We published a Motorola positioning document and company analysis back in February (available here) that outlined how Motorola might establish some improved momentum and gain a better multiple in the market to drive the stock towards $20. Even absent a bold strategy, the valuation of the company post-split is likely to be in the $11–12 range.
Our analysis was mostly greeted by a giant yawn of mildly disgusted indifference. Motorola had been disappointing long enough (most would point to the RAZR in 1993 as their last real innovation) to be no longer worth paying attention to. The situation reminds me very much of the time that a company called Sterling Software (trading under the symbol SSW at the time) acquired the TI software business. Back then, my view of the acquired business was that in the next 12 months SSW stock was likely to double as investors learned how much revenue and earnings the acquired business would add. (SSW did indeed go on to double that year but was still a failure for me as a sell-side analyst because I failed to get clients to put it into their portfolios.)
Adding to the difficulty of getting anyone interested has been the lack of a clear point in time when the shares might start to outperform. In fact, the shares have been “dead money” so far this year. But things are perking up with continued success in the Android market and the realization that the split may be a positive catalyst.
To that end, the sale of their wireless network business to Nokia Siemens for $1.2B in cash is a clear positive. The value is more or less in-line with our $1.8B intrinsic valuation for this business since MOT is retaining the patent portfolio, some receivables and the iDEN business. As described in our note, the Networks business was seen as “the best candidate [business] to eliminate,” and so it comes as some relief that a solution was found. The transaction is expected to be finalized before year-end, paving the way for the complete split of the company at the beginning of 2011.
We are mostly attracted to what will be the mobile computing segment of the company that will include both the Mobile and Home businesses. We’ve made no secret about our preference for mobile and consumer Internet technology investments (as in “Time to Pull the Trigger”, June 2008) and see the combination of mobile and home-based Internet technology as a sensible way to address the consumer market. Although the smartphone is the central feature of mobile Internet, consumers wish to take advantage of other networked devices in their home, and even in their cars, to extend the power and richness of their connected world.
The earnings report today demonstrates at least respectable execution which is all the company needs to begin to win investors over again. Â In our view, the success of Android is producing a powerful tailwind for the Motorola mobile business that will improve the fundamentals sequentially for the next several quarters.
As the split gets closer we will do our IV analysis for the two companies but fully expect the shares to be in double digits in the next 6 months. While not spectacular, this is a very attractive return from current levels in a very liquid security. If the company were to execute well the equity value could easily top $20.
So here we have another stock that looks poised to double in the next 6 to 12 months. Apple is far more sexy (and we own that one too) but based on our IV there is more upside today in MOT.
Our overall IV analysis, as well as that of the individual business segments, is available to R2 subscribers.
[Disclosure: The R2 Model Portfolio has a long position in MOT and so does the author at the time of this writing. Positions are subject to change anytime and without notice. This post should not be considered investment advice.]
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