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Why Is Motorola (MSI) Up 6% Since Last Earnings Report?

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A month has gone by since the last earnings report for Motorola (MSI - Free Report) . Shares have added about 6% in that time frame, outperforming the S&P 500.

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

Motorola Q3 Earnings Beat Estimates on Higher Sales

Motorola reported healthy third-quarter 2018 results on the back of strength in both segments primarily led by North America, resulting in year-over-year growth in sales and profitability.

Net Earnings

On GAAP basis, net earnings for the reported quarter were $247 million or $1.43 per share compared with $212 million or 1.25 cents per share in the year-earlier quarter. The year-over-year improvement was primarily attributable to top-line growth.

Non-GAAP earnings per share were $1.94 compared with $1.53 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 22 cents.

Revenues

Quarterly total net sales were $1,862 million compared with $1,645 million in the year-ago quarter, primarily driven by growth in the Americas and EMEA, acquisitions and adoption of accounting standard ASC 606. The top line, however, missed the Zacks Consensus Estimate of $1,863 million.

Segmental Performance

Net sales from Products and Systems Integration segment were $1,288 million compared with $1,174 million in the prior-year quarter driven by acquisitions and organic growth in North America. The segment’s backlog increased $277 million year over year.

Net sales from Services and Software segment came in at $574 million compared with $471 million a year ago, with growth in every region. The segment’s backlog increased $295 million year over year.

Other Quarter Details

GAAP operating earnings decreased to $294 million from $347 million in the prior-year quarter, primarily due to higher selling, general and administrative expenses, and higher cost of sales. Non-GAAP operating earnings were $452 million compared with $412 million in the prior-year quarter.

GAAP operating margin declined to 15.8% of sales from 21.1% in the prior-year quarter, primarily due to higher operating expenses related to acquisitions and increase to an existing environmental reserve related to a legacy business. Non-GAAP operating margin was 24.3% of sales compared with 25% in the year-ago quarter due to higher operating expenses related to acquisitions.

Non-GAAP operating earnings for Products and Systems Integration were $276 million, down 3% year over year. The fall was primarily due to higher OpEx related to acquisitions and lower gross margins associated with systems integration on a few large projects for non-GAAP operating margin of 21.4% of sales, down from 24.3% in the prior-year quarter.

Non-GAAP operating earnings for Services and Software were $176 million, up 39% year over year driven by higher sales and favorable gross margin mix for non-GAAP operating margin of 30.7% of sales, up from 27%.

Cash Flow and Liquidity

For the first nine months of 2018, Motorola generated $263 million of cash from operating activities compared with $585 million in the prior-year period. Free cash flow for the first three quarters of the year totaled $135 million compared with $379 million in the year-ago period. As of Sep 29, 2018, the company had $851 million of total cash and cash equivalents with $5,095 million of long-term debt.

2018 Outlook Raised

Owing to solid quarterly revenue and earnings growth, management has raised guidance for 2018. Full-year non-GAAP earnings are currently anticipated to lie within the $7-$7.05 per share range on revenue growth of approximately14.5%, up from the previous guidance of $6.79-$6.89. It assumes current foreign exchange rates, approximately 172 million shares and 22.5% effective tax rate. The guidance reflects an expectation of minimal impacts from tariffs, given the company’s very limited exposure to China.

Fourth-quarter 2018 non-GAAP earnings are expected to be in the $2.50-$2.55 per share range on revenue growth of 13.5%, assuming current foreign exchange rates, approximately 173 million shares and 25% effective tax rate.

Going Forward

Motorola remains poised to gain from robust organic growth, disciplined capital deployment and a favorable global macroeconomic environment. The company expects to see strong demand across land mobile radio products, services and software going forward, while the Avigilon acquisition is likely to continue to outperform expectations. Furthermore, Motorola’s competitive position along with attractive portfolio for large addressable markets and healthy balance sheet augur well for future growth.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -7.47% due to these changes.

VGM Scores

Currently, Motorola has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 looks promising. Notably, Motorola has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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