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Mara Kohn
Mara Kohn
Articles (126) 

Motorola Solutions Inc. – A Long-Term Opportunity

December 23, 2011 | About:

Motorola Solutions has two main businesses, namely, the public safety business, involved in selling two-way radios and supporting infrastructure and services, primarily to government agencies and enterprise customers business, involved in the selling of hand-held scanners, tablets, RFID equipment, WLAN base stations, among others, thus enabling customers to manage inventories and supply chains. Vertical markets for this second business include retail and transportation.

While the public safety business accounts for 65% of revenue, the enterprise customers segment represents 35% of gains.

Despite the 60 to 65% of revenue coming from government agencies, MSI has a highly diversified revenue source. The U.S. Federal Government — the company’s largest customer — brings in about 8% of Motorola Solutions' revenue, but even that is spread across multiple agencies that make their own spending decisions. The remaining 35% of Motorola Solutions’ revenue comes from companies that use the company’s products for logistics and supply-chain management, with about 40% of that coming from the retail industry.

The public safety business can be considered to be a wide-moat one.

Motorola Solutions has existed as stand-alone entity since 2011 but has a long track record provided by the predecessor company.

Given its history of slow, steady growth and its low capital requirements, Motorola Solutions could eventually institute a dividend once it hits specific goals for its balance sheet.

Fortunately, the stock has not shown much volatility in the past and has remained largely stable despite the volatility in broader markets.

The company continues to benefit from higher business spending. However, there is a risk: the declining government spending. Recently the U.S. government announced a proposal for budget cuts to achieve $1.2 trillion in savings over a 10-year period.

Network effects contribute to the wide moat in Motorola's public safety segment. It is important that different agencies within the same jurisdiction be able to communicate with each other during emergencies but it is paramount that agencies in adjoining or overlapping jurisdictions be able to communicate too.

Despite the cuts that the U.S. government is forecasting for the years to come, Greg Brown, chairman and CEO of Motorola has said: “This quarter marks the seventh consecutive quarter year-over-year growth -- or year-over-year growth in our Government business, which demonstrates the priority that mission-critical communications spending receives among the federal and state and local governments.“

The biggest risk is the performance of Motorola Solutions' enterprise business, which serves cyclical industries like retail and transportation and doesn't have the same level of competitive advantage as the public service business.

In terms of last quarter results, Greg Brown added: “Highlights for the quarter included growth in all regions, continued strength in Enterprise, better-than-expected Government growth, improved operating leverage and significant return of capital to our shareholders.”

Motorola Solutions' balance sheet has improved to such extent that management has been able to start paying a quarterly cash dividend and has authorized a share repurchase plan. Total cash is $6.65 billion, and net of long-term debt, the company has $4.5 billion in cash. The company also has about $3 billion in pension obligations.

Sales for the company have amounted to $2.1 billion, that is to say, a 10% increase vis-à-vis the prior quarter. GAAP net earnings were $0.45 per share from continuing operations, compared to a $0.04 loss in the year-ago quarter, while non-GAAP net earnings from continuing operations were $0.65 per share compared to $0.54 per share in the third quarter of last year, a 20% increase.

“Last quarter, we emphasized the priority we placed on capital return. During the quarter, we returned $744 million in cash to shareholders through share repurchases and, earlier this month, made our initial dividend payment of $0.22 per share,” concluded Mr. Brown.

Motorola Solutions is trading at a 12.69 P/E ratio. The communication equipment industry has a P/E of 13.33. Motorola Solutions has an EPS ratio of 3.70 while the industry's ratio is 0.01.

The fair value estimate has been boosted from $44 to $50. The operating margins will ramp faster. Revenue growth will average about 6.5% over the long term and the company will continue to achieve some leverage on its SG&A line, resulting in operating margin expansion from 12% in 2010 to 15% in 2015.

In terms of management, President and CEO Gregory Brown has been with Motorola Solutions and its predecessor company, Motorola, since 2003. Prior to the breakup of Motorola into Motorola Solutions and Motorola Mobility, he was co-CEO from 2008 to 2011. Prior to that, he held the position of president and COO. The board intends to combine the roles of CEO and chairman.

Rating: 3.4/5 (8 votes)


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