How much would you pay for a Chinese maker of color televisions and toasters? Do you think there is a reason why General Electric (GE) has essentially exited the consumer electronics business entirely?
The firm thinks Dell (DELL) and HP (HPQ) are as good a comp as Nokia (NOK), and that is not intended as a compliment. What are Dell and HP's operating margins? 6% - 7%. Still, the contrarians will argue that MOT has numerous unlocked gems, and its margin problems are nothing that a good restructuring cannot fix.
There is no easy way for Motorola to fundamentally alter its margins. DB thinks they will likely remain tied to economic and fashion cycles without some drastic action. Icahn Partners thinks the company will be forced to take this drastic action if they lever the company to the gills.
In all the sensitivity analysis the firm performed, the key variable was margins for the handset business. They varied exit multiples, leverage levels and several others factors, but in the end Mobile Device margins were by far the biggest swing factor. Some of these cases offer truly appealing returns, and they understand how investors could find a case for buying the stock at these levels. In DB's view, more things have to go right than can go wrong to get to those returns. Put another way, the margin of safety on Motorola at $17.75 is slim.
The truly shocking thing to them about Motorola in 2007 is that there is so much missing. At 3GSM they had only one truly new phone "the flip-kick RIZR Z8", which is really not that exciting, and the fact that it is a Symbian device underscores how mixed up the company has become.
Where is the SCPL? The market needs something new and the firm thinks its unlikely that Motorola will have anything in time for Christmas this year. They also think the personnel issues at Mobile Devices will prove challenging. We think it will be a few months before the middle management team there settles down. The group has a lot of very talented people, but its unclear who will stick around. With 66,000 employees Motorola has gotten to be an institution, and institutions do not design hot phones overnight.
Finally, one cannot rule out the possibility that Motorola is waging a brutal tactical campaign against Mr. Icahn's hostile offer. Things may not be quite as bad as they sound. Nonetheless, even if they are sandbagging him and the Street to give themselves room to make the necessary changes, its tough to deny that the company is not in as good of shape as it appeared three or four quarters ago.
Notablecalls: Call me a MOT bull here with a stop below recent lows. Despite the warning and the resulting pessimism (it was there before, with the warning acting as the confirmation), the stock managed to put together a bounce on Friday. That tells me there will likely be further upside to this one.
MOT 1-yr chart: