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Technology Stocks : The New Qualcomm - a S&P500 company -- Ignore unavailable to you. Want to Upgrade?

To: Keith Feral who wrote (9881)	5/10/2000 10:39:00 AM
From: LBstocks	Read Replies (3) \| Respond to of 13582

MOT: Reducing Rating to 2M from 1M Salomon Smith Barney ~ May 10, 2000 05/10/00 Motorola, Inc. (MOT $103.75,2-M,Tgt $120.00) Alex M. Cena --SUMMARY:--Motorola, Inc.--Telecommunications Equipment * We are changing our rating on Motorola from a 1M to a 2M * Our EPS estimates have been reduced from $3.20 and $4.25 to $3.10 and $4.12, in 2000 and 2001, respectively * While our long-term positive outlook on Motorola is unchanged, we believe the assumptions behind our more optimistic view may not materialize * An aggressive product roll out in mobile phones, the necessity of the CDMA market for double digit infrastructure and the confirmation of the loss of a major customer to Nortel suggests better than expected results are unlikely in 2000. * Based on our new ests & our belief that MOT can trade at or close to 30x fwd EPS we are lowering our price target to $120 from $200. 05/10/00 Motorola, Inc. (MOT $103.75,2-M,Tgt $120.00) Alex M. Cena --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 12/99 EPS $0.28A $0.44A $0.53A $0.82A $2.08A Previous 12/00 EPS $0.59A $0.67E $0.76E $1.17E $3.20E Current 12/00 EPS $0.59A $0.67E $0.76E $1.07E $3.10E Previous 12/01 EPS $N/A $N/A $N/A $N/A $4.25E Current 12/01 EPS $N/A $N/A $N/A $N/A $4.12E Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: 05/10/00 Motorola, Inc. (MOT $103.75,2-M,Tgt $120.00) Alex M. Cena --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:2M Prior:1-M Price (05/09/00)....:$103.75 P/E Ratio 12/00.....:33.5x Target Price..:$120.00 Prior:200.00 P/E Ratio 12/01.....:25.2x Proj.5yr EPS Grth...:0.0% Return on Eqty 99...:7.9% Book Value/Shr(00)..:24.88 LT Debt-to-Capital(a)12.1% Dividend(00)........:$.48 Revenue (00)........:39497.00mil Yield...............:0.5% Shares Outstanding..:755.9mil Convertible.........:No Mkt. Capitalization.:78424.6mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: 05/10/00 Motorola, Inc. (MOT $103.75,2-M,Tgt $120.00) --OPINION:------------------------------------------------------------------ We are changing our rating on Motorola from a 1M to a 2M. We are also changing our earnings estimates from $3.20 and $4.25 in 2000 and 2001 to $3.10 and $4.12, respectively. While we continue to believe Motorola will be among the biggest winners in the wireless industry, we no longer are comfortable with our high end estimates that were based on a more optimistic view of (1) the potential margin improvement in mobile phones during the 2nd half of the year; (2) continued strong infrastructure sales; and (3) potential for 3G contracts to materialize early for the company. However, we now believe our assumptions may be too optimistic because too many events have to have a very positive outcome. Motorola will be revamping 70% of its product line over the course of the year, while it also plans to double its production volumes. The inherent message behind this transition is the company does not plan to miss the move to data enabled phones much like it missed the move to digital. However, we believe the task though daunting by itself is occurring during a period when much of the necessary components are either in short supply or spoken for makes the task especially difficult. Thus, operating margins are likely to only hit the 10% level by 4Q as opposed to our assumption that operating margins could exceed 11% by the last quarter of the year. While we may be less optimistic, we believe Motorola potentially could be entering 2001 with one of the strongest product portfolios for mobile data applications. There are likely to be more than 70 networks worth $60 billion that may be under construction within the next 18 months in Europe for brand new wireless networks based on the third generation wireless standards. We assumed that Motorola and Cisco after both Ericsson and Nokia would be among the early beneficiaries of the spectrum auctions in Europe due to the combination of Motorola's strong RF capabilities and in CDMA in particular as well as Cisco's dominance in IP. However, Motorola may no longer be among the early winners. We have been able to confirm with management that Motorola did in fact lose the BT/Cellnet contract for a third generation wireless network to Nortel. The loss of a single contract out of potentially 70 worth $60 billion to be awarded over the next 12-18 months is not a big deal. However, we believe this loss is troubling and does raise a cautionary flag because Motorola had supplied BT with both their 1st generation analog TACs network as well as their 2nd generation GSM network only to turn to a new supplier for its third. In our opinion, this contract was Motorola's to lose. There are still 2 of the 5 licensees in the UK that have not committed to a specific vendor for 3G and there is the rest of Europe, but if Motorola could not win a long time customer then the rest may be more of a challenge than we anticipated. Motorola's infrastructure business had turned earlier than anticipated as its installed base of wireless customers, including carriers such as Nextel, DDI and Alltel expand their 2nd generation wireless networks to meet the demands of increased usage from mobile subscribers. We were impressed not only with the results but also with the outlook for the remainder of the year. However, we believe the assumptions behind the sales targets for the remainder of the year may be too aggressive and the difference between double digit growth this year and mid single digit growth this year rests in large part on the CDMA market in China where forward progress is influenced primarily by political and circumstantial events. Since we have been talking about the progress of CDMA in China for the last several years, we are less optimistic that this potential will materialize this year.