Motorola's Not Out of the Picture

When I saw former General Electric CEO Jack Welch on CNBC last week, he had nothing but worrisome predictions for Motorola (NYSE: MOT  ) . The problem, he reasoned, was that the competition is coming out with the same kind of slim cell phones that Motorola is making, but at a smaller size and with added features and options.

"That's not a business I want to be in," Welch reasoned.

Is he right to be so concerned? On Friday, Motorola, the world's second-biggest maker of cell phones, said that its fourth-quarter profit was cut in half, hurt by a sharp fall in phone prices as it tried to hold onto market share amid stiff competition.

So, what else is new?

What happened?
On Jan. 5, Motorola came out with a lower sales and profit forecast for the fourth quarter. Much lower than the actual numbers reported, by the way. Still, two weeks ago, the herd panicked and the stock got pummeled by 8% during the trading day.

Here was another classic example of investor self-sabotage. By that, I mean a never-ending penchant to sell low and buy high, which invariably leads to sub-par returns or, more often than not, outright losses.

Savvy buyers, however, viewed Motorola's plunge on Jan. 5 as a great moment to be stepping up with their bushel baskets, ready to take their fill of a stock that had just gone on sale at a deeply discounted price.

The "story" behind the sell-off was that the company was seeing weakness in its mobile-devices segment. That's the unit that sells the super-slim wireless telephone handsets such as the Razr. As it turned out, in its recent release, the company announced record sales of the devices. However, the company's chairman, Ed Zander, sounded almost as if he were reporting a loss rather than a slightly smaller profit in that first week of January when he said, "We are very disappointed with our fourth-quarter financial performance."

Come on, Ed, cheer up.

Some might say the numbers don't lie, but if that's the case, they don't tell the whole truth, either. It's true that Motorola's mobile-devices segment represented 66% of the company's net sales in 2006, and that's a big chunk, no doubt. The other 34% of its revenues came from two other business units: networks and enterprise (26%), and connected home solutions (8%).

While it's fashionable among Wall Street analysts and the crowd-following investor class to chew their nails over the slowdown in Motorola's handset sales (not to mention the competition from Apple's newly introduced iPhone), they may be missing some promising new developments.

A digital outlook
I direct your attention to Motorola's connected home solutions business. At 8% of the total revenue pie, it is currently the smallest of the company's three business segments. However, it may also be the one with the greatest growth potential. That's because Motorola is one of the worldwide leaders in market share when it comes to sales of digital set-top boxes and HD-DVRs, and the use of that equipment is exploding as satellite, cable, and terrestrial operators worldwide focus on the mass digitizing and upgrading of their pay-TV platforms, so as to promote the adoption of advanced service offerings such as video on demand, HDTV, and DVRs.

According to IMS Research, approximately 96 million digital set-top boxes were shipped in 2005. It forecasts that over the next five years, these shipments will double and surpass 200 million units by 2011. Therefore, growth in this part of Motorola's business could offset some of the weakness now becoming evident in wireless handset sales -- an area where Motorola nonetheless still remains a strong competitor, let's not forget. That's particularly true in countries such as China and India, where Motorola continues to pull away from the pack and where it is likely to gain market share through acquisitions in the coming years.

A cursory glance at a chart of Motorola shows that the stock has been in a three-month-long free fall. The stock has lost a third of its value and hit a new 52-week low a couple of weeks ago.

That drop alone suggests that a hefty discounting of the negative handset environment has already taken place. It's probably too late to start getting all worked up about it, but it isn't too late to step up to the plate and buy stock in a world-class company that has been steeply discounted. In general, you don't see these opportunities come along very often.

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Fool contributor Mike Norman does not own shares in any of the companies mentioned. The Motley Fool has a full disclosure policy.


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