Fisher College of Business
Motorola, Inc.
MOT
Current Price: $9.97
Price Target (1 year): $18.37
Analyst Information:
Name: Evan Harding
Email: harding.78@osu.edu
Phone: 812-240-5343
Advisor: Royce West, CFA
Course: Business Finance 824
Date:
March 4th, 2008
Motorola Net Sales by Division
Enterprise
Mobility
Solutions
[19%]
Mobile
Devices
[52%]
Home and
Networks
Mobility
[29%]
Year
EPS Estimates
Consensus Estimates
High
Low
Number of Estimates
Rating: BUY
2010E 2009E 2008E
1.13
0.63
0.29
0.84
0.64
0.15
1.25
1.21
0.43
0.41
0.26
-0.14
4
25
30
2007
0.14
Recommendation Summary
1. Turnaround in the Mobile Device segment may take longer
than expected, with a return to profitability in 2009.
2. Motorola’s global sales are largely drive by consumer
demand, which could be depressed by US/global
recessionary pressures.
3. Recent federal monetary loosening will continue to reduce
the strength of the dollar, which should positively impact
Motorola’s sales outside the US.
4. Motorola’s Home and Networks Solutions and Enterprise
Mobility Solutions segments forecast strong global growth
through 2011 and continued expansion of market share
beyond current market leading levels.
5. Motorola’s stock is inexpensive relative to all valuation
measures, even following conservative assumptions.
Comparables
Table of Contents
Section
Page(s)
[i] Stock Recommendation Summary
1
[ii] Table of Contents
2
[1] Company Overview
3-4
[2] Economic Overview
4-7
[3] Market Outlook
7
[4] Sector Outlook
8 - 10
[5] Company Analysis
10 - 13
[6] Company Valuation
14 - 18
General Company Valuation
14 - 15
Multiples
16 - 17
Discounted Cash Flow [DCF]
17 - 18
Sum-of-Parts
18 - 19
[7] Summary
20
[8] Recommendation
20
Appendices
21 - 26
[A.1] Income Statement
21
[A.2] Balance Sheet
22
[A.3] DCF Model
23
[A.3.1] DCF Model – Income Statement [GAAP]
24
[A.3.2] DCF Model – Segment Income Statement
25
[A.4] Sum-of-Parts Analysis
26
Page | 2
COMPANY OVERVIEW1
Motorola, Inc. was founded in 1928 in Schaumburg, Illinois. The company’s principle executive
offices are located at 1303 East Algonquin Rd, Schaumburg, Illinois 60196.
Motorola, Inc. is a worldwide provider of broadband and wireless communication products and
services. Their forward vision is one of a seamlessly connected world in which a mobile
consumer can go anywhere without sacrificing their connectivity.
The company operates its business through three segments that include (1) Mobile Devices, (2)
Home and Networks Mobility and (3) Enterprise Mobility Solutions
Mobile Device Segment
Motorola’s largest business segment (in terms of 2007 net sales) is its Mobile Device segment.
The Mobile Device segment designs, manufactures, sells and services wireless handsets along
with integrated software and accessory platforms. It also licenses intellectual property rights to
other companies. This business segment represented 52% of Motorola’s consolidated net sales
in 2007.
The majority of the Mobile Device segment’s net sales are made directly to carriers and
operators, with direct sales to the five largest customers (China Mobile, Verizon, Sprint, Nextel
and Cingular) comprising 39% of net sales in 2006. This segment also sells its products through
an array of third-party distributors, and sales through these channels represented 38% of the
segment’s net sales in 2006. The Mobile Device segment commands a truly global market,
with sales outside of the US representing 65% of the company’s net sales in 2006. This
number is expected to grow, driven primarily by rapid growth in China, India and Latin
America.
Motorola has seen decreasing market share in its Mobile Device segment through 2007 due to
a lack of development in 3G (third generation) high-speed cellular phone technologies.
Therefore, research and development [R&D] efforts are heavily focused on the development of
this technology. Other R&D efforts in this segment are directed toward lower end mobile devices
for sale in developing countries. Finally, since the mobile device market is driven by a
relatively high rate of technology turnover, there is constant R&D directed toward
developing new, cutting-edge technology to lead the next consumer cell phone trend.
Home and Networks Mobility
Motorola’s second largest business segment (in terms of 2007 net sales) is its Home and
Networks Mobility segment. This segment designs, manufactures, sells and services interactive
set-top boxes and digital video system solutions, voice and data modems for DSL and cable
network systems and wired and wireless access systems. The access system products primarily
consist of cellular infrastructure systems for cable and satellite television operators along with
wire line and wireless service providers. The Home and Networks Mobility Segment also
provides end-to-end cellular network systems, including hardware, software, control systems
and services. These networking solutions include a portfolio of products that create and
enhance nearly all aspects of broadband access systems, including the most cutting edge
1
Adapted from Motorola’s 2006 10-K filing along with their Q4 2007 earning press release
Page | 3
telecommunications architectures. This business segment represented 27% of Motorola’s
consolidated net sales in 2007.
This segment’s products are sold directly through its own distribution force and through
independent authorized distributors and dealers. The nature of the wireless infrastructure and
distribution business leads to long-term contracts with customers, and this is also the case with
data modems and set-top boxes. 2006 sales to Motorola’s top five commercial network mobility
customers (Sprint Nextel, KDDI, a Japanese service provider, Verizon, Alltel and China Mobile)
accounted for 34% of this segment’s net sales. Building on its nearly 65 years of experience in
the development of mission-critical systems, this segment is currently the leading provider of
custom private network design and implementation solutions, including data encryption and
distribution systems.
Primary R&D focus is on the further development and enhancement of 3G [third generation]
cellular infrastructure technologies, since the majority or wireless service providers are
continuing to upgrade their systems to this high-speed, 3G technology. Along with further
development of 3G, a Motorola proprietary technology called WiMAX is being trialed as the next
big leap in high-speed wireless data distribution.
Enterprise Mobility Solutions
Motorola’s smallest business segment (in terms of 2007 net sales) is its Enterprise Mobility
Solutions segment. This segment designs, manufactures, sells, installs and services both digital
and analog voice and data communications products and systems for wireless broadband
systems and private networks. Enterprise Mobility Solution’s primary customer base includes
public safety, government, utility, retail and transportation organizations. This business segment
represented 21% of Motorola’s consolidated net sales in 2007.
The majority of this segment’s products are sold, installed and serviced through its own
distribution force. They specialize in the integration of various wireless systems, such as GPS,
barcode scanning, voice-over-IP [VOIP] and RFIDs. The US government, various domestic and
foreign municipalities and public safety agencies represent the majority of this segment’s
customer base. The Enterprise Mobility Solutions segment represents Motorola’s fastest
growing segment with year-over-year [YOY] net sales increasing 43% from 2006 to 2007.
The Enterprise Mobility Solutions segment’s ability to work with pre-existing wireless and wireline data systems gives it excellent prospects for future sales growth as various global
government and private sector organizations work to efficientize their aging
technological infrastructure. This segment’s quick growth, coupled with a continued emphasis
on the R&D of cutting-edge technology offerings promises to propel Motorola to the forefront of
enterprise mobility products and services, thereby solidifying their market dominance in this
segment.
Economic Overview
GDP Trends
For Q4 2007, US real Gross Domestic Product [GDP] increased by 0.6% relative to 2006 levels.
Fiscal 2007 GDP increased 2.2% YOY compared to a 2.9% YOY increase for 2006. The
positive GDP growth in 2007 was driven primarily by an increase in personal consumption
Page | 4
expenditures, which could be attributed to a YOY increase in the price index of GDP purchase
of 2.7% in 2007 as compared to 3.3% in 2006. 2 The overall weakness in GDP growth for 2007
indicates that the US economy is slowing and could signify that it is either entering or already
immersed in a recessionary cycle.
Monetary Policy
Continued upward pressure on energy prices, along with chronic consumer credit issues, point
toward a continued economic slowdown in the US. In light of this economic downturn, the
continuation of federal monetary policy could help to reduce the current consumer credit crunch
and drive the US economy away from recessionary pressures. The Federal Reserve Board
enacted an emergency federal funds rate reduction of 75 basis points to 3.5 percent on January
22, 2008 in “view of a weakening of the economic outlook and increasing downside risks to
growth.” The Board also exercised a further 50 basis point rate reduction to 3.0 percent one
week later indicating that further future cuts may be necessary due to a declining US economic
condition. 3 The Federal Reserve chairman, Ben Bernanke, has been quite clear with his intent
to push for further monetary policy loosening in 2008, projecting a federal funds rate of 2.5
percent by year end.
The US Dollar
In the face of US domestic recessionary pressures, the continued decline in the US dollar will
help to reduce current account deficits that have grown in recent years, and this may help to
buoy US companies that have a large presence in foreign markets. It is known that monetary
policy enacted by the Federal Reserve does have an impact on the relative strength of the US
dollar. In simple terms, a decrease in the federal funds rate will indirectly make US funds
cheaper to international buys since the inherent cost of borrowing US dollars has decreased.
The opposite effect also holds true. One important point that is worth noting is that there will be
an inherent lag between the implementation of monetary policy and its effect on the strength of
the US dollar. All that being said, the effect of the reduction of the US federal funds rate during
the beginning of 2008 should cause a further weakening of US dollar toward the end of
2008/beginning of 2009. This will makes goods exported (from the US) cheaper and imports
more expensive, and the impact that this change could have on the US current account deficit
could represent a significant impact on US companies with a large percentage of global sales.
What’s the Impact?
Figure 1.2 gives a picture of the current condition of the US economy. In the face of rising
commodity prices, slowing domestic growth, falling interest rates and a weakening dollar, the
companies that will fair the best are the ones that have a large foreign presence (in terms of net
sales) along with minimum exposure to commodity price fluctuations.
2
Bureau of Economic Analysis, ‘Gross Domestic Product: Fourth Quarter 2007,’ February 24, 2008.
3
Board of Governors of the Federal Reserve System, ‘2008 Monetary Policy Releases,’ February 18, 2008.
Page | 5
StockVal®
2003
2004
2005
2006
12000
2007
2008
HI 11677.4
LO 10126.0
ME 11014.2
CU 11677.4
GR
3.0%
11400
10800
10200
03-31-2003
12-31-2007
9600
GROSS DOMESTIC PRODUCT-REAL ($BIL)
5.5
HI
LO
ME
CU
GR
3.0
1.5
1.0
5.34
0.96
3.34
2.97
19.7%
02-21-2003
02-22-2008
0.5
FEDERAL FUNDS RATE (%)
100
HI
LO
ME
CU
GR
70
40
30
98.81
25.67
58.45
98.81
22.7%
02-21-2003
02-22-2008
20
CRUDE OIL ($ PER BBL) NF
1.0
HI
LO
ME
CU
GR
0.9
0.8
0.7
0.93
0.67
0.80
0.67
-6.3%
02-28-2003
01-31-2008
0.6
US $ IN EUROS-MONTHLY
Figure 1.2: Economic Data
Since approximately 55% of Motorola’s net sales were outside of the US in 2007, it will benefit
from a forecasted continued weakening of the US dollar. 4 This should improve its competitive
advantage in its handheld device segment since primary competitors such as LG and Samsung,
which are incorporated outside of the US, will be negatively impacted by a declining US dollar.
However, Motorola’s market strength relative to its domestic competitors will not be directly
impacted by this shift in US dollar strength.
With regard to slowing US GDP growth and recessionary pressures on the US economy, USbased businesses will be negatively impacted. Since Motorola does conduct about 45% of its
business (in terms of 2007 net sales) in the US, its bottom line will be hurt by a decline in US
markets. However, Motorola’s competitors will not be immune to this decline, and in-fact
markets as a whole will experience downward pressure. Much of this current (and future) US
economic slowdown has already been priced into the market, and tech stocks in particular have
felt this crunch. This will be elaborated upon in more detail in the Sector Outlook and Industry
Analysis sections that follow.
4
Federal Reserve Bank of Chicago, ‘Strong Dollar, Weak Dollar: Foreign Exchange Rates and the US Economy,’
February 24, 2008.
Page | 6
Market Outlook
Fundamental Overview
The current economic outlook is bleak in the eyes of many analysts. Indicators such as GDP,
CPI and general consumer sentiment point toward recessionary pressures continuing in 2008.
Couple that with increasing uncertainty over progress in the Iraqi war, along with unknown
political changes yet to hit Washington, and most would at least paint the economic horizon as
challenged. Between the banking debacle in 2007, and the ensuing consumer credit crunch, the
Federal Reserve is rushing to curb recessionary tendencies with continually loosening monetary
policies. Yet, even with all of these negative economic indicators, there is hope for the market in
2008. Assuming that most of the financial sector write downs are out of the way, as many
industry experts believe they are, then there is potential upside for the markets in the second
half of 2008.5 This predicted year-over-year upside in 2008 carries even more weight given the
miserable third and fourth quarter 2007 earnings that hit more than just the financial sector
Technical Evaluation
Figure 2.1: S&P500 Six Month Chart
From a technical standpoint, recent market activity indicates upward market pressure with
widening Bollinger Bands and potential breakout above the upper Bollinger Band indicates that
the market could be poised for further upside movement. Although there is some resistance
between 1390 and 1400, it is slight, and the downside support level is a bit stronger at the 1320
level. Although these technical indicators should not be taken as a steadfast predictor of future
market performance, they do tend to point toward slightly more upside than downside risk for
the S&P 500 which has lost more than 10% of its value since October 2007.
5
Twin, Alexandra. ‘Earnings: Nowhere to go but up’ CNNMoney.com, February 27, 2008.
Page | 7
Sector Outlook
The IT sector is a highly global sector, which has a high percentage of international sales.
Following this international theme, outsourcing in this sector is high, which leads to general
reductions in input prices over time. Technology turnover is high, and this translates into a
capitally intensive sector. Product demand is also generally volatile, largely driven by
fluctuations in consumer discretionary spending. Generally speaking, this sector tends to be
driven by US dollar strength and product differentiation. In other words, a weaker US dollar
leads to enhanced product exportability while cutting-edge, ‘trendy’ products push market
demand.
Sector Valuation
Referring to figure 3.1, it can be seen that the IT sector has been oversold in the recent months,
losing nearly 25% of its market value since the end of 2007. This massive sell-off can be
attributed to both US economic uncertainty along with reduced 2008 growth outlooks forecasted
by many of the major IT players during their 2007 fourth quarter earnings reports.
S&P INFO TECH. SECTOR COMPOSITE ADJ M-Wtd (SP-45)
38
PRICE 29.23
37
DATE 02-29-2008
StockVal ®
36
35
35
34
34
_ =-20%
33
33
32
32
31
31
30
30
29
29
28
28
12/07
1/08
2/08
60 Day Avg. Volume 649,436
6470000
2200000
2200000
750000
750000
250000
250000
90000
90000
30000
30000
10000
10000
Volume in Thousands of Shares
Figure 3.1: IT Sector (SP-45) Performance
Relative to the S&P 500, the IT sector seems to be relatively cheap. Based on the valuation
data presented in chart 3.2, this sector does have high P/E, P/S and P/B (along with greater
assumed risk) relative to the S&P 500. However, the consensus growth rate for the IT sector for
2008 is nearly double that of the S&P 500 (i.e. 19% v. 10%), and the current IT ROE is holding
a 24% premium relative to the S&P 500. For these reasons, the IT sector seems to be an
undervalued sector relative to the market.
Page | 8
Table 3.2: IT Sector (SP-45) Valuation Relative to the S&P 500
Relative to SP500
P/Forward E
P/S
P/B
P/EBITDA
P/CF
High
2.98
3.96
3.02
37.23
3.03
Low
1.15
1.58
1.15
1.67
0.69
Mean
1.57
2.04
1.54
2.29
1.61
Current
1.19
1.88
1.62
1.84
0.69
P/E/G ratio
ROE
1.59
1.25
0.79
0.55
1.11
1.02
0.99
1.24
Relative US Dollar Strength
Figure 4.1 indicates that the IT sector’s performance is negatively correlated to the US dollar’s
strength (relative to foreign currency strength). Essentially, when the relative value of the US
dollar is falling, as is the case stemming from current and continued reductions in the federal
funds rate, the IT sector acts as a hedge. The relatively high contributions of exports to the
bottom line of many IT companies (i.e. Motorola had approximately 55% of its sales outside of
the US in 2007), makes them attractive when the dollar is falling.
S&P INFO TECH. SECTOR COMPOSITE ADJ (SP-45) Price 29.23
2003
2004
2005
2006
2007
2008
StockVal®
2009
38
34
31
HI
LO
ME
CU
GR
28
25
37
17
27
29
10.5%
23
21
19
02-28-2003
02-29-2008
17
PRICE
0.93
0.90
0.87
HI
LO
ME
CU
GR
0.84
0.81
0.78
0.93
0.67
0.80
0.67
-6.3%
0.75
0.72
0.69
02-28-2003
01-31-2008
0.66
US $ IN EUROS-MONTHLY
Figure 4.1: US Dollar Strength as it Impacts the IT Sector
Bottom Line
Going forward, the ever shortening ‘shelf-life’ of consumer technologies puts increasing
pressure on IT companies to continually evolve their brand and generate the necessary cash
Page | 9
flows to fuel R&D spending. Also, with wireless handset demand being driven mostly by
consumer trends, wireless handset makers must continually push the envelope on cellular
phone technologies to meet the insatiable consumer demand for the next trendy phone. With
established IT companies such as Apple and Garmin using their inherent brand value to further
launch out into wireless communication equipment, competition is continually increasing.
Finally, in an ever shrinking global landscape, the ability of technology companies to quickly
adapt to changing consumer demand across a wide range of global demographics will be
paramount.
Company Analysis
Motorola, Inc. produces wireless and wire-line communication and networking equipment and
services for both personal and enterprise markets. It is comprised of three business divisions,
and it has been organized in this format following an intra-business restructuring that was
completed during the 2005-2006 timeframe.
Motorola’s largest division (in terms of net sales) is its mobile device division, but this also
remains the persistent and ever-growing thorn in the company’s side. Motorola’s mobile device
global market share dropped from more than 22% in 2006 to an estimated 12.4% by the end of
2007. 6 Even double-digit year-over-year growth in Motorola’s other two divisions could not offset
the 30+% losses experienced by its mobile device segment.
Table 5.1: Motorola’s Sales by Division
Year (Quarter)
FY 2007
4Q 2007
3Q 2007
2Q 2007
1Q 2007
Total Sales ($ Mil)
% Change
Mobile Devices
% Change
36,622
9,646
8,811
8,732
9,433
Home and Networks Mobility
10,691
-14.5%
18,992
-33.1%
% Change
10.8%
Enterprise Mobility Solutions 7,048
% Change
43.2%
-18.4%
4,811
-38.4%
2,724
7.9%
-16.9%
4,496
-36.1%
2,389
5.6%
-19.3%
4,273
-40.2%
2,564
9.4%
-1.8%
5,412
-15.5%
3,014
19.6%
2,138
1,954
1,920
1,036
42.0%
47.0%
41.7%
41.5%
An overview of the past performance of each of Motorola’s business segments, along with
potential market risks within their segment will now be reviewed.
6
Crockett, Roger O. ‘What Can Brown Do for Motorola?’ BusinessWeek, February 28, 2008.
Page | 10
Mobile Device Segment
Past Performance
In 2007, Mobile Devices accounted for nearly 52% of Motorola’s total revenues on sales
of $18.99 billion, with a net loss of approximately $1.2 billion. This represents YoY
declines of 33% and 140%, respectively.
With Motorola’s release of its RAZR cell phone line in 2005, the company’s global market share
in this segment reached more than 22%, which put it a close second to the global leader, Nokia.
From that point forward Motorola has seen its global market share nearly cut in half to levels on
the order of 12% by the end of 2007. 7 Mind you, this drastic decline in segment revenues and
market share was experienced at a time when the global cell phone market was growing. While
companies such as Nokia, Samsung and LG have been revamping their phone lines, including
the expansion of 3G (third-generation) high speed technologies, Motorola’s technology pipeline
has seemed to dry up.
Segment Analysis
During 2007 and into the projected future, a shift in the cell phone market is expected. With
Nokia, the world’s largest cell phone manufacturer currently leading the charge, consumer
demand for low-end (low margin) phones in developing countries such as China and India is
being addressed. At the same time, worldwide demand for high-end multi-feature smart phones
and 3G high-speed data transfer phones is on the rise, but Motorola does not have soon-torelease products that fill either of these facets of consumer demand.8
Now, with much of the downside and chastising of Motorola that has taken place recently there
is still some light at the end of the tunnel. Even in the face of a US economic slowdown, the
veracious consumer-driven appetite for the latest and greatest cell phones will continue to
generate growing demand, and in time Motorola can once again be the benefactor of their
mobile device segment, which was once their bread and butter. They have brought in a new
CEO in Greg Brown who seems to have the drive and forward vision to not only realistically
evaluate Motorola’s current state in the global mobile device landscape, but to also drive
change within the company. Change will happen, and in time this will unlock the market value
that Motorola has lost in seeing its stock drop more than 50% in the past four months.
Potential Risks
There is no shortage of potential risks to Motorola’s projected turn around in their mobile device
segment by the end of 2008. As of the completion of this report, the company has $2.65 billion
in available cash funds. This could potentially present a liquidity risk depending on the amount
of money that Motorola must invest in its handset unit as it plays catch-up with its competition.
Another risk includes a deeper than expected US economic recession which snowballs into a
global recession, but this risk would impact all players in the mobile device arena.
Home and Networks Mobility
7
Crockett, Roger O. ‘What Can Brown Do for Motorola?’ BusinessWeek, February 28, 2008.
8
Crockett, Roger O. ‘What Can Brown Do for Motorola?’ BusinessWeek, February 28, 2008.
Page | 11
Past Performance
In 2007, Home and Networks Mobility accounted for nearly 29% of Motorola’s total
revenues on sales of $10.69 billion, with a net profit of approximately $700 million. This
represents YoY changes of +11% and -20%, respectively.
Segment Analysis 9
The Home component of the Home and Networks Mobility segment accounted for 30% of the
segment’s net sales in 2006. Of these sales more than 80% were in North America, and nearly
75% of sales were related to video solutions, with a large component of this being the sale and
servicing of digital cable boxes, along with associated systems and services. Motorola is the
global leader in the sale of digital cable boxes, and demand growth for this product is expected
to be very strong with the number of high definition [HD] households estimated to grow globally
from 35 million units in 2007 to 128 million units in 2011.
The Networks component of the Home and Networks Mobility segment accounted for 70% of
the segment’s net sales in 2006. Of these sales approximately 39% were in North America, 31%
in Asia and 25% in the European Union countries. Yearly global growth in the number of mobile
video messaging, mobile entertainment and mobile video users is expected to average 50%,
15% and 47%, respectively, through 2011. All of these systems require bandwidth capabilities
that outstrip mobile device systems that are currently available. Motorola currently has in
development (with 47 successfully employed global trials to date) a new broadband bandwidth
management infrastructure called WiMAX which exponentially improves the bandwidth
capability of broadband systems.
Potential Risks
Potential risks for Motorola’s Home and Networks Mobility Segment include a US and/or global
recession that is deeper and/or lengthier than is currently being anticipated. Since sales in this
sector are either direct to the consumer or driven by third-party consumer demand (i.e. with
home networking services), consumer spending is a key sales driver. Also, as highlighted in
Motorola’s 2007 10-K, one primary risk for this business sector involves the consolidation of
customers for cable boxes and high-speed internet modems. Since the supplier base for
consumer cable and internet service is composed of a handful of large domestic and
international players, their movement away from Motorola as a primary supplier would adversely
impact future revenues.
Enterprise Mobility Solutions
Past Performance
In 2007, Enterprise Mobility Solutions accounted for nearly 19% of Motorola’s total
revenues on sales of $7.05 billion, with a net profit of approximately $1.2 billion. This
represents YoY increases of 43% and 82%, respectively. Past segment performance has
9
All financial statistics contained in this section use data adapted from the ‘2007 Financial Analysts Meeting
Presentation.’ released on 09/07/07 and available at www.motorola.com
Page | 12
seen continued increases in net revenues, profits and operating margin. Also, past growth has
led to the development of a strong global customer base that will help to drive future growth.
Segment Analysis 10
This business segment provides mobility systems, applications and services for both the private
and public sectors. Motorola has a commanding market share in its Enterprise Mobility
segment, capturing more than 60% of the total global market in 200711. Also, the global growth
in this segment is projected to average 14% through 2011. Appropriate sources of growth will be
detailed in the paragraphs that follow.
On the public sector side, Motorola is a leading domestic and global supplier of mission critical
systems to various divisions of governments and public safety groups. Public sector sales
accounted for approximately 65% of sales in 2006, with 63% of these sales in North America.
Since public sector sales are driven primarily by ‘mission critical activity groups’ such as police,
firefighters and Homeland Security groups, it has excellent growth potential. This is largely due
to rising domestic and global security uncertainty demanding cutting edge technology to fight
global threats of terrorism. Continued projections of double digit international growth, coupled
with wide-scale switching from analog to all digital systems, will drive sales growth at double
digit levels for the next several years.
On the private sector side, Motorola provides networking and logistic systems to companies
such as Coca-Cola, UPS, Daimler Chrysler and Comcast. These systems encompass product
movement from the shop floor to final delivery. Private sector sales accounted for approximately
35% of sales in 2006, with 65% of these sales in North America. The majority of enterprise
products sold to the private sector in 2006 included mobile computing and advanced data
capture devices, which accounted for 66% and 24% of total private sector sales in this segment,
respectively. While private sector sales can be more volatile than in the public sector, the strong
potentials for global growth offset much of this market risk.
Potential Risks
As with Motorola’s other business segments, a primary source of risks involves the volatility of
consumer demand especially in the face of domestic recessionary pressures. Also, several
government agencies and some aforementioned large corporations account for a large
component of sales within this segment. Therefore the loss of even one of these relatively large
customers could have a big impact on revenue growth. However, given the level at which much
of Motorola’s technology is directly imbedded in many of its customer’s mobility systems, along
with the company’s offerings of the most cutting edge proprietary technologies, this will help to
ensure continued market dominance in this segment.
Company Valuation
10
All financial statistics contained in this section use data adapted from the ‘2007 Financial Analysts Meeting
Presentation.’ released on 09/07/07 and available at www.motorola.com
Page | 13
General Company Valuation
Taking into consideration several key 10-year ratios for MOT, including the ratios of current
stock price to year-forward earnings, sales and book value along with return on equity (%), MOT
seems to be fairly attractive (see figure 6.1.1). Price/sales and price/book value are both well
below their 10-year mean values, and although the price/year-fwd earnings is currently above its
mean value, this factor, along with the current drop in return-on-equity [ROE], can be explained
by Motorola’s recent decline in earnings, led by a decline in their Mobile Device segment. This
recent decline in Motorola’s Mobile Device segment will be addressed by appropriate
discounting in other valuation measures to follow.
MOTOROLA INCORPORATED (MOT) Price 9.97
1998
1998
1999
2000
2000
2001
2001
2002
2002 2003
2003 20042004 2005 20052006 2006
2007
StockVal®
2007
2008
2008
2009
2009
2010
120
HI
LO
ME
CU
90
60
30
99.9 +
13.2
38.1
68.3
02-27-1998
02-29-2008
0
PRICE / YEAR-FORWARD EARNINGS
4
HI
LO
ME
CU
3
2
1
3.81
0.63
1.36
0.63
02-27-1998
02-29-2008
0
PRICE / SALES
8
HI
LO
ME
CU
6
4
2
7.0
1.5
2.9
1.5
02-27-1998
02-29-2008
0
PRICE / BOOK VALUE
20
HI
LO
ME
CU
15
10
5
18.6
-12.2
5.8
3.7
03-31-1998
12-31-2007
0
RETURN ON EQUITY %
Figure 6.1.1: Motorola Financial Data, 10-Yr [taken from StockVal]
Figure 6.1.2 compares Motorola’s stock price, price/sales, price/book and return on equity to
that of the IT Sector [SP-45] of the S&P 500 over the past 10 years. These charts show that
MOT is trading at a discount relative to its mean price, price/sales and price/book relative to the
IT Sector over the past 10 years. The company’s ROE (relative to the IT Sector) is currently
below its mean value, and this indicates a recent drop in Motorola’s financial performance
relative to the sector. Although this is concerning, it can be justified, once again, by the recent
decline in the company’s Mobile Devices segment.
Page | 14
MOTOROLA INCORPORATED (MOT) Price 9.97
1998
1998
1999
2000
2000
2001
2001
StockVal®
2002
2002 2003
2003 20042004 2005 20052006 2006
2007
2007
2008
2008
2009
2009
2010
1.1
HI
LO
ME
CU
0.8
0.6
0.4
1.06
0.33
0.65
0.33
02-27-1998
02-29-2008
0.3
PRICE RELATIVE TO S&P INFO TECH. SECTOR COMPOSITE ADJ (SP-45) M-Wtd
0.8
HI
LO
ME
CU
0.6
0.61
0.23
0.36
0.26
0.4
02-27-1998
02-29-2008
0.2
PRICE / SALES RELATIVE TO S&P INFO TECH. SECTOR COMPOSITE ADJ (SP-45) M-Wtd
1.0
HI
LO
ME
CU
0.8
0.6
0.4
0.89
0.26
0.50
0.37
02-27-1998
02-29-2008
0.2
PRICE / BOOK VALUE RELATIVE TO S&P INFO TECH. SECTOR COMPOSITE ADJ (SP-45) M-Wtd
1.2
HI
LO
ME
CU
0.9
0.6
0.3
1.03
NEG
0.38
0.17
03-31-1998
12-31-2007
0.0
RETURN ON EQUITY RELATIVE TO S&P INFO TECH. SECTOR COMPOSITE ADJ (SP-45) M-Wtd
Figure 6.1.2: Motorola Financial Data Relative to IT Sector [SP-45], 10-Yr
[taken from StockVal]
Figure 6.1.3 compares Motorola’s stock price, price/sales, price/book and ROE to that of the
S&P 500 for the past 10 years. These charts show that MOT is trading at a discount relative to
its mean price, price/sales and price/book relative to the S&P 500 over the past 10 years. The
company’s ROE (relative to the S&P 500) is currently below its mean value, and this indicates a
recent drop in Motorola’s financial performance relative to the sector. Although this is
concerning, it can be justified, once again, by the recent decline in the company’s Mobile
Devices segment.
MOTOROLA INCORPORATED (MOT) Price 9.97
1998
1999
2000
2001
2002
2003
2004
2005
StockVal®
2006
2007
2008
2009
2.5
HI
LO
ME
CU
1.5
1.0
0.5
2.19
0.37
0.76
0.37
02-27-1998
02-29-2008
0.3
PRICE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
2.0
HI
LO
ME
CU
1.5
1.0
0.5
1.58
0.46
0.79
0.49
02-27-1998
02-29-2008
0.0
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
1.5
HI
LO
ME
CU
1.2
0.9
0.6
1.37
0.42
0.81
0.59
02-27-1998
02-29-2008
0.3
PRICE / BOOK VALUE RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
1.2
HI
LO
ME
CU
0.9
0.6
0.3
1.06
NEG
0.38
0.22
03-31-1998
12-31-2007
0.0
RETURN ON EQUITY RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-Wtd
Figure 6.1.3: Motorola Financial Data Relative to S&P 500 [SP-5A], 10-Yr
[taken from StockVal]
Page | 15
Valuation with Multiples
One method by which to evaluate the inherent value of Motorola’s stock is to consider various
price multiples. Referring to table 6.2.1, the price multiple data for price/year fwd earnings,
price/sales, price/book and ROE are recorded for the last 10 years. The difference between the
current multiple values and their means was explained in the General Evaluation section above.
This multiple evaluation assumes a reversion to the mean for each of the multiples being
considered. It is appropriate in this case to assume that financial multiples will revert toward
their mean lines over time given an efficient market.
Now that the target multiples have been set, the target price of Motorola’s stock (on a per share
basis) can be calculated as the product of the target multiple and the target earnings, sales,
book value or ROE per share. These values are estimated by dividing the current stock price of
$9.97 (at COB on 02/29/08) by the current multiple in table 6.2.1. The calculated per-share
values are presented in table 6.2.1.
Table 6.2.1: Motorola Multiples Evaluation
Absolute
Valuation
P/Forward E
P/S
P/B
ROE
High
Low
Mean
Current
99.9
3.8
7.0
18.6
13.2
0.7
1.5
-12.2
38.1
1.4
2.9
5.8
76.6
0.7
1.7
3.7
Target Target E, S, B,
Multiple
etc/Share
38.1
1.4
2.9
5.8
0.29
17.24
5.86
2.69
Target
Price
$11.05
$23.45
$17.01
$15.63
Based on the various target price values presented in table 6.2.1, the average target price is
$16.78, which represents a 68% upside to the current stock price of $9.97 (as of COB on
02/29/08). While this does represent good upside potential for Motorola’s stock, a few questions
that you may have regarding this type of analysis are ‘Why aren’t ratios such as price/cash flow
or price/EBITA included?’ or ‘Isn’t it of some concern that the target price based on forward
earnings is only $11/share?’ These are both valid questions, and they deserve at least some
discussion.
The reason that some multiples have not been included in the analysis is that they incorrectly
skew the data and make it much less analytically useful. Some of these multiples (along with
their calculated target prices) are shown in table 6.2.2.
Table 6.2.2: Motorola Multiples Evaluation [excluded items]
Absolute
Valuation
P/EBITDA
P/CF
P/E/G ratio
High
Low
Mean
Current
99.9
100.0
25.9
6.2
8.6
0.7
10.3
18.5
2.0
29.6
24.1
5.2
Target Target E, S, B,
Multiple
etc/Share
10.3
18.5
2.0
0.70
0.23
1.92
Target
Price
$7.21
$4.26
$3.83
All of the excluded multiples presented in table 6.2.2 along with price/year-forward earnings
have experienced declines over the past year due to the decline in Motorola’s Mobile Device
segment that has been previously discussed. This recent decline in Mobile Devices has led to
operating losses and a YoY decline in net sales and operating margin of 15% and 12%,
respectively. The recent hit that Motorola has taken relative to its profitability has negatively
Page | 16
impacted its finances and many of its financial metrics, thereby leading to their exclusion from
this section of the analysis. However, all of these aforementioned losses will be completely
considered in the DCF and Sum-of-Parts analysis to follow.
Discount Cash Flow [DCF] Valuation
A complete DCF analysis may be found in Appendix A.3. General points of interest, along with a
sensitivity matrix study are completed in this section.
Referring to table 6.3.1, the DCF analysis completed for Motorola was used to complete a
sensitivity analysis relating the implied equity value per share to the terminal discount rate and
to the terminal FCF growth rate. When completing Motorola’s DCF analysis, values of 5.5% and
10.50% were assumed for the terminal FCF growth rate and the terminal discount rate,
respectively. These were considered appropriate given the inherent risks to growth for many
technology stocks, with the uncertainty in the company’s handset unit pushing the assumed
terminal FCF growth rate about 50 basis points lower than would have normally been assumed.
Also, given the historic earnings potential of Motorola, having YoY average sales growth of
nearly 18%12 from 2002 through 2006 and an historic sales growth rate of 11.60%13 the
assumed terminal discount rate of 10.50% seems appropriate and even a bit conservative.
Table 6.3.1: MOT Stock Price DCF Sensitivity Analysis
Sensitivity Analysis Matrix [MOT Implied equity value/share]
Terminal
Discount Rate
12.00%
11.50%
11.00%
10.50%
10.00%
9.50%
9.00%
8.50%
8.00%
Terminal FCF Growth Rate
4.00%
12.40
13.33
14.39
15.63
17.07
18.78
20.85
23.37
26.54
4.50%
12.82
13.84
15.01
16.39
18.02
19.98
22.38
25.39
29.27
5.00%
13.31
14.43
15.74
17.29
19.15
21.44
24.30
27.99
32.91
5.50%
13.87
15.12
16.60
18.37
20.54
23.26
26.77
31.45
38.01
6.00%
14.53
15.94
17.62
19.69
22.28
25.61
30.06
36.29
45.65
6.50%
15.31
16.91
18.88
21.34
24.51
28.74
34.66
43.56
58.39
7.00%
16.24
18.11
20.45
23.46
27.48
33.11
41.57
55.67
83.88
7.50%
17.38
19.61
22.47
26.29
31.65
39.68
53.08
79.89
160.32
Some of the assumptions taken in the DCF model (see Appendices A.3) include YoY sales
growth back in the black at 8.65% for 2008, with continued growth reaching 15% in 2009 and
decreasing linearly for the next ten years to end up at the terminal FCF growth rate of 5.50%
(assumed). This model of projected sales growth for Motorola is in-line with consensus
estimates in the near term [2008-2010]. In their earnings conference call for the fourth quarter of
2007, Motorola’s CEO, Greg Brown, indicated that a turnaround in the company’s mobile device
segment would take longer than expected, with losses continuing through the second or third
quarter of 2008. I believe that this is an optimistic view of things. For this reason, although my
DCF model does assume a continued improvement (i.e. reduction in losses) in the mobile
device segment during 2008, a return to profitability in the handset unit is delayed until the third
or fourth quarter of 2009. While this might be an overly conservative assumption, given the
uncertainty surrounding the turnaround in Motorola’s handset unit and the current and continued
12
Based on income statement data taken from Motorola’s 2003 and 2006 10-K filings
13
Based on StockVal YoY sales growth data for the years 1976-2006.
Page | 17
revamping of management by a relatively new CEO, I believe this profitability model is
appropriate.
Based on all of these aforementioned DCF assumptions, the calculated equity (value) for
Motorola is $18.37 on a per share basis. With a current stock price of $9.97 as of close of
business [COB] on February 29, 2008, the DCF model projects an upside of 84.2%. Although
this seems like a fairly high upside, further review of the DCF model in Appendix A.3 (along with
the growth and discount rate assumptions that were previously reviewed) should indicate that
DCF model assumptions are conservative given the current condition and future expectations of
Motorola.
With all that has been said, it would be a fallacy to assume that the turnaround in Motorola’s
mobile devices segment will be quick and painless. Execution on the mobile device side, while
also investing in the continued growth of its other segments, is no small task for Motorola’s new
CEO. Although there is substantial calculated value in Motorola, it may take through 2008 for
the market to price in this value and push Motorola’s stock price back toward the $20 levels it
enjoyed no more than six months ago, but given the relatively long-term investment strategy of
the SIM portfolio, this delay in return to profitability is passable. Based on the DCF analysis,
purchasing Motorola at the sub-$10 per share level represents a substantially
undervalued stock with excellent long-term growth potential.
Sum-of-Parts Valuation
One appropriate method of analysis for a company that is composed of multiple business
segments, such as Motorola, is to complete a sum-of-parts analysis. In this analysis, I consider
the price-to-sales ratios [P/S] for a number of Motorola’s competitors in its Mobile Device, Home
and Networks Solutions and Enterprise Mobility Solutions segments. Rather than include the
sum-of-parts matrix in the appendices and try to describe in words how the P/S ratios for
Motorola’s competitors are employed, I leave some review of this analysis (presented as table
6.4.1) to the reader. Please also refer to Appendix A.4 for a further review of the Sum-of-Parts
analysis.
Table 6.4.1: Motorola Sum-of-Parts Analysis
FY2007
Sales (mil $)
Mobile Devices
Home and Networks Mobility
Enterprise Mobility Solutions
Total (mil $)
18,992
10,691
7,048
36,731
MOT NOK
0.7
2.04
0.7
2.04
0.7
P/S multiples
AlcatelLucent
Nortel Cisco
0.53
0.53
0.46
Ericsson ARRIS
1.15
3.96
1.15
0.69
3.96
P/S
Average P/S Target
1.30
1.00
1.36
1.36
1.73
1.73
Target Market Cap
(P/S Target * Sales)
18,929
14,555
12,193
45,677
Looking at table 6.4.1, it can be seen exactly how the sum-of-parts analysis is organized for
Motorola. The company’s total net sales for FY 2007 (in each of its three business segments) is
multiplied by a composite P/S in order to quantify the total (estimated) market cap value for
each business segment. The composite P/S is taken by averaging the P/S values for an
assortment of Motorola’s direct competitors in each of its three business segments. It should be
noted that the average P/S in the mobile device (cell phone) industry was discounted since,
conservatively speaking, the recent loss in Motorola’s market share in this industry warrants a
below average P/S value for analysis purposes.
Page | 18
Once the target market capitalization has been determined for each of Motorola’s business
segments, a summation is taken in order to quantify the total target market cap for the company.
This market cap is then divided by the current number of outstanding shares, thereby
generating a target per-share value for Motorola’s stock. The implied per-share value is found
for all of Motorola and for the company excluding the mobile device segment (i.e. if this segment
was worthless, which is not, in-fact, the case). These results are presented in tables 6.4.2 and
6.4.3.
Tables 6.4.2-3: Motorola Sum-of-Parts Summary (with and without mobile devices)
MOT Details
( Discount Mobile Device Segment to
MOT Details
Current Price (2/29/08)
P/S
Shares Outstanding (mil)
Current Market Cap (mil)
Target price
Upside/(Downside) Potential
9.97
0.7
2280.7
22,739
20.03
100.88%
Current Price (2/29/08)
P/S
Shares Outstanding (mil)
Current Market Cap (mil)
9.97
0.7
2280.7
22,739
Target price
Upside/(Downside) Potential
11.73
17.63%
Referring to results of the sum-of-parts analysis presented in tables 6.4.2-3, it can be seen that
the target price for Motorola’s stock is $20.03, which represents a 100% upside relative to
the stock price of $9.97 at the COB on 02/29/08. This is in-line with the implied per-share value
of $18.37 that was calculated using the DCF model in the previous section.
Now, if it is assumed, for analytical purposes, that Motorola’s mobile device segment is
worth nothing, then by the calculations given in table 6.4.3, the target price for Motorola’s
stock is $11.73, which represents an 18% upside relative to the stock price of $9.97 at the
COB on 02/29/08. This says that based on the current stock price, you are buying the Home
and Network Solutions and Enterprise Mobility Solutions segments (at a slight discount) and you
are getting the Mobile Device segment for free. In fact, based on a recent report published by
thestreet.com, sell-side analysts give Motorola a per share value of between $11 and $15
excluding its Mobile Devices segment. 14
All that being said, there is still some risk in assuming that Motorola’s stock is a strong buy
based simply on this sum-of-parts analysis, and even though the sum-of parts, DCF and
multiples analysis all seem to reinforce that a buying opportunity does exist, there is still
downside potential. Referring to a summary of the company’s balance sheet in Appendix A.2,
one point that has been mentioned before that once again deserves mention is that Motorola
currently has cash assets of approximately $2.6 billion. If the turnaround in their mobile device
segment becomes a large liquidity pit (i.e. costing in excess of $2 billion) then there may be
some downside to the sum-of-parts model, but this potential downside is overshadowed by the
company’s strong upside potential.
14
Curzio, Frank. ‘Three Stocks Under $10 to Watch’ www.thestreet.com, February 28, 2008.
Page | 19
Summary
Table 7.1 summarizes the key pros and cons regarding ownership of Motorola stock:
Table 7.1: Motorola Ownership Review
Pros
1. Market leader in home, network and
enterprise mobility technologies
2. Recent federal monetary loosening will
continue to reduce the strength of the
dollar, which should positively impact
Motorola’s sales outside the US.
3. Motorola’s Home and Networks
Solutions and Enterprise Mobility
Solutions segments forecast strong
global growth through 2011 while
expanding market share beyond
current market leading levels.
4. Motorola’s stock is inexpensive relative
to all valuation measures, even
following conservative assumptions.
5. Motorola’s stock has lost more than
50% of its value over the last 4 months,
and the stock currently appears to be
oversold.
Cons
1. The potential for a US/global recession
could reduce consumer demand and
lead to a short term decline in sales.
2. Turnaround in the Mobile Device
segment may take longer than
expected, with a return to profitability in
2009.
3. Motorola’s global sales are largely
drive by consumer demand, which
could be depressed by US/global
recessionary pressures.
4. Long term customer consolidation in
the telecom and cable services arenas
will make bottom line revenues more
sensitive to a decrease in customer
demand.
Recommendation
Motorola is a technology company with excellent growth prospects that has seen a recent loss
of market share in its largest business segment. Even given the recent decline in its Mobile
Device segment, along with its projected prolonged turnaround extending through Q2 of 2009,
this company is undervalued at its current stock price of $9.97/share (as of COB
02/29/08).
Motorola is a relatively inexpensive stock with global technology exposure that has excellent
future growth potential. DCF and Sum-of-Parts analysis indicate upside potential in excess of
80%. The market is currently overshadowing this strong upside potential with the uncertainty
surrounding a sustained turnaround in the company’s Mobile Devices segment, and this
presents a buying opportunity for a stock that has been oversold in recent months, losing nearly
50% of its market value in the past four months.
Final Recommendation: BUY
Sector Recommendation: Increase IT holdings to 320 basis points overweight.
Page | 20
Appendices
Appendix A.1 (Income Statement)
Page | 21
Appendix A.2 (Balance Sheet)
Page | 22
Appendix A.3 (DCF Model)
DCF Valuation
2/27/2008
Ticker: MOT
Evan Harding
Terminal Discount Rate =
Terminal FCF Growth =
10.5%
5.5%
Forecast
2013E
2014E
2015E
2016E
2017E
2018E
61,578
9.36%
66,944
8.71%
72,348
8.07%
77,722
7.43%
82,996
6.79%
88,094
6.14%
92,939
5.50%
4,505
8.00%
4,865
7.90%
5,222
7.80%
5,571
7.70%
5,907
7.60%
6,225
7.50%
6,519
7.40%
6,785
7.30%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
705
35.0%
134
1,333
35.0%
134
1,577
35.0%
147
1,703
35.0%
161
1,828
35.0%
175
1,950
35.0%
189
2,067
35.0%
203
2,179
35.0%
217
2,282
35.0%
230
2,375
35.0%
243
672
1,444
115%
2,609
81%
3,075
18%
3,323
8%
3,569
7%
3,810
7%
4,043
6%
4,263
5%
4,468
5%
4,653
4%
796
2.00%
(345)
-0.87%
598
1.50%
916
2.00%
(653)
-1.43%
688
1.50%
1,024
2.00%
(590)
-1.15%
769
1.50%
1,109
1.97%
(563)
-1.00%
863
1.53%
1,195
1.94%
(585)
-0.95%
962
1.56%
1,279
1.91%
(602)
-0.90%
1,066
1.59%
1,360
1.88%
(615)
-0.85%
1,174
1.62%
1,438
1.85%
(622)
-0.80%
1,284
1.65%
1,511
1.82%
(622)
-0.75%
1,396
1.68%
1,577
1.79%
(617)
-0.70%
1,508
1.71%
1,636
1.76%
(604)
-0.65%
1,619
1.74%
Free Cash Flow
YOY growth
524
1,019
94%
2,274
123%
2,759
21%
2,971
8%
3,179
7%
3,382
6%
3,574
6%
3,755
5%
3,919
4%
4,065
4%
P/E [Estimate]
Stock Price [Estimate, USD $]
18.4
18.4
11.67
18.4
21.09
18.4
24.86
18.4
26.86
18.4
28.85
18.4
30.80
18.4
32.68
18.4
34.46
18.4
36.11
18.4
37.61
Year
2008E
2009E
2010E
2011E
2012E
Revenue
% Growth
39,789
45,779
15.05%
51,190
11.82%
56,309
10.00%
Operating Income
Operating Margin
827
2.08%
2,016
4.40%
3,809
7.44%
Interest and Other- net
Interest % of Sales
0.00%
0.00%
Taxes
Tax Rate
Minority Interest
290
35.0%
134
Net Income
% Growth
Add Depreciation/Amort
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
85,776
16,012
25,883
41,895
1.25%
Shares Outstanding
2,280.7
USD ($)
Current Share Price
9.97
Implied equity value/share
18.37
Upside/(Downside) to DCF
84.2%
Total Debt
Total Cash
Cash/share
4,320
8,610
3.78
Terminal
P/E
EV/EBIT DA
Free Cash Yield
38%
62%
Terminal
Value
85,776.3
18.4
9.7
4.74%
Sensitivity Analysis Matrix [MOT Implied equity value/share]
Terminal FCF Growth Rate
Terminal
Discount Rate
12.00%
11.50%
11.00%
10.50%
4.00%
12.40
13.33
14.39
15.63
4.50%
12.82
13.84
15.01
16.39
5.00%
13.31
14.43
15.74
17.29
10.00%
9.50%
9.00%
8.50%
8.00%
17.07
18.78
20.85
23.37
26.54
18.02
19.98
22.38
25.39
29.27
19.15
21.44
24.30
27.99
32.91
5.50%
13.87
15.12
16.60
18.37
6.00%
14.53
15.94
17.62
19.69
6.50%
15.31
16.91
18.88
21.34
7.00%
16.24
18.11
20.45
23.46
7.50%
17.38
19.61
22.47
26.29
20.54
23.26
26.77
31.45
38.01
22.28
25.61
30.06
36.29
45.65
24.51
28.74
34.66
43.56
58.39
27.48
33.11
41.57
55.67
83.88
31.65
39.68
53.08
79.89
160.32
Page | 23
Appendix A.3.1 (DCF Model – Income Statement [GAAP])
MOT - Motorola Corp.
(USD $ Millions)
Income Statement - GAAP
Net Sales
Consensus [Revenue]
FY
2010E
51,190
FY
2009E
45,779
FY
2008E
39,789
39,600
Cost of sales
Selling, General & Administrative Expenses
R&D Expenses
Stock Based Compensation
Merger/Restructuring Charges
Other Operating Income/Expenses
Operating Profit
Interest Expense
Interest And Invest. Income
Other Non-Operating Income/Expenses
Profit Before Tax and Minority Interests
Provision For Income Taxes (Refund)
Profit Before Minority Interests
Minority Interest Loss (Gain)
Earnings Of Discontinued Operations
Profit attributable to Equity holders
EPS (USD, $)
Basic
Diluted
Consensus [EPS]
High EPS Estimate
Low EPS Estimate
Numb er of Estimates
Avg number of shares (000's)
Basic
Diluted
Capital expenditures, total
% of sales
Depreciation and amortization, total
% of sales
3,809
2,016
827
3,809
(1,333)
2,016
(705)
827
(290)
2,476
134
2,609
1,310
134
1,444
538
134
672
1.14
1.13
0.84
1.25
0.41
4
2,280,700
2,307,900
0.63
0.63
0.64
1.21
0.26
25
2,280,700
2,307,900
0.29
0.29
0.15
0.43
(0.14)
30
2,280,700
2,307,900
FY
2007
36,622
36,600
FY
4Q 2007
9,646
11,790
3Q 2007
8,811
8,800
2Q 2007
8,732
8,700
1Q 2007
9,433
9,400
FY
FY
FY
2005
35,262
36,800
2004
33,602
2003
27,058
2002
27,279
(30,122)
(4,366)
(4,022)
(252)
(23,833)
(3,628)
(3,600)
-
(22,117)
(4,331)
(3,741)
-
(18,101)
(4,073)
(3,771)
-
(18,307)
(4,472)
(3,716)
-
(26,645)
(4,979)
(4,358)
(209)
(7,106)
(1,273)
(1,097)
-
(6,298)
(1,173)
(1,076)
(69)
(6,270)
(1,257)
(1,090)
(73)
(6,971)
(1,276)
(1,095)
(67)
(465)
(519)
(88)
(101)
(90)
(115)
(97)
(103)
(190)
(200)
(101)
76
404
-
(16)
(68)
(86)
57
(1,764)
(833)
(553)
(268)
359
72
(390)
285
(19)
11
41
33
78
(10)
(93)
100
11
8
32
(158)
(82)
114
22
(104)
66
(366)
(93)
134
(2)
(327)
109
4,092
(335)
661
192
4,610
(1,349)
4,605
(325)
396
1,736
6,412
(1,893)
3,329
(286)
283
167
3,493
(1,981)
1,084
(295)
643
(139)
1,293
(400)
(1,813)
(356)
96
(1,373)
(3,446)
961
(105)
56
(49)
0.14
0.14
0.22
111
(11)
100
40
(38)
10
(28)
(218)
37
(181)
3,261
4,519
1,512
893
(2,485)
20
60
400
3,661
59
4,578
20
1,532
893
(2,485)
0.06
0.06
0.04
0.02
0.02
-
0.02
0.02
0.02
1.50
1.46
1.85
1.81
0.65
0.63
0.38
0.37
(1.09)
(1.09)
2,280,700
2,307,900
0.04
0.04
0.13
2,280,700
2,307,900
-
2,290,200
2,318,400
2,296,300
2,522,000
2,372,300
2,372,300
769
1.50%
1,024
2.00%
688
1.50%
916
2.00%
598
1.50%
796
2.00%
527
1.44%
1,209
3.30%
134
1.39%
290
3.01%
123
1.40%
316
3.59%
178
2.04%
311
3.56%
92
0.98%
292
3.10%
Inventories
% of sales
Accts Receivable
% of sales
Accts Payable
% of sales
Chg in WC
% of sales
3,964
7.74%
7,442
14.54%
5,825
11.38%
(590)
-1.15%
3,545
7.74%
6,655
14.54%
5,209
11.38%
(653)
-1.43%
3,081
7.74%
5,784
14.54%
4,527
11.38%
(345)
-0.87%
2,836
7.74%
5,324
14.54%
4,167
11.38%
3,400
9.28%
2,836
2,995
3,016
3,301
5,324
5,165
5,492
6,811
4,167
3,671
3,493
4,010
3,896
3,000
752
(2,116)
Sales growth
Gross Margin
Selling, General & Administrative Expenses
R&D Expenses
Operating Profit
11.82%
15.05%
8.65%
-18.42%
26.33%
-13.20%
-11.37%
-0.20%
-16.90%
28.52%
-13.31%
-12.21%
-0.11%
-19.30%
28.20%
-14.40%
-12.48%
-1.81%
0.43%
236.36%
0.00%
0.12%
400.00%
0.00%
0.25%
-63.46%
0.00%
Other Non-Operating Income/Expenses
Tax Rate
Profit Attributable to Minority Interests
FY
2006
42,879
42,900
7.44%
4.40%
2.08%
-14.59%
27.24%
-13.60%
-11.90%
-1.51%
1.52%
-35.00%
0.00%
1.52%
-35.00%
0.00%
1.52%
-35.00%
0.00%
0.20%
-73.08%
0.00%
2,446,300
2,504,200
2,471,300
2,527,000
2,365,000
2,472,000
2,321,900
2,351,200
2,282,300
2,282,300
649
1.51%
834
1.95%
548
1.55%
554
1.57%
990
2.95%
1,667
6.16%
2,108
7.73%
3,162
7.37%
7,509
17.51%
5,056
11.79%
(3,358)
-7.83%
2,422
6.87%
5,652
16.03%
4,295
12.18%
(1,968)
-5.58%
2,546
7.58%
4,525
13.47%
3,330
9.91%
(384)
-1.14%
2,792
10.32%
4,436
16.39%
2,789
10.31%
(443)
-1.64%
2,869
10.52%
4,437
16.27%
2,268
8.31%
(9,574)
-35.10%
-2.07%
26.10%
-13.53%
-11.61%
-3.88%
21.60%
29.75%
-10.18%
-9.38%
9.54%
4.94%
32.41%
-10.29%
-10.21%
13.06%
24.19%
34.18%
-12.89%
-11.13%
9.91%
-0.81%
33.10%
-15.05%
-13.94%
4.01%
32.89%
-16.39%
-13.62%
-6.65%
-0.02%
-33.33%
0.00%
0.45%
-29.26%
0.00%
4.92%
-29.52%
0.00%
0.50%
-56.71%
0.00%
-0.51%
-30.94%
0.00%
-5.03%
-27.89%
0.00%
Page | 24
Appendix A.3.2 (DCF Model – Segment Income Statement)
MOT-Mot rola Corporation
Income Sta ement-Segment
NetSales
MobileDevices
HomeandNetworksMobilty
EnterpiseMobiltySolutions
Eliminations
OperatingProfit
MobileDevices
HomeandNetworksMobilty
EnterpiseMobiltySolutions
Com onGroupExpense
OperatingMargin(%)
YOYChange(%)
MobileDevices(%)
YOYChange(%)
HomeandNetworksMobilty(%)
YOYChange(%)
EnterpiseMobiltySolutions(%)
YOYChange(%)
SalesGrowth
MobileDevices
HomeandNetworksMobilty
EnterpiseMobiltySolutions
FY
201E
51, 90
19,298
14,538
17,35
FY
209E
45,79
19,013
13,12
13,64
FY
208E
39,789
17,852
1,84
10, 92
FY
207 4Q207 3Q207 2Q207 1Q207
36, 2 9,64 8, 1 8,732 9,43
18,92 4,81 4, 96 4,273 5,412
10,691 2,724 2,389 2,564 3,014
7,048 2,138 1,954 1,920 1,036
(109) (27) (28) (25) (29)
FY
FY
206 4Q206 3Q206 2Q206 1Q206 205
42,85 1,824 10,603 10,820 9,608 35,26
28,38 7,806 7,034 7,140 6,403 9,650 2,52 2, 62 2,34 2,520 4,92 1,506 1,329 1,35 732 (13) (2) (18) (47)
FY
204
31,32
-
FY
203
27,058
-
FY
202
27,279
-
3,809
1, 58
1,018
2, 56
(623)
2,016
(190)
91
1,910
(623)
827
(893)
829
1,514
(623)
(53)
(1,201)
709
1,213
(1,274)
(19)
(38)
192
451
(274)
8
(248)
159
328
(231)
(104)
(32)
19
30
(26)
4,610
3,026
8
68
28
3,493
-
1,293
-
(3,46)
-
7.4%
3.04%
6.0%
7.0%
7.0%
0. 0%
13.0%
-1.0%
4. 0%
2.32%
-1.0%
4.0%
7.0%
0. 0%
14.0%
-1.0%
2.08%
3.59%
-5.0%
1.32%
7.0%
0.37%
15.0%
-2. 1%
-1.51%
-12. 7%
-6.32%
-16.9%
6. 3%
-2.57%
17.21%
3.64%
-0.20%
-5.98%
-8.06%
-16.74%
7.05%
0. 0%
21.09%
9.21%
0. 9%
-10.80%
-5. 2%
-17.50%
6. 6%
-1.35%
16.79%
-2.3%
-1. 9% -3.47%
-17.12% -14.37%
-7. 7% -4.80%
-19.03% -15.7%
7.45% 6.07%
-2.03% -6.1%
15.78% 13.71%
-1.86% 14.25%
1.82%
1.50%
10.79%
27.19%
15.05%
6.50%
10.79%
35.19%
8.65%
-6.0%
10.79%
43.19%
-14.54%
-3.09%
10.79%
43.19%
-18.42%
-38.37%
7.8%
41.97%
-16.90%
-36.08%
5.61%
47.03%
-19.30% -1.82% 21.53% 17. 8% 17.19% 28.69% 23.70% 12.58% 15.76% -0.81%
-40.15% -15.48%
9.43% 19.60%
41.70% 41.53%
16. 2%
(327)
(260)
183
142
(392)
684
67
178
179
(350)
1, 5
843
18
254
(123)
1,723
804
2
239
458
1,048
702
307
(4)
43
6,412
-
10.76% 5.78% 10.89% 15.92% 10.91% 18.18% 1.15% 4.78% -12.63%
-7.43% -10.97% -14.08% -0.62% -2.98% 7.03% 6.37% 17.41%
10.6% 8.67% 1.98% 1.26% 10.96%
9.20% 7.05% 8.0% 9.48% 12.18%
13.57% 1.89% 19.1% 17.64% -0.5%
Page | 25
Appendix A.4 (Sum-of-Parts Analysis)
Sum of Pa rts Mode l
3/3/2008
Ticke r: MOT
Eva n Ha rding
FY2007
P/S m ultiple s
Sa le s (m il $)
Mobile Devices
Home and Networks Mobility
Enterprise Mobility Solutions
18,992
10,691
7,048
Tota l (m il $)
36,731
MOT
0.7
0.7
0.7
NOK
2.04
2.04
AlcatelLucent
0.53
0.53
Nortel
0.46
Cisco
Ericsson ARRIS
1.15
3.96
1.15
0.69
3.96
P/S
Average
1.30
1.36
1.73
P/S
Ta rge t
1.00
1.36
1.73
Ta rge t Ma rke t Ca p
(P/S Ta rge t * Sa le s)
18,929
14,555
12,193
45,677
M OT Details
Current Price (2/29/08)
P/S
Shares Outstanding (mil)
Current Market Cap (mil)
Ta rge t price
Upside /(Downside ) Pote ntia l
9.97
0.7
2280.7
22,739
20.03
100.88%
M OT Details
( Discount M obile Device Segm ent to
Current Price (2/29/08)
P/S
Shares Outstanding (mil)
Current Market Cap (mil)
Ta rge t price
Upside /(Downside ) Pote ntia l
9.97
0.7
2280.7
22,739
11.73
17.63%
Page | 26