Tuesday, January 20, 2009

Research in Motion (NASDAQ:RIMM): Upgraded to Outperform at RBC Capital

RBC Capital is out with a big call on Research in Motion (NASDAQ:RIMM) upgrading the shares to Outperform from Sector perform while raising tgt to $75 from $45.

Firm notes their prior Sector Perform rating was based on 1) reduced margin visibility; 2) execution issues; 3) recession-related growth headwinds. RIM has corrected 28% since Q2 results; they now forecast new upside, based on: 1) improving margin visibility; 2) recovering execution; 3) performance exceeding lowered expectations.

Improving Margin Visibility. In Sept/08, RIM's sharp downward GM outlook (down 670bps F10) surprised investors, on a consumer-related margin downshift and early Storm/Bold costs. On improved mix and cost structure, the firm sees hardware margins stabilizing (32-34% hardware, 41% reported) F10/F11, improving sentiment regarding LT margin trends. They also see RIM benefiting from Op Leverage F10/F11.

Recovering Execution. Execution challenges (delays, quality, shortages) and unfavourable reaction to the Storm also pressured RIM's valuation multiple. Carrier and other feedback suggests RIM's execution may improve F10 as they move up manufacturing and supply experience curves. Firm believes future consumer launches will avoid repeating Storm's stumbles, advancing RIM's consumer momentum and share gains.

Revised Estimates. RBC's F09 estimates remain unchanged; F10 estimates become $15.8B and $3.90 EPS (15% Y/Y) (prior $15.8B, $3.84). They are introducing F11 estimates for $19.2B rev (21% Y/Y) and $5.00 EPS, with 28% Y/Y EPS growth.

Multiple Recovery Expected. Valuation declined 69% since June/08, faster than peers (down 28%) and Nasdaq (down 38%), and trades at 14x, below peers (19x). Firm sees RIM's valuation multiple converging to peers, on alleviation of execution and LT margin concerns. They have been prudent regarding their target multiple in consideration of near-term valuation volatility risks and ongoing recessionary headwinds.

Notablecalls: I like this call as RBC is the Axe in the space. Also:

1) RIMM has a nice upward sloping chart hinting further upside to come.

2) The call itself is a game-changing one. RBC sees improving margin visibility and recovering execution.

I think the stock can do $53+ in the near term.

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