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2HRS2GO: Clear sailing for Motorola

Motorola Inc. (NYSE: MOT) doubled its market value over the past year, and if Hambrecht & Quist is correct, the stock isn't finished yet.

Shares of wireless equipment giant are up more than 4 percent, and while some of that comes from overall gains in the stock market, some of those Motorola buyers probably picked up on the latest H&Q report. Analyst Edward Snyder reiterated a "Buy: Focus List" rating on Motorola with a price target of $120 a share.

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Because Motorola's hands are in a couple of pies that draw inordinate amounts of attention -- Iridium and PowerPC chips -- it's easy to forget the company still gets most of its money from wireless phones. And it's even easier to forget that Motorola happens to be outpacing its peers in that segment.

Although Motorola was slow in getting to the market with advanced digital wireless phones, the company has made up ground and then some, Snyder says. "Yesterday's meeting with management ... confirmed our view that Motorola is gaining share in handsets, growing faster than the industry in semiconductors, and poised for upside in network systems in 2000," Snyder writes in a research note.

Motorola has more orders than it can fill at the moment, prices are stable, and margins are improving. New models should help boost Motorola's earnings by half next year, with the company gaining market share in the TDMA space against Nokia and Ericsson, Snyder says.

Industry forecasts predict 50 percent growth in the overall wireless market next year, so if Motorola just maintains its current share it will ship more than 80 million phones. Should the current growth trend continue, Motorola will be getting half of its revenue from handsets in 2000.

At the same time, Motorola's chip business is prospering. PowerPC chips have raced ahead of Intel's line in equipment from Cisco, Nortel and Lucent; that adoption by network equipment makers should drive the semiconductor products segment's earnings growth easily above 50 percent. Margins continue to improve as more chip manufacturing goes to subcontractors, letting Motorola focus on development.

The only negative for Motorola at this point remains the Iridium bankruptcy morass. At this point, Motorola can't do much except hope for a miracle from the satellite communications project. But it doesn't matter much, because analysts have already factored Iridium out of their forecasts. Anything negative ends up as one-time charges, and if Iridium does find its miracle and actually generates earnings, it's gravy for Motorola. Either way, Motorola's investors won't lose out.

Despite its gradual improvement since last year's trough, Motorola remains at a lower price-to-estimated-earnings multiple than its peers. If the stock were trading in the middle range of its comparable group, the per-share price would be anywhere from $114 to $141, Snyder notes. At the high valuation end (54 times estimated 2000 profits), Motorola would carry a price of $169 a share.

While rivals such as Ericsson AB (Nasdaq: ERICY) are struggling with their own internal issues, Motorola has already come out of the wringer. And unless another major crisis hits -- unlikely, given the accelerating demand for wireless -- Motorola should remain on top for quite awhile.

Other issues:

  • Tellabs Inc.
  • (Nasdaq: TLAB) The telecom equipment maker sits among the S&P Technology Index's top gainers this afternoon. There's no particular news, but with the entire market moving higher today, Tellabs might just have more room to rebound. "It had been very weak over the last few trading sessions," pointed out analyst Chandar Sarkar, with Soundview Technology Group.

    Investors might be reacting to some news a couple of days ago, when word leaked of a huge contract -- hundreds of millions over several years, Sarkar says -- Tellabs won to provide cable telephony equipment to AT&T. Formal announcement of the deal is expected within a few months.

    But more likely, people are just buying on weakness. The market knocked down Tellabs on fears of competition from Cisco, following the latter's recent announcement of a plans to move into optical networking with more than $7 billion in acquisitions. "But there's plenty of growth in the whole optical transport field," says analyst Patrick Houghton, of Sutro & Co.

    That $20 billion market will double within a few years, Houghton predicts, leaving lots of room for other companies. And Tellabs remains a strong player, with its flagship Titan line seeing "phenomal" sales. "There's a lot of affirmation that business is doing well for Tellabs," Houghton says. "They're going to have a very positive third quarter. And not only Tellabs, but for all the core telecom equipment players, you can look forward to a very solid fourth quarter."

  • Amkor Technology Inc.
  • (Nasdaq: AMKR) Salomon Smith Barney analyst Jonathan Joseph upgraded the provider of chip packaging and test services to "buy" from "outperform" and set a price target of $25 a share. "Amkor is seeing orders run well ahead of plans and grow faster than any time in the company's history," Joseph wrote in a report.

    Market indices looked to end the week on a high note. The Nasdaq Composite Index was up 82.75 in to 2816.99 in mid-afternoon trading, the S&P 500 up 32.52 to 1351.63, and the Dow Jones Industrial Average higher by 193.77 to 11036.98. 22GO>