Why We Have A Bearish Outlook On Motorola Solutions

-4.11%
Downside
355
Market
340
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MSI: Motorola Solutions logo
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Motorola Solutions

Motorola Solutions is trading at a nine year high of $77 on the back of several promising factors, including consistency in winning contracts, steady financial performance, a strong position in the niche smart public safety solutions market and Silver Lake’s recent $1 billion investment. However, we believe that there are some risks pertaining to the company’s future and our price estimate for Motorola is about 15% below the current trading price.

The main risk is that Motorola is operating in an industry that is hardly growing, thanks to government budget cuts amid an uncertain economic environment. Between 2013 and 2015, U.S. homeland security budget increased just 4% per annum and it is expected to come down by 1.5% this year. Within the stable domain, the company seems to be loosing its footing, despite all its product innovations and contract wins. Motorola’s share in federal government’s annual homeland security budget has been coming down since 2013 on account of weak device sales and competition from its low cost peers such as Harris, Kenwood, etc. While Motorola still maintains a leadership position in the public safety domain, the existence of competitors and saturation in the market will keep its growth under a check. We believe that it will take the company another three years to reach the level of revenues it generated in 2013.

Motorola Solutions Revenue Growth

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Additionally, it must be noted that Motorola’s stock has shown significant improvement over the last couple of months due to its positive earnings surprise in the second quarter. The company’s revenues and earnings per share for Q2 showed significant improvement and turned out slightly better than expected. Granted that the company is progressing well on cost-cutting initiatives, the fact that there is hardly any topline growth should be a concern. Most of the improvement the company exhibited in the recently concluded quarter came from the incremental revenues from Airwave Solutions and fewer shares outstanding.

While Motorola has been repurchasing a heap of its shares to create a positive sentiment around the market and return more money to its shareholders, the company insiders are interestingly disposing off their shares. This development has a negative connotation of impeding troubles. Motorola’s CEO and CFO collectively sold 134,000 shares, while Chief Administration Office, Executive Vice President of Worldwide sales and Corporate Vice President also sold off some of their shares. A number of company insiders selling their shares while the prices are high somewhat indicates that Motorola may not be doing too well in the ongoing quarter or some underlying weakness is about to overshadow the improvement associated with Airwave Solutions.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Motorola Solutions
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