Seeing Motorola through Bulls' Eyes


By Gene Marcial Has Motorola (MOT) become a value play? At least some pros seem to think so. Indeed, the stock of this leading provider of semiconductors, wireless communications, and advanced electronic systems and services has been severely pummeled -- crashing from a high of a split-adjusted 61 last year to as low as 10.50 on Apr. 6, before snapping back to 15 by Apr. 30. But based on its enterprise value, some analysts now think it has an upside potential of 30 a share.

Probably every piece of negative news that could bedevil a company has been written about Motorola. It reported a first-quarter loss of 9 cents a share, due mainly to the economic slowdown and the downturn in the semiconductor industry. Most analysts don't expect to see any good news on Motorola over the near-term, so they've downscaled their earnings estimates. The company expects to report a wider loss in the second quarter. One of the Motorola bears is Value Line analyst Edward plank, who says its stock "remains untimely for year-ahead price performance."

Still, some analysts are downright bullish. Trading at slightly "over one time our estimated 2001 revenue estimate, we see limited downside risk to Motorola's stock price," asserts Tim Long, analyst at Credit Suisse First Boston. He, too, expects the next few quarters to be challenging, given some inventory, market share, and profitability issues. But he's maintaining his buy rating on the stock. And he says he could he get "more aggressive" because of the probability that some positive catalysts could surface later in the year.

FILLING HOLES. Management, he adds, is focusing on the balance sheet and is exploring ways to monetize, or cash in, some of its assets. Also a plus: Motorola has realized the shortfall in its infrastructure product lines and wants to fix the problem. The company has acknowleged that its infrastructure business -- equipment and technology for wireless equipment -- has been handicapped by the lack of switching technology. Long expects Motorola to announce sometime soon a partnership that will answer this need.

Long is encouraged by the restructuring and streamlining undertaken in Motorola's two biggest problem areas -- semiconductors and handsets. He's still cautious on the level of recovery of revenues and earnings in those two businesses in 2001. The analyst expects Motorola to be in the red in 2001, with an estimated loss of 15 cents a share on estimated revenues of $33.4 billion. But he expects a turnaround next year, with the company posting estimated earnings of 30 cents on revenues of $36.9 billion.

Perhaps the most bullish among Motorola's trackers is Alkesh Shah of Morgan Stanley Dean Witter, who rates the stock a strong buy. The share price already reflects the bad news, says Shah, who argues that Motorola is undervalued based on several metrics. Its risk-reward profile is attractive, he adds. With the stock trading at 0.9 times sales and 1.8 times book value, "we think it is time to own Motorola shares," says Shah. His earnings estimates are more bullish than Long's: Shah expects a loss of 5 cents a share this year but sees Motorola making a profit of 45 cents in 2002.

TRICKY TIMING. Recent layoffs at the company, new outsourcing agreements, and capital-spending cuts have positioned Motorola's earnings for a rapid acceleration when economic conditions start to improve, says Shah. Management, he notes, is defnitely committed to improving cash flow and managing better its working capital.

To make money on Motorola over the next year, investors have to "risk being early," advises Shah. "The issue is timing," he argues. The stock is notoriously hard to predict, he says, because it reacts fast on positive news. On a discounted-cash-flow analysis, "very conservative assumptions imply a value of 24 to Motorola shares," he says. And, he figures, based on a sum-of-its-parts analysis, it has a potential price of 30.

Using a price-to-earnings-to-growth ratio, or PEG, relative to Standard & Poor's, Motorola also comes out inexpensive, according to Shah. It currently trades at an "attractive" PEG multiple of 1.9, vs. 1.8 for the S&P 500, based on 2002 estimated earnings and long-term growth rates. Shah considers the PEG ratio significant because it factors in the company's "franchise value," or its ability to sustain above-average earnings growth. And it also adjusts for changes in earnings growth expectations and valuation levels for the overall market.

PLENTY OF CASH? While the bears argue that that Motorola faces a credit crunch, Shah thinks such fears are overblown. He notes that its cash and cash equivalents amount to $4.5 billion. And it has undrawn credit lines of almost $4 billion. The company, he says, should receive $1.8 billion by September from the sales of cellular-operator assets in northern Mexico to Telefonica Moviles. As part of its cost-cutting plan, Motorola has sold or outsourced six major facilities on various product lines and is negotiating to sell or outsource four additional facilities.

So what's the risk in Motorola's stock? Based on its historical trough and an enterprise-value-to-sales and book-value analysis, the stock's downside is 11 to 13 a share, assures Shah. Clearly, the bulls' case isn't airtight, but it is worth considering. Marcial is BusinessWeek's Inside Wall Street columnist


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