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Wall Street Is Wary Of Motorola's Solid Quarter

The company says its third-quarter results are evidence that a three-year overhaul is paying off, but analysts and investors are only mildly impressed.
CHICAGO (AP) -- Motorola Inc., on the defensive over a downgrade and a pending management change, touted strong third-quarter results as evidence that three years of overhaul have created a much healthier company.

A wary Wall Street, only mildly impressed, wants more proof.

Analysts and investors reacted cautiously to news that Motorola's profits and sales both beat expectations, with more improvement forecast for the fourth quarter. The company's stock rose just 0.6 percent Monday on a bullish day for the market, and fell slightly after hours.

Industry observers cited several reasons for the lack of enthusiasm: The company hasn't yet chosen a successor to outgoing CEO Christopher Galvin. Profitability for its biggest business, cell phones, is down because phones are cheaper. It is struggling with inventory and competition in China, its second-largest market.

"Investors don't have a lot of confidence in the company, in the management team," said Brian Modoff, an analyst for Deutsche Banc Alex Brown.

Morningstar Inc. analyst Todd Bernier voiced concern about shrinking profit margins which dampen the impact of Motorola's rosier sales projections--tied largely to the company's 35 new cell phones in the second half.

"Sales were higher and orders were higher, so you've got to give them some credit. It was a good quarter," he said. "But when you dig a little deeper, I'm not sure I like what I see."

The company's results, rushed out a day and a half early after Moody's downgraded its debt late Friday, included a $116 million profit, an unexpected 5 percent increase in sales and a boom in orders for new phones--up 44 percent from a year earlier.

Even its money-losing semiconductor business, which the company said last week it intends to spin off, picked up more orders in a modest recovery that could stir up more interest among prospective buyers.

Net earnings for the three months ended Sept. 27 amounted to 5 cents a share, compared with a gain of $111 million, or 5 cents a share, for the same period in 2002. Excluding $16 million in special charges, earnings were $132 million or 6 cents per share--3 cents higher than the consensus estimate of analysts surveyed by Thomson First Call.

Revenues climbed to $6.83 billion from $6.53 billion, thanks partly to an 8 percent jump at its No. 1 business unit, mobile phones, which totaled $2.9 billion.

"We are now seeing early results from the decisive actions taken in a very difficult telecom and semiconductor global environment over the last three years," said president and chief operating officer Mike Zafirovski.

Moody's had warned of "the weakened outlook for most of Motorola's business segments" and expected changes after the resignation of Galvin, who is staying on until a successor is named.

But company officials strongly disagreed with that characterization, and Zafirovski, who is a candidate to replace Galvin, said the third quarter "signals some positive momentum in key aspects of our business."

Zafirovski acknowledged to analysts that the company has been slow to come to market with some of its camera phones. Competitors have gotten a significant head start with that item, one of the hottest new consumer electronics products.

"We wish we'd have had more camera phones earlier in the year," he said on a Monday afternoon conference call. "But they will be 50 percent of our portfolio in Q4."