Morningstar | Motorola Starts 2019 Strongly and Signals More to Come; Increasing FVE to $138
Motorola Solutions’ first-quarter results exceeded our expectations on both the top and bottom lines with strong growth for both products and services. Management also slightly raised its outlook for its full-year earnings per share. While we believe the firm’s 2021 targets of $9 billion in revenue and $10 in adjusted earnings per share remain lofty, it's increasingly clear that management has positioned the firm well to benefit strongly from the growing safety and security demands of both public and commercial customers. As a result, we are raising our fair value estimate to $138 from $128. We believe shares are currently fully valued but the firm’s attractive growth opportunities and narrow moat would make us interested should a pullback materialize.Sales in the first quarter grew by 13% year over year to $1.7 billion. Growth was broad based as the products and systems integration segment grew by 12% and services and software increased 14% over the same period. Motorola again grew its backlog significantly, increasing 8% year over year to $10.4 billion with strong demand for its software products. The increased addition of these higher-margin sales also contributed to adjusted operating margin expanding 220 basis points to 13.8%.
The firm highlighted two contract wins in Latin America with mining and utility customers. These contracts, while small, demonstrate the firm’s increasing presence in the near abroad as well as the growing demand for Motorola’s service and software solutions in commercial markets. Management briefly discussed the completed acquisition of Avtec, a developer of dispatch solutions for seaport, airport, and rail industries. While the initial sales contribution from the new addition is expected to be minor (roughly $20 million for 2019) the move again highlights management’s desire to leverage its existing public market focused portfolio further into commercial applications, which we believe will help sustain growth over the long term.
Management anticipates revenue in the second quarter will grow in the 4%-5% range year over year, which implies sequential growth of 11%. Adjusted earnings per share is expected to grow 8% year over year to $1.58 at the midpoint of guidance. Finally, the firm slightly increased its full-year adjusted earnings per share guide to $7.60 to $7.72 from $7.55 to $7.70 to account for a revised outlook in its full-year effective tax rate as well as slightly rosier performance expectations.
Motorola Solutions is engaged in communications and analytics. The company manages its business through two segments: Products and Systems Integration, and Software and Services. Thr products and systems integration segment provides a range of devices, including land mobile radio handsets, infrastructure and accessories, as well as video security devices and infrastructure. The segment also includes the implementation and integration of such systems, devices and applications. The company also sells to commercial and industrial customers who use private radio networks and video security. The Software and Services segment provides a range of solutions for government, public safety and commercial customers.
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