Wednesday, February 07, 2007

Calls of Note Part 1

- Bear Stearns notes that given the volatility in Motorola (NYSE:MOT) shares after its earnings miss and activist interest they've revisited their MOT valuation. After reviewing a variety of scenarios and valuation metrics including DCF, LBO, buybacks, and sum-of-the-parts they see a fair value range of $23-25 per share compared to the $19.73 closing price Tuesday.

After operating margins dropped from 11% to 7% q/q, firm's $23-25 range is based on mgmt's guidance to an OM rebound in 2H07 and long term margins in the 10-12% range. However, MOT's challenge in replacing RAZR and iDEN cash flow is huge and justifies a discount to peers. They expect continued volatility in the near term including a rough 1H06.

A big question is whether MOT (and tech in general) can handle more debt. Bear believes that from ~2x net cash today MOT could certainly buy stock back faster, and may be already. Were MOT to lever net debt to 2x EBITDA it could buy back ~1/3 of equity. While accretive on an EPS basis, they believe this may leave many tech investors unwilling to hold the stock. Recent tech LBO's though indicate that private equity firms may consider a run, but MOT's size could present a challenge.

Although handsets have seen strong, steady growth for 4+ years the firm believes there is still potential for a downturn in the business which could leave a debt-laden company impaired. However unlikely, the prospect of having to reduce R&D to make interest payments could make a cyclical downturn permanent. Connected Home and the gov't bus offer some diversification from MOT's handset business (still ~2/3 of cash flow) and they believe are better within the company than sold off.

Maintains Peer Perform.

Notablecalls: Considering I issued a short sell call on MOT yesterday, I thought it was important to highlight any subsequent broker chatter on it. The stock declined $0.30-$0.35 after the open but found some buy interest in the afternoon following chatter Carl Icahn is beginning to circle the boat in a more aggressive manner. Tight leash.

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