Motorola

Investment Notes

MOT

Please see disclaimer at bottom of this document

 

 

February 13, 2006 (21.50) 

 

Started buying MOT at $12.30 (Freescale adjusted) in January 2002.  I bought in 2002 because of the opportunity of gains via a potential telecom depression.   Since 2002, the price has increased  to $21.50.  My projections of Sales, typical metrics and other potential expectations were met and beat by MOT.  Not necessarily company specific, as it may have been industry specific.

 

Below on 2/13/06, you will see some quick estimates.  I think that I am using conservative metrics, yet, I have NOT double checked all metrics.  There is an obvious difference in ROI computed under 2 methods.  Theoretically, the lesser of the ROI could be potentially considered a margin of safety.

 

Large vendor in the wireless handset market, wireless infrastructure market and cable equipment market.

 

Standard and Poor’s listed bond rating at BBB+ on 2/11/06.

 

 

Notes:

 

1.               Shares outstanding on 12/31/05 is 2599.9 

2.               Guidance given during CC on 1/19/06 

a.     eps for 1Q06  $0.25 - $0.27 including stock option compensation expense 

b.     estimated annual stock option expense b/w $250 - $300M annually, spread evenly quarter by quarter. 

c.     1Q06 shares outstanding expected to be 2.56B shares. 

d.     1Q06 Tax Rate expected at 36%, also expects that to be number for all of 2006. 

e.     Expects improvement on operating margin, which is currently 11.8%.  They claim that is “excluding the significant items I discussed earlier.  I do not know if he is referring to stock option compensation or the Telsim collection or all of the above. 

3.               estimates I have collected:

 

Revenue

 

 

2006

2007

2008

Citigroup

$41,038.6

NMF

NMF

S&P

NMF

NMF

NMF

Morningstar

NMF

NMF

NMF

Morgan Stanley

$40,716

43,911

46,765

JP Morgan

40,636

42,481

NMF

CIBC

42,208

44,470

NMF

 

EPS

 

 

2006

2007

2008

Citigroup

$1.34

1.45

1.54

S&P

1.25

1.45

 

Morningstar

NMF

NMF

NMF

Morgan Stanley

1.35

1.59

1.66

JP Morgan

1.18

1.40

NMF

CIBC

1.35

1.54

 

 

4.               Morgan Stanley expects share count to be as follows:

 

2005A

2,525

2006

2,546

2007

2,514

2008

2,489

2009

2,502

 

 

5.               Review of DEF 14A filed 3/14/05

 

a.         Stock Ownership Table from Def 14A

 

 

Name

Ownership

Ed Zander

1,059,445

Mike Zafirovski

3,315,677

All Directors and nominees

10,214,716

 

                        Officer’s and director’s appear to own b/w 3.5% to 3.9% of common stock.

b.               I looked at compensation table.  MOT does not appear to be shy with paying their head guys.  Many make in excess of $1M.  Zander in 2004 cleared $6.5M in compensation.  Account for RSA’s he made another $9M and has options on 2.6M shares.

 

c.                Option grants in Fiscal 2004 , expiring in 2014, typical base price is $16.30/ share, yet Zander has most at exercise price of $12.97.

 

 

# of shares

% of total options to employees

Zander

2,570,480

3.92%

Zafirovski

894,080

1.36%

Devonshire

502,920

0.77%

Brown

474,980

0.72%

Nemcek

474,980

0.72%

 

 

d.               Retirement plans appear very friendly to officers. 

 

Name

Comp covered by plans

Credit Service

Zander

1,500,000

1 Year

Zafirovski

962,308

4 years 8 months

Devonshire

642,308

2 years 10 months

Brown

583,654

2 years 0 months

 

 

6.               Some quick back of the envelope valuation scenarios.  I think my projections were conservative.  This is merely a road map for moving forward.  I used eps rates of 8% for 10N and 3% thereafter.

 

 

EV Analysis

 

 

 

Share Outstanding

2,600

Share Price

$21.50

Market Capitalization

$55,900

 

 

Less: Cash and Short Term Investments

-$14,785

Add: Long Term Debt

$3,806

 

 

Enterprise Value

$44,921

 

 

EV per share

$17.28

 

 

 

 

Stockholders' Equity

16,673

Book Value per Share

$6.41

Please keep in mind that $1.11 below in eps is below all estimates I have seen.  I am trying to be as conservative as possible.

 

Quick Projections 2006

 

 

 

Revenue

$41,000

 

 

Net Margin

$4,510

 

 

Tax Rate

36.00%

Corporate Taxes

$1,624

 

 

Net Income after Taxes

$2,886

 

 

Shares Outstanding

2,600

 

 

eps

$1.11

 

Below is an interesting way I valued Motorola.  There are so many possible road blocks, yet as I mentioned above, this is a road map for me.  So far this method seems to be the method I am favoring.  It seems logical, yet probably very far from what will happen in the future.  I have not assumed dividends, as I am assuming the earnings become future equity.  As I write that, I think perhaps here is a flaw in my analysis.  I wonder if I am double counting earnings and equity.  I don't think so, but I need to continue to think about that and refine it as well.

 

FV of current equity and future earnings 13-Feb-06
 
Tangible Book Value $16,673
 
Net Profit $2,886
 
Growth Rate of Net Profit  for 10N 8%
Growth Rate of Net Profit after 10N through 15N 3%
 
FV of Net Profit in 10N $6,232
FV of Net Profit in 15N $7,224
 
FV of tangible book value plus Net Profits for 10N $77,810
FV of tangible book value plus Net Profits for years 11 - 15N $123,287
 
Current Enterprise Value $44,921
FV of tangible book value plus Net Profits for 10N ($77,810)
Years 10
ROI on tangible book value plus Net Profits for 10N 5.65%
 
FV of tangible book value plus Net Profits for 10N $77,810
FV of tangible book value multiplier 2.50
 
FV of Tangible Book Value using BV multiplier in year 10 $194,524
 
 
Current Enterprise Value $44,921
FV of tangible book value plus Net Profits for years 11 - 15N ($123,286.84)
Years 15
ROI on tangible book value plus Net Profits for 15N 6.96%
 
FV of tangible book value plus Net Profits for 15N $123,287
FV of tangible book value multiplier 2.50
 
FV of Tangible Book Value using BV multiplier in year 15 $308,217
 
 
Potential Future EV using BV multiplier above  
 
Current Enterprise Value $44,921
FV of Tangible Book Value using BV multiplier in year 10 ($194,524)
Years 10
ROI on  FV of Tangible Book Value using BV multiplier in year 10 15.79%
 
 
Current Enterprise Value $44,921
FV of Tangible Book Value using BV multiplier in year 15 ($308,217)
Years 15
ROI on  FV of Tangible Book Value using BV multiplier in year 15 13.70%

 

Below is an alternate method.  I don't think it is an appropriate method, as it gives no credence to real assets that will exist in 15 years.  Nevertheless, I kind of like seeing that a potential worst case scenario could still be an annualized return of 3.15%.

 

 

 

Alternate Method (Sanity Check)

 

 

 

 

 

FV of Net Profit in 15N

$7,224

P/E estimate

9.942

 

 

Market Cap on above

-$71,821

Years

15

Current Enterprise Value

$44,921

ROI in 15N using above

3.15%

The following sanity test uses a net margin multiplier.  This method also doesn't take into account real assets which would exist in 15N.

 

Potential Revenue Growth

  
 
Current Revenues $41,000
Growth Rate of Revenues  for 10N 8.00%
Growth Rate of Revenues after 10N through 15N 3.00%
 
FV of Revenues in 10N ($88,516)
FV of Revenues in 15N $102,614
 
FV of Revenues in 15N $102,614
 
Revenue Multiplier based on Al Meyer Rule of Thumb net margins 2
 
Possible Market Cap year 15 ($205,228)
Years 15
Current Enterprise Value $44,921
ROI in 15N using above 11%

 

 

Intrinsic Value Work from separate spreadsheet.

 

AAA Corporate Bond Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

Motorola

Motorola

Motorola

Motorola

Symbol

mot

mot

mot

mot

Report Date

21-Jul-00

18-Jan-02

1-Feb-03

10-Feb-06

Report Used

Value Line

Value Line

rbc

rbcpa

Base Year

2000

2002

2002

2006

 

 

 

 

 

Price

33.000

13.720

8.250

21.500

 

 

 

 

 

30 year Bond Rate (AAA)

6.75%

6.75%

5.75%

5.75%

S & P Bond Rating

 

 

 

BBB+

 

 

 

 

 

Sales Per Share

17.90

12.00

11.70

15.77

Price/Sales

1.84

1.14

0.71

1.36

 

 

 

 

 

Projected R & D

 

 

 

1.42

Growth Flow Ratio (s/b <12=nrml)

31.43

171.50

58.93

8.50

 

 

 

 

 

Cash Flow Per Share

2.15

1.00

1.05

1.55

Capital Expend Per Share

1.40

0.50

0.25

0.30

Net Cash Flow Per Share

0.75

0.50

0.80

1.25

Price/Cash Flow

15.35

13.72

7.86

13.87

Price/ Net Cash Flow

44.00

27.44

10.31

17.20

 

 

 

 

 

Cash King (s/b > 10 % )

4.19%

4.17%

6.84%

7.93%

 

 

 

 

 

Total Interest Coverage

15.00%

15.00%

15.00%

15.00%

 

 

 

 

 

Growth Rate

26.50%

12.50%

12.50%

10.00%

Earnings Per Share

1.05

0.08

0.14

1.11

Projected EPS Year 2

1.40

0.60

0.33

1.22

Projected EPS Year 3

1.77

0.68

0.37

1.34

Projected EPS Year 4

2.24

0.76

0.42

1.48

Projected EPS Year 5

2.83

0.85

0.47

1.62

 

 

 

 

 

Dividends Per Share

0.17

0.17

0.16

0.16

Dividend Yield

0.52%

1.24%

1.94%

0.74%

 

 

 

 

 

Book Value Per Share

10.05

5.38

5.14

7.45

Intangibles Per Share

0.00

0.00

0.00

0.00

Net Book Value Per Share

10.05

5.38

5.14

7.45

Price/ Net Book Value

3.28

2.55

1.61

2.89

 

 

 

 

 

Return on Shr. Equity

11.00%

0.00%

2.00%

17.31%

ROE/PE (current)

35.00%

0.00%

3.39%

89.37%

ROE/PE  Year 2

46.67%

0.00%

8.00%

98.22%

 

 

 

 

 

Working Capital

5625

4560

7420

15362

LT Debt

3200

6300

7500

3806

Shr. Equity

21555

15165

11760

16673

LT Debt / Working Capital

56.89%

138.16%

101.08%

24.78%

LT Debt / Shr. Equity

14.85%

41.54%

63.78%

22.83%

 

 

 

 

 

Cash

 

5643

6370

14785

Current Assets

20001

18981

16577

27984

Inventory

5446

3250

2869

2522

Current Liabilities

14781

11345

9517

12622

Short Term Debt

 

2717

1457

448

Quick Assets

14555

15731

13708

25462

 

 

 

 

 

Current Ratio

1.35

1.67

1.74

2.22

Quick Ratio

0.98

1.39

1.44

2.02

Flow Ratio (s/b < 1.25 )

1.35

1.55

1.27

1.08

 

 

 

 

 

P/E Ratio Current

31.43

171.50

58.93

19.37

P/E Ratio Year 2

23.57

22.87

25.00

17.62

P/E Ratio Year 3

18.63

20.33

22.22

16.02

P/E Ratio Year 4

14.73

18.07

19.75

14.56

P/E Ratio Year 5

11.64

16.06

17.56

13.24

 

 

 

 

 

Inverse P/E Current

3.18%

0.58%

1.70%

5.16%

Inverse P/E Year 2

4.24%

4.37%

4.00%

5.67%

I/P/E to Bond Rate (Current)

47.14%

8.64%

29.51%

89.79%

I/P/E to Bond Rate Year 2

62.85%

64.79%

69.57%

98.69%

 

 

 

 

 

Div Yield / AAA Bond

7.63%

18.36%

33.73%

12.94%

 

 

 

 

 

PEG Ratio (Current)

1.19

13.72

4.71

1.94

PEG Ratio Year 2

0.89

1.83

2.00

1.76

PEG Ratio Year 3

0.70

1.63

1.78

1.60

PEG Ratio Year 4

0.56

1.45

1.58

1.46

PEG Ratio Year 5

0.44

1.28

1.40

1.32

 

 

 

 

 

PEGY Ratio (Current)

1.16

12.48

4.08

1.80

PEGY Ratio Year 2

0.87

1.66

1.73

1.64

 

 

 

 

 

Graham Ratio (current)

103.20

437.36

94.58

55.90

Graham Ratio Year 2

77.40

58.31

40.13

50.86

 

 

 

 

 

Highest P/E Avg 5 + Years

25.00

25.00

25.00

25.00

P/E  (current) to High P/E

1.26

6.86

2.36

0.77

P/E  Year 2 to High P/E

0.94

0.91

1.00

0.70

 

 

 

 

 

Intrinsic Value (current)

42.09

1.75

3.59

24.21

Price / Intrinsic Value(current)

78.40%

785.36%

229.88%

88.81%

 

 

 

 

 

Intrinsic Value Year 2

56.12

13.10

8.46

26.61

Price / Intrinsic Value Year 2

58.80%

104.72%

97.52%

80.81%

 

 

 

 

 

Intrinsic Value Year 3

71.00

14.74

9.52

29.27

Intrinsic Value Year 4

89.81

16.58

10.71

32.19

Intrinsic Value Year 5

113.61

18.66

12.04

35.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

Motorola

Motorola

Motorola

Motorola

Report Date

21-Jul-00

18-Jan-02

01-Feb-03

10-Feb-06

Price

33

13.72

8.25

21.5

Growth Rate

26.50%

12.50%

12.50%

10.00%

Price/Sales

1.84

1.14

0.71

1.36

Price/ Net Cash Flow

44.00

27.44

10.31

17.20

Price/ Net Book Value

3.28

2.55

1.61

2.89

P/E Ratio Current

31.43

171.50

58.93

19.37

P/E Ratio Year 2

23.57

22.87

25.00

17.62

Current Ratio

1.35

1.67

1.74

2.22

Quick Ratio

0.98

1.39

1.44

2.02

LT Debt / Shr. Equity

14.85%

41.54%

63.78%

22.83%

LT Debt / Current Assets

16.00%

33.19%

45.24%

13.60%

Return on Shr. Equity

11.00%

0.00%

2.00%

17.31%

 

 

 

 

 

PEG Ratio (Current)

1.19

13.72

4.71

1.94

PEG Ratio Year 2

0.89

1.83

2.00

1.76

PEGY Ratio (Current)

1.16

12.48

4.08

1.80

PEGY Ratio Year 2

0.87

1.66

1.73

1.64

 

 

 

 

 

Graham Ratio (current)

103.20

437.36

94.58

55.90

Graham Ratio Year 2

77.40

58.31

40.13

50.86

 

 

 

 

 

Growth Flow Ratio (s/b <12=nrml)

31.43

171.50

58.93

8.50

Cash King (s/b > 10 % )

4.19%

4.17%

6.84%

7.93%

Flow Ratio (s/b < 1.25 )

1.35

1.55

1.27

1.08

 

 

 

 

 

Intrinsic Value (current)

42.09

1.75

3.59

24.21

Intrinsic Value Year 2

56.12

13.10

8.46

26.61

Intrinsic Value Year 3

71.00

14.74

9.52

29.27

Intrinsic Value Year 4

89.81

16.58

10.71

32.19

Intrinsic Value Year 5

113.61

18.66

12.04

35.41

 

 

 

 

 

Intrinsic Value / Price (current)

27.56%

-87.27%

-56.50%

12.59%

Intrinsic Value / Price Year 2

70.07%

-4.50%

2.54%

23.75%

Intrinsic Value / Price Year 3

115.14%

7.43%

15.36%

36.13%

Intrinsic Value / Price Year 4

172.16%

20.86%

29.78%

49.74%

Intrinsic Value / Price Year 5

244.28%

35.97%

46.00%

64.71%

 

 

Disclaimer

 

 If you are a client of ours, and if you have questions regarding Motorola, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading these notes, we urge you to do your own research. We will not be responsible for any person making an investment decision based on these notes. these notes are a "by-product" of our research. We are not responsible for the accuracy of these notes. We are not responsible for errors that may occur in these notes.  Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our long position of Motorola from our portfolios.  We will not notify readers revisions to these notes. We are not responsible to keep readers of these notes updated for changes or material errors or for any reason whatsoever.   We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have Motorola in their portfolios. There could be various reasons for this. Again, if you would like to discuss Motorola, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).

 

Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.