Is Motorola Solutions Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Motorola Solutions' (NYSE: MSI  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Motorola's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Motorola's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Motorola's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Motorola managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Motorola's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Motorola's key statistics:

MSI Total Return Price data by YCharts.

Criteria

3-Year* Change

Grade

Revenue growth > 30%

(58.5%)

Fail

Improving profit margin

1,702.1%

Pass

Free cash flow growth > Net income growth

141.4% vs. 115.3%

Pass

Improving EPS

115.8%

Pass

Stock growth (+15%) < EPS growth

10.1% vs. 115.8%

Pass

Source: YCharts. *Period begins at end of Q2 2009.

MSI Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

134.1%

Pass

Declining debt to equity

17.6%

Fail

Dividend growth > 25%

18.2%

Fail

Free cash flow payout ratio < 50%

21.3%

Pass

Source: YCharts. *Period begins at end of Q2 2009.

How we got here and where we're going
Motorola earns a solid six out of nine possible passing grades. Since it only began paying dividends a year ago, there's not been much time for Motorola to boost its payouts. Perhaps the next time we check in, Motorola will be able to increase its score. In addition to the increased payout, Motorola also added $2 billion to its buyback pile, providing extra juice to future EPS expectations as its outstanding shares continue to dwindle.

These graphs track Motorola's progress after its spinoff of Motorola Mobility early in 2011. The smartphone segment turned out to be the object of Google's affection, though it's quite possible Big G was only using Motorola Mobility to get at its patent trove. The remaining Motorola generates a substantial amount of revenue from government contracts, and the company has been working to expand its presence in government communications, particularly for public-safety officials. That puts Motorola either in competition or collaboration with Harris  (NYSE: HRS  ) , which has developed a line of secure mobile devices for the same public-service sector. I'd expect more collaboration than competition, as Motorola's focus is more on the networking aspect than the hardware side.

Motorola's famous push-to-talk feature hasn't helped NII Holdings (Nasdaq: NIHD  ) in Latin America, where the telecom has struggled to upgrade its network and fend off larger global telecom peers. NII licenses Motorola's technology under the Nextel brand, but this technology has a distinct enterprise focus, which could put Motorola at risk if NII gets gouged by a global downturn.

To diversify, Motorola recently bought British handheld terminal device maker Psion, which should bring it more supply chain management business. Both Credit Suisse and Goldman Sachs seem to like Motorola's efforts, as analysts for both banks gave the company a buy recommendation in September.

Motorola's also recently teamed up with Cisco (Nasdaq: CSCO  ) and Netgear (Nasdaq: NTGR  ) to fight back against a patent troll that's been accused of bilking small businesses of licensing fees. It's a nice effort, and could wind up successful, but it's hard to see how the collaborative legal fight will help Motorola push back against Cisco's dominant position in the networking space. If nothing else, it engenders some small-business goodwill.

Putting the pieces together
Motorola has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Motorola’s got quite the fight on its hands to maintain its growth against a tide of government cutbacks. Which companies are insulated from this belt-tightening? The Fool’s found four great stocks that could skyrocket after the 2012 elections, and they’re all available in our exclusive free report. Want to find out more? Click here to get the information you need, at no cost.

Keep track of Motorola by adding it to your free stock Watchlist.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of Google and Cisco Systems. Motley Fool newsletter services have recommended buying shares of NetGear, Google, and Goldman Sachs Group. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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