Certain stocks are either loved or hated. Investors shun them
when sales and profits are sliding, yet become quickly enamored
when results start to improve. But any rebound in a company's
operating picture can come in fits and starts, so when speed bumps
emerge in the story, momentum-chasing investors tend to dump a
stock. In the case of
, their loss could be your gain.
Roughly 18 months ago, it appeared Motorola was headed for ruin as
operating losses grew. Investors questioned whether the company's
disparate divisions still held any value. Shares moved down below
$4 for much of the market downturn, and even briefly breached the
$3 mark when the market collapsed. But management finally
understood the depths of the problems and decided to take a big cut
at expenses while maintaining research and development on products.
Those moves steadily paid off and the shares began to rise from the
ashes to a recent high of $9.45.
Such meteoric ascents are often the work of momentum investors
typically seeking to ride a wave of good news, and then flee at the
appearance of any bad news. When Motorola reported tepid
fourth-quarter results, it was a race for the exits. Shares are
down roughly -30% in the past three months, putting them back into
value territory. To get a sense of that value, you need to look at
the company as a series of distinct parts. Taken together, those
parts appear to be worth about $9.
Let's start with the balance sheet, where the company has roughly
$4.1 billion in net cash ($1.77 a share). Motorola is expected to
generate $2 billion to $3 billion in free cash flow this year, so
the cash position should be at least $6 billion by year-end, but
we'll stick with that $1.77 a share calculation for now.
We can next assess the value for the company's Enterprise &
Mobility Segment (
), which sells communications equipment to public safety agencies
and asset monitoring equipment (acquired through its purchase of
barcode and RFID vendor Symbol Technologies a few years back). The
EMS division is likely worth roughly $9.5 billion ($4.08 a share),
based on an assumption of seven times projected 2010 EBITDA (on an
enterprise value basis). That multiple is lower than pure play
companies in the EMS segment such as
Zebra Technologies (Nasdaq: ZBRA)
Together, Motorola's EMS division and current cash balance are
worth around $6, not far below the current stock price. Investors
are getting the company's remaining two divisions for free. The
first is the Home & Networks Mobility (
) division, which makes set-top cable boxes and other telecom
hardware. The unit generates about $8 billion in annual sales and
$700 million in operating cash flow, and is likely worth four or
five times cash flow -- let's call it $3 billion ($1.30 a share).
Then we can look at the much-maligned mobile phone division, which
was an industry leader just five years ago with its Moto phone, but
is now an industry laggard. This division hemorrhaged cash in
recent years, but massive cost cuts have shrunk those losses and
management believes the division will become profitable by the end
The optimism stems from a decision to get behind
Google's (Nasdaq: GOOG)
Android operating system. Google-based smartphones have become an
early hit for Motorola, as two million units were sold in the
fourth quarter of 2009. Motorola is also working with Google to
sell a smartphone direct to consumers through the Web, similar to
Google's collaboration with HTC on the Nexus One phone.
Motorola gets more than $400 for each of these smartphones, well
more than the $120 average sale price for traditional cell phones.
Notably, Motorola understated revenues in this segment by $200
million in the fourth quarter due to an accounting provision. This
early success is having an understated impact on the income
statement thus far, but that will change in 2010 when new rules are
adopted that require only a portion of smartphone sales to be
So how do you value a struggling mobile phone business that has
been showing new promise?
Dell (Nasdaq: DELL)
trades at just 0.3 times revenue, while
Palm (Nasdaq: PALM)
RIMM (Nasdaq: RIMM)
trade at 0.9x, 1.1x, and 1.7x, respectively. If Motorola's division
traded at 0.5 times revenue, the division would be worth $4
billion, or $1.65 a share. Taken together, the HMS and mobile phone
divisions are likely worth about $3 a share. This means we're
looking at a nearly +50% appreciation from the current price to
become fairly valued .
Management has acknowledged that Motorola has become an unwieldy
conglomerate . It knows these assets need to be monetized to truly
unlock shareholder value. Whether that will come in the form of
splitting the company in two or a selloff of one of the units (both
have been discussed) remains to be seen. As that process unfolds,
shares of Motorola should again re-visit recent peaks.
-- David Sterman
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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