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Motorola Solutions: Fortunately, More Of The Same

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About: Motorola Solutions, Inc. (MSI)
by: D.M. Martins Research
Summary

Motorola Solutions' 3Q results were in line with the company's trademark ability to deliver consistent top-line growth and margin expansion.

A rich effective tax rate masked what would have otherwise been a more impressive earnings beat.

Despite the "beat and raise", MSI has failed to gain much traction since earnings day, opening a window of opportunity into this stock.

Looking for excitement, surprises, and underdog stories in the equities markets? If so, then ignore mission-critical solutions provider Motorola Solutions (NYSE:MSI).

On October 30, the Chicago-based company delivered another "boring" all-around beat, its fourteenth of the past fifteen quarters. To be fair, revenues of $1.99 billion barely inched ahead of consensus this time and grew at a more timid 7% pace YOY, now that M&A has become a bit less of a factor in driving sales higher compared to this time last year. Adjusted EPS of $2.04 topped expectations by eight cents, the narrowest beat since late 2017.

Credit: Hart Wilcox

More of the same, fortunately

Motorola Solutions has consistently delivered on revenue growth, margin expansion, lavish quantities of cash flow and healthy backlog increases - a winning combination that, in my view, has justified the stock's rich valuations. The third quarter of 2019 was not much different, as key operating metrics in both the products and services/software segments looked robust once again (see chart below).

Organic revenue growth reached only 4% as it had last quarter, and much of the increase can probably be credited to the bolt-on acquisitions of the past few years. The Americas segment, accounting for about 70% of total company revenues, performed strongly enough across the board (e.g. LMR, command center, service, video) to offset issues of currency headwinds worldwide, a tough compare in the Middle East and macroeconomic challenges in China.

Source: montage using company's earnings slide

Margins continued to improve substantially as the company continues to gain scale, despite the opex pressures caused by the integration of recent acquisitions (e.g. WatchGuard, Avtec and Vaas International). Legal expenses associated with an intellectual property dispute with Hytera has also been dragging Motorola Solutions' profitability a bit, but the headwinds should eventually subside.

Lastly, on the P&L, an effective tax rate of 23% looked much richer than expected and caused what I calculate to have been 14 cents worth of YOY EPS drag. If not for it, the 3Q19 earnings beat could have been much more noticeable than it was. See non-GAAP income statement below.

Source: DM Martins Research, using data from company's earnings report

On the stock

Despite the strong third quarter print that also included a modest bump in full-year EPS guidance, MSI has failed to gain much traction since earnings day. In fact, shares have been down roughly 10% since establishing an all-time high in late August, even though the broad market (SPY) continues to reach for new peaks. Bearish action may have been driven by valuations that continue to look rich (see graph below), especially after the stock's steady climb of 25% over the past 12 months vs. the S&P 500's more modest +11% returns in the same period.

Chart Data by YCharts

Yet, I continue to be an MSI bull for a couple of reasons. First, the company continues to deliver consistent results, quarter after quarter. I believe predictability, coupled with healthy bottom-line growth expectations, is a good recipe for share price appreciation going forward. Second, MSI is overwhelmingly owned by institutions and insiders (90% of the float), which I believe makes sharp selloffs rare and unsustainable over a longer time horizon.

For these reasons, and despite a current-year P/E of 21.0x that does not look like much of a bargain, I remain an MSI shareholder.

Disclosure: I am/we are long MSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.