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Monday, October 29, 2007

Motorola's good quarter not all that good

Motorola (MOT) recently released earnings and the stock got a little boost. Was the stock gain warranted? Is Motorola out of the woods?

First, we can acknowledge there are a few positives mixed in with the negatives. After three quarters of declining earnings, two of which showed losses, MOT actually showed a profit of $60M. That is very good news and may indicate that the worst is behind the company and the tide is turning, to mix a couple of metaphors. On the negative side, the year-over-year comparison is stark: 3rd quarter earnings in 2006 were $968M, more than 16 times greater that this year's 3rd quarter.

On the revenue side, this year's 3rd quarter revenues of $8.8B were less than 10% lower than last year's $10.6B. $8.8B was a small improvement over the previous quarter's revenue and that's another positive. Still, earnings have plunged while revenues have shown a moderate decline. This indicates something's still wrong with Motorola. And this earnings shortfall comes despite progress in cost-cutting.

Segment results --

Home and Networks Mobility had segment sales of $2.4 billion, up 6 percent compared with the year-ago quarter. Excluding special items, operating earnings were $165 million, compared with operating earnings of $231 million in the year-ago quarter. As a future profitability driver, I'm interested to see if Motorola can leverage their early entry into WiMax and become a leading supplier of chips in this sector.

Enterprise Mobility Solutions had segment sales of $2.0 billion, up 47 percent compared with the year-ago quarter. Excluding special items, operating earnings were $336 million, compared with operating earnings of $280 million in the year-ago quarter.

As for the Mobile Devices segment, read on...

Cell phone problems --

Some of this quarter's numbers indicate improvement (increased number of units shipped, higher gross margins lower expenses) but there are still issues in the cell phone unit. Sales, at $4.5B were down 36% from the previous year's quarter and the segment incurred an operating loss of $138 million, compared with operating earnings of $843 million in the year-ago quarter.

In terms of product mix, Motorola has problems at the top and bottom ends of the market. At the high end, it has no product to directly compete with Apple's iPhone, for example. At the low end, it is losing share to its main competitors, Nokia, Samsung and Sony Ericsson. This means Motorola is not benefiting from the strong growth in emerging markets where lower-priced phones dominate.

Conclusion --

I still see nothing compelling in Motorola's story. A better quarter financially may indicate the beginning of a turnaround but that notion is being undercut by the fact that the company has slid from number two to number three in the world wide cell phone market.

In looking at the 8-K, operating earnings for the company as a whole were actually negative and MOT would have shown another quarterly loss if not for positive numbers in the categories Other Income (interest income, gains on sales of investments and businesses and the catch-all category "Other") and Earnings from Discontinued Operations.

This is not the sign of the definitive turnaround investors have been hoping for. The stock could very well weaken further from here.

Disclosure: author owns no shares of MOT

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