New Motorola Stock Faces Headwinds

NEW YORK (TheStreet) - Motorola enacted a strategic split earlier this month. The two new companies include Motorola Mobility (MMI) and Motorola Solutions (MSI).

Motorola Mobility consists of mobile phones, digital TV boxes and broadband modems, while Motorola Solutions primarily features radio and other security devices for government and commercial clients. In light of the recent announcement, we are launching coverage on the two companies.

Our analysis contains historical gross margin estimates for both Motorola Mobility and Motorola Solutions. For example, we had previously estimated the gross margins for Motorola's mobile phone business as 29% for 2010; we now estimate it to be around 24% for 2010.

We have also updated indirect expenses like SG&A, R&D, Capex, etc. based on the new information. All in all, we have arrived at a $19.32 price estimate for Motorola Mobility stock, well below market price. Our price estimate for Motorola Solutions stands at $33.33, roughly 10% below market price.

Since our price estimate for Motorola Mobility stock is well below market price, we examine here a potential upside scenario for the company. In the past, Motorola has faced stiff competition from Apple ( AAPL), Research in Motion ( RIMM) and Nokia ( NOK) in the mobile phone market, causing its market share to decline from 22% in 2006 to around 4.5% in 2009. We estimate this number declined further to 2.4% at year end 2010.

These are not good signs for Motorola, which has tried to change its fortunes by introducing a flurry of smartphones in 2009 and 2010. The iPhone launch on Verizon's network, which will start selling on February 10th, could be another problem for Motorola.

Aside from putting further pressure on Motorola's market share, the development could also force the company to increase marketing expenses to compete. We project the company's market share will continue to decline to around 1.5% by the end of our forecast period.

However, if Motorola could withstand these competitive pressures and maintain its market share at 2010 levels of around 2.4%, there could be an upside of around 25% to our price estimate for Motorola Mobility stock.

To achieve this upside, Motorola Mobility will have to sell more mobile phones than projected in our base estimate. As Motorola has increased focus on smartphones, potentially higher smartphone sales could also prompt upside in average pricing and, consequently, gross margins.

In addition to the market share scenario described above, if Motorola manages to increase its average phone pricing to $300 by the end of our forecast period (vs. our base projection of $227) and gross margins increases to 38% (vs. our 30% estimate) our price estimate for Motorola Mobility stock will approach the current market price.

You can see the complete $19.32 Trefis Price estimate for Motorola Mobility stock here.

You can see the complete $33.33 Trefis Price estimate for Motorola Solutions stock here.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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