SI shorts on Mot , a latest report on MOT and NOK... Two stocks we have been highlighting..Motorola's Chips Deserve the Credit for Rising Stock Price, Investors Say
By Andrew Brooks
Motorola's Chip Business Has Investors Betting Big (Repeat)
(Repeats story that originally ran Saturday. Adds company
comment in the 8th and 15th paragraphs.)
Schaumburg, Illinois, June 19 (Bloomberg) -- Motorola Inc.
stock is outperforming its two big cellular-telephone rivals,
Nokia Oyj and Ericsson AB. Yet investors and analysts say
Motorola's semiconductor business deserves the credit.
Shares of the world's No. 3 chipmaker are up 52 percent this
year compared with a 43 percent gain for Nokia and Ericsson's 37
percent rise. Motorola closed at a record 93 1/8 yesterday.
Investors expect chips to fuel earnings for Motorola in
coming quarters. Motorola cut $1 billion in costs from its chip
unit last year and now is wringing a profit from the business
after a year of losses. Nokia and Ericsson, meanwhile, must rely
on phones and phone equipment.
''We're in a turnaround for semiconductors and that could
turn into huge profits for Motorola,'' said Chris Bedowitz, an
assistant portfolio manager at Invesco Funds Group, which owns
about 1.57 million Motorola shares.
A year ago, some analysts and investors were demanding the
company shed the chip division. They also suggested that Chief
Executive Christopher Galvin, grandson of founder Paul Galvin,
didn't have what it takes to replace George Fisher, who was all
but canonized for building Motorola's cell-phone business.
Source of Misery
''Galvin did the right things from the time he came in the
door. People just couldn't see it because it takes a long time to
turn a company this size around,'' said Albert Lin, a portfolio
manager of Abernathy Group, which owns about 400,000 Motorola
shares. ''People will say he's as great if not better than
Fisher.''
Motorola said it still has more work to do.
''We have been able to deliver on some promises that we
made,'' said David Rudd, a company spokesman. We still have a lot
of challenges ahead.''
Galvin couldn't be reached for comment.
While these are flush times for Motorola investors, the
stock was a source of misery for them less than a year ago.
Last October, the shares fell to 38 3/8, their lowest since
May 1993. Not only were world financial markets plunging, but
Motorola had served up several quarters of earnings
disappointments that included the second quarter's $1.98 billion
in charges for job cuts. That led to a 1998 loss of $962 million,
Motorola's first annual loss in 13 years.
The Cure
But Galvin was already working on the cure.
The company slashed 24,000 workers last year and said it
would scale back the number of chip-products it makes to 24,000
from 60,000 in the next year or two. Motorola also plans to farm
out half of its chip manufacturing to other companies by 2002.
The company's chips are used in everything from cars to printers
to cell phones and pagers to cable modems.
Getting out of the chip business wasn't a viable option, the
company said.
''We are uniquely positioned to provide the products our
customers want,'' spokesman Rudd said. ''Semiconductors is a big
part of that.''
Analysts said the overhaul was the reason the chip business
made $47 million in the most recent quarter, the first time in
five quarters that the unit made money. After the belt-
tightening, the business is poised for even bigger gains,
analysts said.
Recovery
''A recovery for them is better than anyone else because of
the cost cutting,'' said Brian Modoff, an analyst at Deutsche
Banc Alex. Brown, who rates Motorola ''strong buy.'' ''They don't
have to work as hard as the other guys.''
Motorola said in April it expects semiconductor sales to
increase 9 percent to 11 percent this year. Analysts figure that
the company will boost that forecast next month, when it reports
second-quarter results.
''Motorola's likely going to beat their numbers and
investors like that,'' Modoff said.
Motorola's phone business also is on the mend.
After losing the No. 1 ranking among cellular-phone makers
last year to Finland's Nokia, Motorola has spent the past 12
months developing and shipping new digital models, including its
popular StarTAC phones. For the first time in years, Motorola is
winning market share in the cell-phone market.
Digital Catchup
''They finally have digital products in the marketplace, and
those are doing very well,'' said Gregory Geiling, an analyst at
J.P. Morgan Securities Inc., who rates Motorola ''buy.''
At the end of 1998, Nokia controlled 23 percent of the
worldwide cellular-phone market, while Motorola held 20 percent
and Ericsson had 15 percent, according to market researcher
Dataquest in San Jose, California.
Though Motorola is No. 2 in cellular phones overall, it
trails Nokia and Ericsson in sales of digital models offering
clearer sound, longer battery life and better security than
analog. But it's catching up.
Motorola, which lagged Nokia and Ericsson in introducing new
digital cell phones for two years, was first to market models for
the world's fastest-growing cellular technology used by Sprint
PCS and Bell Atlantic Corp., two of the largest U.S. wireless
providers.
Product Line
The lead in that technology, known as code-division multiple
access, of CDMA, has given Motorola time to catch up on other
standards where Nokia and Ericsson are stronger.
''Motorola's gone from having a terrible product line to
having one of the best in the industry,'' J.P. Morgan's Geiling
said.
Investors also are betting on big wins for Motorola in China
as it builds nationwide CDMA networks. Analysts expect China's
wireless market to pass the U.S. as the world's largest in the
next several years.
While Nokia has been increasing its lead as the No. 1 cell-
phone maker, Sweden's Ericsson has been slipping. First-quarter
profit at the Stockholm-based company declined by half as costs
for new products and job cuts rose and wireless phone sales
declined 12 percent.
''Motorola will easily be able to replace Ericsson this year
as No. 2 in the digital handset market,'' Geiling said. ''The
market is increasingly going to be dominated by Nokia and
Motorola.''
If he's right, the best may be yet to come for Motorola
investors.
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