Is Motorola Calling? (MOT)

By Stephen Brown | March 01, 2007 AAA

"Vive la Difference!", the French are apt to say when they are in one of their more magnanimous moods.

It is a sentiment I wholeheartedly embrace.

To wit, in January my astute Investopedia colleague Glenn Curtis presented a cogent analysis of Motorola's (MOT) woes in his commentary Hang up the Phone on Motorola.

Glenn was less than impressed with Motorola's cost-cutting measures (axing 3,500 employees), its new KRZR phone and its valuation, especially when compared to the competition.

To quote him directly, "...investors need to ask themselves if they would rather invest in a company that is trading at roughly 17 times the current 2007 earnings estimate (of $1.10 a share) and is expected to show between 10% and 14% revenue growth and flattish earnings growth (Motorola), or a company that trades at about 14 times 2007 earnings estimates of $1.45 a share and is expected to generate about the same revenue growth, but has higher margins, and is expected to grow its bottom line by 17% in the coming year -- Nokia (NOK)."

Motorola is hurting, to be sure. In January, the company, which makes one in four of the world's cell phones, reported a 48% decline in net income in the fourth quarter thanks to a collapse in profit margins for its popular RAZR cell phone.

Worse, Motorola is teetering on becoming a has-been in the hip mobile-communication niche, having ceded industry buzz to Apple (AAPL), its partner in a previous phone project, which introduced its highly anticipated iPhone a few month's ago.

But despite its current woes, I think Motorola is worth a sniff, and I'm not the only one.

A few investors believe the company's current troubles present investing opportunity -- none more than famed value investor/agitator Carl Icahn, who recently purchased 33.5 million, or 1.4%, of Motorola shares, and according to a recent reports, is interested in purchasing up to $2 billion more. (To be fair to Glenn, Icahn's Motorola position was reveled after his original commentary had been posted.)

I like Icahn and his modus operandi -- pressure management to make more shareholder-friendly decisions.

While little is known about his actual plans, Icahn has said publicly that he wants Motorola to spend the majority of its $15 billion cash account to buy back company shares to boost its floundering share price.

Motorola has already taken steps in that direction, having bought back $700 million worth of stock in the fourth quarter, and it plans to spend another $3.8 billion on share repurchases through June, 2009. Icahn wants more and he wants it sooner rather than later.

That said, buybacks aren't the perfect panacea for a floundering share price. While they can drive up share prices by creating market demand, the appreciation can prove fleeting. What's more, the cash spent on buybacks means less cash is available for activities such as R&D and acquisitions.

Motorola recently closed the acquisition of Symbol Technologies for $3.9 billion in cash. Many analysts believe Symbol will strengthen the company's enterprise wireless business, particularly in vertical markets such as retail, travel and transportation, manufacturing, and wholesale distribution. To the extent they limit the company's ability to do more of these types of acquisitions, stock buybacks are a very real opportunity cost.

Nevertheless, many of Motorola's largest shareholders appear to like what Icahn is saying. Eight of the company's 10 largest investors added more shares in the most recent quarter, according to recent regulatory filings.

But what if Icahn's rabble-rousing falls on deaf ears? Is Motorola still a legitimate investment based on its own merits?

My somewhat equivocating answer is, "I think so".

Motorola is in solid shape financially. The company has its cash hoard, a debt-to-equity ratio of 20%, a current ratio of 2.2 times, and a proven ability to generation operating cash flow.

What's more, Motorola shares trade about 16 times their estimated 2007 earnings per share of $1.10 to $1.25. In the broader technology sector, Motorola's shares appear to be even more of a bargain when compared to Apple's 28 earnings multiple.

Applying a reasonable P/E multiple of 20 times to 2007 EPS, or a price-to-sales of 1.1 times to 2007 sales estimate of $19 to $20 per, I can easily see a share price in the low- to mid-$20 range.

Thank goodness for "la difference" -- without it we wouldn't have much of a market.

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