Up 30% In The Last 12 Months, Will Motorola Solutions Stock Rally Further Following Q4 Results?

Motorola Solutions Inc. (NYSE: MSI) – one of the largest suppliers of land-mobile-radio (LMR) solutions – is expected to report its Q4 2023 results on February 8th. We expect the company’s revenues for the quarter to stand at about $2.83 billion, slightly ahead of consensus estimates, marking a roughly 4% growth versus last year. We expect that earnings will come in at about $3.63 per share, roughly in line with the consensus. See our analysis of Motorola Solutions Earnings Preview for a closer look at what to expect when the company publishes earnings.

Despite concerns about an economic slowdown, demand for Motorola Solutions products has been strong. Over Q3 2023, the most recently reported quarter, MSI’s revenues rose 8% year-over-year to $2.6 billion. Motorola’s Products and Systems integration segment saw sales rise by 5% to $1.6 billion, driven by growth in land mobile radio communications and video security and access control offerings, while software revenue rose 12% to $741 million led by higher command center, LMR, and Video software demand. We expect to see the businesses grow further in Q4, driven by the company’s strong backlog of almost $14.3 billion at the end of the previous quarter. Moreover, improving component supply could also help Motorola Solutions’ margins. The company uses a lot of mature semiconductor chips, that use process nodes of 40 nanometers and above, which remained in short supply through Covid. However, lead times have been coming down over the past several quarters with prices also easing, and this could also help Motorola’s profitability to an extent.

MSI stock has seen extremely strong gains of 95% from levels of $170 in early January 2021 to around $330 now, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. However, the increase in MSI stock has been far from consistent. Returns for the stock were 60% in 2021, -5% in 2022, and 21% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that MSI underperformed the S&P in 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could MSI face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

MSI’s core LMR product is a cash cow of sorts, given that customers are generally locked in once they buy into the system. Moreover, governments don’t meaningfully scale down public safety-related budgets, even during economic downturns. The company’s growing cash generation has helped it to raise its dividend at an average rate of over 10% over the last five years to above $3.50 per share. Motorola’s revenue visibility is also improving given its strong backlog. However, MSI stock currently trades at about 25x forward FY’24 earnings, which is a relatively higher multiple, in our view. We value MSI stock at about $302 per share, which is 8% below the current market price. See our analysis Motorola Valuation: Is MSI Stock Expensive Or Cheap? for more details.

[1] Returns as of 1/31/2024
[2] Cumulative total returns since the end of 2016

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