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Motorola and the Profit That Wasn't

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By now, you've heard the news: Motorola (NYSE: MOT  ) surprised the Street and earned a penny in profit last quarter.

Except that it didn't.

According to this morning's press release, Motorola earned $0.01 per share on $5.5 billion in sales in the second quarter of 2009. That sales number's down 32% from last year's Q2. The profit number is up, but only by virtue of a series of "one-time" charges and benefits: $0.04 per share charged off for impairments and the costs of reorganization (layoffs and such).

Those losses are counterbalanced by $0.06 per share in gains from a legal settlement, tax benefits, a reserves adjustment, and gains from the firm's in-house cash management vehicle, the so-called "Sigma Fund." Absent these one-time events, the company would have lost a penny for the quarter.

Now that we've put that fallacy to rest, let's review the rest of the damage:

  • Motorola's Home and Networks Mobility division turned in the strongest earnings performance for the quarter ("strongest" being a relative term). Sales declined 27% year over year, while operating profit dropped 38%.
  • Enterprise Mobility Solutions took second place, with a 17% sales decline causing a 40% slide in profit.
  • Last and least was the firm's ailing Mobile Devices division, where sales plummeted 45%, and caused an actual loss for the quarter. 27% less of a loss than in last year's Q2, but a loss nonetheless.
  • Companywide, free cash flow was flat against the year-ago quarter, with the result that Motorola still burned through nearly $900 million in cash flow over the last 12 months.

This last division (the one that makes cellphones by the way) now holds less than a 6% market share globally, putting it in a virtual dead heat with LG and Sony's (NYSE: SNE  ) Sony-Ericsson joint venture in the race for third place. Samsung and Nokia (NYSE: NOK  ) occupy the next two higher rungs, with Research In Motion (Nasdaq: RIMM  ) and Apple (Nasdaq: AAPL  ) the next two lower -- but unlike Motorola, they actually produce healthy profits on their phones.

Foolish takeaway
Taking the news as a whole -- the illusory profit, the staggering declines in sales, and Motorola's dwindling position in the cell phone industry -- I have to wonder why investors thought today's report was reason to bid the stock up 8%. To me, it's getting harder and harder to make an attractive sales pitch to potential buyers of the cellphones division.

And the longer Motorola puts this off, the more money it loses.

So what do you think, Fool? Will Motorola be able to hock its cell phone division before the cash runs out? Or alternatively, can it recharge the division and make it good as new? Weigh your thoughts, then post your comments below.

Of course, this isn't all Motorola's fault:

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Fool contributor Rich Smith owns shares of Nokia. Apple is a Motley Fool Stock Advisor pick. Nokia is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2009, at 4:57 PM, KL1114 wrote:

    you're a bit harsh on Mot there Fool... results from Home and Networks and Enterprise Mobility reflect the state of the economy..their fortunes will improve or not based on whether the economy will imporove or not.. but both are reliable cash/profit generators in a stable economy.... the phone business is the glass half full or empty piece..I think the damage has been done to this business for most part, but future fortune(as everyone knows) will depend on release of new phones in late 3rd qtr and 4th being the hits they could be.. stock is up because people are betting that it may be a 3 banger for the year relative to 1/09 price ...some of us have doubled up already and may get another good bump out of it.. the carriers like what they have seen so far with future product previews so there is some light at the end of the tunnel there..carrier enthusiasm is a big key..and let's face it..when investors have lost 30-40% in 08, they are looking to recoup some of that with plays like Mot.. guess we'll see eh?

    loyal reader, Kevin Leonard

  • Report this Comment On July 30, 2009, at 6:27 PM, prginww wrote:

    Even more baffling is how MOT can be up 62% YTD, and NOK down 16% YTD. NOK has a P\E of 8.9, and MOT has a P\E of 53.1. I would love to hear the explanation on this one.

  • Report this Comment On July 30, 2009, at 7:13 PM, KL1114 wrote:

    speculation willneed...pure and simple.. no fundamental reason..

  • Report this Comment On July 31, 2009, at 11:56 AM, singinintherain2 wrote:

    Remember Palm anyone? This time last year it was given up for dead! One new smartphone and it went from $3 to $14. I think this will be Moto next year.

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Rich Smith

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.

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