Motorola's Missing Penny

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You know the old saying, "There's just no pleasing some people"? Seems a lot of those people work on Wall Street. Yesterday, Motorola (NYSE: MOT) did its darnedest to please everybody by issuing a bang-up earnings report. It boosted sales 26% year-on-year. It quadrupled its Q3 2003 earnings (to $0.20 per diluted share). It retired $450 million in long-term debt. Wall Street's response was to erase more than $2 billion of Motorola's market cap, dropping the stock 4.9% in after-hours trading. The apparent reason: Motorola "missed estimates" by a penny. Once more, that was "missed by a penny" but "lost $2 billion in market cap." That was one pricey penny.

Motorola even went so far as to predict precisely the same fourth-quarter revenues and profits that the Street had (officially) been looking for: mid-$9-billion revenue and about $0.24 in per-share profits, which would equate to roughly 20% year-on-year earnings growth. Official expectations aside, analysts were reportedly disappointed when, upon opening the earnings statement, they found no "special prize" inside -- something along the lines of the cell phone shipment numbers that rivals LG, Samsung, and Sony (NYSE: SNE) have been putting out recently. It seems that Motorola's mere 15% increase in shipments since Q3 2003 didn't qualify.

The Street's reaction seems especially peculiar in light of the fact that Q3's superb results were no fluke but just the continuation of a strong resurgence at Motorola. Over the past nine months, sales are up 36% over last year, and net margins are better by half after increasing from 2.1% to 3.4%. Result: Profits are up by well more than 100% per diluted share ($0.37 year-to-date). The company looks well on its way to notching GAAP profits in the low $0.60s for the year.

Now granted, with a share price in the upper $17s, that gives Motorola a pretty lofty P/E ratio of about 30. Companies that richly valued aren't often given a whole lot of slack when they underperform. But come on! That P/E completely understates Motorola's true cash profitability. Even without considering this quarter's strong performance, which hasn't yet been entered into Yahoo! (Nasdaq: YHOO) Finance's database, just a glance at the previous 12 months' numbers reveals that Motorola has an enterprise value-to-free cash flow ratio of 14. This company is far cheaper, on an "owner earnings" basis, than its P/E would suggest. Cheap enough, in fact, that while this here Fool will never buy other than a Nokia (NYSE: NOK) phone, he could perhaps now be persuaded to pick up a few shares of Motorola stock.

There's plenty more to know about a big business such as Motorola. Read all about it in:

• Motorola Powers Down
• Motorola Makes Noise
• Motoring Motorola
• Motorola Sets Freescale Loose

Fool contributor Rich Smith owns shares in Motorola rival Nokia but not in any other company mentioned in this article.