Motorola: Skeptical On Ichan Purchase, Awaiting Catalyst

Mar. 1.07 | About: Alphabet Inc. (GOOG)

Couple of firms comment on Motorola (NYSE:MOT) after financier Carl Ichan and three of his entities filed to buy more than $2 billion, or 4.4 percent, of the company's common stock. The company also filed its 10K last night:

- Piper Jaffray
notes the co indicated in its 10K that roughly 39% of Mobile Device sales were to China Mobile, Sprint, Verizon, Cingular, and T-Mobile. With firm's channel checks indicating weakening North American market share and a continued drop in Motorola ASPs, they have lowered their 1H07 estimates. Motorola indicated mobile device inventory was up year over year due to slower Q406 demand than Motorola anticipated for certain products, which the firm believes was primarily iDEN phones and KRZR handsets. Checks indicate additional price cuts of KRZR and RAZR during Q107 should help lower inventory, but such pricing actions will likely result in sequentially lower Q107 operating margins. The co indicated "going forward mobile devices will rebalance its market share and profitability objectives with a greater emphasis on profitability."

Based on more cautious 1H07 outlook, they are lowering 2007 proforma EPS estimate from $1.17 to $1.08 and 2008 estimate from $1.39 to $1.36. Maintains Market Perform but lowers tgt to $20 from $21.

- JP Morgan believes MOT's current lackluster handset line-up is leading to continued ASP and operating margin pressure in Q1 and Q2 which also raises the potential for a more modest turnaround in back half of '07. Coupled with the current leadership void following the departure of Ron Garriques, they are reducing their Mobile Devices operating margin estimates. However, the firm continues to believe MOT is capable of returning to double-digit handset margins longer term and with near term share price support provided by Carl Icahn, they are maintaining Overweight rating.

Reducing handset margins to 2.5% in Q1 and 4.5% in Q2, down 350 basis points each from previous estimates while Q3 and Q4 margins fall to 6.0% and 9.0% down 300 and 100 basis points respectively.

Icahn purchases limit downside as 4 of Carl Icahn's funds filed notice after the close of their intentions to purchase a minimum $1.2B worth of MOT stock. At Wednesday's $18.52 close, $1.2B implies approximately 65M new shares in addition to the 40M shares which Icahn's funds already control, giving him a minimum 4.3% stake of the roughly 2.5B shares outstanding.

Notablecalls: Looks like things in the handset space are going to get worse before getting better. In order for things to get better, we need something new - new kinds of services or killer products like the iPhone. I don't see anything that exciting coming from MOT nor NOK in the near term.

Regarding Ichan, call me paranoid but I'm not buying this potential increase in positions. I suspect that a month later investors will find out Ichan has actually reduced its currently reported quantity. I've seen it happen at least once in the past. The stock was up around 5% last night in after market action. Don't think the levels will hold.