Up 40% since March, we believe Motorola Solutions stock (NYSE: MSI) has a potential downside of around 15% from current levels. The company sells data communications and telecommunications equipment and its shares are currently trading at $ 174, about 5% above the level it was at in early 2020. It was trading at $ 186 in February 2020 – just before the coronavirus outbreak – and is currently only 6% below that level. While service revenues increased slightly in Q3 2020 compared to Q3 2019, product revenues fell to $ 1.04 billion from $ 1.2 billion in the same period. With industrial demand still not returning to pre-Covid levels and the pandemic slowing the global rollout of 5G, we believe the stock could drop by around 15%, from $ 174 to below $ 150. Our conclusion is based on our comparative analysis of Motorola Solutions stock performance during the current crisis with that of the 2008 recession in our interactive dashboard.
Coronavirus crisis 2020
Timeline of the 2020 crisis so far:
- 12/12/2019: Coronavirus cases first reported in China
- 01/31/2020: WHO declares global health emergency.
- 02/19/2020: Signs of effective containment in China and hopes of monetary easing from major central banks help S&P 500 reach record high
- 03/23/2020: S&P 500 34% drop from the peak level seen on February 19, as COVID-19 cases accelerate outside China. It doesn’t help that oil prices collapse in mid-March amid a Saudi-led price war
- Since 03/24/2020: S&P 500 recovers 71% since lows on March 23, when the Fed’s multibillion-dollar stimulus package removes short-term survival anxiety and puts liquidity into the system.
In contrast, here is how MSI stock and the market in general behaved during the 2007-08 crisis.
Timeline of the 2007-08 crisis
- 1/10/2007: Approximate pre-crisis peak of the S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
- 03/01/2009: Approximate low of the S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 09/01/2008)
MSI and S&P 500 performance during the 2007-08 financial crisis
We see that MSI stock has gone from levels of around $ 39 in September 2008 (pre-crisis peak) to levels of around $ 14 in March 2009 (as markets bottomed out), this which implies that MSI stock has lost more than 60% from its pre-crisis peak. It recovered from the 2008 crisis, to $ 32 at the start of 2010, increasing more than 1.2x between March 2009 and January 2010. The S&P 500 Index fell 51%, from 1,540 to September 2007 to 757 in March 2009. It then rebounded to levels of 1124, increasing by about 48% between March 2009 and January 2010.
MSI fundamentals in recent years
MSI’s revenue grew from $ 6 billion in 2016 to $ 7.9 billion in 2019, mainly due to higher service revenues. Along with the rise in income, profits also fell from $ 3.30 to $ 5.21 during this period.
Does MSI have sufficient cash cushion to meet its obligations during the coronavirus crisis?
MSI’s debt grew from $ 4.4 billion in 2016 and currently stands at $ 5.4 billion. Meanwhile, total cash flow has been roughly stable at around $ 1 billion during this time. The company generated approximately $ 1.8 billion in cash from operations in fiscal 2019. This stable cash position combined with strong cash from operations provides the company with a reasonable cushion to deal with the current crisis.
Phases of the Covid-19 crisis:
- Beginning to mid-March 2020: Fear of the rapidly spreading coronavirus epidemic results in reality, with an acceleration in the number of cases worldwide
- End of March 2020 and beyond: social distancing measures + lockdowns
- April 2020: Nourished stimulation suppresses short-term survival anxiety
- May-June 2020: Resumption of demand, with gradual lifting of lockouts – no more panic despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continuing improvement in demand and advances in vaccine development boost market sentiment
With the recent surge in the number of new cases of Covid-19 in the United States, we see demand for telecom equipment stagnating in the near term, which would see MSI’s product revenue struggling to return to pre-Covid levels anytime soon. We believe Motorola Solutions’ stock has significant downside potential in the near term, and while lockdowns are being gradually lifted, an immediate increase in demand for equipment does not look very likely. This could see MSI stock drop about 15% from its current level to just under $ 150.
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