At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Dueling analysts: The mega Motorola matchup
Should you buy or sell Motorola Mobility (NYSE: MMI)? That depends on whom you ask. Literally, this week we have one Wall Street powerhouse (Gabelli) pounding the table in favor of the company, while a second (Credit Suisse) argues that Gabelli's beating a dead bovine.
Let's give the bulls the first shot at this one. On Tuesday, Gabelli called Motorola Mobility "a formidable player in Android-based smartphones and tablets." Dismissing the firm's current negative net profit margin, the analyst argues that rising sales of high-tech devices will enable Motorola to "grow its sales, improve profitability, and regain market share." Gabelli also sees a chance for accelerated growth of DVRs in the international market, which could also help Motorola's results.
Point ... counterpoint?
Sounds good so far, but you haven't heard the rebuttal. Long a Motorola booster, Credit Suisse turned on a dime yesterday, knocking the stock all the way down from "outperform" to "underperform."
The analyst argues that this Apple (Nasdaq: AAPL) wannabe's Xoom tablets and Android-powered phones just don't cut the mustard against the iEmpire. Crunching the numbers, Credit Suisse expects Motorola to earn about a third less than previously predicted, and thinks the stock could experience "22% downside to our new $19 target price."
Indeed, in a fiercely competitive environment, Credit Suisse thinks Motorola will struggle to earn even a 5% operating margin. For context, that's about where Nokia (NYSE: NOK) is right now. Apple and Research In Motion (Nasdaq: RIMM) both score in the 20s, and even Ericsson (Nasdaq: ERIC) ekes out a 12.5% operating margin.
The news gets worse. Credit Suisse also worries that Motorola's market share is "vulnerable" as Verizon (NYSE: VZ) continues to expand its iPhone launch. Predicting that Motorola will only command a 4% global share of the smartphone market by 2011-2012, Credit Suisse warns that this implies "lower revenue, which combined with a more aggressive pricing environment, will result in a slower margin recovery."
So who's right? Credit Suisse or Gabelli?
I've been warning investors away from Motorola Mobility for months, and urging investors to consider instead the better value available at Motorola's ugly stepsister, Motorola Solutions (NYSE: MSI).
How did that work out? See for yourself. After initially spiking post-spinoff, Motorola Mobility has trended steadily downward to where it sits today, about 33% cheaper than when I began panning it. In contrast, Motorola Solutions has steadily gained value since breaking free from its handset albatross. But while I still like Motorola Solutions today, I'm beginning to believe that Gabelli might actually have the better argument regarding Motorola Mobility.
I certainly see why Credit Suisse might be spooked at the valuation here. At first glance, Motorola Mobility looks pretty pricey at 149 times trailing earnings. But next year, that P/E is expected to drop down to 14 times earnings. What's more, the stock already looks attractive if valued on its free cash flow. Factor out the company's ample cash cushion, and MM sells for an enterprise value-to-free cash flow ratio of less than 8.0 -- not bad for a 13% projected grower.
Foolish takeaway
As of this writing, Motorola Solutions and Motorola Mobility sport almost identical EV/FCF ratios -- 7.7 for MS, 7.8 for MM. They're both cash-rich operations, both expected to post double-digit growth. Motorola Mobility, however, sports the better growth rate, estimated to notch 13% earnings expansion over the next five years, versus about 10% for Motorola Solutions.
So here at the nadir, I'm going to make it official: Today, I prefer Gabelli over Credit Suisse, and Motorola Mobility over Motorola Solutions. Both stocks are attractive, but the cell phone magnate has the edge.
