Friday, October 09, 2009

Research in Motion (NASDAQ:RIMM): Upgraded at Baird, positive comments from RBC

Research in Motion (NASDAQ:RIMM) is getting some interesting commentary this morning:

- Baird is upgrading RIMM to Outperform from Neutral with a $84 price target saying they would be buyers on recent weakness. RIMM has declined almost 20% since reporting Q2 on September 24, presenting what they view as an attractive entry point.

Strong forecast growth. Baird forecasts revenue to grow 34.9% this year and 19.7% in 2011, with EPS growing 22.0% and 17.9% over the same periods. - Smartphone market expanding. In calendar Q2, global smartphone shipments grew 26.9% YOY, with Apple and RIM both taking share YOY (according to Gartner).

- Upcoming device launches positive. They believe upcoming device launches in front of the holiday season, including Storm 2, could provide a positive catalyst.

- iPhone headline risks in the stock? With Apple recently announcing plans to offer the iPhone through three carriers in the U.K. and Canada, they believe at least some of the Verizon/iPhone headline risks are likely in the stock.

- Valuation compelling. RIMM is currently trading at 13.9x Baird's fiscal 2011 EPS forecast, vs. our big-cap tech index at 16-17x and the S&P 500 at 14.8x. Their $84 target price is based on 17.0x their 2011 fiscal EPS estimate of $4.95.

- RBC Capital highlights 10 reasons why they remains bullish on Research in Motion (RIMM):

#1-3) Competitive Advantages Intact. BlackBerry's 'crackberry' messaging, other advantages (e.g. battery life) remain unmatched. Strong Q3 unit guidance (37-48% Y/Y) affirms RIM remains relevant with consumers, carriers. RBC expects RIM to narrow competitive gaps in Browsing, Apps, UI (User Interface), next 6-12 mos. Despite intensifying competition, they foresee a shakeout, with RIM retaining global leadership.

#4) Don't Fear Moderating ASPs. Recent ASP mix-shift is not from competitive pressures, but self-inflicted, positioning RIM to better penetrate the mainstream Smartphone opportunity. Moderating ASPs are part of firm's long-term thesis on the Smartphone market (they expect ASPs to decline at est 8-10% annually to $273 end F12), but unit momentum and market penetration for RIM increases. GM's meanwhile are expected to remain healthy at 40-41%. This yielding growing earnings power with EPS above street at $5.43 F11 and $6.40 F12.

#5-6) Strong Market Growth Mitigates Competitive Impacts. Smartphones to grow est >40% annually to est 35% handsets by 2012. The hypergrowth means RIM can weather a 300bps competitive share loss, and still grow faster than street ests next 3 years. But Smartphones are not a zero sum game; RBC sees 3-4 leaders all taking share from NOK, MOT, etc.

#7) Healthy Margins. RBC foresees LT margins at 40-41% as RIM remains a highly profitable Smartphone to carriers (= healthy subsidy) and benefits from scale, supply chain efficiencies. They do not expect market commoditization.

#8-9) Pending Catalysts. They see multiple catalysts ahead, including product launches, prod/service innovations, financial results, Smartphone share gains, and improving investor visibility. RIM well positioned to capture non-NA Smartphone opportunity, est. 406M units by CY12 at 44% CAGR. Firm also foresees a recovering Enterprise upgrade cycle.

#10) Compelling Valuation. With est 38% F10 growth at healthy margins, valuation at 0.5x PEG and 14x FTM P/E vs. 9-46x historical, and 30x peers (including NOK at 17x and -4% FTM growth) in their view significantly undervalues RIM's fundamentals and opportunity, and has already built in significant competitive impacts. They foresee recovery and upside as competitive, margin fears dissipate and visibility improves to RIM's advantages, retained innovation leadership, margin resiliency and share gains.

RBC reiterates their Outperform rating and $150 target (Street high target).

Notablecalls: RIMM is starting to look like a major battleground:

- The bears tend to point out raising competition from Apple, Androids from MOT & DELL and even PALM. This should lead to lower volumes, lower ASP's and eventually lower margins.

- The bulls on the other hand highlight the international opportunity and the fact RIMM trades around 14x EPS.

Must say I have no clue how this battle will end. Nokia is yet to make its move in the space (I mean a REAL move) which is something that cannot be underestimated. Their R&D budget is bigger than AAPL, RIMM, PALM combined.

Meanwhile RIMM can (and probably will) beat estimates again making shorts look silly.

So RIMM is becoming another mindless trading vehicle with ratings changes slapped both ways depending on 10pt moves up or down.

Tough one.


1 comment:

tigeram1 said...

plus, RIMM is probably not going much of anywhere till they beat / miss at next earnings, the stock seems to go from earnings to earnings
Baird does raise good points about rimm phones being highly profitable to the carriers compared to appl, etc.
But, there was a piece the other day from another sell side firm about apple ramping up capex to build out their capacity to handle data compression etc to provide better service to customers. They are probably doing this in regards with tablet PC( much more than just a tablet reader) where they see a lot of potential.... but could it also boost performance of iphone users?