Well, maybe it's not worth $20 a share.
Or at least that was the apparent takeaway from Motorola's (MOT) latest earnings disappointment, one that dampened hopes the telecom equipment company might fetch more than twice its current stock price if it's broken into two separate businesses.
The mobile-phone and network equipment maker suffered a wider-than-expected loss for the first quarter as sales shrank 21%, with the ailing handset business stumbling anew. Motorola reported Apr. 24 that it lost $194 million in the first three months of 2008, surpassing the $147 million loss Wall Street was expecting. First-quarter sales slid to $7.46 billion, coming in shy of the $7.75 billion analysts had projected.
The handset business posted a gaping first-quarter loss of $418 million as sales plunged 39%, to $3.3 billion, vs. year-ago levels. Phone shipments plunged 40% to 27.4 million, leaving Motorola with a mere 9.5% share of the global market, down from 12.4% in the fourth quarter. Even worse, the latest outlook from management seemed to imply the company has lost more market share in the current quarter.
As a result, American Technology Research analyst Mark McKechnie now puts combined worth of the company's handset and network businesses at $15 to $17 a share, assuming Motorola goes ahead with the plan announced in March to spin off the phone division in 2009. Richard Windsor, an analyst with Nomura, figures $16 to $18 is more like it.
Any of those numbers would still represent a sizable premium to today's market valuation: Motorola's shares slid 3% after the earnings report, falling to 9.31. And yet it's less than what investors were counting on just months ago.
Pursuing New Phones
Many analysts believe the decline in Motorola's phone shipments hasn't hit bottom. The Razr line—including the newer Razr2—still accounts for about 20% of unit sales, a worrisome figure considering Razr sales fell by about 4 million units between the fourth and first quarters, figures Bill Choi, an analyst with Jefferies & Co. Likewise, the Krazr music phone, "may be getting a little long [in the tooth], too," Choi says. Demand for both phones, longtime pillars of Motorola's handset business, will continue to shrink, dragging down revenues through the second and even third quarter, he figures.
While Motorola plans to unveil new phones in the current quarter and through the second half of 2008, they may not contribute significant volumes until 2009, figures Nomura's Windsor. And it's an open question whether any of these phones will capture consumers' fancy the way the Razr did years ago. But Motorola CEO Greg Brown remains confident the phone business is working on products that can halt the spiral. "We've historically done quite well in design, and we'll pursue messaging and touch[-screen phones]," Brown told BusinessWeek.com.
Forecast: Slow Recovery
There's another major complication, though. Nokia (NOK), Samsung, Sony Ericsson, and Apple (AAPL) are redoubling their efforts to capture a larger slice of the North American phone market, which currently accounts for 44% of Motorola's device sales.
Nokia is revamping its strategy to work more closely with U.S. service providers. Sony Ericsson, best known for its Walkman music phones, is expected to roll out a slew of new handsets in the second half of 2008. And Samsung and LG Electronics have expanded their U.S. sales with touch-screen and music phones. And Apple is seen launching a new version of its blockbuster iPhone as early as June. All this comes as Motorola works to cut its research and development spending by $240 million this year.
McKechnie at American Technology Research doesn't foresee a speedy recovery. "The turnaround will be very slow," McKechnie says. "It's going to take them a while, maybe until the end of 2009 or even 2010."
None of this bodes very well for the potential value of an independent cell-phone business. RBC Capital Markets analyst Mark Sue cautioned that if phone sales continue to weaken, "market share loss may make investors reconsider the sum of parts valuation for Motorola."