Friday, April 24, 2009

Research in Motion (NASDAQ:RIMM) : Upgrade to Buy with a $100 tgt - Citigroup

Citigroup is out with a major call on Research in Motion (NASDAQ:RIMM) to Buy from Hold while raising their tgt to $100 from $65.

Thesis — Citi notes their Sept 2008 downgrade was based on concern over deteriorating gross margins (50% Aug '08, 46% Nov '08, 40% Feb '09). However, they now have increased confidence that GM% has stabilized in 42-44% range. Stable GM% combined w/RIMM's still stellar topline growth from strong consumer uptake should drive a positive EPS revision cycle, historically a positive catalyst for RIMM shares. $100 TP based on ~20x P/E applied to above consensus FY11 $4.78. While they recognize RIMM shares’ outperformance since Apr 2 earnings call, they see add'l gains as RIMM offers rare growth in wireless sector. Firm adds RIMM to CIRA's Top Picks Live for best new money ideas.

Edge — Citi believes consensus remains overly fixated on RIMM's gross margins but they expect focus will shift over next few qtrs back to RIMM's unit growth. They expect RIMM will overtake MOT in N. American market by end of CY09 as RIMM's share gains continue (1.8% share CY08 growing to 4.2% in CY11). Carrier promotions are increasingly geared toward RIMM & away from Motorola & Sony Ericsson feature phones as carriers benefit from additional data/email revenue streams. These aggressive promotions (BOGO) open new consumer adoption & accelerate our "Smart Becomes Average" view of mainstream adoption vs. former high-end/niche. Enterprise stabilizing & regulatory changes (Mass state encryption) also small help to enterprise units.

Upcoming Investor Day — May 4 investor day a focus on BES 5.0 software that saves corporations money via embracing virtualization as well as App World. Firm does not expect new product launches (would be upside) at this event but they do expect Verizon to launch a Curve refresh (Niagara) 3G, better web browser & screen in the coming quarters.

Notablecalls: That $100 tgt is going to create at least some buzz among traders. After all, it's RIMM we're talking about here.

Not the biggest fan of the upgrade. Sudden confidence in gross margins? Geez Louise... go back and read the latest RIMM call from Morgan Keegan to get the scoop on recent gross margin 'outperformance'

Upcoming Investor Day a catalyst? No new product launches. No catalyst there.

Not saying the stock won't run on this. I think it will. I will be buying. I just don't have much conviction in the call itself.