Motorola Should Shift Focus Onto Margins From Share -- Merrill

Merrill Lynch comments on Motorola (NYSE:MOT) after speaking to the company about the issues leading up to pre-announcement. Firm is encouraged to see that management is planning to devote the time and effort to explain its "get well" plans, as explained below. However, none of the issues impacting Motorola seem temporary, and in their view, the recovery to historical margins may be gradual.

Comparing trends at MOT with its top 4 comps over the past 2 yrs, they note that shipments rose by 103% vs. 58% for competitors. MOT also showed better margin trends, led by a better product portfolio, featuring the RAZR, rising from 5% to 12% (ex 4Q) vs. a decline from ~15% to ~12% by its comps. As such, they were surprised that over the same timeframe MOT's ASP declines were steeper than its comps pointing to a somewhat irrational and aggressive pricing strategy. That strategy may have to be reconsidered.

However, without a good replacement for the RAZR, there is a risk that continued aggressive pricing could put greater pressure on margins, similar to long-term trends at Nokia. ML would therefore hope to see Motorola shift its primary focus to profitability rather than market share targets.

Following the release of 4Q financials on January 19, the company plans to host the normal post-earnings conf call at 7:30AM EST, followed by a two hour session at 10:00AM with the entire senior management team to discuss two main issues: 1) MOT's "get well" plans and the road to margin recovery and 2) MOT's 2007 outlook and the company's strategic focus. Firm expects mgmt to be more open with its acquisition and diversification strategies away from the commoditizing handset biz.

Maintains Neutral.

Notablecalls: Love the comments from ML. I also salute MOT management for hosting the two hour session to discuss their plans. That may even help the stock in the n-t.