Jefferies & Co. reiterated its hold rating on shares of Motorola Mobility Holdings Inc. (NYSE: MMI) ahead of first quarter earnings results, with a price target of $28.
We expect Motorola Mobility will beat consensus estimates on the top and bottom line for first quarter. We believe sell in of the Atrix (AT&T HSPA+ phone) and Xoom tablet were sufficient to drive better than expected results toward the high end of guidance of a loss of $0.09-$0.21, said Peter Misek, an analyst at Jefferies.
Misek said Motorola Mobility was hit by a few dynamics this past quarter. Firstly the much heralded launch of the Xoom was met with initial demand that quickly faded as a high price point, quirky communication around the requirement for a data plan, and no initial 4G connectivity caused consumers to pause.
Compounding this was the launch of Apple Inc.'s iPad 2, which quickly stole the limelight and added pressure on the already weak Xoom sales. By the time WiFi versions launched, Misek believes the sales trends and consumer decision process had already been made up.
In terms of the Atrix, Misek believes sales ramped through the quarter but a possible lack of knowledge of Android products by the AT&T sales force and entrenched sales trends caused Atrix sales to be likely in-line with the lower end of expectations. In his opinion, a major decline in Motorola Mobility volumes at Verizon was due to competition with the iPhone 4 and the stunning launch of the HTC Thunderbolt.
Q2: Expect Weak Guidance
Due to slower than expected sell through of the Atrix and Xoom combined with a pushout of the Droid Bionic (4G phone for Verizon), Misek believes Motorola Mobility will guide second quarter revenues and EPS below the Street.
Misek believes Motorola Mobility will have to reboot its tablet efforts with a much more price sensitive offering. This is likely to cause margin pressure going forward. He has included a price cut (and higher shipments) into his second half estimates. Also, a full quarter of an LTE Xoom should help third quarter as well.
The launch of the Samsung Charge (LTE Droid) at Verizon is the source of another competitive threat in second quarter, especially as Misek believes it will receive Hero status at Verizon and receive the lion’s share of marketing dollars.
2011: Second Half Consensus Reset Needed
Misek believes there is a chance Motorola Mobility resets full year volume expectations lower for smartphones and tablets (current guidance = 20 million to 23 million). If they do not, he believes they will likely be forced to do so at the end of second quarter.
It remains a critical question of mindshare and marketshare with Motorola Mobility being forced to ramp sales and marketing expenses in order to grab attention.
Also, consensus estimates have not factored in a potential calendar fourth quarter iPhone 5 launch. Currently the Street estimates $0.52 earnings per share for Motorola Mobility in fourth quarter, representing 63 percent of full year earnings. While seasonality will help, Motorola Mobility could see a redux (brought back, restored) of the competitive situation that hurt its first quarter market share.
The brokerage narrowed its first quarter loss per share estimate for Motorola Mobility to $0.10 from $0.19, while lowering its revenue estimate to $3.034 billion from $3.045 billion. Street analysts predict a loss of $0.12 a share on revenue of $2.84 billion for the first quarter.
The brokerage widened its second quarter loss per share estimate to $0.24 from $0.10, while lowering its revenue estimate to $2.803 billion from $3.372 billion. Street analysts predict profit of $0.12 a share on revenue of $3.06 billion for the second quarter.
In addition, the brokerage narrowed its 2011 loss per share estimate to $0.05 from $0.22, while lowering its revenue estimate to $13.208 billion from $13.333 billion. Street analysts predict profit of $0.87 a share on revenue of $13.08 billion for the fiscal 2011.
We cut our estimates. The primary driver is the second quarter work down of excess Atrix and Xoom inventories as well as the push out of the Bionic, said Misek.
Meanwhile, the brokerage raised its first quarter handsets shipments estimate to 9.6 million from 9.0 million, smartphones shipments estimate to 3.5 million from 3.0 million, and tablets shipments estimate to 0.5 million from 0.0 million.
For the second quarter, the brokeraeg maintained its handsets shipments estimate of 10.1 million, while lowering its smartphone shipments to 3.0 million from 4.0 million and tablets shipments to 0.1 million from 0.5 million.
For the full year 2011, the brokerage raised its handsets shipments estimate to 44.1 million from 41 million, while lowering its smartphone shipments estimate to 17.5 million from 20.0 million and tablets shipments to 1.4 million from 2.3 million.
Stock: Valuation Provides Some Support
In spite of business concerns, Misek remains of the view that the management team is one of the most seasoned and experienced and will likely have alternative plans to continue Motorola Mobility down the road to revival.
We would reiterate our view that Motorola Mobility and Sony Ericsson should merge in order to take on the other juggernauts; however, given the current situation and share price we reiterate our 'Hold' rating and $28 target, said Misek.
Misek said the shares likely reflect most of his concerns at this level and net cash per share of about $10 provides downside protection for investors. Motorola Mobility is trading at 0.5 times of 2012 Street equity value/Sales versus 0.4 times for Nokia Corp. (NOK) and 0.3 times for Dell Inc. (DELL).
We value Motorola Mobility using equity value/Sales due to limited expected profitability in 2011, and 2012 profits are skewed toward the back half of the year. Motorola Mobility's reliance on Android could turn into a competitive disadvantage with differentiation becoming increasingly difficult, said Misek.
Motorola Mobility stock closed Monday's regular trading down 3.97 percent at $23.93 on the NYSE.