Motorola Solutions Wary Of Govt Spending Cuts But LTE Shift Can Help

by Trefis Team
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Motorola Solutions (NYSE:MSI) will announce its Q1 2012 results on April 25th. Last year, the company got a boost from higher spending by both enterprise as well as government customers as demand for its wireless equipment remained solid throughout the year. Going forward, we believe that investors need to look out for risks arising from a decline in government spending as governments around the world express a greater need to keep fiscal deficits from spiraling out of control. Such an environment could lead to higher pricing competition from rivals such as Cisco (NASDAQ:CSCO), Honeywell International (NYSE:HON) and Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC).

Taking these risks into account, we have a $45.23 price estimate on Motorola Solutions’ stock, about 10% below the current market price.

See our complete analysis for Motorola Solutions stock here

At the outset, we would like to clarify that the company is not to be confused with the more popular brother, Motorola Mobility. While Motorola Mobility is famous for the smartphones it manufactures, Motorola Solutions makes public safety equipment such as two-way radios used by police and enterprise wireless solutions such as handheld computing devices used in retail stores. The two companies were formed after the bigger Motorola split up in early 2011.

Government spending cuts remain a risk

Motorola Solutions derives most of its value from government customers, who contribute more than 65% of its total revenues, as of 2011. This puts a major part of its revenues at risk if the ongoing talks to reduce fiscal deficits across the world result in widespread government spending cuts.

Recently, the U.S. government announced a proposal for budget cuts to achieve $1.2 trillion in savings over a 10-year period. [1] While Congress hasn’t yet approved the spending cuts, rising debt levels and a worsening fiscal deficit outlook makes it increasingly likely that the two Congressional parties ultimately agree on budgetary cuts of some kind. Moreover, the global macroeconomic conditions suggest that government spending could take a hit in many other developed economies as well, as debt levels rise to precarious levels.

That said, Motorola Solutions participates in the safer and more stable public safety market. While government spending may be cut due to the ongoing concerns, public safety will be among the less likely areas to take a hit as it figures very high on most governments’ priority lists. Still, there could be a slight impact of the spending cuts on revenues, with the risk of a bigger hit if the macroeconomic conditions get worse.

LTE shift

Going forward, we expect Motorola Solutions to benefit hugely from the payroll tax bill that received Congress approval in February 2012. The bill has set aside a 10MHz block of spectrum – the so-called D block in the 700Mhz band – for use in a nationwide LTE mobile broadband network for police, firefighters and other public safety agencies. In addition, about $7 billion of funds will be granted for the deployment of the dedicated LTE network.

With the sanction for additional spending on public safety, Motorola Solutions is likely to benefit hugely from the higher stickiness of its government customers as well as its strong market position and large installed base of security devices. (see Motorola Solutions to Benefit from Public Safety Broadband Spending) A big portion of the funding however rests on the ability of the FCC to conduct auctions for the allocated TV spectrum to wireless carriers in a fair manner and generate sufficient revenues for public safety allocation.

We are also likely to witness 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. We expect Motorola Solutions to benefit hugely from this industry-wide LTE switch in the coming years.

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Notes:
  1. Federal Budget (Obama Jobs Bill, 2012 Budget), New York Times, October 12th, 2011 []
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