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Motorola Upgrade Questionable

Lehman Brothers upgraded mobile phone maker Motorola Inc (MOT) to overweight from equal weight, saying improvements in operating expenses should help the company's phone unit return close to break-even by the fourth quarter.

Operating expenses are important but so are compelling products and Motorola is lacking in buzz at the moment. Motorola does not have anything close to the iPhone, for example, and the RAZR, while still a good seller, does not have the cachet it once had.

If buzz isn't the strategy, then heading in the opposite direction and dominating the low-cost market sector is a viable alternative. Motorola has not been especially successful in this area either, having admitted it can't match competitors prices. To make matters worse, Sony-Ericsson is now entering this market and that will only make the sector more competitive and more difficult for Motorola. Given that growth is so strong in emerging markets where high-end devices are not necessarily in highest demand, this could be a serious long-term negative for Motorola.

Motorola is sandwiched in the mid-market with a product portfolio that is increasingly focused on the Americas. With the level of competition that exists in the mid-market sector, you can assume that margins are thin.

Motorola reported earnings in July that were dismal and indicated that its mobile devices unit will not be profitable in 2007. This is in spite of the fact that it is second only to Nokia in worldwide handset shipments.

Motorola did say they expected things to pick up somewhat in the second half and that seems to be confirmed by the Lehman analysis. Nevertheless, I can't agree with the Lehman rating and would advise anyone who felt compelled to invest in a handset manufacturer to look at Nokia (NOK), a company that has leading market share, turns a profit consistently and has an advancing stock price.

Disclosure: author does not own any of the stocks mentioned in this article

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