Supported by strong sales of its newly-launched Android-powered smartphones, Motorola Inc. (MOT) posted an unexpected profit in first quarter 2010. This positive surprise, together with an equally bright financial outlook, has enthused the investing community. This is also reflected in recent Zacks Consensus Estimate revision trends.
Ever since the company declared its first quarter financial results on April 29, nearly half of the analysts that cover the stock raised their earnings estimates. There are, however, quite a few analysts who have gone in the opposite direction. Continuation of top-line volatility and an extremely competitive smartphone market may be their main concerns.
First Quarter 2010 Highlights
A quarterly EPS of 4 cents handsomely beat the Zacks Consensus Estimate of a loss of 1 cent. Gross margin was 35.4%, compared to 27.9% in the prior-year quarter. More importantly, operating margin was 1.5%, compared to a negative (8.4%) in the year-ago quarter. This spectacular performance was due to a huge headcount reduction achieved in 2009.
However, quarterly total revenue of $5,044 million was down 6.1% year over year and was also below the Zacks Consensus Estimates of $5,121 million.
In the first quarter, Motorola shipped 2.3 million 3G smartphones, a considerable improvement over 2 million smartphones shipped in the previous quarter. Management announced that 20 3G smartphone models will be introduced in 2010 with a targeted volume of 12 million – 14 million.
Agreement of Analysts
Overall, the Zacks estimate revision trend is quite favorable. In the last 30 days, thirteen analysts out of 25 total revised their estimates upward for the second quarter, while 11 analysts raised estimates for the following quarter.
Furthermore, sixteen analysts out of 30 total moved their full fiscal 2010 earnings estimates upward, while 14 analysts raised their full fiscal 2011 earnings estimates during the same time period.
The positive impetus for estimate revision stems from fairly encouraging market acceptance of Motorola’s 3G smartphones and the company’s proposed business restructuring and separation strategy. Most of the restructuring took place in the struggling Mobile Devices segment. As a result, operating expenses of this segment reduced 65% year over year. Interestingly, Motorola predicts that the Mobile Device segment may return to profitability in the fourth quarter of 2010.
Nevertheless, we also notice some reversals of the positive trend. In the last 30 days, five analysts reduced their earnings estimates for the second quarter, third quarter, and full fiscal 2010, while 8 analysts negatively revised their estimates for full fiscal 2011.
Continuation of revenue volatility is a major concern for Motorola. Fiscal 2010 revenue may remain flat compared to the previous year. As of now, Motorola launched 8 3G smartphones, but none of these products have received market traction as favorable as its iconic RAZR phone. Moreover, the businesses of the company’s Home Division and Network Solutions Division are still reeling under the economic slowdown that forced telecom carriers and a number of states and municipalities to impose tighter budgetary control.
Magnitude of Estimate Revisions
In accordance with overall positive estimate revision trends, the Zacks Consensus Estimate has moved up 3 cents in the last 30 days for the second quarter and by 1 cent for the following quarter. Accordingly, the Zacks Consensus Estimate moved up by 8 cents for full fiscal 2010 in the last 30 days and by 4 cents for full fiscal 2011.
Reaffirm Neutral Recommendation
Motorola has started showing initial signs of revival. In addition to its newly-launched Android-based 3G smartphones, the company is continuously introducing innovative products for broadband communications infrastructure, enterprise mobility and public safety solutions.
The market for broadband network and enterprise solutions will remain healthy in the long-run. We believe effective cost control measures, massive demand for wireless broadband services and newly-introduced high-end 3G smart-phones will support the stock price in the near-term.
However, we do not foresee any above market gain for the stock any time soon and thus maintain our Neutral recommendation.
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