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February 07, 2006

Motorola Under Pressure

Motorola (MOT) shares are set to bounce at the open on an analyst upgrade. The gains look small so far, especially against the 16% decline in the stock since 4Q05 EPS were reported on January 19th. Earnings were greeted by a sharp sell-off as numbers merely matched consensus despite higher whispers and despite management noting that some shipments were delayed by component shortages, 1Q06 EPS guidance was not increased. The reaction showed that investors still don’t trust MOT and are concerned about the company’s ability to sustain its market share gains. These concerns may have been increased by worries that unexpectedly strong handset shipments in 2005 for the entire industry won’t repeat in 2006 making the competitive environment that much tougher for MOT. Finally, concerns continue that the RAZR is getting to be an old form factor whose appeal will wane....

Selling in the shares had moderated somewhat until late last week when two new issues arose. First, according to one analyst, there were reports that deliver of the Q Blackberry-type device to Verizon would be delayed to 2Q06. Second, on Monday, another analyst reported that initial demand for the company's PEBL phone at T-Mobile was "very slow" and that RAZR sales at VZ were not as strong as expected. T-Mobile has an exclusive on the PEBL right now and VZ had not offered RAZR's until very late in 2005. Compounding the issue was the analyst's report that Samsung's RAZR killer, the "Blade," was selling very well at Sprint. This analyst did report that Cingular is seeing strong demand for the SLVR.

Other analysts have reported better anecdotal evidence about MOT's sales so far this quarter but the continued selling in the shares clearly show investor concern that MOT's market shares will halt or reverse. I have consistently stated that investors are underestimating the turnaround at MOT and are basing too much of their analysis on the missteps in the pre-Zander era. It appears this debate will be answered with 1Q06 results and 2Q06 guidance. I think the street will respond to market share and ASPs for MOT with overall industry shipments less of a factor.

In the meantime, the shares look cheap. Consensus estimates for 2006 and 2007 are $1.31 and $1.49, respectively. Using those figures, the P-E is 15.7 times and 13.8 times 2005 and 2006. Adjusting for the company's extremely strong balance sheet makes the shares look even cheaper. MOT ended 2005 with over $4 per share in net cash, which equates to about $10 billion. Assume it earns 4% and is taxed at 35% and the cash contributes 10 cents per share to EPS. Back out both the net cash and the EPS and the P-E falls to 14 times on 2006 estimates. The valuation should provide support for the stock around current levels as should the large share buyback the Board approved last summer.

I've been holding out for $26-28 to exit my remaining MOT position. Reaching that target is proably a stretch right now but I believe any resumed confidence in the 2006 outlook could push the shares back to $23-24 ahead of the company's 1Q06 report in early April. I am staying long.

Posted by Steve Birenberg at February 7, 2006 10:10 AM in MOT