Why Is Motorola (MSI) Down 1.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Motorola (NYSE:MSI). Shares have lost about 1.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Motorola due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Motorola Q4 Earnings Beat Estimates on Top-Line Growth

Motorola reported solid fourth-quarter 2019 results, ending the year with record sales, cash flow and backlog driven by strength in both segments and diligent execution of operational plans. The company is well poised to sustain the momentum in 2020 with healthy demand across its portfolio and large addressable markets.

Net Earnings

On GAAP basis, net earnings in the reported quarter were $244 million or $1.39 per share compared with $423 million or $2.44 per share in the year-earlier quarter. The drastic decline, despite top-line growth, was primarily attributable to expenses related to pension obligations.

Non-GAAP earnings in the quarter were $2.94 per share compared with $2.63 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 15 cents.

In full-year 2019, net earnings decreased to $868 million or $4.95 per share compared with $966 million or $5.62 per share in 2018 owing to expenses related to pension obligations. Non-GAAP earnings were $7.96 per share compared with $7.15 a year ago.

Revenues

Quarterly net sales were $2,377 million compared with $2,254 million in the year-ago quarter, driven by growth in both the segments and solid performance in the Americas. The top line exceeded the Zacks Consensus Estimate of $2,372 million.

In full-year 2019, net sales improved 7.4% year over year to $7,887 million led by strength in the Americas.

Organic growth in the quarter was 2%, and acquisitions contributed $82 million to incremental revenues, partially offset by $17 million currency headwinds. Region wise, revenues improved 10% in the Americas to $1,715 million driven by growth in Land Mobile Radio, Video Security, and Command Center Software. This was partially offset by 9% decline in EMEA (Europe, Middle East and Africa) to $448 million owing to adverse foreign currency translation and large system deployments in the Middle East in the prior year. Asia Pacific revenues were up 6% year over year to $214 million led by growth in Australia.

Segmental Performance

Net sales from Products and Systems Integration were relatively flat at $1,673 million as growth in the Americas and Asia Pacific were offset by decline in the Middle East and Africa. The segment’s backlog was down $40 million to $3.2 billion primarily due to two large system deployments in the Middle East and Africa.

Net sales from Services and Software totaled $704 million compared with $584 million a year ago, with growth in all regions. The segment’s backlog increased $699 million to $8.1 billion, primarily due to multi-year agreements in the Americas and Emergency Services Network extension.

Other Quarter Details

GAAP operating earnings increased to $590 million from $516 million in the prior-year quarter, while non-GAAP operating earnings were up 9% to $707 million. The company ended the quarter with total backlog of $11.3 billion, up $659 million.

Overall GAAP operating margin jumped to 24.8% from 22.9% in the prior-year quarter, primarily due to higher revenues. Non-GAAP operating margin was 29.7% compared with 28.8% in the year-ago quarter.

Non-GAAP operating earnings for Products and Systems Integration were flat at $484 million for corresponding margin of 28.9%. Non-GAAP operating earnings for Services and Software were $223 million, up 34% year over year driven by gross margin expansion and higher sales led by strong demand for Command Center Software solutions and continued growth in services business. This resulted in non-GAAP operating margin of 31.7% for the segment, up from 28.6%.

Cash Flow and Liquidity

Motorola generated $795 million of cash from operating activities during the quarter compared with $812 million a year ago, bringing the respective tallies for 2019 and 2018 to $1,823 million and $1,075 million. Free cash flow in the fourth quarter was $736 million.

As of Dec 31, 2019, the company had $1,001 million of cash and cash equivalents with $5,113 million of long-term debt compared with respective tallies of $1,257 million and $5,289 million a year ago.

Outlook

First-quarter 2020 non-GAAP earnings are expected to be in the $1.30-$1.35 per share range on year-over-year revenue growth of about 2%.

Full-year 2020 non-GAAP earnings are currently anticipated to lie within the $8.65-$8.80 per share range on revenue growth of 4%.

Moving Forward

Motorola is poised to gain from robust organic growth, disciplined capital deployment and a favorable global macroeconomic environment. The company expects to record strong demand across land mobile radio products, video security portfolio, services and software while benefiting from a solid foundation. Furthermore, Motorola’s competitive position and attractive portfolio for large addressable markets and healthy balance sheet augur well.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

Currently, Motorola has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision has been net zero. It comes with little surprise Motorola has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.