Here is a look at how Motorola Solutions Inc. (MSI) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $104.59 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $39.39 |
| Value Based on 0% Growth | $23.09 |
| Market Implied Growth Rate | 8.14% |
| Net Current Asset Value (NCAV) | -$10.83 |
| PEmg | 24.78 |
| Current Ratio | 2.32 |
| PB Ratio | 6.51 |
Balance Sheet - 9/30/2013
| Current Assets | $6,580,000,000 |
| Current Liabilities | $2,840,000,000 |
| Total Debt | $2,458,000,000 |
| Total Assets | $12,058,000,000 |
| Intangible Assets | $1,599,000,000 |
| Total Liabilities | $9,382,000,000 |
| Outstanding Shares | 258,700,000 |
Earnings Per Share
| 2013 (estimate) | $4.26 |
| 2012 | $2.95 |
| 2011 | $2.20 |
| 2010 | $0.70 |
| 2009 | -$0.35 |
| 2008 | -$13.09 |
| 2007 | -$0.35 |
| 2006 | $9.10 |
| 2005 | $12.74 |
| 2004 | $6.30 |
| 2003 | $2.66 |
Earnings Per Share - ModernGraham
| 2013 (estimate) | $2.72 |
| 2012 | $0.79 |
| 2011 | -$0.92 |
| 2010 | -$1.92 |
| 2009 | -$1.61 |
| 2008 | -$0.52 |
Conclusion:
Motorola Solutions Inc. presents an interesting scenario. The company is far from suitable for the Defensive Investor type, defined as investors that seek to have the least possible amount of risk, but is suitable for the Enterprising Investor despite failing the earnings stability requirement. Defensive Investors should look for other opportunities, perhaps by reviewing the ModernGraham Valuation of Cisco (CSCO), because Motorola's lack of earnings stability or growth (the Defensive Investor looks at a ten year period to determine whether earnings have grown sufficiently), its lack of consistent dividend payments, and its high PEmg and PB ratios.
Enterprising Investors should feel comfortable proceeding with further research into whether Motorola would be suitable in their individual portfolios. From a valuation side of things, the company has grown its EPSmg (normalized earnings) from -$1.61 in 2009 to an estimated $2.72 for 2013. That's quite a turnaround, and more than supports the market's implied estimate of 8.14% growth. As a result, the company would appear to be undervalued at the current time.
What do you think? Do you agree that Motorola Solutions Inc. is undervalued? What would be your assessment? Is the company only suitable for Enterprising Investors?
Disclosure: The author did not hold a position in Motorola Solutions Inc. (MSI) at the time of publication and had no intention of entering into a position within the next 72 hours.
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