is a stock I have liked for a while. The company just delivered excellent results for the first quarter and guided sales and profits materially higher. The shares have been creeping up lately, but I believe the turnaround potential is still vastly underestimated by investors and Wall Street analysts. Quite simply, many of the sound bites surrounding the company are wrong.

First, the cell phone is still a highly technical product. Emerging new features such as video, music, higher quality cameras, small form factors, VOIP features and others create solid opportunities for innovation and differentiation.

The cell-phone business is not overly competitive. The top five guys have nearly 80% share, with leaders making very good profits. Both


(NOK) - Get Report



reported 17% operating margins in the last quarter. Motorola's meager 10% margins offer material opportunity for upside!

Motorola's wireless infrastructure business is still healthy, despite less share in 3G than I would like. The



business, an area of concern, should be strong for the next two years.

Motorola's home division is not just a cable box business anymore. The company is on the cusp of an explosive growth phase with the buildout of digital cable, cable telephony and fiber-to-the-premises services such as fiber video on demand. Motorola is the only company that can offer hardware and software infrastructure to both the cable and telephone service providers, as well as subscriber products to businesses and residences.

Because most of Wall Street is tepid on the shares, analysts dramatically understate Motorola's real earnings power. Its current earnings estimate simply reflects a historical bias against this long-underperforming company.

As my previous posts have stated, Motorola should earn around $1 per share this year and $1.20 next year. Consensus estimates are 93 cents and $1.02 for this year and next. Motorola recently published a set of financial targets to improve operating margins from 2004's 10% to 14% by 2007.

Not one analyst

on the Street has the company achieving its 2007 financial targets!

If the handset business is decent for the next three years, and if Motorola gains big market share as I expect, and it achieves the midpoint of its margins targets, Motorola could generate $1.50-plus per share profits in 2007. Combined with 10% to 15% revenue growth, these fundamentals could be best-of-breed in the tech sector over that period. These results should generate a healthy valuation premium for the stock as the company delivers.

And here sits Motorola at $15.75, trading for virtually 10 times EV-earnings and 5.5 times EV-EBITDA on next year's results. For a company with high revenue growth, expanding margins(for the next three years), strong balance sheet and impressive free cash flow, the valuations are downright cheap.

Pay little attention to lowballing analysts and "sell"-screaming investment commentators. They don't yet understand the upside potential in the Motorola story. If Motorola only delivers Wall Street estimate-type results, the shares should be OK. But, if and when Motorola delivers its projected turnaround financials, those same bears will love the shares much, much higher.

I reiterate what I wrote last fall: If Ed Zander, the new CEO, and his management team execute to a very reasonable plan, the stock will be a home run and the CEO will be on the cover of a popular, national business magazine as a turnaround guru!

At the time of publication, Marcin was long Motorola, although positions may change at any time.

Robert Marcin is the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback and invites you to send it to