Motorola Solutions: Consistent Growth To Continue

Summary

• 3Q21 results and FY21 guidance show steady, consistent operations with market share gains.
• MSI continues to operate in a number of expanding markets with customers requiring a number of device refreshes.
• Bolt-on acquisition strategy and increased R&D will keep MSI at the forefront of its growing business segments.

Tim Boyle/Getty Images News

Motorola Solutions' (NYSE:MSI) strong, recurring revenue base in an expanding market makes for a solid investment, particularly during a time of general uncertainty in the broader equity markets. Below are a few considerations for MSI in 2022.

Strong financial results with record backlog

Source: Motorola Solutions 3Q21 Earnings Presentation

Topline growth and record backlogs were the highlights of MSI's Q3 results - $2.1bln in revenue (+11% y/y) and a record ending $11.4bln order backlog (+7% y/y) demonstrate the impressive demand that continues to come Motorola's way. Subsequently, MSI also raised FY21 guidance from 9.5% - 10% up to 10% - 10.25% revenue growth despite supply chain constraints which the company has seen all year.

With the expectation that supply chain shortages may continue into the first half of 2022, Motorola initially provided an unofficial 7% revenue growth guidance for next year. Management has reiterated that demand continues to exceed supply, and approximately 50% of the backlog will actualize next year as multi-year revenue streams. Should supply chain shortages ease sooner than anticipated, there is upside to the conservative +7% growth projected, as Motorola has a visible line of demand to work with.

Operationally, investors will appreciate the +150bps expansion y/y in operating margin, and +26.5% increase y/y in free cash flow through 3Q21 YTD at $959mln; CEO Greg Brown anticipates that 2022 will bring continued expansion of operating margins. Currently, Motorola has faced pricing pressure from freight costs - with excess demand in 2021, MSI has had to utilize expedited freight more than normal in an environment that has seen large increases in transportation costs via ocean and air. As shortages ease in 2022, so will the freight mix which Motorola deploys, which should result in a better bottom line margin.

Tailwinds across each end market

Land Mobile Radio Mission Critical Communications (LMR), of which Motorola has generated ~78% of its total revenues through Oct 2021 YTD, remains a robust market with a number of tailwinds. Encompassing both commercial and public safety sectors, the global market is expected to grow at a ~25% CAGR to a $145bln TAM by 2027.

As senior management alluded to in its latest earnings, the company is seeing a "large scale device refresh" among many customers primarily in the United States, but also internationally as well via German and Romanian upgrade contracts. The big push in the US is partially driven from the American Rescue Plan (ARP) signed in March 2021, which is a multiyear relief bill directly allocating $350bln for states/cities/counties to invest in technologies and services for future public health emergencies. Motorola has confirmed these ARP conversations with customers, which is expected to play out over the course of several years. With a strong stimulus and budget, along with the number of general infrastructure refreshes needed, the demand side for LMRs should remain strong in the near future.

The other markets Motorola operates in, video security and command center software, are key for future growth. Video security is expected to be a $63bln TAM by 2023, and MSI has identified this as a tremendous opportunity with 30%+ annual growth. Command center software is also a double digit growth market where Motorola has recorded market share gains, growing at 1.5x the market. Both segments are end markets with increasingly "need to have" type products that have the ability to enhance public safety systems through physical devices (body cams, fixed video security) and software services (emergency call management, real-time intelligence operations, video-as-a-service).

Bolt-on acquisitions and R&D will continue to improve Motorola's product offerings

Smaller bolt-on acquisitions to improve product portfolio have been a part of Motorola's DNA for some time. Over the past 18 months, Motorola has added OpenSource (cloud-based mobile access control), Callyo (cloud-based applications for law enforcement), and Pelco Inc. (video security solutions) to enhance its offerings across video security and command center software. With ~$1.6bln in cash & cash equivalents as of 3Q21, Motorola has the funds to continue this strategy alongside a 5% increase y/y in R&D for the quarter; the company is well positioned to continue to development of key products in its portfolio.

Particularly as a number of customers shift towards cloud-based and hybrid-based solutions, the key factor for Motorola is that its solutions are becoming increasingly ecosystem friendly. These include product integrations such as Motorola's V300 body-camera and APX P25 radio platform, as well as acquisitions that complement each other such as OpenSource and Avigilon (OpenSource brings Avigilon's access control towards mobile-first and cloud-first approaches). As Motorola shifts towards video and software, it continues to bring an approach in meeting clients' needs where they are.

MSI is an attractive investment in 2022, even with 2021 share price gains in rearview mirror

MSI currently trades at ~29x forward non-GAAP P/E, which has increase given the share price gains over the past year. But if we use MSI's guidance for 2022, which includes 7% revenue growth with expansion of operating margins, we can expect FY2022 revenue of ~$8.725bln at an estimated 26% non-GAAP operating margin.

Assuming that a ~29x forward non-GAAP multiple is rich but reasonable for an industry incumbent such as MSI, the estimates above would imply a market cap of ~$65bln, or roughly 40% upside over the current $45bln market cap. Although these are only high level estimates, they demonstrate the value created from MSI's consistent revenue growth with an expansion of operating margins that will continue in 2022.

Motorola remains a LMR leader well positioned to capitalize on the emerging trends of video security and software services. Investors can take comfort in MSI (amid an uncertain 2022 market for equities) due to its highly visible demand backlog, easing freight and supply chain environment in 2H22, and expanding revenue and margins.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.