Motorola Faces Spending Cuts But Acquisitions And LTE Shift Drive $50 Value

Motorola Solutions (NYSE:MSI) is set to announce its earnings on July 25th. During the earnings call, we will be on the lookout for signs of a slowdown in infrastructure spending which could impact Motorola’s top-line growth. We will also be closely following the management’s updates on the full year outlook of the company. The macroeconomic concerns surrounding the European debt crisis and burgeoning debt levels of governments worldwide has increased the risks of a decline in government as well as enterprise spending.

However, we believe the company’s fundamentals remain strong due to its recent acquisitions as well as the industry-wide shift to LTE, that we believe will help preserve its strong market position as well as bring in a steady stream of revenues going forward. We have a $50 price estimate for Motorola Solutions’ stock, about 8% ahead of the current market price.

See our complete analysis for Motorola Solutions stock here

Enterprise faces risks of slowdown but acquisitions bolster prospects

While government spending cuts could have a much bigger impact on Motorola considering that such revenues account for about two-thirds of its overall sales, we believe that enterprise revenues are at a bigger risk from an economic slowdown due to the more critical nature of Motorola’s government business. Motorola’s government customers buy equipment such as two-way radios that are used in mission-critical public safety situations. The critical nature of public safety causes it to figure among the topmost of government priorities; so it would be among the last to see budget cutbacks in case governments decide to hold back on their spending.

On the other hand, enterprises are more susceptible to spending cuts across their business verticals. Last quarter, for example, saw softness in European enterprise spending due to an increase in uncertainty surrounding the European debt crisis. In 2009 as well, when many countries went into a recession, Motorola’s enterprise sales fell by 20% while government sales declined by only about 7%.

While Motorola’s more stable government business keeps the company less susceptible to macro-economic uncertainties, an economic slowdown will have a big impact on its high-growth enterprise business. However, the company has been focusing on increasing its market share within the enterprise through important acquisitions such as last year’s Rhomobile and the more recently announced Psion. The company has already leveraged its Rhomobile acquisition to launch an application framework targeted at enterprise developers and promote sales of its rugged handheld devices. We see Motorola’s enterprise focus helping it tide over near-term macroeconomic concerns while preparing itself for the long-term enterprise demand for mobile computing devices.

Government business to benefit from LTE shift

Meanwhile, a sustained decline in the demand for iDen infrastructure will be a drag on enterprise sales in the near-term as iDen is gradually phased out in the U.S. and Latin America. Most of the growth in enterprise revenues is being seen from the sale of rugged mobile computing solutions to businesses that use them to scan bar codes, handle baggage and manage their supply chain, etc.

As for government revenues, we see the adoption of LTE for public safety as the next big growth driver. The company’s recent introduction of the LEX 700, the first handheld public safety LTE device, showed its market leadership. Last quarter, it was also awarded a $4 million contract from Harris County, Texas to expand their public safety LTE network. We are likely to witness a more widespread shift from the older analog to newer digital networks as faster technologies such as LTE are adopted in the marketplace and local governments overhaul their analog networks. We expect Motorola Solutions to benefit hugely from this industry-wide LTE shift in the coming years.

In February this year, Congress signed off on a job creation bill that re-allocated the D Block spectrum for public safety use and provided a funding of $7 billion to build out a nationwide network over the next 8 years. Motorola could benefit hugely from the higher stickiness of its government customers as well as its strong market position and large installed base of security devices to grab a big chunk of that pie going forward. (see Motorola Solutions to Benefit from Public Safety Broadband Spending)

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