Time For A Second Look At Motorola?

Motorola’s fortunes have, over the last 4 years, been inextricably linked to buoyant demand for its RAZR flip-phone. When Motorola failed to update the device or follow its success with other compelling designs (as LG did with the Chocolate, for instance), Moto stock lagged rival handsetmakers Nokia (NYSE: NOK) and Research In Motion (NASDAQ: RIMM). Moto execs really thought that the premium cachet of a smartphone carried by business users would translate to consumers, who drive sales of phones on a larger scale. Sadly, Motorola didn’t play this angle as well as Research In Motion did, with its halo enterprise handsets (8800, 8820, 8830) setting the bar in the enterprise market, and the Pearl phone moving huge unit volume (and margins) in the consumer market. In fact, any idiot who was paying attention in September 2006 when Research In Motion entered the consumer market with the launch of the Pearl and bought RIM stock has since been rewarded with a 447% gain in 13 months; a real gee-whiz stock play there. It’s a perfect example of good strategy and execution on the part of RIM management, and Motorola tripped by not playing their strong hand.

In fact, since its high roughly a year ago (10/13/06) of $26.20/share, Motorola is down 28% to $18.85/share as of this writing. After the fall, is Motorola a compelling buy at this price? That’s for you to decide, but let’s look at the evidence in favor:

New products.

One space where Motorola hasn’t completely fallen off the wagon is smartphones. It’s Q smartphone has sold well, and has just been updated with the very competitive Q9M on Verizon and Q Global on AT&T, respectively. Motorola was expecting RAZR-like sales (55 million+ to date) out of the Q, which hasn’t happened, and won’t. However, the new Q’s are a hit with consumers and reviewers alike, sporting a comfortable keyboard, wireless broadband data, a new version of Microsoft Windows Mobile, and real innovative design.

On the consumer front, Motorola has finally launched a true successor to the RAZR in the RAZR 2 flip-phone. It’s not as revolutionary a design as its predecessor, but it packs innovative features like an external touchscreen. I played with a Sprint version a few days ago, and it has Sprint TV piped over their EVDO data network. When watching CNN on the internal screen and flipping the clamshell closed, there is an imperceivable changeover: the video switches instantly to the exterior touchscreen. Genius. That’s the kind of impressive technology that consumers want. In addition, the RAZR 2 has a better camera at 2 megapixels, snappier software, a glossy finish, and the all-important svelte figure that RAZRs are known for.

Motorola has already moved more than a million RAZR 2′s in only a few months on the market.

Well positioned in growth markets.

Motorola is the sole supplier of WiMax infrastructure and modems to Wireless ISP ClearWire, which is ramping up its sales presence in the United States, Ireland, Belgium, and Mexico. This first-mover advantage establishes Motorola as a leader in a growing market for WiMax equipment that will provide internet service all over the world.

Becoming leaner and meaner.

Motorola’s sale of its embedded communications computing business to Emerson Electric for $350 million has just been approved. By selling off non-core assets, Motorola can better compete in the wireless phone market, its core focus.

Operating expenses have fallen three consecutive quarters-nearly 15% compared to Q4 ’06.

Also, just looking at net income (which had fallen to a loss in Q1 and Q2 2007), it looks like Motorola might be rebounding. They bounced back into the black, posting net income of $60 million for the most recent quarter, and their guidance is much rosier for both sales and net income.

Icahn – Lady In Waiting.

The press has been reporting that the corporate raider Carl Icahn, after failling in a bid to get a board seat, may attempt to take control of Motorola again. This would be a positive development for Motorola stock, as many speculators like to bet with the activist sharks.

All these developments considered, it looks like Moto is really executing on its turnaround strategy. Glad to have you back, Moto.

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