Still leery of Motorola (MOT)? Join the crowd. Wall Street remains skeptical about how the world's third-largest wireless handset maker can survive the fierce battle in the high-end market against Apple's (AAPL) touch-screen iPhone and Research in Motion's (RIMM) BlackBerry. But some analysts are starting to embrace the idea that the beleaguered technology giant is finally turning the corner after returning to profitability—barely—in the second quarter. Motorola's earnings of 2¢ a share on sales of $8.1 billion surprised the Street—analysts had expected a loss on sales of less than $8 billion.
To be sure, the notion that Motorola is on its way to recovery, after reporting a string of quarterly losses for more than a year, is still a minority view among analysts. But the opportune time to turn optimistic may be now, when the Street is still skeptical. Of the 34 analysts who follow Motorola, 21 remain neutral on the stock and two recommend selling it. Only nine of the 34 dare rate it a buy.
And so the stock remains in limbo, trading at 9 a share, down from its 52-week high of 19.68 on Oct. 25, 2007, even though the company eked out a profit. What will get analysts to change their calls on Motorola? Most are waiting for more evidence of a sustained return to profitability. The stock's fortunes will take a turn for the better when institutional investors realize the shares have become too oversold to resist. And that's when the stock will begin shooting up. By then, however, it may be a bit late for individual investors to bag the big gains.
Improved investor confidence in Motorola will partly depend on whether its new management team, headed by Dr. Sanjay Jha, newly appointed co-CEO of Motorola (BusinessWeek.com, 08/04/08) as well as CEO of the mobile devices business, will be up to the job of quickly propelling the company to sustained profitability. Greg Brown, now serving as co-CEO of the company with Jha, was named CEO of the Broadband Mobility Solutions unit.
The appointments are "a positive development" after a five-month search for a CEO and "mark progress toward the split-off of the company's mobile device unit" in the third quarter of 2009, says Raimundo Archibold Jr, an analyst with investment firm Kaufman Bros. Archibold rates the stock a buy with a 12-month price target of 18. Jha had been with Qualcomm (QCOM) for 14 years, most recently as chief operating officer and president of Qualcomm's CDMA Technologies, its chipset and software unit.
In the second half of 2008, Motorola plans to introduce 34 devices, five of which are expected to be 3G handsets. "Still, we expect Motorola to lose share in the second half because it will still not have a viable offering at the low-end of the market, which represents the fastest-growing segment," says Todd Koffman, an analyst at investment firm Raymond James & Associates (RJF). (The firm has done business with Motorola.) He expects Motorola to ship 27.5 million units in the third quarter, resulting in revenues of $3.3 billion and a narrower operating loss.
The revival of the handset business has been slow in coming. But some analysts are starting to become more bullish. "While the turnaround in the handset business has taken longer than initially expected, progress is clearly being made," says Koffman. He recommends Motorola as a "strong buy" and expects further improvement in its profitability, driven by cost-cutting measures and an array of new products.
The stock's low valuation "looks compelling," the Raymond James analyst adds, given an expected recovery in Motorola's mobile devices unit, along with consistently improved results at its nonhandset businesses—the home and networks mobility unit and enterprise mobility solutions, which include two-way radio systems. These nonhandset businesses are stable sources of growth, while the mobile handset business has "turned the corner," says Koffman.
The company appears to have controlled the bleeding at the troubled mobile devices segment. Sales grew modestly, to $3.3 billion from $3.2 billion in the second quarter. The unit shipped 28.1 million handsets, up from 27.4 million in March, beating expectations.
Koffman expects sharply higher profits for Motorola in 2009 on a turnaround in revenue. He forecasts earnings of 54¢ a share on revenues of $36.9 billion, up from 2008's estimated 2¢ a share on $32.5 billion in revenues. In 2007, the company posted a loss of 4¢ a share on revenues of $36.6 billion.
Can Motorola keep up with Apple and Research in Motion? Bindu Benjamin, an analyst at First Global Markets, believes the tech giant's new product lineup will help it compete much better in the high-end market against the best-selling products of both companies. He concedes that Motorola's troubles are still far from over, and that regaining strength in the competitive handset business "will remain a huge challenge, given the strong lead already established by the market leaders and new entrants to the market." Nonetheless, the growth momentum in the nonhandset businesses will provide support amid the challenging times ahead for the handset operations. But Motorola's return to profitability and mildly positive outlook "is the story," argues Benjamin.
Indeed, that may be the story that reluctant investors should focus on.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.