Revenue at Motorola (MOT) in the fiscal fourth quarter came in well below expectations as the new Droid failed to stop the bleeding for the world’s former number one cell phone maker.  Analysts were expecting to see sales of $5.96 billion in the quarter, but actual results come in well below that at $5.7 billion a nearly 20% decline from a year ago.  Revenue from the sales of mobile phones actually dropped at a faster rate, falling 22% and bringing in just $1.8 billion.  The company shipped about 12 million phones (2 mil were smart phones) compared to 19.2 million last year.  They were able to top EPS expectations of 8 cents per share by one penny, when excluding one-time charges.  Clearly, cost-cutting was the key reason why Motorola was able to best Wall Street’s earnings expectations, and the market is selling off shares by 11% in morning trading.

Perhaps even more important than the reduced sales in the last quarter was Motorola’s weak outlook for the quarter ahead.  They forecast a loss of between 1 and 3 cents, and consensus estimates had predicted a 3 cent per share profit.  Co-CEO Sanjay Jha defended the outlook by saying that they were still in the midst of a transition in their handset division towards becoming a smart-phone maker, instead of a basic mobile phone company.  This transition will take time, and the company said they are still going “full steam ahead” with plans to spin out the handset division but the timing on such a move is still very much in the air two years after announcing intentions for the split.  They did say that they expect the handset division to be profitable by the fourth quarter of this year.

It is clear that Motorola is in the midst of a transitional phase as it recreates itself as a smart-phone maker.  The first quarter of sales for the Droid was fairly successful but the rest of the company’s offerings dragged down results.  Motorola has leveraged itself to the Google (GOOG) Android operating system for their phones, as a key to turning around the company.  Motorola plans to unveil about 20 new versions of 3G smart-phones globally this fiscal year, and surely most if not all of them will be wired with Android.  It remains to be seen if any of these devices will achieve great results, and from our point of view the smart phone market is all about producing a quality, must-have phone rather than a great number of so-so options.  The Droid and the Cliq were able to sell 2 million units in their first quarter, so MOT hopes filling out their sales offering will have similar success.

The other divisions of Motorola actually produces about two-thirds of revenue, but both of these divisions saw revenue decline in the quarter as well.  Home and network division (set-top receivers for televisions) saw sales decline 24% to $2 billion in the quarter.  The enterprise mobility unit (walkie-talkie) actually dropped the least of the three divisions, only 12% to $2 billion.

At Ockham, we have viewed MOT as Overvalued since early October when the stock got into the mid-$8 range.  We continue to have a negative valuation stance on the company as of this week’s report because the sales have continued (and even accelerated) their three year slide, and current cash earnings simply do not support the price level.  The management team is trying to right the ship by focusing on smart-phones but they are already playing catch up in a field that has intense competition. 

The initial results from the new strategy have seen a decent response, but phones often sell well soon after their launch.  There are much more attractive stocks for value investors looking to ride the smart-phone wave.  For those looking for ideas, we have written on a few occasions that Research in Motion (RIMM) is attractively valued based on current fundamentals.

These are exciting times for technophiles as everyday technology becomes more and more integrated into life.  In the first few days of the year techies are treated to a major unveiled of Google’s (GOOG) much anticipated Nexus One handset.  Furthermore, a feast of new gadgets and gizmos will be on display later this week at the annual Consumer Electronics Show or CES for those in the know.  Also, the rumors swirling around a new Apple (AAPL) tablet computer will be settled in a formal announcement later this month.  There is a buzz and an excitement in the air surrounding the tech sector, which begs the questions: Could tech stocks repeat the impressive run they enjoyed over the last year?

Technology stocks were one of the brightest spots in the entire market for the past year, and the 58% return (as measured by the sector iShare: IYW) is second among sectors only to Basic Materials’ (IYM) 59% return.  By now, most investors are aware of the terrific performance of some of the large cap tech stocks in the past twelve months.  Among the most impressive are Apple’s advance of 147%, Baidu’s (BIDU) 215%, and Google has more than doubled as well.  Mid-caps like Western Digital (WDC) and Cree (CREE) have nearly tripled.  The returns for some tech small caps are almost comical; DragonWave (DRWI) was a 13-bagger and Netlist (NLST) is more than 1600% greater than this time last year.  That kind of performance is undeniably attractive to any investor.

Can investors expect the same sort of performance in the year ahead?  We are not so sure that they should.  Sure, there are electrifying product releases and CES is sure to wow the crowd with 3D-Television, tablet computers and eReaders, as well as plenty of developments on the mobile phone frontier.  However, at Ockham we look at valuation and reject the notion of chasing momentum, and the outstanding performance of the tech sector makes it less attractively valued than some of the other sectors.  As you can see from our Enterprising Investor’s Guide newsletter from just about a year ago, we viewed the technology sector as the most attractively valued of all sectors (the pertinent data is on the table of stocks on page 5).  Sector ratings at Ockham are simply a capitalization weighted roll-up of all of the stocks we cover within the sector.  The performance of the stocks in the technology sector have made us more cautious of the valuation and as of our most recent weekly newsletter we have tech as the fifth most attractive sector out of the ten broad sectors we follow.

We continue to believe that each portfolio should have some exposure to the high-flying tech sector, but it is no longer the most attractive sector in our view.  We think value-oriented investors should be interested in the more defensive sectors of Healthcare and Utilities.  The sectors we think have become a little overheated of late include Financials and Basic Materials, and may be due for a bit of a pull back.  As for Tech, it’s in the middle of the pack which is understandable considering the sector’s nearly 60% appreciation over the past twelve months which is nearly three times the overall return of the S&P 500.  Investors should be aware that the excitement over the latest technologies have not been lost on the investing world and have–at least somewhat–already been priced in.

“Empire Google is more than doubled since the March lows, but lately over the last couple of weeks the stock seems to have hit a wall. This stock has been stalled…I say, Google, look out $600. You ain’t seen nothing yet. Pictures are worth a thousand words and $750.” — CNBC’s Mad Money 12/15/2009

Jim Cramer often does a segment called “Off the Charts” where he dissects a stock from both a fundamental and technical perspective, and on Tuesday’s show this segment featured Google (GOOG).  From a technical perspective, Cramer said that the technician he trusts claims this chart is the best in the book.  The stock is showing higher highs and lower lows, and looks to be headed higher, potentially much higher.

Looking at the fundamentals Cramer believes that the analysts are too negative on Google, as the most bullish among them has a $700 price target.  With those same analysts calling for fiscal 2010 earnings per share of $26.37, it assumes a multiple will stay just about in line with the current fiscal year at 26.5x.  For Cramer, that simply underestimates Google’s growth potential as the world’s undisputed online search advertising leader.  Although Google still dominates that industry, they are actively diversifying their business lines in recent years and are moving into uncharted territory, such as mobile phones and television advertising data (TiVO and Google Are Watching Your Remote).  With exposure to everything from search and web services to mobile Internet and browsers, Google is about as diverse a Technology company as exists today.

The latest search data from Comscore shows Google has fortified its market share lead with nearly 70% of queries, after an initial surge from Microsoft’s (MSFT) Bing.  It would be hard to deny that even with the difficulties in advertising during the recession, online advertising is a slice of the pie that is growing rapidly.  Yet, as Cramer pointed out online advertising only accounts for 12% of all advertising dollars these days.  The growing success of Cyber Monday sales following Thanksgiving through sites like Amazon (AMZN) is a sign of things to come as more and more people transact on the web.

At Ockham, we see big things for the future of Google as well, but the current valuation only receives a neutral Fairly Valued rating at present.  The company shows impressive growth (both organic and through savvy acquisitions) and ability to generate profits, but the steady march upward over the past year has made the stock less attractive to a value investor.  This is easily demonstrated through comparing Google against itself historically.  Since becoming a public company, the market has been willing to pay between 26x and 51x cash earnings per share for GOOG, and while the current level is on the low end of the range at 29x, it is still considered normal valuation in our methodology.  It is a similar situation with price-to-sales per share metrics.  The current level of 8.3x is on the low end of the historical range of 7.3x to 14.9x.

Google is currently within its historically normal valuation ranges, yet if it were able to achieve the midpoint of these ranges it would imply a price for GOOG of $790.  Google is still growing rapidly but may not be able to command the same premium from the market as it did as a less mature company.  Clearly, we are still optimistic about Google’s long term prospects just like Cramer; however, this not news to the market and there are plenty of cheaper stocks.

Google (GOOG) is in the information business and they have moved that business forward today in a deal with TiVo (TIVO) to analyze the way people are watching and not watching television.  The goal of the pact will be to show advertisers more accurate information on how many are actually watching television live or have pre-recorded and are skipping through the commercials.  The obvious market leader in search advertising, Google has recently taken a special interest other forms of advertising including mobile advertising with the acquisition of AdMob and television advertising with data licensing deals with Nielsen and now TiVo.

TiVo was the first digital video recording (DVR) technology to allow users to record live television for viewing at a later time.  The consequence of this is that recorded programs were often watched and ads were fast forwarded through.  Of course, it did not take long for advertisers to realize that often they were paying for spots to reach fewer viewers.  As DVRs were just hitting the scene early in the decade, many feared this would doom television’s most robust source of revenue, advertising.  However, that fear has proven to be at least somewhat overblown as television advertising is still vital to the industry, and the recession has taken a bigger bite out of advertising budgets than the proliferation of DVRs.

In fact, a fascinating study from researches at Boston College suggests that viewers are actually paying closer attention when fast forwarding.  Think about it, when watching a program live people often lose interest during commercial breaks and may leave the room or do something else to occupy their time.  Whereas a viewer actively fast forwarding is watching the screen with their thumb on the play button.  Thus, a brand icon flashed on the screen for only a fraction of a second can have an effect on the target audience.

Google will provide a better data set for advertisers to work with, and they will undoubtedly start to plan their advertising campaigns around the ways that most people are watching the content.  Sporting events like the Super Bowl will always be a great way to advertise in a real-time live format, as most viewers will be watching the game live.  Popular sitcoms may be fertile grounds for fast forwarding targeted advertisements because of their likely higher rate of recording.

This deal and Google’s other efforts to move into the television advertising space are an interesting move, and the data they are collecting should make the marketplace a little more efficient.  Google has made a mint out of collecting and analyzing data, and while they are not the only company doing this, they are undoubtedly the largest and most well capitalized.  Ockham’s methodology has a Fairly Valued rating on both GOOG and TIVO at their current valuations.

“I thought the downgrade should have been made 20 points ago. You’ve got a 14 times earnings stock in the 50s. I’m not going to back away from it at this level. I’d rather buy it than sell it. It’s really down a lot.” — CNBC’s Mad Money 11/2/2009

Not much has been going right for Research in Motion (RIMM) investors recently with the stock about 33% in just under 6 weeks time.  The most recent sell-off was sparked by a downgrade to “Sell” from Citi (C) analyst Jim Suva related to stiffening competition particularly from smart phones running on Google’s (GOOG) Android operating system.  The stock was down about 6% on Monday mainly due to this downgrade news.

We have to agree with Cramer’s assessment above that the downgrade is probably too late as the stock has fallen hard already on concerns over increased competition.  Research in Motion has dropped considerable even as earnings have continued to increase significantly over the last few quarters.  So, relative to a market that has seen substantial P/E expansion, RIMM has seen its multiple contract.  This is an interesting phenomenon especially considering RIM operates in a particularly hot sector of smart phones where most other stocks have enjoyed a very nice run over the past few months.  For example, over the last six months Research in Motion has fallen 21%, whereas competitors like Apple (AAPL) has increased 48% and Motorola (MOT) is up 64%.  Even Palm (PALM) which is expected to make a profit until fiscal 2011 is just about even over the past half year.

This seems to us to be a perfect example that has fallen deep out of favor with the market, and in most cases we see that as an opportunity to value investors.  The stock has continued to drop as the fundamentals have strengthened; a fact that we believe the market will eventually take into account.  Not surprisingly, we have RIMM rated Undervalued and if the price falls any further it may be an upgrade to Greatly Undervalued in next week’s rating review.  For an example of just how undervalued Research in Motion is, we looked at the past eight years of price-to-sales for RIMM and it has normally traded within the wide range of 3.7x to 12.1x revenue per share.  That metric now sits at only 2.04x, which is incredible for a company that is expected to grow revenue at 34% this fiscal year and 23% in the next.

Cramer is correct that this is a stock that investors should more readily buy than sell.  The Citi downgrade was piling on with the bad news and the resultant drop should be viewed as an opportunity.