Wednesday, October 18, 2006

Color on quarter: Motorola (NYSE:MOT)

Several firms are commenting on Motorola (NYSE:MOT) after the co released its Q3 results last night:

- Morgan Stanley notes that the bears will point to slower growth than the competition and lower ASPs, while the bulls, the firm among them, will point to the step-up in operating margins and expectations for a rebound on new products in Q4. They recommend using weakness stemming from the disappointing quarter as a buying opportunity ahead of what should be a return to better execution in coming quarters.

Sales of $10.6 billion missed our $11.1 estimate due to an inventory correction for iDEN handsets, a lack of 3G products in Europe, reduced average handset prices, and weak wireless infrastructure spending in Europe. MS expects these issues to be resolved in Q4 on the launch of new handsets at Sprint, more high-end handsets in the mix including 3G in Europe, and some seasonal improvement for infrastructure. The firm trims their estimates slightly -- C2007 drops to $1.63 from $1.68 -- on a slight reduction to market share estimates.

The handset market continues to surprise to the upside, and they think it has a few more quarters to go. Maintains Overweight.

- Deutsche Bank notes that as is often the case with Motorola decent quarters are often masked by small misses in one segment. In last night's results, there were two missing pieces. First, weak capex from Motorola's GSM carriers in Europe. Firm believes this is a relatively small piece of business for Motorola, and was likely to decline with time anyway. A bigger concern was the weakness in orders from Sprint (presumably) ahead of the launch of dual-mode iDen/CDMA phones. While obviously this is a concern for the quarter, we think over time weakness in iDen will be offset by gains on the CDMA side.

Deutsche thinks it is significant that the company was able to improve operating margins in its handset business despite the softness of its higher margin product. The company deserves credit for making some significant strides in delivering on its promised operating margin improvements. Firm points out that the company was able to launch GSM and CDMA versions of the KRZR simultaneously in Q3 and will launch GSM and CDMA versions of the MotoFone in Q4, feats unthinkable only a year ago.

In their view, the fundamental thesis for Motorola has not changed. The company is improving margins, gaining share and generating a tremendous amount of cash. Most importantly, they still have the most compelling line of handsets on the market. Barring something exciting from Finland, they think Motorola should continue to outperform as we enter the Christmas shopping season. Maintains Buy.

- CIBC: Has MOTO lost its mojo? The firm thinks not. Investors need to ask--can Samsung, LG
and others keep up? In any given quarter they can take away from MOT's upside, but in the long run they lose. And when MOT bounces back, it will be at higher operating margins. They believe it's time to buy.

Clearly not the most inspiring quarter, although MOT delivered bottom-line results in line with the Street at $0.34 despite the top-line shortfall ($10.6B vs. firm's $11.4B and Street $11.1B). iDEN handset delays ahead of new dual CDMA/iDEN models and a slowdown in EMEA GSM spending were the cause. They continue to see MOT's handset portfolio as the pace setter and expect the company to bounce back as the new KRZR, RIZR, FONE handsets ramp in 4Q.

CIBC is adjusting their 2006 revenue and EPS estimates to $43.4B and $1.33 from $44.4B and $1.35 and 2007 estimates to $45.0B and $1.52 from $46.3B and $1.56. Firm is introducing FY08 estimates of $47.3 billion and $1.79. Reiterates SO rating and $28 price target.

Notablecalls: There is no question of what to do with MOT here - you gotta buy the common right here. The stock started to sell off couple of days ahead of results, the results disappointed and now we have several tier-1 firms defending it - thats a good recipe for a bounce. Be the trading chef.

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