Weak Product Demand Could Drag Motorola Solutions Stock Down To $160

-6.70%
Downside
250
Market
233
Trefis
MSI: Motorola Solutions logo
MSI
Motorola Solutions

Motorola Solutions stock (NYSE: MSI) is up about 12% since the beginning of 2021, but at the current price of $190 per share, we believe that Motorola Solutions stock has around 15% potential downside.

Why is that? Our belief stems from the fact that Motorola Solutions stock is up around 1.5x from the low seen in March 2020. Further, after posting mixed FY ’20 numbers, it’s clear that MSI did not benefit from the pandemic and product demand has still not fully recovered to pre-pandemic levels. Our dashboard What Factors Drove 65% Change In Motorola Solutions Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

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Motorola Solutions stock’s rise since late 2018 came despite roughly unchanged revenues, from FY 2018 to FY 2020. Net margins dropped marginally from 13.2% to 12.8% over the same period, as a result of rising expenses. Combined with a 5% rise in the outstanding share count, this 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 19x in late-2018 to 31x by 2020 end, as the investor expectations surrounding telecommunication equipment demand rose, implying a rise in demand for MSI’s products and services. The P/E multiple has further risen to 34x currently, riding 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 and radio equipment. This is evident from Motorola’s FY 2020 earnings, where revenue came in at $7.4 billion, down from $7.9 billion in 2019. With no significant changes in operating expenses as a % of revenue, operating margins came in at around 33%, the same level as in 2019. However, EPS rose to $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 equipment demand still not back to pre-pandemic levels, demand for MSI’s products will remain low in the near-to-medium term.

We believe the stock will see its P/E multiple decline from the current level of 34x to around 30x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $160, a downside of over 15% from the current price of $190.

 

While Motorola Solutions stock does not seem attractive currently, 2020 has created many pricing discontinuities which can offer further  trading opportunities. For example, you’ll be surprised how the stock valuation for Activision Blizzard vs. D.R. Horton shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

 

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