Lehman Brothers on Motorola (MOT)
On Tuesday March 25, the day before Motorola announced its intention to split into 2 divisions — Mobile Devices and Broadband & Mobility (Government, Cable, Symbol, Networks) — Jeff Kvaal and Amir Rozwadowski of Lehman Brothers published a rather comprehensive update, and followed it a day later (Wednesday March 26) with a post-announcement update.
They maintain their 1-Overweight rating on MOT but on Tuesday (before the announcement) reduced their price target from $13 to $12, which they reiterated on Wednesday while noting that they see possible upside to $15.
Below are their excerpted comments on Mobile Devices from the Tuesday report, and it's rather dismal as relates to both Q1 and Q2 ...
>> Weaker Handset Demand Leads Our Estimates Lower: Our recent proprietary checks across Motorola's value chain (including suppliers, distributors, and carriers) indicate weaker than expected handset demand despite ongoing pricing reductions. Overall, our checks indicate that total units for the company’s first quarter are likely to now be below the 30M level, potentially in the range of 27-28M, a marked decline from our previous estimates of 32M units. The ongoing decline in units may impact Motorola on another front – our checks suggest the company may be impacted by higher costs as its lower unit shipments may impact its volume thresholds for certain component suppliers. We also believe ASPs are likely to continue to decline as Motorola has been lowering its prices in order to push dated products through the channel. We are therefore lowering our 1Q08 sales and earnings estimates to $7,847M / ($0.11) vs. our previous estimates of $8,503M/($0.06).
Several factors are leading us to reduce our unit estimates for the quarter. On the components front, our checks indicate that several of Motorola’s component vendors in Asia continue to expect slightly weaker than expected demand as Motorola has been reducing its shipments during the quarter. Several component supplier checks earlier this quarter suggest that unit shipments could be down sequentially in the 20-25% range. More recent anecdotal checks suggest Motorola has not come back for reorder as rapidly as thought, suggesting further downside is possible in 1Q and that little improvement is likely in 2Q. We also believe that the company is facing some shortages for CDMA components which have also weighed upon unit shipments during the quarter. We are careful to note that component checks can be influenced by excess inventory in the component chain or market share shifts between suppliers. Alex Yang covers handset components in Taiwan for Lehman Brothers.
Our distributor / carrier checks echo the implied weaker unit shipments for the company. We believe that Motorola continues to be impacted by a stale product portfolio as V8 sales continue to be stagnant, while pricing on the V3 and V3i continues to ebb lower. Motorola's ELBA, officially the ROKR E8, seems to be facing ongoing challenges – as we believe that the device is once again delayed. We do not believe Motorola’s new kick slider – the Z10 – is faring well in Europe thus far. Finally, Samsung has recently indicated that the US market – 53% of Motorola’s handset sales – is growing at a modest 5% rate this year, and that it is confident in its ability to gain share.
Motorola's backlog coverage does not appear to support a 30M figure, rather implies a unit shipment number closer to the mid 20s. Backlog at the end of 2007 stood at $647M declining by ~54% from 2006. We note that there was a similar decline at the end of 2006 which led to a 16% year-over-year decline in 1Q07. Our historical backlog analysis indicates that when backlog declined, the following quarter often experienced a decline or at best modest growth. Or considered another way, our new 1Q estimate requires Motorola to ship almost 5x its 4Q backlog. This would be its highest ratio in at least six years. We recognize that handsets are typically not a backlog business but factor in our analysis in the context of our other cautious industry data points.
Update on 2H08 Product Refresh: We believe that Motorola continues to work on new products for 2H08 based on new silicon platforms by both QUALCOMM and Texas Instruments. Motorola currently expects products based on both platforms in 2H08, though we anticipate products based on QCOM arrive in 3Q/4Q with products based on TI's Cedarpoint platform in 4Q/1Q09. We believe high profile phones are likely to include xPIXL (5MP camera), Texel (touch screen ROKR), and Skarven (widescreen camera with touch screen). Motorola should return to the sub $30 phone market in 3Q based on TI chips - management is confident in its ability to be profitable at a $25 ASP. TI's eCosto platform appears likely to ship in 2009 - later than hoped – and so phones based on this platform are unlikely until 2009. Motorola is also in the process of slimming to three operating systems, Windows Mobile, Symbian, and Linux/Java. Ultimately Symbian may fall away, [no UIQ ???] leaving two operating systems.
Mobile Devices: Valuation Illuminated By Nokia and Palm: Our recent conversations suggest Motorola may consider a near-term valuation for the Mobile Devices business of at least $10 billion. Based on sales estimates this equates to 0.7-0.8x sales, which in our view is optimistic given Motorola’s current challenges including a lack of a product roadmap, bruised distribution relationships, a poorly perceived supply chain and a lack of clear leadership. We see support however at 0.5x EV/ Sales based on current multiples at Palm, Nokia and Sony Ericsson. For comparison purposes, Nokia, including Networks, is currently trading at ~1.29x 09 EV/ Sales. Additionally, Palm is currently trading at 0.6x 09 EV / Sales. Motorola however has better distribution, a wider product range and better brand, in our view. We believe most competitors have a similar or better margin. Sony Ericsson currently performs at 13%, LG has margins of 6-11% and Samsung has been averaging ~10-11%. A 0.5x sales multiple yields ~$3/share in value for Motorola’s Phone unit. This equates to a 12x multiple given a 5% normalized margin.
Mobile Device Estimates: For the full year, while we recognize Motorola has expanded its cost reduction efforts to include an additional $500 million, concerns around visibility and progress with Mobile Devices remains. We subsequently lower our 2008 Mobile Device outlook and look for Motorola's share in phones to fall below 10% from 14% in 2007. We expect ASPs to remain under pressure and do not expect the division to return to breakeven in 2008. We model Mobile Device margins at a loss of -13% in 2008. We model a modest +2% operating margin for Mobile Devices in 2009. ###
If I have time I'll abstract a few of their comments about the split from their Wednesday report. Both the Tuesday and Wednesday Moto updates (which I access through Fidelity) are quite good, IMO, and worth a thorough read for those that have access.
- Eric - |
