Motorola Solutions (MSI) is set to announce its Q4 earnings on Jan. 23. The company, which was formed after the erstwhile Motorola split in two in 2011, primarily manufactures mission-critical communication products used in public safety such as analog and digital two-way radios, wireless voice and data communication devices and accessories. It also has an enterprise segment that develops rugged handheld devices such as bar code scanners, radio-frequency identification (RFID) readers, enterprise tablets and other mobile computing solutions. The company’s fundamentals seem to be on a firm footing not only due to the traditionally recession-proof nature of public safety spending, but also due to its recent acquisitions and the industry-wide shift to LTE, which we believe will help preserve its strong market position, and bring in a steady stream of revenues going forward.
However, while the company has done well recently despite the macroeconomic debt overhang of the Eurozone crisis, investors need to watch out for a slowdown in infrastructure spending that might impact the top line. During the earnings call, we will be closely following the management’s updates on the 2013 outlook for the company, which could be impacted by the passing of the narrowbanding deadline in the U.S., a stronger dollar and a difficult business environment globally. The macroeconomic concerns surrounding the European debt crisis and burgeoning debt levels of governments worldwide have increased the risks of a decline in government as well as enterprise infrastructure spending.
We have a $52.40 price estimate for Motorola Solutions' stock, about 10% behind the current market price.
Narrowbanding Cliff a Concern
Fiscal year 2012 has been good for Motorola’s government business so far with y-o-y revenue growth rates in excess of 10% in each quarter. While the company had started 2012 with caution, setting a guidance of only 5% growth for the full year due to the macroeconomic uncertainty surrounding the euro debt crisis, government spending has so far held up pretty well, causing Motorola to revise its revenue outlook for the full year, from approximately 5%-6% to 6%-6.5% y-o-y growth.
However, a portion of the out-performance has been on account of the narrowbanding mandate that the Federal Communications Commission (FCC) had issued, necessitating a switch to a more efficient spectrum band for most public safety operations. For example, 3% of the 12% growth in government revenues last quarter had been on account of an increase in public safety spending in the U.S., on infrastructure upgrades required by this shift. However, the deadline for this transition passed on Jan. 1, 2013, and while the same has been waived for a few projects, we do not see the high growth seen in recent quarters sustainable in the long run. Still, the critical nature of public safety spending, which causes it to figure high among government priorities, should help Motorola continue to remain insulated from any spending cuts done by governments worldwide, trying to reign in debt levels.
Key Growth Avenues in the Future
Since government sales account for about two-thirds of its overall sales, Motorola has to an extent, remained shielded from the effects of a tough macro-environment so far. On the other hand, enterprises have proved to be more susceptible to spending cuts across their business verticals. Management acknowledged last quarter that the enterprise revenues had come in weaker than anticipated and the segment is therefore expected to see a mid-single-digit decline for the full year 2012.
However, Motorola is focusing on maintaining market share within the enterprise segment during this difficult period through important acquisitions such as Rhomobile in 2011, and the more recently completed Psion. The company has already leveraged its Rhomobile acquisition to launch an application framework targeted at enterprise developers and promote sales of its rugged handheld devices. The Psion purchase will help it expand globally and strengthen its mobile computing portfolio. We see Motorola’s enterprise focus helping it tide over near-term macroeconomic concerns, while preparing itself for the high future demand for enterprise mobile computing devices.
As for government revenues, we see the adoption of LTE for public safety along with the broader trend of analog-to-digital shift, not only in the U.S., but also internationally as the key drivers of Motorola's value. U.S. public safety spending in the coming years will be bolstered by a job creation bill passed in February last year that reallocated the D Block spectrum for public safety use and provided a funding of $7 billion to build out a nationwide network over the next eight years.
Motorola is likely to benefit from the higher stickiness of its government customers as well as its strong market position and large installed base of security devices, to grab a big chunk of that market going forward (see "Motorola Solutions to Benefit from Public Safety Broadband Spending").
Disclosure: No positions.