If there’s anything to be taken away from yesterday’s frightening declines in markets around the world, it’s to shun the pipe dreams — the stocks that will see their prices go through the roof due to a supposed, often mythical, catalyst. The reason is simple: They’re the most vulnerable companies.

Beaten-up Motorola, one of the world’s largest cell phone manufacturers, is an example of a company thought by some pros to fit the bill.
Reflecting two back-to-back quarterly losses and a series of internal headaches, among them collapsing profit margins, out-of-control costs, tumbling market share, loss of key personnel, and repeated failures to achieve targets, Motorola’s stock understandably is in the investor doghouse.

The shares, down last year and again this year, closed yesterday at $17.35, just three cents above their 52-week low.
Motorola is off sharply from its 52-week high of $26.30 and its all-time peak of $61.54, but the stock is still at a highly inflated price, some observers contend. Why? Because it’s pipe-dream time again, what with Motorola known to be enjoying a fair amount of speculative buying based on the following prospects:

• Acquisition of the firm or a leveraged buyout.
• A significant turnaround based on the assumption that the chief executive officer, Edward Zander, will soon be booted out. Speculation is rife that such a change will take place, although Motorola’s chief financial officer, Thomas Meredith, recently said “the board supports Mr. Zander.”
• Activist investor Carl Icahn, who bought 60 million shares — or 3% of Motorola’s stock — will stir the pot, forcing a takeover or major changes.

The president of Gramercy Capital Management, Joan Lappin, says she thinks a happy scenario is nonsense. Heavy insider selling, she says, implies no acquisition. As for a turnaround, spurred by a possible departure of Mr. Zander, “it will take at least five years to repair the damage he has done to one of the world’s great brands,” she says. On a leveraged buyout, the loss of earnings would make it difficult for some LBO firms to pull it off since it would be forced to take on the leverage, raising the question of how the interest on the debt would be paid. Regarding Mr. Icahn, his silence suggests he has lost interest and has moved on, Ms. Lappin argues.

“I wouldn’t touch the stock,” she says. “You have an incompetent CEO over his head and a dysfunctional board. Why would anyone want to buy this stock?” Given Motorola’s fundamentals, she considers the stock overpriced. As the quarters drag on with not much improvement from current losses, “people will give up,” she says. She figures the stock could possibly drop to $10, roughly a 40% dip from current levels. While that seems pretty drastic, Ms. Lappin points out the shares traded below $8 in 2003.

Apparently, a lot of investors side with her bleak outlook. Indicative of this, Motorola’s latest short interest (a bet the stock price will fall) stands at a hefty 139.2 million shares, up from 125.6 million a month earlier.

Consensus earnings estimates call for Motorola to earn 20 cents a share this year, down from $1.10 in 2006, and 68 cents in 2008. Ed Snyder, who tracks the wireless industry for Charter Securities, an independent research firm in Las Vegas, wasn’t immediately available, but the last time I chatted with him, he was far less optimistic than his colleagues, predicting operating earnings of 10 cents a share this year and a slight loss in 2008.

His view: Motorola is a troubled company that is losing money in phones, which is about 60% of its business. To change that, he believes it needs a new design that will take years to achieve. “Motorola badly needs a fix at the top management level,” he says. “I don’t know if Ed Zander is up to the job.” If he owned the stock, Mr. Snyder would sell it, he says. He views a buyout as a crapshoot and “without it, the stock is worth maybe $16 or $17.”

Mr. Icahn — described by one Motorola official to a large fundholder as “a pesky New York mosquito that should soon fly away” — declined to comment when I asked him about the Wall Street buzz that he’s been selling some of his Motorola holdings. One informed source, however, tells me it’s not so. In fact, this source says Mr. Icahn still retains his entire stake. Further, Mr. Icahn is actively pushing for a breakup of the company, including the sale of the mobile devices business, as well as an appointment of a new CEO from the outside, the source says.

There’s little doubt that Mr. Zander’s 2.5-year reign as Motorola’s chief has been disastrous for both the company and its shareholders. The board, however, doesn’t see it this way, having awarded him 800,000 additional options earlier this year. Who says mediocrity doesn’t pay off?

I tried getting a comment from Mr. Zander and some of Motorola’s outside directors, including Miles White, chairman of Abbott Laboratories, and James Stengel, a global marketing officer at Procter & Gamble. Alas, no one would respond to phone calls.

dandordan@aol.com