Motorola Inc last week reported disappointing earnings, but its credit quality has improved dramatically since the spring, and has room to improve further, traders said.
Motorola last week announced results that looked pretty good to credit investors, even if equity investors were disappointed with the company's slowing revenue growth and lower-than-expected handset shipments.
Motorola reported that profit more than tripled to $479 million from $115 million a year earlier. The company ended the quarter with net cash of $4.4 billion, compared to net debt of $41 million at the end of 2003.
The company's spreads have been steadily improving in the credit derivatives market since March, as Motorola has spun off its Freescale Semiconductor unit, paid down debt and generated solid cash flow.
The cost of protecting Motorola's debt against default has fallen to 40 basis points, or $40,000 for every $10 million insured, from 110 basis points earlier this year.
There is room for the company's spreads to narrow further, as its credit ratings improve, but spreads are unlikely to narrow by another 60 percent, a trader said.
Motorola is currently rated "Baa3" by Moody's Investors Service and "BBB" by Standard & Poor's, with a positive outlook from both agencies. Motorola has repeatedly said it is targeting low-single-A ratings, and is looking to regain access to the commercial paper markets.
Even if Motorola's spreads grind tighter over time, there could be bumps along the way, traders said. Mobile phone handset sales have grown fiercely competitive, and although Motorola has done a good job of taking back market share, it could have trouble holding onto gains. With spreads so tight across the corporate bond market, there is little room for error, traders said.
"It's a very technical market," one trader said.