Motorola Motoring (News) November 17, 1999

Motorola Motoring

By Richard McCaffery (TMF Gibson)
November 17, 1999

All hail Motorola (NYSE: MOT) investors who kept the faith during last year's dark hours, held their shares, and watched the stock appreciate 117% to around $120 over the last 12 months.

Buy-and-hold investor Philip Fisher, who recognized the company's strengths in the 1950s, would be proud.

Today the company announced it would spend less than expected to ready its systems for the year 2000. It expects to spend between $225 million and $235 million fixing its systems, down from earlier estimates as high as $300 million.

Is the difference significant to a company with sales of $29 billion last year? You bet. With about 624 million shares outstanding (fully diluted), a savings of $65 million amounts to earnings of $0.10 per share.

The Schaumburg, Illinois company also has paid $743 million to banks that loaned money to Iridium LLC (Nasdaq: IRIQE), according to Bloomberg. Motorola was the largest shareholder in Iridium, the ill-fated satellite telephone company that entered Chapter 11 last summer.

Motorola is left with about $200 million in exposure to banks for its Iridium investment. The company set aside $944 million in special charges for Iridium on its Q3 income statement.

Having restructured, refocused, and cut costs, Motorola looks sharp. Its target market is personal communications and embedded electronics products. It's out of the low-margin commodity businesses, having sold divisions that won't generate at least 15% revenue growth for the long term, and will have trimmed its ranks by 24,000 by year's end. Many of those that left were part of divisions the company no longer considered strategic, such as its automotive, component, computer, and energy units.

Motorola, one of the world's top cellular phone makers, has a view of the future that looks something like this: In 1998 there were 1 billion wireline phone/data users, along with 300 million wireless phone users and 200 million Internet users. In about four years, Motorola expects there will be over 1 billion wireless Internet users -- consumers using devices like Motorola wireless phones to access the Internet for news, quotes, business information, intranets, etc. Right now, the wireless penetration rate in the U.S. is over 30%, and analysts expect that to quickly accelerate to more than 50%. That leaves enormous opportunities for growth.

There are lots of hurdles, of course. Competition from companies like Nokia (NYSE: NOK) and Ericsson (Nasdaq: ERICY) will keep Motorola busy as the number of mobile phone users expands.

Investors clicking onto financial websites like Yahoo! (Nasdaq: YHOO) or Market Guide might think they've completely missed the boat on Motorola in terms of pricing. According to numbers crunched by those sites, Motorola has a trailing price-to-earnings ratio around 116. Not many people want to pay $116 for $1 worth of a company's profits.

Keep in mind, though, that P/Es are a very limited way of looking at a company's valuation since they only consider earnings and stock price. Also, the numbers these sites use to estimate the P/E include special and one-time items. To get a look at the company's real earnings power you have to exclude those charges, a standard practice among investors. That gives Motorola a trailing P/E around 79.

Go a step farther and look at the expected full-year earnings for 1999. Motorola has said it's comfortable with forecasts in the $2.00 range, which gives the company a 1999 P/E around 58, which is much closer to the truth than 116.

Next year, Motorola expects earnings to grow another 50%, which would bring them to $3.00 per share, or a 2000 P/E around 40, warranting perhaps a closer look.

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