Motorola Suffers from High Inventories, Weak Margins

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The Street continues to fret over the troubles at Motorola (MOT).

Philip Cusick, an analyst at Bear Stearns, Friday trimmed his estimate on handset shipments for the company for the first quarter to 56 million from 58 million, and his 2007 forecast to 244 million from 250 million. His EPS estimate for the full year drops to $1.03 a share from $1.22 (ex stock options).

“Our checks indicate that MOT ended 4Q with significant inventories for a range of products from MOTOFONE to RAZR,” he wrote in a research note. “While we believe MOT wants to minimize discounting going forward, MOT was still aggressive to work through inventory. KRZR in particular has seen significant discounting at [Verizon (NYSE:VZ) Wireless].”

Cusick says he believes the company may have had a negative operating margin in the December quarter, and says the same could be true in the first quarter (though he estimates a 1% operating margin, down from 4% in the fourth quarter as a whole).

Cusick thinks the company from here will try to stabilize prices even at the cost of market share losses:

We see MOT’s ownership base shifting to value and event-driven funds from traditional tech holders. Though MOT looks cheap we believe that a very low or negative handset margin could could test the value thesis and would stay on the sidelines, preferring Nokia (NYSE:NOK).

Meanwhile, the Street is also on the lookout for companies that could be affected by Motorola’s ongoing woes. On Wednesday, I posted about Merrill’s estimate cut on Skyworks (NASDAQ:SWKS) on that basis; Friday, Reik Read of Robert W. Baird cut his estimates on the same basis on Multi-Fineline Electronix (NASDAQ:MFLX), which makes flexible printed circuit boards used in cell phones. Reid trimmed his fiscal 2007 EPS estimate to 75 cents a share from 78 cents, citing “what appears to be incremental weakness in the broader handset market, particularly at Motorola,” which accounts for about 70% of the company’s business.

Reid’s colleague Tristan Gerra Thursday noted his concerns about weakening demand for cell phone components on Asia.