|Playing Motorola's New Smartphone Stock|
By BOB O'BRIEN
The four-month-old stock has a peer-industry multiple but outsize earnings-growth expectations.
There are no second acts in American lives, F. Scott Fitzgerald once insisted. But don't tell that to the executives at Motorola Mobility Holdings (ticker: MMI), the spinoff company now responsible for the latest generation of Motorola smartphones.
Once a dominant name in the cellphone industry, Motorola became known for not keeping up with the times. Successful product innovations like the StarTac and the Razr were followed by duds -- and periods of unprofitability to match.
Motorola Mobility Holdings (MMI)
Stock Price: $25.56
52-Week High: $36.54
52-Week Low: $22.56
Market Cap: $ 7.4 billion
Est. 2011 EPS: $ 0.80 per share
2011 P/E: 31 times
Est. Long-Term EPS Growth:* 7%
Est. ('11/'10) EPS Growth: N/A
Revenue (trailing 12 months): $13 billion
Dividend Yield: None
CEO: Sanjay K. Jha
Headquarters: Libertyville, Ill.
* Based on analyst estimates looking ahead three to five years.
Sources: Thomson Reuters
And critics of the newly cast mobile-phone company have reasons to wonder if this new company is the same old Motorola phone division in a new dress.
After all, the stock, which launched in early January, had a nice run-up before falling back to earth. It's slightly down from the price it commanded when it split from the rest of Motorola, an entity now called Motorola Solutions (MSI).
But bulls say Motorola Mobility is once again snatching victory from the jaws of defeat. And they may be on to something: With 27 smartphone models, it's selling feature-laden handsets at premium prices. Its average mobile-phone price in the first quarter reached $229, up from an ASP (average selling price) of $130 in 2009. It sold more than four million smartphones in the first quarter of this year, up 78% year-over-year, while shipping a higher-than-expected 250,000 units of the tablet product it introduced this year.
Trading at 14 times next year's earnings, it has got essentially a peer multiple, even though Wall Street's long-term earnings-per-share growth estimates are high for the sector. Analysts project there's at least 25% more upside over the next several months – Tero Kuittinen, who covers mobile devices at MKM Partners, puts the price target at $35 for this $25.54 stock.
"This is a company that's made some pretty bold moves over the last two years," says Kuittinen, who has a Buy rating on the stock.
Later this week, Motorola Mobility will roll out the Droid X2, its key product launch for the spring, which is aimed at the Verizon Communications (VZ) network. That will complement its existing relationship in North America with AT&T (T).
Motorola Mobility has beefed up its presence in critical international markets, having gotten its Atrix smartphone on the Orange U.K. platform ahead of rivals from Korea making comparable products. Networks in Brazil have lavished promotional backing on the Atrix, continuing the company's already-strong Latin American momentum. Its non-North American sales now account for 50% of activity, up from 25% in just one year.
"The driver of this growth, we believe, is continued traction at AT&T as well as international expansion in markets such as China and Latin America, which is increasingly becoming evident," Credit Suisse mobile analysts wrote in a recent report.
Meanwhile, the bulls insist that investors aren't giving enough credit to Motorola Mobility's home-electronics business, which manufactures set-top boxes and DVRs, and contributed $903 million in revenue last quarter, nearly one-third of sales. The share price also doesn't fully reflect the market value of the nearly 17,000 patents that Motorola Mobility holds. Intellectual property can be a valuable asset when used strategically.
Skeptics rightly note that Motorola still flubs new-product rollouts. Last month, the company said it plans to delay the launch of its first 4G smartphone, the Droid Bionic, possibly until later this summer. Analysts expect the handset market to put a premium on nimble product launches. Because so many smartphone manufacturers use Google's Android operating system, there's a lot of "me, too" products available.
As a result, product cycles are likely to shorten, and handset makers are going to have to develop a reliable pipeline. The ubiquity of the Android pipeline lowers barriers to entry – Google gives Android away – and gives both carriers and consumers leverage.
There are also questions about Motorola's push into the tablet market: One analyst from a boutique research operation excoriated the Xoom as "an epic flop."
Ultimately, though, Motorola couldn't afford to cede the tablet market to Apple and the host of rivals flooding in, lest it be accused of missing another product cycle. "If Motorola doesn't compete in tablets, they'd be taking a huge risk," insists MKM's Kuittinen.
"We continue to be positive on Motorola Mobility in light of its strong product momentum this month," Kuittinen says.
Given the share's reasonable price, we're inclined to go with him on this.
•MKM Partners has a Buy rating and a $35 price target on Motorola Mobility Holdings.
•Credit Suisse has an Outperform rating and a $31 price target on Motorola Mobility. The firm has performed investment banking services to Motorola within the last 12 months.