Wall Street Hangs Up on Motorola

The wireless phone giant's stock dropped Friday after it warned of lower than expected results

Motorola (MOT)shares fell sharply on Jan. 5, after the wireless phone maker warned of lower than expected profits and slowing sales. The warning prompted a number of Wall Street firms to downgrade their opinions on the shares.

The Schaumburg, Ill.-based company said late Jan. 4 that it will have sales in the range of $11.6-$11.8 billion during the fourth quarter, versus the guidance given on Oct. 17 of $11.8-$12.1 billion.

The wireless industry has been growing more slowly recently as it matures and fewer people need to buy new phones. Companies continue selling more in developing countries, where cell phones are less widespread but also not as easy to sell at hefty prices. Industry players have had to contend with bruising competition.

Analysts said Motorola estimates it will have 23 cents to 26 cents earnings per share during the fourth quarter before options and one-time charges. The mean analyst estimate had been for 39 cents per share on nearly $12 billion revenue, according to the San Francisco research firm StarMine, which aggregates data from Thomson Financial.

"We are very disappointed with our fourth-quarter financial performance," said Motorola CEO Ed Zander. He added that he remains committed to the strategic direction and long-term financial targets announced in July, but he expects to discuss plans for improving his company's profitability Jan. 19 along with fourth-quarter earnings.

Investors pummeled Motorola on Jan. 5, with the shares falling 7.8% to finish the week at $18.94 per share on the New York Stock Exchange. During the session, the stock hit a new 52-week low of $18.

Bear Stearns analyst Philip Cusick downgraded Motorola to peer perform from outperform. "Given the sudden degradation in the business and lack of detail/explanation in the sharp margin deterioration, we cannot justify defending the stock near these levels," Cusick wrote. (Bear Stearns does and seeks to do business with companies covered in its research reports.)

Motorola said its Mobile Devices unit sales were around 66 million units, up 23% from the third quarter of 2006 and up 48% from the fourth quarter of 2005. But it also said that its sales and earnings shortfall took place in that segment, and "is attributed to an unfavorable geographical and product-tier mix of sales as compared to the company's internal forecast."

Deutsche Bank downgraded the stock to hold from buy. (Deutsche has done business and received fees from the company in the past year.) "We are concerned that slowing growth in mobiles, a shift in volumes to low-priced models, and reinvigorated competition will force Motorola to choose between market share and pricing in coming quarters," analyst Brian Modoff wrote in a research note.

Modoff pointed out that Motorola faces tough competition from the likes of the Finnish cell phone titan Nokia (NOK) and Asian vendors who offer thin phones. He added that the iPod and computer maker Apple (AAPL) is likely to launch its own mobile phone possibly next week, a move that could dent Motorola's marketing efforts.

"We think sales of low end devices in Asia were strong, but believe Motorola lost sales momentum in North America," said Standard & Poor's equity analyst Kenneth Leon. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.) Leon kept a buy opinion on the stock, explaining that he wants to wait for the full earnings release on Jan. 19 before revising his outlook. "Motorola's earnings pre-announcement suggests that it gained market share in mobile devices but that margins narrowed."

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