Citron Sees 78% Downside In Motorola Solutions, Company Calls Claims 'Baseless'

Motorola Solutions Inc MSI has become the most recent target of Citron Research run by activist short seller Andrew Left.

Left, notorious for reporting on companies engaged in fraud or are overvalued, said days of Motorola's closed-end business are numbered.

Misusing The Dominant Position

Citron alleged that Motorola Solutions, which was spun-off from Motorola in 2011, has been controlling the market for first responder communications in North America using its dominant position in a fragmented customer base.

Left explained that Motorola makes the bulk of its profits (76.7 percent) by selling overpriced handsets to its single-source contracts in the U.S. The winning formula for Motorola Solutions according to the report is this: Dote on police, fire and sheriff's departments; woo contracting officials; pursue every angle to gain a sole-source deal or an inside track, and where possible, embed equipment with proprietary features so it can't interact with competitors' products.

Huge Disparity Between U.S. & U.K. Pricing

The report contrasted the pricing the company charges in the U.S. and the U.K. Giving an example, Citron Research said the city of Chandler purchased 30 APX 6000 police radios costing the government $5,200 per piece, markedly higher than the $975 it charged on sales to first responders in the U.K.

Explaining the difference, Left said the LMR Network of the U.K. and the rest of the world is an open platform. Consequently, Motorola faces competition.

Citron believes Motorola would go all out in opposing the FirstNet, an independent, interoperable communication system for first responders, to be built by AT&T Inc. T in 2017. According to the report, Congress is already aware of the Motorola Monopoly.

Impact Of Monopoly Loss

Once Motorola loses its monopoly pricing power on U.S. handsets, Citron believes the company's gross margins on the U.S. handset business would be cut in half or more in the coming years.

"MSI's gross margins on handsets are likely to re-base to the mid-30s, and head toward single digits, in line with its own European margins for handset makers that face greater competition. Using this "normalized" earnings level, we see MSI generating around $3.50 of normalized earnings. As the market recognizes the secular pressures on MSI, we see the multiple re-rating to 12x to reflect a more commoditized handset maker. This places MSI shares 50% lower than its current trading value," the report added.

Even if the company transforms into a services company, Citron thinks shareholders will not be happy with contracting gross margins and multiples.

Company Claims Charges Baseless

Refuting the allegations, Motorola said in a statement, "Our government contracts are the result of robust competitive bidding processes. We compete every day and win thousands of contracts annually because we have the best products and most reliable solutions available in the market at a wide range of price points. Importantly, all of our products meet open standard interoperability requirements defined by our customers in the U.S. and other countries around the world."

Terming Citron's claims as false and misleading, the company said different countries have different standards and require different technologies and that it sells radios at all price points in each region The company also suggested accessing the "Get The Facts" section of its website for accurate information about it and its competitive pricing.

Citron has a target price of $45 on the stock, suggesting 78.4 percent downside from current levels. At the time of writing, Motorola Solutions Shares were down 5.13 percent at $77.65 on over seven times its average volume.