Eric Savitz
Motorola: Buy Ahead Of The Split?
Dec. 10 2010 - 9:11 am | 0 views | 0 recommendations | 0 comments
By ERIC SAVITZ
Very early in January, Motorola (MOT) as we know it will be no more. The parts you probably care about – handsets and TV set-top boxes – will be spun off as a new company called Motorola Mobility. The leftovers – mostly communications infrastructure products – will be known as Motorola Solutions. When the split happens, the question for investors will be which pieces to keep. For now, the question is whether to buy the stock ahead of the split.
Oppenheimer analyst Ittai Kidron votes yes, asserting in a research note this morning that the current MOT valuation doesn’t fully reflect the value of Motorola Mobility, which after the split will have the ticker MMI. He thinks the company can be profitable in 2011 despite the challenges posed for sales of its Android-based handset once Verizon Wireless (VZ, VOD) starts selling the Apple (AAPL) iPhone sometime in the 2011 first half. Kidron sees the company turning profitable in the second half – and that doesn’t reflect any contribution from tablets. (You can assume the company at some point will jump into the tablet market along with every other PC and handset maker on the face of the Earth.) Kidron thinks the company can earn 67 cents a share next year, and he says the company will start out with $11.50 a share in cash. He calculates a valuation for MMI of around $5 billion – and contends that MOT’s stock price doesn’t reflect that.
Kidron sees Q1 device shipments dropping 18.8% sequentially from Q4, with smart phones dropping 30%. But he thinks for the year overall, MMI will boost smart phone shipments by 30.4%. And though not in his model, he sees a potentially big boost from tablets, noting that for every 1 million sold, MMI can generate an extra 12 cents a share of profit. And while he calculates an initial $5 billion valuation, he notes that at the company’s target margin of 8%-12%, the company can earn $2 to $3 a share, and see a $10 billion market cap.
The bottom line, according to Kidron: The coming split offers “an opportunity to unlock value,” and he would jump on the MOT shares now. “While iPhone/Verizon is a headwind,” he writes, “we don’t believe MOT’s stock price fully reflects MMI’s initial market cap potential as we calculate it or the potential for future margin improvement.”
MOT this morning is unchanged at $8.34.
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