MOTODECLINO

Motorola shares look cheap, still risky.

NEW YORK (Reuters) - Despite hopes the worst could be over for Motorola Inc's (MOT.N: Quote, Profile, Research) struggling cell-phone business, the company is still a risky bet, according to analysts who cite operational, economic and credit concerns.

Motorola shares, which have lost about 65 percent of their value in the last 18 months, may prove to be a bargain if the company shows sure signs of a recovery in the mobile phone unit. But this is not even a reasonably safe bet yet, based on the company's most recent financial results and forecasts.

"We're not really there yet from an investment point of view. Just because a stock is cheap it doesn't necessarily mean it's a bargain," said RBC Capital analyst Mark Sue.

Based on his 2008 revenue estimate, Motorola's share price of around $9.24 implies a 0.5 enterprise value-to-revenue ratio.

Citigroup credit analyst David Hamburger warned Motorola may even see a rating downgrade to junk status from investment grade as soon as a year from now, unless it logs strong improvements.

Motorola posted a wider quarterly loss on Thursday with weak cell-phone sales, particularly in its top North American market. The company that once wowed consumers with its slim Razr phone said its global market share had slid to less than 10 percent from a peak of 23 percent in late 2006.

In the meantime, bigger rivals Nokia Oyj (NOK1V.HE: Quote, Profile, Research), which has a 41 percent market share, Samsung Electronics Co Ltd (005930.KS: Quote, Profile, Research), which had a 16 percent share, and smaller rival LG Electronics (066570.KS: Quote, Profile, Research) all gained ground in the quarter.

"We'd rather own Nokia or Qualcomm or LG Electronics," said Nomura analyst Richard Windsor. While Motorola may yet improve, "I don't think you have to invest in it yet."

Nokia's shares currently trade at 11.4 times expected 2008 earnings before items and Qualcomm Inc (QCOM.O: Quote, Profile, Research), which sells mobile phone chips to LG, Samsung and Motorola, trades at 20.7 times its expected earnings, according to Reuters Estimates.

WHO WANTS A DEVICE UNIT?

Motorola raised some hopes by telling investors that cell- phone revenue may rise slightly in the current quarter, but RBC Capital's Mark Sue said even if the worst is over, Motorola is most in need of a successful new phone line-up.

"If they don't improve their execution, the light at the end of the tunnel may move further out," he said.

In an effort to address its troubles and compensate long- suffering shareholders, Motorola plans to spin off its mobile devices unit next year. But while analysts initially thought it could find a buyer for the business, no obvious suitors have emerged.

Motorola Chief Executive Greg Brown stopped short of saying the first quarter would be the company's lowest point, but several analysts drew optimism from his view that mobile device losses would stabilize in the current quarter.

Even the most enthusiastic among them were cautious. Citigroup equities analyst Jim Suva titled his report on the company "Not a Funeral, but Definitely Not a Party."

Mobile devices represented 44 percent of first-quarter revenue, but analysts are also concerned about Motorola's other units, which provide set-top boxes and wireless network equipment to service providers and sell mobile devices to enterprise and government clients.

"The underlying assumption is that the mobile device business is what you have to fix and that the other businesses will be OK," UBS analyst Maynard Um said in an interview, but added that there is some "uncertainty about that assumption."

Um noted sales to government clients were flat in the first quarter and a slowing economy could particularly hurt Motorola's government business, as lower tax income would constrain government spending.

CREDIT WORRIES

Citigroup credit analyst Hamburger cited other worries, including uncertainty about Motorola's credit rating and the post spin-off capital structure, which it has yet to announce.

Hamburger was disappointed by the company's target of ending 2008 with the same net cash balance of $4.3 billion that it had at the end of 2007, as he had expected a cash increase.

He also noted that improvements would be needed in mobile devices if the company is to get back to that cash level after reporting about $3.5 billion cash in the first quarter.

Motorola, whose debt is currently 3.4 times its earnings before interest, tax, depreciation and amortization (EBITDA), also risks a downgrade to junk status from its investment grade rating unless debt-to-EBITDA falls closer to 2.5, he said.

This could happen within 12 to 18 months from now, partly as a result of a likely allocation of about 60 percent of Motorola's cash to the mobile device spin-off, said Hamburger.

A junk rating could increase financing costs and hurt equity and debt investors.

"That's a cost on the business and would potentially depress earnings," he added.