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Motorola prospects spark debate

Morgan Stanley says the wireless company's surging shares are too pricey, tells investors to be wary and issues a downgrade, but other analysts don't necessarily agree.

Shares of Motorola, which have surged 68 percent since the beginning of April, are too pricey, and investors should be wary, according to Morgan Stanley, which Friday downgraded the wireless company to "outperform" from "strong buy."

Wall Street analysts have been weighing in with opinions about Motorola's prospects since the company's analysts meeting Tuesday. At that meeting, Motorola maintained its 2001 forecast, indicated that July has gone according to its plans, and issued a relatively upbeat view about the future. Meanwhile, CEO Chris Galvin apologized for the lack of growth over the last three years and promised better performance.

Although the meeting prompted a bevy of positive comments, Morgan Stanley analyst Alkesh Shah said that Motorola shares are too expensive. Motorola, which is trading at about $19, is approaching his $23 price target, Shah said.

"We believe that shares of Motorola are beginning to get ahead of themselves," said Shah. "We look for improved execution or visibility to change our outlook."

While crediting Motorola for its efforts to cut costs, Shah said he was cautious about the Schaumberg, Ill.-based company's expectations for handset sales and semiconductor growth. Motorola this week projected 15 percent to 20 percent growth in the chip market, but Shah said the forecast might be a little too optimistic.

Shah said that a delay of the economic recovery, weak infrastructure investment and weaker-than-expected wireless handset sales could hurt Motorola's chip revenue.

Until Motorola actually shows that its cost cutting has improved the bottom line, and it can produce a solid outlook for the upcoming year, Shah said he'll remain cautious: "We believe that without a significant increase to our earnings forecast, improved visibility into 2002 or other macroeconomic events, our rating on shares of Motorola is less bullish."

Not all analysts agreed. In a research note, Salomon Smith Barney analyst T.C. Robillard Jr. said Motorola should perform well in the next six to 12 months because it has cut costs and because handset and chip sales should rebound.

Robillard said that Motorola has staged two major rallies in the last six years and that both were driven by cost-cutting benefits, a new mobile phone lineup and a chip recovery. "We believe these same three factors are in place to be the drivers for Motorola as it enters 2002," said Robillard, who recommended that investors buy the stock at current prices.

Other analysts took the middle ground. David J. Heger, an analyst at A.G. Edwards, said that Motorola's paring of costs--the company has completed 24,000 out of a planned 30,000 layoffs--should help the bottom line, but a weak global economy could derail growth.

"The worst may be behind Motorola, but we would like to see a few more data points to confirm our suspicions," he said.

Motorola last month posted a second-quarter operating loss of $232 million, or 11 cents a share, excluding special charges. Including the charges, the company recorded a net loss of $759 million, or 35 cents per share.

According to First Call, Motorola is expected to post a loss of 5 cents a share in the third quarter and then a profit of 4 cents a share in the fourth quarter.