Motorola Responds to an Emergency Call
Improving public safety in times of disaster has helped pull the two-way radio maker from its own crisis. Why the stock can climb another 15% or more.
Hurricane Sandy reminded us again in 2012 that emergency services is a growth business. Firefighters, police officers, EMS technicians, and 911 operators—all first responders in a disaster—are getting better at what they do, in part because of added experience and in part from improved technology. Among the biggest providers of the technology is Chicago-based Motorola Solutions (ticker: MSI), which makes public-safety communication devices.
No matter how tight the local budget or fraught the national fiscal politics, spending on public safety is gaining. In 2012, 44% of municipalities hiked expenditures on public safety, outstripping spending on infrastructure and education, according to the National League of Cities. "They're closing fire stations and police precincts, but spending on public-safety systems has been rising," says Terry Hall, who runs the York-Poquson-Williamsburg 911 Center in Virginia and presides over the Association for Public Safety Communications Officials.
This priority helped Motorola's government-segment revenues jump 12%, to $1.5 billion, in the third quarter, and its operating margin to hit 20.4%. Government business is expected to push Motorola revenues to $8.7 billion in 2012, up from $8.2 billion in 2011, while the company's other key group, commercial radio, is being revamped.
Much of two-way-radio growth is reflected in the stock, which has gained by a quarter from its July low to $54.88, giving it a market value of $15.4 billion. The shares now trade at 17.5 times forward earnings, versus 13 for the overall market, and yield 1.9%, modestly below market rate.
Although that may make the shares seem a little overstretched, they actually have plenty of remaining power. Demand for Motorola's safety devices is expected to remain strong, while the company's solid cash flows and underused balance sheet offer the possibility of delivering more capital to shareholders via dividends and stock buybacks. That also will provide money for acquisitions and fixes for its commercial-radio unit. Kulbinder Garcha of Credit Suisse has a $62 target for the stock, about 15% above last week's level. Depending on how aggressive Motorola is with its balance sheet, the upside could be $10 or more above that.
Why will public-safety radio continue to grow? Most systems are 15 to 20 years old and must be upgraded to new digital services to help first responders do their jobs more effectively. Motorola provides the new systems, which are faster and offer more features, and can connect to existing analog devices. Among the more popular items these days is a special system that keeps track of first responders, so they don't clog an area in a time-critical situation. Hall notes that his Motorola digital 911 service in Virginia stayed on even as cellphone networks went off during 2011's freak local earthquake.
"We're having a record year in public safety, the best year we've had," says CEO Greg Brown, a Motorola veteran who oversaw the split-up of the company's enterprise mobility and consumer units two years ago (the latter was purchased by Google this year), when the whole company was brought low by weak cellphone sales.
Source: Barron's
