Why We Revised Our Price Estimate For Motorola Solutions’ To $87

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MSI: Motorola Solutions logo
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Motorola Solutions

We recently increased our price estimate for Motorola Solutions (NYSE:MSI) by around 30% to $87. Motorola’s integration of Airwave following the acquisition has gone relatively smoothly, and has helped boost the company’s revenues and gross margins. Our new model accounts for this success, which – combined with a slight decline in the discount rate – led to the increase in our valuation for the company. Below we discuss the changes made to our model. 

See our complete analysis for Motorola Solution

Surge in Services Revenues

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Airwave has provided a boost to Motorola’s Services division. This division includes integration, maintenance & support, and iDEN services. With the acquisition of Airwave, Motorola entered the British telecommunication market, with the former’s network covering 99% of Great Britain’s landmass. Moreover, the U.K. is going through an upgrade to ESN (Emergency Services Network) which uses 4G technology for faster voice and video communication between emergency services. This could further lead to an uptick in Motorola’s Services revenues in the coming years, which were constant at around $2 billion since 2012 before jumping to nearly $2.4 billion in 2016 after the acquisition.

Our earlier forecast for Services revenue by the end of our forecast period was $2.5 billion dollars, which we have increased by over 5% to $2.65 billion.

Rise in Gross Margin Projections

Motorola’s Services gross profit jumped by 32%, from $670 million in 2015 to $870 million 2016, which was largely driven by Airwave. The Services gross margin rose by 4 percentage points, which helped boost the company’s non-GAAP EPS from $3.33 to $4.92 in 2016, indirectly leading to higher future cash flow projections. Our earlier projection of gross profits by the end of our review period was $800 million, which we have now increased by over 10% to $900 million. However, we still expect the gross margins to fall marginally despite the company’s efforts at efficiency improvements. This is because Motorola will likely incur additional long-term costs while upgrading some obsolete technology being used by emergency services to more modern technologies such as ESN.

Reduction In Weighted Cost Of Capital

We have also reduced our weighted average cost of capital for Motorola due to a lower Beta in recent years, as the stock’s volatility has declined along with the plunge in the CBOE volatility index. Additionally, Motorola has refinanced some of its debt in recent years at relatively low rates, which also factored into our cost of capital adjustment.

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