Tuesday, February 13, 2007

Calls of Note Part 1

- Citigroup is out cautious on Motorola (NYSE:MOT) saying data-points and checks point to disappointing results for the Motofone. Coming into the key 4Q selling season of last year, management made bets on two product transitions:


From C11x low-end handsets to newer W-series and Motofone devices

The problems with the first transition were evidenced in the 4Q preannouncement that the company made in early January. Now, it seems that issues around the second transition are starting to bubble to the surface.

Citi's handset component colleagues have been picking up indications that component orders for the Motofone might be at risk. This is consistent with firm's own checks that suggest that orders have been disappointing. Further punctuating this has been comments from Mot's competitors which suggest the product has not created much market impact.

Firm also believes the disappointment here is creating some management turmoil in Motorola, given how much the company was betting on this product to help them gain share in the emerging markets. Symbolically, it is also troubling as it is the first product to be based on the SCPL, upon which senior management has high hopes. Citi originally estimated that Motorola would sell 6 million Motofones in 1Q, and now they think that this estimate may be at risk. For every 1 million reduction in Motofone sales, they estimate the EPS impact to be around one tenth of a penny, so the impact on bottom line is limited.

Longer-term, the impact could be more pronounced. It is no new revelation that the lower-end of the handset market is continuing to grow as a larger part of the mix. Thus, in order to capture their market share and scale objectives, Motorola has to do well here.

Given these issues, it makes it difficult to be constructive on the stock at this time. Maintains Hold.

Notablecalls: Looks like the short suggested last week is paying off. I must note however that the call was made in anticipation of weakness in the high-end mkt but the Motofone most certainly represents the low-end. The call by Citi is likely going to cause some selling pressure in MOT and I would cover some of the short into that weakness. Nice catch Daryl!

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