Wednesday, March 14, 2007

Calls of Note Part 2

- Merrill Lynch is lowering their 1Q estimates on Motorola (NYSE:MOT) to reflect supply chain checks which are indicating in some cases as much as 20% sequential declines on orders of PCBs, casings, and connectors. The data also suggests sluggish demand for the KRZR and a slow start to the RIZR. They are lowering 1Q EPS to 18c from 19c and note that there could be further downside.

With growing evidence of a weak handset portfolio, the firm can no longer assume the best of both worlds, or growth in handset shipments coupled with ASP stabilization. In their view, management will elect to be margin-conscious and will therefore let MOT's market share decline rather than allow ASPs to drop. MLCO now models '07 units to be up 10.1% YoY vs. 20% before, with EPS estimate of $1.01, down from $1.12 (consensus is $1.17).

Firm notes Motorola's stock still looks cheap, trading at 13x new 2008E EPS of $1.38, down
from $1.54 (Street at $1.42). Furthermore, the stock could look even cheaper should management finance a stock buyback with debt. They therefore believe that the downside risk is limited. On a negative note however, shares will likely remain confined to the current trading range due to struggles in the handset business, risks to the profitable iDEN business and greater contribution from the less profitable Wimax segment.

Notablecalls: No surprises here. Must say I'm starting to turn somewhat more bullish on MOT as valuation is low and we have been getting some bullish indications from component suppliers. The $18 level may provide a short-term bounce here. Not a high conviction call, though.

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