Motorola Solutions (NYSE:MSI) could benefit hugely from the recent Congressional approval of a payroll tax bill that allows the The Federal Communications Commission (FCC) to conduct auction of TV airwaves for wireless purposes. The bill that was passed last month also sets aside a 10MHz block of spectrum – the so-called D block in the 700Mhz band – for use in a nationwide mobile broadband network for police, firefighters and other public safety agencies. In addition, an estimated $7 billion from the proceeds of the auction will be used to build out the nationwide network. The payroll tax bill therefore not only addresses the spectrum crunch situation that wireless carriers such as Verizon (NYSE:VZ) and AT&T (NYSE:T) face, but also creates a multi-billion dollar market opportunity for Motorola Solutions.
Public safety spending good for Motorola Solutions
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Motorola Solutions, which was formed after the company split into two entities at the start of 2011, participates in the more sedate but stable public safety market. It specializes in making two-way radios and other communication products used by police departments, fire departments and other local emergency agencies. The company’s revenues from governments rose 6.1% last year to $5.36 billion, accounting for almost 65% of total revenues. The remainder of its revenues comes from products sales of handheld computing devices used in logistics, supply-chain management and retail stores to enterprise customers.
Over the last year and a half, Motorola Solutions has secured a number of lucrative municipal contracts, including a few in California, Texas and Mississippi. With the the sanction for additional spending on public safety, Motorola Solutions is likely to benefit hugely from its strong market position and large installed base. Also, given that government customers are more likely to stick with existing partners due to higher costs of switching to a competitor such as Cisco (NASDAQ:CSCO) or Honeywell International (NYSE:HON) bodes well for the company.
Moreover, we are likely to experience a more widespread shift from the older analog to newer digital networks as faster technologies such as LTE arrive in the marketplace and local governments overhaul their analog networks. The federal government has also shown more willingness to fund the switch in recent times. We expect Motorola Solutions to benefit hugely from this industry-wide LTE switch.
Motorola Solutions’ radios and other security devices division contributes close to 75% to the company’s total value. The company has seen a run-up in its stock price recently, partly due to its stock buyback program that saw activist investor Carl Icahn unload almost $1.2 billion worth of shares last month. (see Icahn Shows the Value in Activism With Motorola Investment)
Our $45.23 price estimate for Motorola Solutions’ stock is now around 10% below the current market price.