Several tier-1 firms are commenting on Motorola (NYSE:MOT) after the co warned late last night:
- I believe yesterday's call of the day goes to Deutsche Bank for downgrading the stock to to Hold from Buy just 2 hrs ahead of the news. The firm notes they 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. The firm lowered their price target from $30 to $22 on lower estimates.
The firm believes global handset volumes remain strong, but they expect some slowdown in growth rates in 2007. Further, much of the volume gains in the latest and coming quarters have come from low-end devices. Thinks Motorola is finding it harder to balance market share and margins, and we are headed into a lower margin environment in 2007.
In the past, the company has bee able to use its leading product portfolio to boot both growth and profitability. This is also becoming harder as many Asian vendors now offer truly thin phones. DB would also not rule out a better line-up from Nokia at 3GSM. Finally, they think Apple is highly likely to launch its own mobile phone possibly next week. This may not be a volume threat to Motorola, but could capture RAZR's 'iconic' status, denting Motorola's marketing efforts.
- Morgan Stanley notes the significant cut in profitability this quarter is a blow to a
key tenet of our thesis that margin improvement (along with market share gains) would drive stock outperformance. As this news will be quickly priced in to shares tomorrow, they're going to resist the temptation to change their Overweight rating at this point until they learn more about the reasons for the margin collapse and assess whether they are fixable over the next few quarters.
Motorola's negative pre-announcement is striking in at least two regards. First, and most important, mobile device operating margins appear to have been cut in half this quarter to around 5-6%. Second, although of far less importance right now, is that Motorola appears to have gained around 150 bps of share in the handset market this quarter. Regarding profitability, based on the limited data Motorola released last night, the firm believes gross margins at the corporate level are a little over 27% this quarter, down from 31.9% in 3Q06 and below MS estimate of 31.5%.
Clearly there was bad news priced into shares given the recent underperformance, but they don't think news this bad was priced in. The firm would not be surprised to see shares trade off 5% or more in tomorrow's session. They estimate ASPs were around $121 this quarter, below their estimate of $135. Tgt goes to $25 from $26.
- Piper Jaffray is downgrading their rating to MP from OP based on belief it could take several quarters for Motorola's handset operating margins to recover.
While handset unit shipments of 66M exceeded firm's 62M estimate, handset ASPs and operating margins were well below estimates. In fact, they estimate handset ASPs were approximately $120 versustheir $135 estimate. Further, they estimate mobile phone division operating margins were roughly 4-5% during the quarter versus 11% estimate.
Given the disappointing operating margins for Motorola and lack of strong mid-to-high end products to replace the now lower ASP RAZR, PJ believs Motorola's mobile phone margins could remain below 10% throughout 2007. Due to the disappointing Q406 results and channel checks indicating increasing competition, they are lowering their 2006 proforma EPS estimate from $1.34 to $1.19, 2007 from $1.56 to $1.07, and introducing a 2008 est of $1.33.
Tgt goes to $20 from $27.
Notablecalls: Can't say the news is a total surprise. Check the archives over the past couple of months for further commentary. The magnitude of the miss is, though. I happened to sit at my desk when the news hit and the first question to cross my mind was, "If this is how bad MOT is doing, what the heck will Nokia's (NOK) results look like when the co reports on Jan 25?"
Motorola's RAZR/KRZR (thin line) is still the hottest selling handset on the mkt and despite that the co can't put together a decent qtr. Nokia has been lagging in terms of innovative handsets meaning a time bomb ticking away there as well.
Back to MOT, I suspect we may see an initial bounce just below the $19 level. The co is still profitable and the stock is down over 25% from it's recent top (not that expensive either). In medium-term however, I'm not that optimistic. The handset market has run out of steam. It has been nearly commoditized. Must say I have no idea how MOT could come about fixing this problem. S-t the only winner in the handset space will most likely be Apple with their iPhone. That won't make things easier for MOT/NOK.
- I believe yesterday's call of the day goes to Deutsche Bank for downgrading the stock to to Hold from Buy just 2 hrs ahead of the news. The firm notes they 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. The firm lowered their price target from $30 to $22 on lower estimates.
The firm believes global handset volumes remain strong, but they expect some slowdown in growth rates in 2007. Further, much of the volume gains in the latest and coming quarters have come from low-end devices. Thinks Motorola is finding it harder to balance market share and margins, and we are headed into a lower margin environment in 2007.
In the past, the company has bee able to use its leading product portfolio to boot both growth and profitability. This is also becoming harder as many Asian vendors now offer truly thin phones. DB would also not rule out a better line-up from Nokia at 3GSM. Finally, they think Apple is highly likely to launch its own mobile phone possibly next week. This may not be a volume threat to Motorola, but could capture RAZR's 'iconic' status, denting Motorola's marketing efforts.
- Morgan Stanley notes the significant cut in profitability this quarter is a blow to a
key tenet of our thesis that margin improvement (along with market share gains) would drive stock outperformance. As this news will be quickly priced in to shares tomorrow, they're going to resist the temptation to change their Overweight rating at this point until they learn more about the reasons for the margin collapse and assess whether they are fixable over the next few quarters.
Motorola's negative pre-announcement is striking in at least two regards. First, and most important, mobile device operating margins appear to have been cut in half this quarter to around 5-6%. Second, although of far less importance right now, is that Motorola appears to have gained around 150 bps of share in the handset market this quarter. Regarding profitability, based on the limited data Motorola released last night, the firm believes gross margins at the corporate level are a little over 27% this quarter, down from 31.9% in 3Q06 and below MS estimate of 31.5%.
Clearly there was bad news priced into shares given the recent underperformance, but they don't think news this bad was priced in. The firm would not be surprised to see shares trade off 5% or more in tomorrow's session. They estimate ASPs were around $121 this quarter, below their estimate of $135. Tgt goes to $25 from $26.
- Piper Jaffray is downgrading their rating to MP from OP based on belief it could take several quarters for Motorola's handset operating margins to recover.
While handset unit shipments of 66M exceeded firm's 62M estimate, handset ASPs and operating margins were well below estimates. In fact, they estimate handset ASPs were approximately $120 versustheir $135 estimate. Further, they estimate mobile phone division operating margins were roughly 4-5% during the quarter versus 11% estimate.
Given the disappointing operating margins for Motorola and lack of strong mid-to-high end products to replace the now lower ASP RAZR, PJ believs Motorola's mobile phone margins could remain below 10% throughout 2007. Due to the disappointing Q406 results and channel checks indicating increasing competition, they are lowering their 2006 proforma EPS estimate from $1.34 to $1.19, 2007 from $1.56 to $1.07, and introducing a 2008 est of $1.33.
Tgt goes to $20 from $27.
Notablecalls: Can't say the news is a total surprise. Check the archives over the past couple of months for further commentary. The magnitude of the miss is, though. I happened to sit at my desk when the news hit and the first question to cross my mind was, "If this is how bad MOT is doing, what the heck will Nokia's (NOK) results look like when the co reports on Jan 25?"
Motorola's RAZR/KRZR (thin line) is still the hottest selling handset on the mkt and despite that the co can't put together a decent qtr. Nokia has been lagging in terms of innovative handsets meaning a time bomb ticking away there as well.
Back to MOT, I suspect we may see an initial bounce just below the $19 level. The co is still profitable and the stock is down over 25% from it's recent top (not that expensive either). In medium-term however, I'm not that optimistic. The handset market has run out of steam. It has been nearly commoditized. Must say I have no idea how MOT could come about fixing this problem. S-t the only winner in the handset space will most likely be Apple with their iPhone. That won't make things easier for MOT/NOK.
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