My latest column is up at RealMoney.

I usually want a stock to score highly in four out of five categories before giving it much consideration: earnings momentum, earnings quality, price momentum, free cash flow and return potential.

This week, only three stocks went four for five, and I’ve talked about them all before: W&T Offshore (WTI) , Pitney Bowes (PBI) and Rent-a-Center (RCII) . As I look for new investment ideas, I’m left with three options, each of which has significant drawbacks.

1. Go short
2. Change strategy
3. Stay on the sidelines

I seldom short stocks, but I’ll probably try to scratch out some extra gains by writing covered calls on stocks like Ansys (ANSS) that I like long-term, but that look a little stretched in the near term. I also will likely leave a little cash standing by to put to work when conditions are more favorable. But like many investors, I generally plan to stay long and close to fully invested. In markets like this one, that means shifting gears a little bit.

Without straying too far from my comfort zone, I’m considering letting my winners ride (and possibly paying up for those like WTI that meet my criteria but have seen strong rallies), searching for deep value plays, and possibly even making a speculative play or two.

Disclosure: At the time of publication, William Trent has a covered call position in Ansys (ANSS) and has written put options against the shares of NutriSystem (NTRI).

The following is a reprint of my January 18, 2007 RealMoney column.

Oracle’s (ORCL - Annual Report) agreement to meet BEA Systems (BEAS) half-way on price was hailed by InfoWeek as making Oracle a middleware powerhouse. “Among other things, BEA will add to Oracle its WebLogic and AquaLogic SOA and BPM tools, as well as its Tuxedo transaction processing monitoring software. BEA’s Java Virtual Machine technology also could push Oracle deeper into the hot market for virtualization software,” said the article.

Oracle has been leading the way in software industry consolidation, and this deal is another step in the process. When SAP (SAP - Annual Report) announced in October that they would be buying Business Objects (BOBJ), I hoped they were following Oracle’s lead. It is better business for SAP to integrate its software with that of Business Objects than to force its customers to do the integration.

In the past, there were just too many different application software vendors. The excess made competition stiffer than it needed to be and made it difficult for customers to integrate the different products. Oracle figured out that customers would be willing to accept the reduced competition in favor of reduced complexity.

Furthermore, software companies generate so much cash that these deals quickly pay for themselves. For example, Oracle’s free cash flow (the difference between the cash generated from operations and cash paid for new equipment) before acquisitions was $6.6 billion over the last 12 months. BEA has averaged another $200 million in free cash flow in each of the last three years. The combined companies will generate enough cash in the next 15 months to completely pay for the acquisition, leaving Oracle’s balance sheet as strong as it is today.

In my October article, I said a higher yield and growing free cash flow (at Oracle) compared with a lower, flat one (at SAP) is not much of a choice in my book. Since then, Oracle stock has continued to outperform, being down just 3.4% compared with a 12.6% decline in the S&P 500. SAP is down 9.8%.

An investor who likes the latest deal even more than I, of course, is Carl Icahn. I agree with James Altucher that piggybacking the best activist investors can pay off. Carl Icahn’s portfolio at Stockpickr lists a few other ideas.

Which brings me to the very first article I wrote for RealMoney, in which I said a cash flow upturn could carry Motorola (MOT - Annual Report) upstream. Motorola represents 25% of Icahn’s holdings.

In September I said “If Motorola can get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there, I estimate the stock would be worth nearly $23, more than 25% above the current price. Management could do that pretty much just by trimming R&D expenses to the 2004 level (which was all they needed to produce the previous hit product anyway).”

The obvious risk, of course, was that cash flow could move in the wrong direction. And it did. Free cash flow over the trailing 12 months ending in September was just $325 million, compared to the 2004 level of $2.5 billion. With the cash flow, the stock has also headed down – 19.1% since I wrote that article, compared with a 6.5% drop in the S%P over the same period.

At the new (lower) enterprise value, the free cash flow yield is just 1.2%. But turnarounds don’t happen in a day, and the CEO change only happened in late November. I don’t expect next week’s earnings report to be anything special, but I also think a return to pre-RAZR cash flow levels

And if it doesn’t, I expect Icahn will have lots to say about it.

The following is a reprint of my January 16, 2007 RealMoney column

In a volatile market, investors tend to gravitate toward companies and investments that provide stability. As crazy as this may sound, I think that stability can be found in a semiconductor company – namely, Taiwan Semiconductor (TSM). I think the table below shows just how stable.

Taiwan Semiconductor Cash Flow Generation ($U.S. Billions)

Sources: Taiwan Semiconductor, Yahoo! Finance, William A. Trent estimates

Taiwan Semi operates in an unsexy part of the semiconductor industry known as “foundries.” It sounds as exciting as a blacksmith shop, and that isn’t far from the truth. Foundries don’t design any of the products they manufacture. Instead, they make the chips that other companies design. Their expertise isn’t in technology so much as process and efficiency.

Because they don’t design the chips themselves, Taiwan Semiconductor and other foundries such as United Microelectronics (UMC) typically get lower gross margins. The design profits fall to their customers. TSM’s expertise in manufacturing and economies, however, are much needed by customers who are often too small to absorb the enormous costs of building a chip fabrication plant.

Such customers include many fabless semiconductor companies and systems companies such as Altera (ALTR), Broadcom (BRCM - Annual Report), Marvell (MRVL - Annual Report), nVidia (NVDA), Qualcomm (QCOM) and VIA Technology, as well as integrated device manufacturing companies such as Advanced Micro Devices (AMD - Annual Report), Analog Devices (ADI), Freescale, and Philips (PHG).

Many small customers have given the company a balanced sales base. By end market, 40-45% of sales are communications-related, about 30% are to the computer market, 15-20% go to consumer electronics and the rest serve the memory and industrial markets. In 2006, the largest customer represented 10% of company sales, and the top ten amounted to just over half of sales. The lack of concentrated exposure to any customer or end market is one of the reasons TSM can generate stable cash flows.

The largest customer related risk factor may be that three quarters of sales are to customers in North America, and thus may impact the company if there is a U.S. recession. However, the global end markets for technology suggest that the true end customer is more widely dispersed geographically.

As the cash flow table shows, it seems fairly safe to say TSM will generate about $2.5 billion in cash flow. In some years, such as 2006, the cash flow may be unusually high. But even the industry downturns in 2004 and 2007 did relatively little harm. Given that the current enterprise value for Taiwan Semi is about $42 billion, it is offering a free cash flow yield of just under 6%.

If I had $42 billion that I wanted to invest safely, I might choose between buying TSM outright or investing it all in 5-year U.S. Treasuries. The Treasuries are currently yielding about 3.0%, so I would get $1.25 billion in interest each year from my investment. If that were my choice, I think I would go with the $2.5 billion in cash flow offered by Taiwan Semi.

It’s true that as a small investor owning a portion of TSM I would not be able to access all of the free cash flow. There is some risk to the comparison, since I am hoping the company invests any cash they hold onto wisely. But the company does pay two thirds of the cash flow as a dividend. Unless things change, that is still a 4.0% yield taxed at 15% compared to a 3.0% yield taxed at my marginal income tax rate.

How Bad Can it Get?

As stable as it may appear, I also have to acknowledge that TSM’s cash flow is not guaranteed. However, I think 2007 probably marked a fundamental bottom for the semiconductor industry – or at any rate that things won’t get much worse.

Consider, for example, the pricing environment. The Bureau of Labor Statistics reported that semiconductor prices declined 16.9% in December compared to the year earlier. That number was a modest improvement over November’s decline, which was the worst on record. Even the depths of the Internet bust were better times for semiconductor pricing. The fact that the pricing environment is so extraordinarily bad suggests to me that it probably won’t get too much worse.

Year/Year Change in Semiconductor Prices (PPI Data)

Source: Bureau of Labor Statistics

Furthermore, as I have written in other columns, I think the turnaround in semiconductor fundamentals is within sight. Pricing is a function of supply and demand, and since March of 2007 demand (semiconductor revenues as reported by the Semiconductor Industry Association) has been growing at a faster rate than supply (bookings for new semiconductor equipment as reported by Semiconductor Equipment and Materials International).

I think the industry’s recent restraint in adding new capacity will soon become evident in stronger pricing even if there is an economic slowdown. If I am right, what already looks like a solid and stable cash flow level could soon look even better.

Disclosure: William Trent has a long position in SMH.

The following is a reprint of my December 20, 2007 RealMoney column

I have long complained that Plantronics’ (PLT) increasing exposure to consumers was nothing but trouble. If lower margins and higher advertising costs weren’t enough, the fact that the consumer part of the business was dragging down overall growth was the icing on the cake.

The company was cleaning up its act earlier this year, and the shares rallied as a result. But an earnings miss in October and a downgrade by JPMorgan (JPM - Annual Report) have robbed stockholders of the entire year’s worth of gains.

Once again, the main culprit is the consumer business – specifically the Audio Entertainment Group (AEG), which was formed through the company’s ill-advised purchase of Altec Lansing. Through the six months ended September 30, that segment’s sales were just $43 million – down from $63 million in the same period last year.

In addition to the AEG, the company continues to struggle with more intense competition in the mobile headset business. One reason for the JPMorgan downgrade was that channel checks indicate the company is losing share of Bluetooth headsets to Motorola (MOT - Annual Report) and Nokia (NOK).

Finally, inventories continue to be far too high for my comfort. They have more than doubled over the past couple of years compared to a cumulative sales increase of just 42%. It isn’t the situation one wants to have in a slowing economy, especially in the face of competitive pressure.

The Good News

There are still a few reasons for optimism, though. For one thing, the drop in AEG revenues means it now accounts for less than 12% of the total business. Even if things continue to deteriorate, the incremental impact will be less likely to weigh on the total company.

Furthermore, the company took action to try and prevent such deterioration. Last month they announced a plan to close and/or consolidate a number of facilities as part of a strategic initiative to lower costs. They are also trying to design fresher products that consumers may actually want to buy, but those aren’t expected until next Christmas.

One good thing that could come of the restructuring in the short term would be a disruption in manufacturing. Though this doesn’t sound good at first blush, it would give the company a chance to work down those inventories.

Not a Bad Value

Shares are trading at less than 17x the consensus estimate for the fiscal year ending in March, and just 14x the estimate for March 2009. Unfortunately, given the recent news it is likely both sets of estimates will come down over the next few weeks.

The 9.9% consensus analyst estimate for 5-year growth is less than the company’s sustainable growth rate based on ROE. This means if growth is less than expected the company should be able to compensate by raising the dividend or buying back shares.   On a price to book basis, I think the current multiple of 2.2x could increase. Combined with the growth potential, a valuation expansion could lead to double-digit gains for the stock.

Over the last 12 months Plantronics generated $79 million in free cash flow. If anything, I think this could improve if the company gets a grip on its inventory levels and production capacity. The current FCF/EV yield is fairly attractive at 6.3%, which provides a decent margin of safety while waiting for the growth to materialize.

Although I like the valuation and believe there is cause for optimism, the stock has whipsawed lately due to numerous analyst upgrades and downgrades. Investors willing to take a chance on it would want to pick their price carefully.

Writing puts may also be an effective strategy here. As I write this, the February 25’s are trading at $1.10, offering a potential 4.5% 1-month return on the money risked and an effective purchase price of $23.90 in the event of further market declines.

This article is a reprint of my December 19, 2007 RealMoney column.

An Update of My September 2007 Stock Picks

• My picks in September had winners and losers, but fortunately more of the former
• Closing out my bearish stance on Office Depot (ODP)

I wrote six articles in September that included a bullish or bearish stock opinion, and with three months behind them I thought it was a good time to see how they performed and whether any changes were warranted. On the whole, the picks are playing out more or less as planned.

Motorola

On September 10, I wrote that if Motorola (MOT - Annual Report) could get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there Motorola shares would be worth nearly $23.

Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander’s recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.

Still, I think the issues at Motorola can be fixed by bringing the costs – particularly research, development and overhead – in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner. Either way, I’m sticking to my guns on Motorola.

Yahoo

On September 11 I made a bearish call on Yahoo! (YHOO), saying I didn’t believe in the consensus growth estimates and that Yahoo isn’t generating enough cash flow today to make waiting for the recovery worthwhile — at least not for me.

Things haven’t gotten any better since then, and the stock has lost 1.1% – although that is a slightly better performance than the 1.7% loss in the S&P over the same period. I remain bearish on Yahoo.

Office Depot

On September 12, I made a bearish call on Office Depot (ODP), saying “things are likely to get worse before they get better.” Things got worse, and after the company missed earnings and delayed filing its required 10Q the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.

But I also said “it looks like a stock that will pay off in the end,” and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money) and I think there are more reasons to be positive than negative.

Think the worst of the housing downturn is over? Office Depot’s solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot’s P/E is a fraction of Dell’s (DELL).

Office Depot could still have some downside, and I don’t expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I’m closing out that call.

Delta Airlines

On September 17 I made another bearish call, this time against Delta Airlines (DAL). Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is.) The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.

Short term, anything can happen as airlines have tons of leverage that can lead to wild swings in profitability in pricing. But long-term I don’t think the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.

Apple

I weighed in favor of the bulls for Apple (AAPL) on September 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple’s 3.9% free cash flow yield down to 2.9%, so it isn’t the value it was then.

Still, the cash flow rose 250% from the prior year, and Apple’s market share remains small for most of its product lines. The company continues to make desirable products, and if I have to take a chance on a tech name surviving an economic downturn it might as well be Apple.

Adobe

My last September stock pick was a bullish call on Adobe (ADBE) on the 18^th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on that news after buying up the shares in anticipation of it.

Although the sell-off wasn’t very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early, as the shares are down 6.3% since the article and the S&P is only down 4.9%.

On their earnings call, the company reiterated their guidance for next year. As the next product cycle moves closer, I think my bullishness will pay off.

Disclosure: William Trent owns shares of Adobe (ADBE) and has written naked put options against the shares of Office Depot (ODP).

William Trent currently has a short position in put options related to Office Depot (ODP).

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.

But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.

The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="http://stockmarketbeat.com/blog1/category/tech/sunw/">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.

I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.

Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

This article was originally published at RealMoney on September 17, 2007 and was featured in the September 24, 2007 Festival of Stocks.

Few stocks boil the blood of both bull and bear as much as Apple (AAPL), and for good reason. The company, richly valued though it is, has come out with more cool products than the rest of the tech industry combined. That helps excite the bulls, and as for the bears, there’s a good chance many of them are jealous for having missed out on the stock’s run. They have sour grapes they hope will someday be pressed into wine. And before you fanboys of some other tech stock get all hot and bothered about my disrespect of your favorite company’s innovation record, allow me to summarily dismiss them.

• Research in Motion’s (RIMM) Blackberry? Great mobile enterprise email device. But that’s for work. Ewww!
• VMWare (VMW)? See above. Not to mention it’s hard to show off your virtual server.
• First Solar (FSLR)? Try this for a pickup line: “Hey, want to go back to my place and see how thin my solar film is?” Unh-uh.
• Google (GOOG - Annual Report)? Still great at search. Nice email product. So what? They’ve spent more than a billion and a half on research and development in the last 12 months, and I dare you to tell me where it went.

As you can probably tell, I haven’t gotten nearly enough hate mail recently, and I’m trying to kick things up a notch. So back to the task at hand: Apple. Let’s quickly take a look at what I think are the best arguments on each side.

First up is whether the “halo effect” from the iPod is helping bread and butter Mac sales. Mac units were up 33% year over year, compared with just 12% for PCs overall. Bears counter that most PC makers (with the exception of industry leader Dell (DELL) had unit growth similar to the growth in Macs. But this ignores the very important point that Mac units sell for much more on average than the typical PC – so in terms of revenue share is likely growing much faster. Edge: Bulls.

Next, is the iPhone a phlop? When 270,000 units were sold in the first two days, I said “the 730,000 they are guiding to for the next three months seem conservative laughably low.” It is now looking as though it was only conservative. It is pretty clear the price cut was driven in part by a significant slowdown in sales – to possibly as low as 5,000 units per day by the time of the price cut according to one convincing analysis. But that would still put the iPhone in the same league as Palm, even if not quite matching their original estimate of being in RIMM’s league next year. But don’t forget – they got where they are now being sold by one carrier in the U.S. As they roll out to other carriers on other continents, they could meet their target yet. It’s not living up to the hype, but it is still a success. Edge: Even.

Finally, the iPod – a product that nobody seems to care about anymore, yet which sold 10 million units last quarter when it hadn’t had a product refresh in ages.

From an accounting standpoint, things are going so well that they are now deferring revenue from their new products rather than booking it up front. This practice will help bake some growth into the cake. True, the company’s earnings were boosted by a penny due to a lower bad debt reserve, but when you are beating quarterly estimates by a quarter that is just chicken feed.

While the stock has nearly doubled over the last year, its free cash flow has more than tripled. As a result, a company that is growing at more than 20% per year on the top line is yielding 3.9% on a free cash flow to enterprise value basis.

About the most significant risk, in my mind, is the possibility of a consumer slowdown combined with increasingly high expectations. Apple is far more consumer-driven than other tech stocks, and a 40x P/E multiple might not hold up if they only beat by a nickel instead of the quarter investors have come to expect. That’s why I think the free cash flow is so important in this case – it provides a solid backstop, and would help justify being patient through a slowdown should it come. If the company can grow at even half the current rate over the next five years, investors are likely to be well compensated for the added risk.

Positions: Short Research in Motion (RIMM)

This article was originally posted at RealMoney on Sept. 11, 2007.

As I noted in my Motorola column, I like to take a look at the stocks with unusual option activity on StockPickr to see if there is anything sufficiently interesting to investigate further. Friday’s list was a doozy, with heavy activity listed for deep out-of-the-money October calls for Motorola (MOT - Annual Report), Arch Coal (ACI) and Yahoo! (YHOO). Having found a possible long-term bargain in Motorola I turned my attention to Yahoo! to see if I could pull a two-fer. Alas, it looks as though I may have bagged my limit.

Unlike Motorola, Yahoo! has no chance at a bloodletting fire-the-CEO rally (justified or not) because it has already happened. Instead, any hopes for a short-term pop in Yahoo! shares are probably underpinned by the persistent buyout rumors, with Microsoft (MSFT - Annual Report) and EBay (EBAY) being the buyers most frequently bandied about. But the problem with those rumors is they have been around forever, and so far smoke has yet to signal fire. Anybody buying the name in hopes of a buyout should therefore be prepared (and paid) to wait.

So, will Yahoo! reward a patient approach? It doesn’t look that way to me. Its free cash flow in 2006 was $700 million, half the level achieved in 2005. It is only good for a 2.3% free cash flow yield on the current enterprise value. That means essentially all of the return potential has to come from growth – which doesn’t seem like a safe bet given last year’s decline. Sure, the growth rate over the last five years is nearly 45% – but that is coming off of the lowest lows of the Internut Bust. The consensus five-year growth estimate is 24%, including a 20% decline in the current year. By implication, that means the subsequent four years would have to post average growth of nearly 40% annually. Color me skeptical. With an ROE of just 8.27%, assuming growth will be faster than that implies adding debt or issuing new shares unless they can somehow boost the ROE itself – a feat far easier said than done. Coincidentally (or not) that is about in line with the actual year/year growth rate in the latest quarter.

I know, I know – that’s all just academic theory. So let’s consider Yahoo’s businesses to get a feel for what the company can do to boost that ROE and ramp up the earnings growth. According to the latest 10Q, fee-based businesses such as premium mail, web hosting and premium Flickr accounts contribute just 12% of revenue. While they may grow, it is hard to imagine them growing enough to move the needle. That leaves “marketing services” such as HotJobs and display advertising. Somehow, the latest employment report leaves me less than fired up about HotJobs’ prospects. As for display advertising, financial services firms have accounted for anywhere from 12% to 30% of online advertising. A good chunk of that is mortgage refinancing and credit cards – both of which seem likely to suffer as credit standards return to historic norms.

Yahoo! is a great company, with a balance sheet strong enough to carry them through any downturn in the online advertising market. But they aren’t generating enough cash flow today to make waiting for the recovery worthwhile – at least not for me. There are other companies out there that look like safer bets. While Yahoo! could very well return to growth, it just looks too hard to earn a return high enough to compensate for the risk.

The following article was previously published at RealMoney on Sept. 10, 2007.

Though I consider myself a longer-term investor, I like to take a look at the stocks with unusual option activity on StockPickr to see if there is anything sufficiently interesting to investigate further. Friday’s list was a doozy, with heavy activity listed for deep out-of-the-money October calls for Motorola (MOT - Annual Report), Arch Coal (ACI) and Yahoo! (YHOO). I dug a little deeper on Motorola, and came away thinking it might be worthwhile even for those willing to wait longer than October to see a return.

Motorola was having an investor day on Friday, though it is hard to imagine anyone thinking it would produce an announcement worthy of a 20% up move. In fact, there probably is only one such possible announcement, and that is of Ed Zander’s resignation. The company has struggled to find a follow-up that matches the RAZR’s success, let alone one-ups it. In Zander’s own words, “In Mobile Devices, we did not achieve the level of sales and unit shipments that we had expected, primarily in Asia and the Middle East and Africa. Europe, as we have been saying all year, continues to be a challenge.” The message boards are downright gruesome.

But if all it takes for a 20% up-move in Motorola is a new CEO, the market has gotten awful forgetful. After all, it was just four short years ago that the stock rallied 10% (from a far lower base) on the news that Chris Galvin was resigning to be replaced by Zander. It makes one wonder why they keep them as long as they do – if I could get a 10% rally on every CEO firing, I wish Motorola would do it at least once a year. Zander is credited with putting the RAZR on the fast-track and for… not much else. Why settle for anyone’s second-best idea? Give them a few months to put their best one into action, then sayonara! It’s time to find someone else, with a new best idea. Call it crowd-sourcing for CEOs.

So in case you missed the sarcasm, color me skeptical that Zander’s departure would do much for Motorola over the long term. And don’t tell me they need “compelling products” when Nokia (NOK) consistently produces the blandest, clunkiest, ugliest, bulkiest – and best-selling – phones on the market. The analyst day highlighted a return to cash generation – which will definitely be needed for a turnaround to succeed, regardless of who is behind it.

Motorola generated cash flow from operating activity of $3 billion in 2004, $4.6 billion in RAZR-backed 2005 and $3.5 billion last year. For the last 12 months, however, they are down to $2.2 billion – of which $700 million was used up in capex. Still, in a somewhat depressed year it is enough to make the free cash flow yield on Motorola’s $35.6 billion enterprise value comparable with the current treasury yield. All Motorola needs to do is get cash flow back to 2004 levels and today’s investors will be compensated for accepting the risk. If they can get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there I estimate the stock would be worth nearly $23 – more than 25% above the current price. They could pretty much do that just by trimming R&D expense to the 2004 level (which was all they needed to produce the previous hit product anyway.) This scenario doesn’t require them to create the next RAZR, but if they did it would make for a nice icing on the cake.

The obvious risk to this thesis is that cash flow could move in the wrong direction. It isn’t hard to imagine possible scenarios where this happens, especially given the lukewarm reaction the street is giving the recent comments on cash flow improvement. It wouldn’t be the first time a management team gave up on a promising strategy in order to give investors what they thought they wanted. If you are a buyer on the cash flow story you’ll probably want to flee for the exits if anything is announced that will eat up the cash. Fortunately, however, Icahn is nipping at Motorola’s heels. That might be enough to keep them from doing anything too rash.

Cisco’s (CSCO) latest quarter was the talk of the town, and looking at the recent PPI data on telecom equipment (switchboard and switchgear apparatus) it should be no surprise.

The next fair question for any skeptical investor, of course, is whether the best ever pricing environment means things can only get worse. To gauge the market, I looked at some recent calls from a variety of telecom equipment makers.

Cisco doesn’t seem worried.

Although competition remains robust, we believe we are gaining market share versus almost all of our major competitors in most product categories. But we also believe we are getting a larger share of our customers’ total spend on communications and IT.

(Excerpt from full CSCO conference call transcript)

Nortel (NT) isn’t raising prices, but doesn’t seem to feel pressured.

I am very pleased we’re delivering measurable progress on margins. This is evidence of our processes and productivity improvements and, but also pricing discipline. And we’re bringing value with a great level of discussions. We’re improving productivity. Obviously we’re not increasing prices but there is a disciplined process and I think we’re demonstrating we’re able to deliver strong.

(Excerpt from full NT conference call transcript)

Juniper (JNPR), however, voiced some concern over competitors with “nothing but price to offer.”

Certainly demand is — as long as people continue to value their networks equal to or beyond what they have, which we believe they are, and then on top of that, they use them more than they did before. Every time something like the iPhone comes out, making it easier to put YouTube videos up and for people that demand higher bandwidth applications, that only adds to the demand curve. So there’s a lot of innovation going on in that space and all of it makes positive contribution to the infrastructure market.

Pricing is at it has always been — it’s always a challenge in a given case and clearly some of our competitors have nothing but price to offer. So we’re aware of that but I wouldn’t say that’s changed in the last couple of years, so probably not a big difference that I would note.

I do think what people can most easily judge the success of the company by is do we continue to gain in the markets that we serve? Do we continue to gain the market share and continue to improve the operating model of the company in the process and continue to grow the generation of our cash and the kind of things that we think make the business healthy and healthier today than it was yesterday and healthier tomorrow than it is today, so we’ll continue to push all those metrics.

(Excerpt from full JNPR conference call transcript)

Alcatel/Lucent (ALU) is already seeing pressure.

Our Q2, 2007 gross margin suggest difficult pricing environment, one that has been impacted in the short-term and not only our need to withstand some level of collective efforts by our competitors to unseed us our customers but, as well they — need occasionally to support some product migrations. Additionally for this transition year of 2007, we are strategically reinvesting the gross margin savings in selective markets to position the company for the long-term, while achieving most of our operating expense savings on a comparable basis.

In the second quarter gross margin was negatively effected by or negatively impacted by an unfavourable product in geographic mix, continued investments as I described and the impact of some product transitions cost as customers migrate their networks.

(Excerpt from full ALU conference call transcript)

All in all, it seems like a very company-specific environment, one in which it makes sense to stick with the leaders.