Research in Motion (NASDAQ:RIMM): Downgraded to Underperform at Cowen; Consensus EPS at risk

Cowen is making a significant call in Research in Motion (NASDAQ:RIMM) downgrading the name to Underperform from Neutral.

According to the firm, RIMs's aggressive push into international markets has helped the company to offset fierce competition in its core North American market the last two quarters. Looking forward, however, they believe that to reach F11 consensus forecasts (Cowen F11 revenue/EPS are ~10% under consensus) RIMM must either continue to grow international sales rapidly or improve its market position in North America. They do not believe prospects for either outcome are promising; Cowen's latest non-U.S. industry checks have begun to soften while competitive smartphone trends in N.A. are intensifying. Firm believes their below consensus F11 EPS of $4.85 more appropriately discounts the risks they see appearing over the next 6-12 months and are downgrading RIMM to Underperform from Neutral.

N.A. Operators Aggressively Pushing RIMM Competition. Though the North American market overall remains healthy, the firm expects Android’s share to increase at Verizon, Sprint and T-Mobile through the summer of 2010 as both high-end (HTC, Motorola) and low-end (incl. Chinese OEMs) arrive with new products. An iPhone update at AT&T also looks likely to dent the impact of RIM’s upcoming product refreshes due in that (HSPA) channel. Finally, they note that HP’s acquisition of Palm will most likely help keep webOS a viable competitor in North America.

International Expectations High as Channel Pressures Increase. RIM’s push into international markets has helped to mitigate recent share loss in N.A. CDMA channels; non-North American revenue more than doubled y/y and accounted for 48% of RIM’s F4Q10 (February) sales. Cowen's latest industry checks show channel confidence has waned over the last few weeks. They note that during the 2008 downturn similar worries quickly converted into channel de-stock when consumer weakness did appear. Finally, new low-priced Nokia QMDs and smartphones (C3, E5 and C6) are set to arrive shortly and challenge RIM’s 8520 franchise.

Cowen vs. Consensus
RIMMs's low 12x multiple on consensus F11 EPS of $5.42 has helped it withstand recent market pressure, but Cowen sees previously discussed headwinds increasing for the company over the next two quarters that could pressure consensus EPS. Consensus may also be underestimating growth in amortization costs most likely tied to IPR and NOC costs that they anticipate will increase in coming quarters. As indicated earlier, the primary risk to their view on RIM shares is the number of new products (both hardware/software) RIM is set to launch in coming months.

The company’s new OS should improve the browsing experience on RIM phones, but overall Cowen worries whether consensus fully discounts launch costs and execution risk tied to the opportunity. WThey expect to see the new BlackBerry OS 6.0 in F3Q11, but the companys's push into prepaid and international markets should be a greater factor, pressuring ASPs. They see hardware ASPs dropping from $330 in F10 to $289 in F11. Their strong unit/weak ASP outlook suggests RIM can still grow sales outside former core NAM CDMA/HSPA channels but that a slowdown could occur when Nokia, iPhone and still more Android products arrive in 3Q10.

Notablecalls: I think Cowen has discovered something the more savvy investors have known already for quite some time - RIMM is facing significant competition not only from the iPhone but a host of Android-based devices as well (namely HTC). The reason why they have been showing strong unti growth outside of North America, is because of pricing. ASP's have been coming down to push units. Their product is increasingly becoming commodity. Now even Nokia is coming out with Bberry look-a-likes.

Couple days ago British bank Standard Chartered said its employees could switch from the BlackBerry to the iPhone. All 75,000 of them. That is another worrisome datapoint as RIMM has always been considered to have a rock-solid place in the corporate world.

At this point, I really have no idea how RIMM could stop the upcoming slide in growth & eventually consensus expectations.

I guess that is the reason why this powerhouse is trading 12x EPS. But what if consensus is 10-20% too high?


All in all, RIMM will trade down on this downgrade, likely towards the $62/share level.

The risk?

The main risk I see here is a possible snap-back rally in the market. Note that Stifel was out with a curious market call yesterday intraday saying:

We are seeing something odd going on in the Options Markets today

The CBOE Intra-Day Put-Call ratio leapt as high as 2.44, and is near 1.6 now The last 4 times it approached 1.2, it signaled a impending 5-8% rally in the SPX.