Motorola’s Struggles to Continue into 2010

Revenue at Motorola (MOT) in the fiscal fourth quarter came in well below expectations as the new Droid failed to stop the bleeding for the world’s former number one cell phone maker. Analysts were expecting to see sales of $5.96 billion in the quarter, but actual results come in well below that at $5.7 billion a nearly 20% decline from a year ago. Revenue from the sales of mobile phones actually dropped at a faster rate, falling 22% and bringing in just $1.8 billion. The company shipped about 12 million phones (2 mil were smart phones) compared to 19.2 million last year. They were able to top EPS expectations of 8 cents per share by one penny, when excluding one-time charges. Clearly, cost-cutting was the key reason why Motorola was able to best Wall Street’s earnings expectations, and the market is selling off shares by 11% in morning trading.

Perhaps even more important than the reduced sales in the last quarter was Motorola’s weak outlook for the quarter ahead. They forecast a loss of between 1 and 3 cents, and consensus estimates had predicted a 3 cent per share profit. Co-CEO Sanjay Jha defended the outlook by saying that they were still in the midst of a transition in their handset division towards becoming a smart-phone maker, instead of a basic mobile phone company. This transition will take time, and the company said they are still going “full steam ahead” with plans to spin out the handset division but the timing on such a move is still very much in the air two years after announcing intentions for the split. They did say that they expect the handset division to be profitable by the fourth quarter of this year.

It is clear that Motorola is in the midst of a transitional phase as it recreates itself as a smart-phone maker. The first quarter of sales for the Droid was fairly successful but the rest of the company’s offerings dragged down results. Motorola has leveraged itself to the Google (GOOG) Android operating system for their phones, as a key to turning around the company. Motorola plans to unveil about 20 new versions of 3G smart-phones globally this fiscal year, and surely most if not all of them will be wired with Android. It remains to be seen if any of these devices will achieve great results, and from our point of view the smart phone market is all about producing a quality, must-have phone rather than a great number of so-so options. The Droid and the Cliq were able to sell 2 million units in their first quarter, so MOT hopes filling out their sales offering will have similar success.

The other divisions of Motorola actually produces about two-thirds of revenue, but both of these divisions saw revenue decline in the quarter as well. Home and network division (set-top receivers for televisions) saw sales decline 24% to $2 billion in the quarter. The enterprise mobility unit (walkie-talkie) actually dropped the least of the three divisions, only 12% to $2 billion.

At Ockham, we have viewed MOT as Overvalued since early October when the stock got into the mid-$8 range. We continue to have a negative valuation stance on the company as of this week’s report because the sales have continued (and even accelerated) their three year slide, and current cash earnings simply do not support the price level. The management team is trying to right the ship by focusing on smart-phones but they are already playing catch up in a field that has intense competition.

The initial results from the new strategy have seen a decent response, but phones often sell well soon after their launch. There are much more attractive stocks for value investors looking to ride the smart-phone wave. For those looking for ideas, we have written on a few occasions that Research in Motion (RIMM) is attractively valued based on current fundamentals.

Motorola’s Struggles to Continue into 2010

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.