Low Expectations Aid Motorola's Stock

Expectations are so low for Motorola (MOT) that when it manages to meet estimates reduced by 59%, investors breathe a sigh of relief and reward the company's shares with a 6% pop.

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The shares have languished far below their 52-week high, set in March 2000, of $60.10. In recent trading, they were up $1.31 to $22.50.

The world's second-largest maker of handsets is enjoying something of a revival of its troubled stock, despite the weak results released Wednesday, despite confirming that first-quarter operating profit margins for both its handset and semiconductor businesses will be down and despite neglecting to provide promised financial projections for fiscal year 2001.

In a conference call on Thursday morning, Motorola, based in Schaumburg, Ill., also disclosed that it expects slackening demand in worldwide handset sales for 2001.

Expecting Worse

Even so, "there were concerns that there were going to be very disappointing results," says Todd Koffman, an analyst with Raymond James. And that seems to have successfully outweighed all the bad news. (He rates Motorola a market perform, and his firm hasn't done underwriting for the company.)

The omission of guidance for 2001 was all the more surprising because Motorola had said during its shortfall warning in December that it would provide the guidance when it announced fourth-quarter and year-end earnings.

"I couldn't believe that they didn't give forward guidance," says Todd Bernier, a stock analyst with Morningstar.com. "Analysts like me will draw negative conclusions."

He adds, "You get a sense that they don't have a clue. After all, they can't even forecast a decent EPS [earnings per share] number and a decent revenue number." (His firm doesn't rate stocks or participate in underwriting.)

Limited Visibility

The company blamed its lack of projections on the global economic situation. "Slowing economies are more vulnerable to external factors such as the changes in energy prices now occurring, domestic and foreign political problems and changes in the credit markets," said Robert Growney, Motorola's president and chief operating officer. "How these macroeconomic conditions evolve over the next several quarters is something we cannot predict, except to say that they will have an effect on the growth of our markets. As a result, we will not be providing annual guidance on sales or earnings at this time."

He said that the company hopes to provide that guidance when it reports its first-quarter results. For the first quarter, Motorola expects earnings per share of 12 cents and sales of $8.8 billion. The consensus estimates of analysts polled by First Call/Thomson Financial are for 12 cents and $9.5 billion.

Mike Zafirovski, president of the personal communications sector, which includes the handset business, said on the call that he doesn't expect to see significant improvements in that business over the next three to six months. But he added that the company is taking steps to restructure the business, which should lead to "material improvement" in the year's second half.

Indeed, sales and operating margins for the first quarter are slated to be down, compared to both the first quarter of 2000 and the fourth quarter.

"We've been hearing this for years," Bernier says of the promise to turn the PCS division around. "Will these steps to profitability translate to profits?"

Global

Motorola also noted that it estimates the industry's global mobile phone market volume in 2000 was about 410 million units, higher than Nokia's (NOK) estimate on Tuesday of 405 million. Finland-based Nokia is the leading seller of handsets.

The company also said that it still expects worldwide industry sales this year at the low end of a 525 million to 575 million range. At the same time, replacement sales will account for 44% to 46% of phone sales.

Motorola's expectation of a reduction in demand confirms the fears of observers spooked by Nokia's announcement that it sold 128 million phones, fewer than some market estimates. "I think the industry is going to have a tough time doing 500 million units," says Koffman. "I still think 525 million is not a layup."

He reasons that penetration rates in certain markets, especially Europe, are quite high and that estimates of replacement rates are overly optimistic.

But the sale of even 525 million phones would result in growth of 28% over the year before, which is a decline from previous growth but is still healthy. "People are prematurely postulating the decline in the cell phone industry," says Bernier.

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