MOTOROLA'S REVIVAL IS AGAIN BEING QUESTIONED on Wall Street, after the maker of cellphones, cable-TV set-top boxes and telecom-networking equipment issued disappointing financial guidance for the current quarter, prompting analysts to cut their profit estimates for 2010.
Motorola, which touched a high of 9.45 last fall, now is below 6.50. Wall Street sees 2010 profits around 25 cents a share, versus the prior estimate of 35 cents. The company sees a loss of one to three cents in the current quarter, versus earlier estimates of a slight profit.
But while Moto faces challenges in its major businesses, notably cellphones, its shares look increasingly attractive on a sum-of-the-parts basis. The company appears to be worth at least $9 a share. Where a company breakup is unlikely, a sum-of-the-parts exercise is academic. But Motorola plans to spin off its cellphone unit, and reportedly has weighed a sale of its home and networks division, which makes cable-TV set-up boxes and cable modems for high-speed Internet access. Motorola won't comment on the speculation.
Motorola seems primed for a breakup because it has co-CEOs, with Sanjay Jha, formerly of Qualcomm, heading the "mobile-devices" segment and Greg Brown overseeing the rest of the company.
Morgan Keegan analyst Tavis McCourt recently wrote that Motorola is "worth $8 a share," without taking into account the cellphone unit. For starters, Motorola has $4.6 billion, or $2 a share, of net cash and investments.
.The Schaumburg, Ill.-based company also has an overlooked and valuable division called Enterprise Mobility, which sells radio, data-communications and other equipment to police and fire departments and other government operations. The unit generated $1.1 billion of operating profits in '09 and could be worth $10 billion, or more than $4 a share, given an entrenched customer base that often buys only U.S.-made products. Macquarie analyst Phil Cusick has called this Motorola's "jewel," given its good growth prospects and high operating profit margins of 15%.
The mature home-and-networks division had operating profits of $558 million last year and could be worth $4 billion, or almost $2 a share.
All this totals about $8 a share without the mobile-phone division, which is reviving under Jha's leadership. It lost more than $1 billion in 2009, but its financial picture improved as the year wore on, thanks to Motorola's new generation of smartphones that combine Internet access, e-mail and software applications. Jha expects the division to move into the black by the fourth quarter, aided by an emphasis on higher-margin smartphones like the Droid and the Cliq, which can sell for more than $400.
Motorola has many doubters. There's concern that its smartphones won't beat entrenched rival BlackBerry, made by Research in Motion's, or Apple's iPhone. Motorola's mobile-phone market share was just 4% last year, down from 22% in 2006, when its berslim RaZr ruled.
"If successful, this division could easily be worth $1 to $2 a share in a spinout, even if it gets back to only minimal profitability, and as much as $5 a share if it can achieve global success. In any event, at less than $7 a share, we do not believe that an investor needs to be 'bullish' on wireless to invest in Motorola," McCourt wrote.
Barclays Capital analyst Jeff Kvaal Friday upgraded Motorola to Overweight from Equal Weight, citing the stock's pullback and his optimism about its cellphone and public-safety divisions. "A profitable phones unit should allow a split and push the shares toward our $9 target," he wrote.
Motorola stock plunged from 26 in 2006 to as low as 3 a year ago as profits gave way to big losses and some investors questioned its viability. Carl Icahn, the activist investor who took a sizable stake in Motorola in 2007, has been quiet after getting one of his lieutenants, Keith Meister, on the board. Last year, Motorola cut $1.9 billion in costs, while still spending $3.1 billion on research and development. The usually successful Icahn is being patient, even though he's sitting on about a 50% loss on his 5% stake in Motorola, now worth $775 million.
Motorola has made several bad moves: It overpaid when it purchased bar-code-scanner maker Symbol Technologies in 2007 for $3.7 billion. It also wasted money on share buybacks in 2006 and 2007, when it repurchased $6.8 billion of stock at an average cost of nearly $20.
Tech value stories often turn into value traps that burn investors. Yet Motorola's cash and asset value offer a nice margin of safety. With some favorable developments, like a successful breakup, the stock could be up 40% in the next year.
The Bottom Line
Motorola shares could rise 40% if the company can spin off a profitable cellphone division. Its most valuable unit sells communications gear to police and fire departments.