Motorola upped despite warning
After warning that it likely would drop into the red in its June quarter, the company gets upgraded based on an improved outlook.
The chip and electronics conglomerate said yesterday that it would eliminate 15,000 jobs, or 10 percent of its workforce, and take $1.95 billion in charges as a result.
Some analysts welcomed the move as a positive cost-cutting effort. J.P. Morgan, which set a 12-month price target of $65 on the company, today upgraded it to "buy" from "neutral" based on the view that the downsizing is a step in the right direction.
Indeed, the company has laid out plans to get back on track. In addition to reducing
its workforce,
Motorola will consolidate manufacturing operations, exit "non-strategic, poorly performing businesses," and write-down certain assets--adjusting their accounting values downward--to more accurately reflect their worth on the books.
"This plan really has some good teeth in it," said Brant Thompson, a J.P. Morgan research analyst. "[Motorola] is taking steps to change its business to make itself more competitive."
The plan should result in $750 million in annual savings, Motorola said.
While the steps are seen as necessary, some are disappointed that the company is restructuring--again.
"They did so much restructuring last year, and this says to me that they did only half a job last year," said Charles DiSanza, an analyst at Gerard Klauer Mattison who revised his earnings expectations of the company for 1998 and 1999 downward.
He noted that the company put its modem business on the block last year, and also got out of the Apple clone business.
"Those were major steps, but most had thought they were done restructuring," he said. "It is good that they are doing it, because it paves the way for the future, but it is unfortunate that they had to take restructuring charges."
The downtrodden company's stock, which traded as high as 90.5 last July, closed down .5625, at 50.9375, near its 52-week low of 50.63.
The company announced yesterday after the markets closed that its second-quarter earnings, excluding the nearly $2 billion in charges, are expected to come in well below analysts' expectations.
First Call's, consensus of analysts' estimates had expected Motorola to post a second-quarter profit of about 20 cents per share, down from 62 cents the previous year.
Motorola cited "deteriorating demand and global pricing pressure" as the culprits for its expected shortfall, factors that sprang largely from the weakened state of the semiconductor business in general and from Asia's economic troubles. These issues also could result in an operating loss for the quarter.
"I would like to see demand strengthen--not necessarily a bull market in semiconductor [sector][, but [a stopping of] the losses," DiSanza said, noting that he is looking forward to the company's introduction of new products this summer.
"I'm not saying [the losses] are their fault, but I want to see new handsets, and some stabilization in semiconductors," he added. "And I would like to be impressed by the new digital phones."
Brian Modoff, an analyst at BT Alex Brown who has a "hold" rating on Motorola's stock, also was not convinced that the company's problems have come to an end.
The significant restructuring should result in some savings, he said, but the company clearly still faces challenges, particularly on the semiconductor side of its business, because pricing will continue to be a challenge throughout the remainder of the year.
Other challenges lie in its cellular infrastructure, handset, and paging businesses, Modoff added. He noted that Motorola's management team has been very good at restructuring its business, but said he is waiting for more concrete results before upping his rating on the company's stock.
"It has yet to demonstrate its ability to execute from an operating standpoint," he said, "and that leaves a big question in my mind."