Friday, September 26, 2008

Research in Motion (NASDAQ:RIMM): Colour on qtr

Research in Motion (NASDAQ:RIMM) in focus today.

Let's start with the downgrades:

- Deutsche Bank lowers their rating to Sell from Hold, lowering their tgt to $70 from $120. RIM has become more dependent on hardware sales with time. This means that they have to keep running to keep up with changes in consumer tastes and risk missing numbers if their products do not hit. The company stated they expect operating margins to improve as R&D spend decreases, but also seemed to indicate ad spending would continue to grow. The company guided Q3 gross margins to 47% and expect the margins to move into the mid 40s in FY10. This is well below DB's estimate of 50%. RIM pointed to a large number of new product lines for the cut. In part, the firm thinks this is indicative of their struggle with 3G technologies among other issues.

- RBC Capital is downgrading RIMM to Sector Perform from Outperform, lowering tgt to $90 from $165 for 2 reasons: 1) reduced visibility to recovering margins; 2) increased risks to growth from the macroeconomic environment.

RIM's strong fundamentals (great products, competitive advantages, execution) and momentum
from RIM's pending product cycle remains; However, RIM's thrust to invest in market share ('land grab') " pressuring GMs 370bps Q/Q and 670 bps F10 -- caught them/market by surprise, raising risks to valuation.

Reflecting a more conservative outlook, they are lowering F09/F10 outlook to $11.3B rev/$3.62 EPS ($11.4B, $3.84 prior) and F10 to $16.4B rev/$4.68 EPS ($17.5B, $6.00 prior).

The upgrades:

- Raymond James upgrades RIMM to Outperform from Mkt Perform while cutting their tgt to $110 from $140.

- CSFB is upgrading RIMM to Neutral from Underperform noting that following the company’s F2Q results, they are lowering their EPS estimates by 5%/2% for FY09/FY10 to $3.64/$4.58 and revising price target to $80; however, given that their margin concerns (now evident), are likely to force Street numbers toward their already below consensus estimates, they raise rating to Neutral.

Within a robust smartphone market (expect 2H08 and 2009 growth of 60%) they believe that RIM’s share will be flat globally at about 14%. This lack of share gains is in contrast to recent years and is driven by our expectations for share loss at AT&T in the U.S. (where they believe share is unsustainably high at around 70%) especially given the success of the 3G iPhone. Given this, the firm now projects FY09/FY10 volumes of 26.7mn/40.8mn and expect revenue growth to slow to 53% in FY10, structurally lower than the triple digit growth seen in recent times

On their new estimates, RIMM shares trade on a P/E of 17.5x which they believe is reasonable especially given that consensus expectations may now become more realistic.

The positives:

- UBS is keeping their Buy rating and $165 tgt unchanged noting gross margin pressure now make RIMM more of a top line conviction play.

- JP Morgan is keeping RIMM at Overweight saying that though they advised waiting until after the F2Q09 print before buying RIMM on potential weakness, they are disappointed that the weakness originates not in a temporary setback owing to a product transition but in a permanent step-down in gross margins. That said, they believe this pullback is an excellent entry point into a tremendous growth stock, with the multiple at a multiyear low, even using significantly lower FY10E EPS.

- TD Newcrest believes the company is making a bet on market share at the expense of gross margin. They understand the bet and think it is a smart move. But overall, the Street tends to be short sighted and this explains the slaughtering of the stock in after hours trading following the release of these results. Firm's updated forecast shows slightly lower EPS, but they think RIM could still grow faster than reflected in their estimates. At these prices, they are very bullish on the stock despite target price reduction to $140 from $170 previously.

Notablecalls: Well, RIMM's now below the $80 level I was talking about couple of days ago. Earnings power is still around $5-6 per share. I suggest you wait til Monday or even Tuesday to make some buys in the low $70's.


Adam said...

IMHO, I think a better entry is at 65/67

Hemanth said...

What is your take on AIG as of today?

The Operator (Tim) said...

RIMM is broken, don't expect it to move higher until earnings season is over.