LMR Innovation And Strategic Acquisitions Set To Boost Revenue And Earnings Growth

Key Takeaways

• Strong demand in Land Mobile Radio products and Software and Services indicates sustained revenue growth, enhanced by strategic acquisitions.
  
• Investments in R&D and a significant backlog suggest robust future growth in net margins and earnings, reflecting financial health.
  
• Dependency on supply improvements and court disputes, alongside unpredictable international growth, poses risks to revenue and earnings stability.

Catalysts

Provides public safety and enterprise security solutions in the United States, the United Kingdom, Canada, and internationally.

• Continued strong demand and favorable product mix within Land Mobile Radio (LMR) products are expected to drive revenue growth, evidenced by a 15% increase in Products and System Integration (SI) revenue.
  
• Revenue growth in Software and Services, particularly excluding the U.K. Home Office, by 11% due to strength across all technologies, indicating potential for sustained revenue growth through software and service offerings.
  
• Increased earnings per share by 22% and a significant backlog of $14 billion, indicating robust demand and financial health, which can contribute to future growth in net margins and earnings.
  
• Investments in research and development, including the opening of a new R&D center in Cork, Ireland, focused on expanding Motorola Solutions' safety and security offerings, aim to enhance future product competitiveness and drive revenue.
  
• The acquisition of complementary businesses, including a global provider of critical event management software and a provider of vehicle location and management solutions, is expected to integrate well into Motorola Solutions' ecosystem, enhancing its product and service offerings and contributing to revenue growth.

Assumptions

• Analysts are assuming Motorola Solutions's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.0% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $15.63) by about August 2027, up from $1.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 billion in earnings, and the most bearish expecting $2.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.8x on those 2027 earnings, down from 45.5x today. This future PE is greater than the current PE for the US Communications industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Risks

• The reliance on component supply improvements for strong Q2 LMR product growth might not sustain, potentially impacting future revenue from this segment.
  
• The U.K. Home Office charge control dispute, despite being under the highest court's review, poses a financial risk depending on the outcome, which could affect earnings.
  
• The Video Security Products segment's mid-single-digit growth could underperform if market share gains do not materialize as expected, affecting overall revenue growth.
  
• The slight dilution from recent acquisitions might impact near-term earnings per share, reflecting operational leverage risks.
  
• International market's mid-single-digit growth, excluding the U.K. Home Office, shows variability that could lead to less predictable revenue streams from these regions, potentially affecting overall financial stability.

Valuation

• The analysts have a consensus price target of $416.58 for Motorola Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $467.0, and the most bearish reporting a price target of just $351.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $12.5 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 31.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $399.64, the analyst's price target of $416.58 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.