More Options for Investors: Motorola Splits In Two


It's official. Motorola (MOT) is now two separate companies with two independently traded stocksfor investors to choose from.

One new company is Motorola Mobility (MMI), which includes the snazzy Android-based Droid smartphones and cable set-top boxes. The other is Motorola Solutions (MSI), a slower, steadier business comprising such important but unglamorous products as emergency-response two-way radios and bar-code scanners. Some analysts say folks looking for a higher risk-return play should bet on the mobility business because the potential upside there is greater by a wide margin compared to the other new company.

Shares of Motorola Mobility rose as high as 7.3% to $33.45 in Tuesday morning trading from its opening price of $31.17 a share, despite the mixed markets. Motorola Solutions, however, dipped below its opening price of $37.30 a share in early morning trading before recovering into positive territory by a slim margin later in the morning. At its highest point of the morning, Motorola Solutions climbed by 1.9%.

Splitting the two businesses is something investors at the 80-plus-year-old company have been clamoring for -- especially billionaire investor Carl Icahn. He waged a failed proxy fight to push change at the company in 2008 but settled for two board seats to enact change from within. Motorola's risky though high-growth potential attracted a certain investor set. But during an October video interview with DailyFinance, Motorola Mobility CEO Sanjay Jha noted that Motorola in its then-current form was hamper by a slower business model.

In a recent research note, Gleacher & Co. analyst Mark McKechnie said he expects the split to translate into a per-share target price of $31 for Motorola Mobility -- and a $43 per-share price for Motorola Solutions -- based on his pre-split target price of $10 a share for the old Motorola.

Playing the iPhone Angle

While sizing up Motorola Mobility's prospects, McKechnie noted some investors are assuming Apple's (AAPL) iPhone will migrate onto the Verizon Wireless network, which had -- at one point -- heavily marketed Motorola's Android-based Droid phones.

"But the longer-term upside potential for [Motorola Mobility] as a dominant Android handset and tablet player is being overlooked," McKechnie said in his report. "We believe our model for March handset sales down 19% [quarter over quarter] and a 'break-even' operating result for the consolidated MMI more than capture the iPhone risk."

He also advised investors to take advantage of any weakness in Motorola Mobility's stock when an iPhone-Verizon deal is finally announced. And he says he remains confident in the company's long-term position in smartphones.

Elsewhere in his report, McKechnie said:

  • MMI is attractive at 12x our preliminary CY 11 [calendar year 2011] estimate of $1.10 plus cash, 9.5x CY 12 plus cash and just 0.3x EV/2011 sales.

  • We view MMI as a cheap ($2.4 bil implied market cap) option and believe it will remain a dominant player in the rapidly growing Android ecosystem. Our CY 11 forecast assumes 20.6 mil Android units at a $292 ASP [average selling price] (down 17% y/y) and 1% operating margins for the division. Our CY 12 forecast assumes 27 mil Android units at a $255 ASP (down 12% y/y) and 1.8% operating margins for the division.

  • Our [set-top box] Home forecast assumes 5% growth for both CY 11 and CY 12 and stable margins of 8.2% and 8.5% versus 7.6% in CY 10.

  • Our $31 target for MMI is based on 0.7x EV/CY 11 sales or roughly7 17.5x our CY 12 estimate plus cash.

Credit Suisse analyst Kulbinder Garcha initiated coverage on Motorola Mobility with an outperform rating and a $41 price target. The analyst noted expects earnings of $1.57 a share this year and $2.60 a share next year, based on a fully taxed basis.

"We believe upside could be driven by continued smartphone market strength, success in tablets, and [operating margins] in-line with management's long term target of 8-12% versus our estimate of 7.8% in 2012," Garcha said in a research note Tuesday.

But Citigroup analyst Jim Suva, however, initiated coverage on Motorola Mobility with a hold rating Tuesday and $31.50 price target. In making his assessment, Suva said in a research note that separating the company does not alter the fundamentals of the mobile and set-top business.

"MMI remains a show-me story in the smartphones, which looks to become increasingly competitive as the iPhone comes to key customer Verizon and competition in the Android market heats up from both traditional and non-traditional vendors," Suva said.

Suva also issued a hold recommendation for Motorola Solutions His assessment of Motorola Solutions and a $43 price target. He noted in his report that while the Solutions business retains the fundamentals that have given it a healthy financial performance, Motorola Solutions is already approaching its fair value.
One investment bank, Susquehanna, initiated coverage on Motorola Solutions with a neutral rating, according to a StreetInsider.comreport -- which gave Motorola Solutions a price target of $39 a share.

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Susquehanna is reportedly forecasting Motorola Solutions to post 5% to 8% growth in its core markets, StreetInsider also says profit margins could improve after MSI restructures costs, following the sale of its networks division. Another possibility cited in the report: A leverage buyout player could enter the picture and take MSI private. That potential is based on Susquehanna's number-crunching of a $3.5 billion to $4 billion equity stake of 25% to 30% -- and leverage of 5.5x to 6x earnings. Motorola Solutions, as a result, could potentially produce a 15% to 20% investment return after five years.

All this gives investors some figures to chew on as the markets start to follow a new chapter in Motorola's decades-long evolution.

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