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

EPS

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

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

a.         Stock Ownership Table from Def 14A

                        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.

d.               Retirement plans appear very friendly to officers. 

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.

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.

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.

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%.

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

Intrinsic Value Work from separate spreadsheet.