A Smart Bet for Many Reasons

09/07/2010 1:00 pm EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says Motorola looks appealing because of its restructuring, its status as a takeover candidate, and its hot Droid smart phones.

In a number of respects, Motorola (NYSE: MOT) is the quintessential “special situations” stock:

  • The firm is in the midst of a major restructuring, which includes selling off assets and splitting the company into two separately traded entities.
  • The break-up, scheduled for next year, will separate the company’s handset phone business from its enterprise mobility business. Typically, Wall Street tends to value the parts more than the whole, so a break-up, if successful, should be a plus for shareholders.
  • Billionaire investor Carl Icahn recently upped his stake in Motorola to nearly 10% of the outstanding stock. Icahn’s presence lends some takeover appeal to the stock, as well as some price support.
  • The company’s product cycle appears to be on an up swing, with the success of the firm’s Droid product line.

[Since] Motorola has been a chronic underachiever for years, my guess is Wall Street’s expectations are pretty low for the company. Thus, the hurdle isn’t very high for the company to beat expectations.

Per-share profits have beaten the consensus earnings estimate in the last four quarters, and I suspect the company will continue to put up results that beat expectations.

To be sure, it is tough to get too excited about these shares. The stock has consistently disappointed Wall Street with its inability to put together consistent earnings and revenue growth. And the competition in its primary markets is very keen. Of course, these are all reasons the stock trades at [around] $8 per share, versus its 2006 high of more than $26 per share.

Do I expect Motorola stock to get back to 2006 levels? No. However, I am feeling more fondly about these shares than I have in probably three years. I like the various investment angles—company break-up, asset sales, buying by a big insider, a re-energized product line. I like the fact that the stock is still pretty much hated on Wall Street. And I like the sub-$10 stock price.

While it is tough to recommend these shares for conservative [dividend-reinvestment-plan] investors (after all, the company doesn’t even pay a dividend), more aggressive investors looking for a stock that is not likely to correlate closely with the overall market may find these shares appealing. I do believe Motorola will outperform the [Standard & Poor’s] 500 Index over the next 18 months.

Motorola offers a direct-purchase plan whereby any investor may buy the first share and every share directly from the company. Minimum initial investment is $1000, although Motorola will waive the initial minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of a minimum $50.

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