Thursday, July 12, 2007

Motorola (NYSE:MOT): Color on warning

The analyst community is mostly supportive of Motorola (NYSE:MOT) following a negative pre-announcement issued last night. There are some exceptions, too:

- CIBC notes that although June was tougher than expected, their thesis and Sector Outperformer rating are unchanged. Firm's positive stance is based on the long term opportunity for a recovery in the company s handset business, and they believe nothing has changed with respect to this. In fact, a closer look at MOT s results reveals positive trends that they believe over time will enable the company to exceed expectations.

First, ASPs (pricing) came in at around $130 vs. $119 in 1Q07. This suggests Motorola not only held firm on pricing but also continued to pull back on its presence in the low-end, in which CIBC believes the company never made a profit. Second, they note that the company has just completed the first round of layoffs ($400 million) suggesting we have yet to see the benefits of the cost initiatives in earnings. Third, and although Motorola has not commented on this topic, they believe inventories have improved materially which could help reverse sell-in trends. Last but certainly not least, the firm si positive on the appointment of Stu Read, Motorola s head of supply chain, as the new head of Mobile Devices.

Longer term we see positives in the pre-announcement, primarily reflected in data points suggesting management is committed to its new business strategy. To be sure, the revenue shortfall is meaningful, yet the earnings miss was small (only $0.01). Even with the miss, they believe some investors expected a bigger shortfall.

- Deutsche Bank thinks the magnitude of the miss indicates the company's intention to put the worst behind it. This includes clearing inventory, overhauling their pricing strategy and clearing the deck for possible new product launches later in the year or early CY08. While a true turnaround for Motorola depends on refreshing the product line-up, they think today's news could mark the bottom. However, the timing of the handset turnaround remains uncertain and Motorola's competitors
continue execute.

- Morgan Stanley notes the press release doesn't include any comment from CEO Ed Zander, which after the recent proxy battle seeking his ouster likely adds to speculation that his tenure at the company may be coming to a close. Regardless of one view of his role in the RAZR success or rapid deterioration over the past few quarters, calls for a change in senior leadership are likely
to increase, and, at least in firm's view, provide valuation support for shares around current levels. Maintains Equal Weight with $20 tgt.

- Goldman Sachs continues to see deteriorating fundamentals ahead. They are reducing their 2008 EPS estimates to $0.46 from $0.91. While some may view a bottoming process forming with weak 2Q results now out of the picture, they believe that most investors are underestimating the deterioration in the company's fundamentals & they continue to believe that a turnaround will be a multi-year effort. As they've highlighted in previous notes, they believe MOT's market share continues to erode into 2008 as checks indicate the company cancelled a number handset models slated for next yr, which puts it in a tough position from a product portfolio perspective. Maintains Neutral.

Notablecalls: Weakness in Asia and Europe should not come as a surprise. It looks like MOT continues to hold it own in US, its most important market. Exiting the low-end side of the business makes sense as soon there will be no low end to speak of.

It also looks like Ed is going to be between a rock and a hard place. That's one warning he could not afford. Icahn is going to have a field day.

Kudos goes to RBC Capital for their hefty cut on the rev est side last week. The stock may be weak today but as Deutsche said - MOT stock is in a midst of a bottoming process.

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