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Tickers in this Article: MOT, NOK, CSCO, AAPL
Motorola (NYSE:MOT) continues to be a disappointment for its long-suffering shareholders. But now is not the time to follow them to the exits. The stock is priced for investors willing to hold on for a turnaround.

Motorola's corporate performance has been downright dismal. It has been pushed into the No. 2 spot in the fiercely competitive global mobile-handset space. Nokia (NYSE:NOK) now owns 36% of the market.

The Razor Isn't Enough
Forced to sell its phones at lower and lower prices, Motorola is seeing profit margins slip away, too. Despite operating in the red-hot wireless industry, Motorola managed to lose money in the first quarter of 2007. More recently, the company was forced to lower its Q2 earnings guidance numbers.

To make matters worse, Apple (Nasdaq:AAPL) has grabbed the spotlight with the launch of its fancy new iPhone, leaving Motorola's new products largely unnoticed by the market. The attention that Motorola has received lately has been negative - and deservedly so.

Since last summer, the market has knocked down Motorola shares by about 10%. Looking back over three years, the stock has dramatically underperformed its peers and the market. Since July 2004, Nokia has returned a whopping 99%, Cisco (Nasdaq:CSCO) gained 27%, and the S&P 500 Index rose 36%. Motorola, on the other hand, returned shareholders a measly 2% over the same period.

What Motorola's Got
The news isn't good, but there are reasons to think things won't get worse. The stock could be close to bottom. In fact, if you look closely, you can find some signs pointing to recovery.

The road to any kind of recovery starts with getting the problems out into the open. This spring billionaire value investor Carl Icahn sought a board seat to shake things up. His bid failed, but his work exposed the company's lack of vision and recovery plan.

It's now clear to just about anybody who watches the stock, including the company's board, that Motorola's management needs to do more than just talk about producing innovative products and regaining margins. The pressure is now on CEO Ed Zander's executive team to "walk the talk".

Moving Forward

Look for a revamped market strategy from Motorola. A renewed focus on a broader product portfolio of higher-than-average phones and less reliance on the low-end and "blockbusters" could put profit margins back on track. Meanwhile, hefty cost-cutting initiatives announced last quarter should give the bottom line a further boost.

Of course, turnaround efforts could take many quarters to show meaningful results. So, in the meantime, it's worth considering the stock's valuation.

The shares have fallen far enough. At $17.70, the stock is priced at less than 1-times 2007 revenues, and it delivers a 2008 free cash flow yield of 8.5%. Nearly $3 billion in cash sits on the balance sheet. Priced any lower, Motorola's cash flow would make it an eye-catching takeover target.

What's more, Motorola trades at hefty discount to its peers. Motorola is priced at just 16-times earnings compared to Cisco's multiple of 25 and Nokia's 21. Three years ago, Motorola was trading at 36-times earnings, more than double today's multiple.

All this suggests that plenty of potential exists for unlocking value at Motorola. The valuation gap ought to narrow, which could translate into hefty gains for investors.

Of course, with few short-term catalysts available to ignite them, Motorola shares could be dead money for some time. But nervy investors willing to hold while others are selling could be well-rewarded.

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