Motorola Solutions Upgraded at Jefferies

"Our upgrade is due to: our checks indicate state/local comm equipment spending being up year-over-year despite budget and headcount concerns; we expect Motorola Solutions to announce a combination of buybacks and dividends when they report on July 28 before the markets open, D Block LTE legislation could pass this fall, providing a strong tailwind to 2013," said Peter Misek, an analyst at Jefferies.

Misek said his checks indicate tax receipts have been stronger than expected, cushioning the roll-off of some of the federal rainy day funds. Also, his checks indicate that much of the public safety spend is earmarked and separate from any headcount cuts, which alleviates an investor concern. Finally, his checks point to fairly stable police and fire headcounts, despite budget issues.

Misek said his checks point to 2012 state/local comm equipment spending being up year-over-year. He expects Motorola Solutions to announce a combination of buybacks and dividends when it report on July 28.

With about $4.5 billion in net cash post the Networks sale and post the recent debt tender, and with about 5 percent free cash flow yield based on Misek's 2012 estimates, he believe Motorola Solutions has ample flexibility.

Misek believes the legislation for a nationwide public safety LTE network is unlikely to pass this summer due to the debt cap debate (though there is a slight chance the D Block legislation is included in an eventual debt cap deal).

Misek expects that the odds of the legislation improve this Fall and it is mainly a question of when not if, as Democrats and the president support the bill. While Republicans are more mixed, he believed the deficit reduction aspects of the bill have won over enough to ensure passage.

Misek believes the single biggest driver for revenues in 2013+ is the LTE government network proposed by the Obama administration. He believes this about $10 billion package of networks, devices, applications, and services would be a huge potential boon to Motorola Solutions.

In February, President Barack Obama announced a plan to free up 500MHz of spectrum (of which 115MHz has already been freed up) and auction it for $27.8 billion. Uses of the proceeds include $9.6 billion for deficit reduction and $3 billion for advanced wireless R&D, and ensure 4G coverage of rural areas (98 percent in five years).

Of the remaining $10.7 billion, $3.2 billion will be to reallocate the D Block (which is a band of spectrum that would be reserved and prioritized for public safety and not auctioned as called for under existing law); $7 billion for the build, and $500 million for R&D support.

In June, the wireless D-Block auction bill was approved by the Senate Commerce Committee. Jay Rockefeller (D-WV) who authored the bill was joined by support from Kay Bailey Hutchison (R-Texas), leading to a 21-4 vote in the committee. The bill now advances to the full Senate floor for a vote. The Senate bill was renamed S.911.

Rockefeller is targeting passage before the tenth anniversary of 9/11, but with the August Congressional holiday approaching and attention firmly focused on the debt cap bill, there is unlikely to be enough time for the Senate to vote on it.

Rockefeller is trying to use the debt reduction portion of S.911 to get it included in any debt cap agreement, but Misek is not optimistic about this strategy.

In July, John D. Dingell (D-MI 15) and Gene Green (D-TX 29) introduced H.R. 2482, companion legislation to Senate bill S. 911. House Republicans have proposed a different version that includes auctioning white space and negating net neutrality.

"We do not think the Republican version is viable as President Obama has said he will veto any bill that violates net neutrality. We do believe that a bill similar to S.911 will be able to garner enough bipartisan support to pass. We see the passage of D Block legislation as likely in the next 12 months with the most likely scenario being passage this fall," said Misek.

Misek believes the addressable market for Motorola Solutions will be $3 billion to $5 billion over three years starting in 2013, in line with management's guidance. Despite some investor fears that Raytheon will win a large amount of the business, he believes the vast majority will go to Motorola Solutions.

The brokerage launched its 2013 adjusted earnings estimate for Motorola Solutions of $3.12 per share on revenue of $9.654 billion.

Misek introduced 2013 estimates with revenues up 11 percent year-over-year and EPS up 20 percent (Street up 5 percent and up 11 percent). He introduced his 2013 estimates assuming $1 billion of spending occurs with Motorola Solutions winning 80 percent.

"We expect MSI to slightly exceed expectations for second quarter and provide solid third quarter guidance. We believe the main topic during the earnings call will be the discussion around dividends and buybacks. We do not expect much incremental news flow regarding the D Block legislation," said Misek.

Motorola Solutions stock closed Friday's regular trading up 1.04 percent at $44.77 on the NYSE.