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Motorola's Making Sense

I am hard to please. I like to see "1 + 1 = 2" logic -- something that's strangely missing when I ponder the press releases and press interviews from many company CEOs. That's why a news release from Reuters caught my attention on Wednesday. It said that Motorola (NYSE: MOT  ) CEO Ed Zander is fed up with rivals copying his company's cell phone designs.

How's this for connecting the dots? Motorola says it will no longer announce new phones for up to nine months in advance. Instead, it will make announcements when the phones become available to customers. That's a perfect example of the "1 + 1 = 2" logic I like to see. And for that reason, I have to admit I finally like Motorola.

Of course, this simple logic is not lost on companies in industries whose products have short life cycles -- such as the computer industry. Zander's previous employer, Sun Microsystems (Nasdaq: SUNW  ) , makes product announcements when its products are ready to ship. And Apple Computer (Nasdaq: AAPL  ) is famous for launching products that create immediate shortages at the stores -- a situation that causes the press to write about the feeding frenzy. That's smart business, and it allows Apple to get word of mouth that its peers lack.

When I select a cell phone, my choice has always been a Motorola design. I like what the company offers. And others must, too, since Motorola is No. 2 in its industry, perhaps in part because of the hot-selling, pricey, ultra-thin RAZR model. But the RAZR has also been widely copied.

So why does Motorola, the stock, look interesting to me now? Well, it's not momentum. Look at a chart of Motorola's stock, and you can see that today's price is slightly above what it fetched five years ago. But, consider this: The stock is trading for 12.3 times trailing earnings and carries a strong balance sheet.

Also catching my attention was a January preview of the company by the Fool's own Rich Smith. He pointed out that the company's risky selling-for-less pricing strategy had led to falling gross margins. But Rich also pointed out that the company's cost controls have operating margins on the rise, thus fueling an expansion to bottom line.

Many would argue that Motorola is fairly valued at 12.3 times earnings, since analysts forecast the long-term growth rate to be a solid but not robust 10%. That happens to be the same growth rate that peers Nokia (NYSE: NOK  ) and Ericsson (Nasdaq: ERICY  ) are expected to attain, yet they, respectively, sell for 19.2 and 18.1 times earnings. Of course, we'd do well to note that Motorola has recently posted strong earnings -- a trend that hangs in the balance, according to product cycles and continued innovation. As such, continued strength will be necessary to retain the current valuation.

Consider this, too: Motorola gained market share in 2005 in Europe, Latin America, and north Asia. The company has expanded its infrastructure in China and India to position itself for a larger share of those markets. Part of making those gains has included the introduction of 26 new handset models in 2005, and part has come from the aforementioned low-price strategy -- which should yield a meaningful position over the longer term.

Here is the bottom line: At midday Wednesday, Motorola's stock was unchanged. Investors would be well served to step back, look at the industry, and consider what Motorola is doing -- particularly because handsets accounted for 62.5% of sales last quarter. Then they may reach the same conclusion as I have -- Motorola's new approach to business makes sense, and it very well could add cents to the bottom line.

Are you looking for the best investments on Wall Street? Fool founders David and Tom Gardner recommend two for your consideration every month in theMotley Fool Stock Advisornewsletter. Try a satisfaction-guaranteedfree trial subscriptiontoday.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. The Motley Fool has adisclosure policy.

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