Softening Demand To Drag Motorola Solutions Stock Below $160?

Motorola Solutions stock (NYSE: MSI) is up only around 12% since the beginning of 2020, but at the current price of $183 per share, we believe that Motorola Solutions stock has around 15% potential downside.

Why is that? Our belief stems from the fact that MSI stock is up almost 1.5x from the low seen in March 2020. Further, after posting mixed FY 2020 numbers, it’s clear that MSI did not benefit from the pandemic, and that telecom equipment demand has still not fully recovered to pre-Covid levels. Our dashboard Buy Or Sell Motorola Solutions Stock? provides the key numbers behind our thinking, and we explain more below.

Motorola Solutions stock’s rise since late 2017 came despite roughly unchanged revenues, from FY 2018 to FY 2020. Net income margins dropped slightly from 13.2% to 12.8% over the same period, as a result of rising expenses. This, combined with a roughly 5% rise in the outstanding share count, led to EPS dropping by 6%, from $5.95 to $5.58 over this period.

Motorola Solutions’ P/E (price-to-earnings) ratio rose from 15x in 2017 to 29x in 2019, as the investor expectations surrounding telecommunication equipment demand rose, implying a rise in demand for MSI’s products. The P/E multiple has further risen to 33x currently, rising with the rally in the S&P, but given Motorola Solutions’ mixed FY 2020 results, there is possible downside risk for MSI’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus and the resulting lockdowns have hampered demand for Motorola’s telecommunications equipment and radio products. This is evident from Motorola’s full-year 2020 earnings, where revenue came in at $4.08 billion, down more than 15% from $4.75 billion in 2019. With no significant changes in operating expenses as a % of revenue, operating margins came in at 33.5%, the same level as in 2019. However, EPS came in at $5.58 vs $5.21 last year, but a closer look reveals that this was largely due to a $378 million difference in other income between the two periods. Further, with industrial demand still not back to pre-Covid levels, demand for MSI’s products will remain low in the near-to-medium term.

If there isn’t clear evidence of containment of the virus anytime soon, we believe the stock will see its P/E multiple decline from the current level of 33x to around 29x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $155, a downside of around 15% from the current price of $183.

While Motorola Solutions stock may not seem attractive, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Colgate Palmolive vs Intel shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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