Time To Exit Motorola Solutions Stock?

Up 40% since March, we believe Motorola Solutions stock (NYSE: MSI) has potential downside of around 15% from its current levels. The company sells data communication and telecommunication equipment and its stock trades at $174 currently, around 5% higher than the level it was at in the start of 2020. It traded at $186 in February 2020 – just before the outbreak of coronavirus – and is currently only 6% below that level. While services revenue came in slightly higher in Q3 2020 vs Q3 2019, product revenue dropped to $1.04 billion from $1.2 billion over the same period. With industrial demand still not back to pre-Covid levels and with the pandemic slowing down the global roll-out of 5G, we believe the stock could drop around 15% from $174 to below $150. Our conclusion is based on our comparative analysis of Motorola Solutions stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • Since 3/24/2020: S&P 500 recovers 71% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how MSI stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

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  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

MSI and S&P 500 Performance Over 2007-08 Financial Crisis

We see MSI stock declined from levels of around $39 in September 2008 (pre-crisis peak) to levels of around $14 in March 2009 (as the markets bottomed out), implying MSI stock lost over 60% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to $32 in early 2010, rising more than 1.2x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

MSI Fundamentals Over Recent Years

MSI revenues increased from $6 billion in 2016 to $7.9 billion in 2019, driven primarily by rising services revenue. Along with higher revenue, earnings also increased from $3.30 to $5.21 during this period.

Does MSI Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

MSI’s debt has risen from $4.4 billion in 2016 and currently stands at $5.4 billion. Meanwhile total cash has remained roughly flat at around $1 billion over this period. The company generated around $1.8 billion cash from operations in fiscal 2019. This steady cash position combined with strong cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., we see the demand for telecommunication equipment remaining stagnant in the near term, which would see MSI’s product revenue struggle to get back to pre-Covid levels anytime soon. We believe that Motorola Solutions stock has significant downside potential in the near term, and even as the lockdowns are gradually lifted, an immediate surge in equipment demand does not seem very likely. This could see MSI stock potentially drop around 15% from its current level to just below $150.

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