Motorola has us revved up

Benj Gallander and Ben Stadelmann
Monday, August 16, 2010

It’s hard not to smile when you see the price information for Motorola going wayyyyyy back to the late ’70s. In those days, Moto’s shares traded with fractions and employees likely showed up to meetings wearing groovy disco bell-bottoms.

The last time we wrote about this, the Rolling Stones of technology firms, was in January of 2001. We noted that the company had legal troubles, an inflated P/E multiple near 40 and overly compensated management. The share price had already dropped by two-thirds to the $20 range, but we still issued a rare short call. A few months later, after it had skidded another 40 percent, we opined it would be intelligent to cover.

Motorola eventually got hit even harder right into 2003 before it staged a dynamic turnaround on the success of the RAZR line of phones. As with many technological triumphs, the excitement did not last and the shares experienced another precipitous decline. In the last quarter of 2008, we bit the buy bullet at $6.01 — but only gingerly, owing to the chaotic economic environment.

Today, Motorola is once again attracting investors, courtesy of the Droid X smart phone, which is selling out in stores. Observers are watching closely because the general feeling is that the success of this product will determine whether Motorola can complete a turnaround. Heck, it has even garnered enough interest that it appears to be shaking Apple’s tree.

Motorola’s handset division hasn’t made a net profit in nearly four years, and co-CEO Sanjay Jha is hopeful of breaking even by the fourth quarter.

The operating profit posted in the second quarter was the first since December 2006. Mr. Jha wants the division to be free of any long-term debt when it spins off into a separate, publicly traded company named Motorola Mobility. The recent sale of the networks division for $1.2 billion (US) to Nokia Siemens is a big step down the debt-freedom path.

One reason we particularly like the subdivision of this enterprise is that it’s reasonable to expect that the move will work the magic of unleashing shareholder value, potentially offering investors a quick return. Plus, as readers know, we love to see debt reduced.

After the networks division sale, assuming that it comes to pass, we will also have shares in the new Motorola Solutions, headed up by co-CEO Greg Brown, which will concentrate on government and enterprise customers. It will be made up almost entirely of the enterprise mobility component, which has traditionally been profitable and a good engine of growth while propping up the handset business.

Motorola’s largest and arguably loudest shareholder, Carl Icahn, is once again buying. The iconic Mr. Icahn started acquiring shares in 2007 and once even started a proxy fight. After his latest purchase, he owns just less than 10 percent. It’s nice for us to see him in for the ride; even though he does make some major errors, he more often than not makes gobs of money.

Motorola has said it expects to ship 12 million to 14 million smart phones in 2010, with 2.7 million in the second quarter. Though the sticker price is a lot nicer, Motorola used to sell a much larger number of cheaper cellphones. Looking ahead, one very real concern is the pace of technological change — the R&D brain trust must come up with the next newer new thing to keep the company amongst the leaders of the pack.

Though the Droid X is critical to success right now, it is not an end in itself. Analysts already want to know about future releases, and estimates for this year alone range from eight to 20 new phones.

Motorola’s share price seems exceedingly attractive at this level, and we see strong value in owning these shares before the split takes place. That is why we have Motorola as a buy, with a target price of $24.49. As always with MOT, we expect a manic ride.