Motorola's Stronger Signals

S&P has boosted the cell-phone giant's credit rating, citing improved operating performance

On May 31, 2005, Standard & Poor's Ratings Services raised its corporate credit rating on Schaumburg (Ill.)-based Motorola (MOT ) to BBB+ from BBB. The outlook is stable. The action reflects improving operating performance and ongoing reductions in asset intensity -- i.e., a greater reliance on outsourced manufacturing, which helps provide greater financial flexibility -- across the company. Those factors are tempered by an expanding focus on the volatile cell-phone industry, which now accounts for more than half of the company's total sales and earnings.

The ratings on Motorola reflect its moderate diversity; good positions in the cellular handset, two-way radio, broadband, and wireless-infrastructure industries; strong balance sheet and good cash-flow generating capacity; as well as the challenges of rapid technology evolution and aggressive market conditions in its core markets.

Motorola's March quarter sales were 10% above year-ago results, while EBITDA (earnings before interest, taxes, depreciation, & amortization) margins have been in low-teens percentage area. The phone unit's sales increased 6% year-over-year, while units increased 13%, reflecting continued progress in updating its product line, as well as continued product-development expenses. The business is not asset-intensive, and returns are good.

UNDER PRESSURE. Still, the business has only a limited history of performance at these levels. Longer-term cell-phone financial performance will depend on continual introduction of new competitive models and continued cost reduction in an environment marked by rapid technology change, fluctuating market shares, and uncertain carrier and consumer preferences. Motorola's cell-phone unit has about half Nokia's (NOK ) market share, and competitive pressures are expected to remain intense as major suppliers seek leadership in the fastest-growing markets.

Wireless-network profitability had benefited from major cost reductions and increasing sales levels in China and other growing markets, while the private radio business has experienced higher sales of public-safety systems. The broadband operation continues to face challenging industry conditions and a narrow customer base, while automotive module sales are weakening, given substantial exposure to North American suppliers.

Outlook: The outlook is stable. Motorola is expected to sustain recent levels of operating profitability and cash flows, while maintaining a strong balance sheet, notwithstanding expected aggressive competitive conditions in its key markets. However, if the company is able to leverage its strong technological capabilities to further improve operating profitability, and is able to materially strengthen its market position, the outlook could be revised to positive over the intermediate term.

From Standard & Poor's Ratings Services

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
Standard & Poor's Regulatory Disclosure

Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.

BW MALL SPONSORED LINKS

What can you do about the Falling US Dollar? Trade It! Learn Forex Trading with a Free Practice Account from GFT.
A Better Stock Screen Discover How to Buy the Right Stock And What Price to Pay for It!
Find the Stock of the Year! Gryphon Financial wants to offer you the chance to take your investing to a much higher level.
Click Here to Download Free Asset Management Research & Guides Stay-Up-To Date With Market Activity & Trends. Become an Educated Investor Through Unbiased Research
Download Free Research On GDP and Recession Economy will post positive growth through the middle of this year and skirt a recession. Learn More

Buy a link now!

Get BusinessWeek directly on your desktop with our RSS feeds. XML

Add BusinessWeek news to your Web site with our headline feed.

Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.

To subscribe online to BusinessWeek magazine, please click here.

Learn more, go to the BusinessWeekOnline home page