LMR And Video Business Will Drive Motorola Solutions Q2 Earnings

Motorola Solutions (NYSE: MSI) – one of the largest suppliers of land-mobile-radio (LMR) solutions – has seen its stock rise 25% year-to-date. This compares to Ericsson stock (NASDAQ:ERIC) which has gained just about 4% over the same period. Motorola is poised to report its Q2 2024 earnings in early August and we expect revenues to come in at $2.6 billion, up about 8% versus last year and slightly ahead of consensus estimates. Earnings are likely to come in at about $3 per share, which is in line with consensus estimates and up from $2.65 per share in the year-ago period. See our analysis of Motorola Solutions Earnings Preview for a closer look at what to expect when the company publishes earnings.

The company’s Q1 2024 results were better than expected, with revenue rising by about 10% year-over-year to $2.4 billion,  led by higher demand for land mobile radio communications and video security and access controls. The software and services segment expanded by 4%, driven by growth in the video and command center business. Motorola’s operating margins have also been trending higher, with adjusted operating margins coming in at 26.7%, up 220 basis points versus last year driven by a more favorable sales mix and a higher revenue base.  The company also upped its guidance for the full year during the last quarter, projecting revenue growth of approximately 7%, with earnings likely to come in at between $12.98 and $13.08 per share. We expect these trends to continue over Q2 as well, with the company seeing higher uptake of LMR products, such as APX NEXT, as well as stronger demand for its refreshed lineup of professional commercial radios.

MSI stock has seen extremely strong gains of 130% from $170 in early January 2021 to around $390 now, vs. an increase of about 45% 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 and even for the mega-cap 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?

There are a couple of reasons to consider the stock. 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 $3.90 per share. Motorola’s revenue visibility is also improving. The company ended the quarter with a Q1 backlog of a record $14.4 billion, up 2% from the year-ago quarter. MSI has also been investing its cash flows from its LMR business into strategic acquisitions in the public security space. Over the last few years, the company expanded into areas including video security and command center software. Earlier in July, the company said that it acquired Noggin, a provider of cloud-based business continuity planning and critical event management software.  However, MSI stock currently trades at about 30x forward earnings. This is a relatively high multiple in the current market environment and also relative to historical levels. We value MSI stock at about $340 per share, which is 13% below the current market price. See our analysis Motorola Valuation: Is MSI Stock Expensive Or Cheap? for more details.

[1] Returns as of 7/22/2024
[2] Cumulative total returns since the end of 2016

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