Tuesday, February 06, 2007

Motorola (NYSE:MOT) - short around current levels

Couple of firms comment on Motorola (NYSE:MOT):

- CIBC notes that based on checks, they believe MOT is experiencing a slowdown in handset demand in January. Channel overhang from a strong December push, saturation in demand for RAZR in certain regions, a slowdown in ASP discounting and stronger performance from NOK are to blame.

Firm believes Motorola's internal target for handset shipments in 4Q06 was only 58-60 million units. Yet, with the slow demand for the KRZR, Motorola pushed its channels for more volume, making for 6-8 million units upside relative to internal expectations.

Given the magnitude of the late 4Q06 push, the channel still feels the overhang with inventories of certain models available. Specifically, CIBC believes pockets of KRZR inventories remain, despite ASPs now dropping below $200 (~$190 based on contacts). Recent ASP concessions has created a wait and get a lower price approach with customers. Also, Motorola appears to have lost some share in January in North America, Europe and China.

At the same time, they believe MOT has taken its first steps in reorganizing its handset division. Through a regional overhaul, the handset unit is now aligned into four groups vs. seven before. Top management in the handset regional groups has also been realigned. Following unit and ASP adjustments, they are lowering estimates.

While Carl Ichan can make an impact on MOT stock price, the firm believes fundamentals are still weak and still see potential for downside. Maintains Sector Performer rating.

- Citigroup notes a couple of points of interest that they think could have an impact on the
financials and/or sentiment around Motorola:

Management decided to cancel their Handset-related meetings at the 3GSM conference in Barcelona. Management noted that they under-estimated the amount of time that carriers were demanding from their executives and simply could not accommodate investor meetings. This is a departure from their normal practice of meeting with investors each year at this conference. Given that Europe is a key focus for Motorola this year in terms of market share and that they are launching a set of new products in 2H07, their explanation for the cancellations makes some sense. Having said this, many will remember the following. Management also avoided meeting investors at CES and subsequently issued a 4Q06 preannouncement. This previous sequence of events will likely influence the way that investors perceive this recent development. Citi does not think this is in any way connected with Icahn's presence as the company still is hosting meetings for their Networks business.

They are encouraged by the increased promotional support that Verizon seems to be providing for the KRZR.

Firm thinks that Motorola's experience with the KRZR punctuates two of our key thesis around the North American wireless industry. First, you have to provide exclusives (at least on a short-term basis) to get carriers to push your product. It means a slower volume ramp but the probability for achieving longer-term success goes up dramatically. Secondly, evolutionary products are truly confined to wholesale price points in the $200 level or below. The problem for Motorola and the KRZR is that is virtually impossible that the amount of cost reduction that they have seen with the KRZR has come close to matching the price deterioration. Thus, they think this product likely has seen meaningful margin contraction in 1Q07. Maintains Hold and $22 tgt.

Notablecalls: The problems in the handset space started with inventory builds at the low-end. ASP's fell and margins got crushed. I now hear the high-end market has started to show signs of weakness. This of course means we are going to see estimates going lower over the next couple of months. Btw, I think MOT's a short off of these comments. Tight leash.

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