Despite Its Many Flaws, Motorola Looks Attractive At $22
Research Analyst: Will Frankenhoff
Since our last update (October 12) shares of Motorola Inc. (NYSE: MOT) made tentative advances toward the $23.00-$24 range, but have since retreated once again. Motorola's performance stands in marked contrast to arch rival Nokia Corp. (NYSE: NOK) , which, even taking into account Friday's weakness, is now trading 38% above its 52-week low.
The reasons for this disparity in performance are simple: market size and profitability, primarily in the handset business. While Motorola's management has been repeating its intention to take share in the handset market at the expense of Nokia, the fact remains that Motorola's share still sits in the low-mid teens while Nokia's has risen from around 29%-30% in the fourth quarter of last year to the 34%-35% range at the end of the most recent quarter.
Similarly, as we noted in our previous update, Motorola had been reiterating its goal of 10% operating margins for the handset division by the end of the fourth quarter as recently as August. The fact that management is now giving guidance on handset margins in the 6.4%-6.5% range for the fourth quarter is, to say the least, a disappointment, especially when investors consider that Nokia sacrificed profitability in order to gain market share and still reported operating margins of 20% in the third quarter.
Simply put, given management's inaccurate guidance throughout the year, we believe Motorola is now in the position of having to regain the trust of Wall Street. We're not implying that Motorola is dead money. In fact, we believe that a solid upside surprise on the top or bottom lines in at least one of the next four quarters could provide the stock with a significant boost. Of course, some respectable amount of margin improvement would be appreciated as well.
Keep in mind that Motorola is the most diversified on the Big Three cell phone makers, that it has a wide product portfolio, and has for years been a significant R&D machine. Furthermore, Motorola is the cheapest stock of the bunch, trading at a mere 16 times now-reduced 2001 estimates of $1.40 a share, compared with Nokia's forward multiple of 43 times earnings and LM Ericsson Co.'s (NASDAQ: ERICY) forward P/E of 37.
"Keep in mind that Motorola is the most diversified on the Big Three cell phone makers..."
Motorola might not have the best risk/reward ratio of the group, but it certainly has the most bad news priced in, and almost any good news could give the stock a pop. Motorola's valuation, viewed in conjunction with its demonstrated technological innovation and substantial intellectual property, continues to offer promise for the long-term investor.
As a result, while we do not expect the stock to come on strong during the last four weeks of the Magic 25 season, we are maintaining our "buy" recommendation based on our belief that Motorola's problems can be fixed and long-term shareholders will be rewarded.
Updated on November 10, 2000 with MOT at $21.88.
Recommended on December 10, 1999 at $43.67.
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Authors says management gives inaccurate guidelines and he like MOT. Go figure.
Jack |
