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Morningstar | Motorola Solutions Remains the Public Safety Leader, Shares Modestly Undervalued. See Updated Analyst Note from 21 Dec 2018

Motorola Solutions is the dominant supplier of land mobile radio, or LMR, technology for the public safety space, controlling more than 80% of the U.S. market. The firm retains its narrow economic moat, however, we are lowering our fair value estimate for Motorola Solutions to $128 from $136 per share, after adjusting our long-term view. While we expect revenue growth and operating margin expansion due to recurring revenue from services and software, as well as cost savings after several acquisitions are bedded in, we are less bullish on our second stage assumptions, after updating our expectations on LTE’s expansion into the public safety market.

Over the past several years, Motorola has divested low-margin segments which were outside of the firm’s core competency of emergency communications infrastructure and two-way radios while also increasing investment in software and services that help make its competitive position more secure. The firm benefits from tight customer relationships and institutional knowledge of municipal and national governments, primarily in the U.S. but increasingly abroad. We see emergency equipment as a nondiscretionary expense for governments and believe that technological disruption typically moves slowly in the public sector due to the potential high cost of failure. In total, we believe Motorola Solutions benefits from switching costs and intangible assets that warrant a narrow moat rating.

Looking ahead, we still foresee governments investing in Motorola's services and software solutions as well as Project 25, or P25, radio systems and devices. Despite competition and threats of regulation, Motorola’s devices are considered the standard within the emergency services world. We believe the firm can leverage this device dominance through its increasing suite of service offerings for command centers, such as computer-aided dispatch and, increasingly, analytics, be an even more integral component of the public safety landscape.

We believe the eventual implementation of FirstNet and increased LTE adoption in the public safety market will be challenges for the firm but we are not of the view that these threats will rapidly disrupt the Motorola’s trajectory, even if we have tempered our late stage assumptions. The wheels of local and municipal governments move slowly and even if the technology becomes viable in the near term, we do not see technological comparability (or even superiority) as an imminent enough threat to supplant the firm’s moat over the next decade. That said, we are watching LTE trials with great interest.