Dundee: RIM — Recession vs. Soft Landing

The headline caught my eye, I must admit.

Although Canadian equity research analysts are maligned for not being sufficiently critical of our home-grown success story, Research In Motion (RIM:TSX, RIMM:Q), the following snapshot from Dundee Securities sees the forest for the trees. For as long as I can remember, RIM has traded based upon headlines. But that doesn’t mean primary research should be discounted for long term tech investors:

Share price reflecting a 45% cut in EPS

· Is RIM really trading at 7x earnings? The market doesn’t think so. Companies that are growing double digits, both top and bottom line, generally don’t trade at 7x earnings. Over the past 6 months, numerous reports have shown that RIM’s competitive position is deteriorating. iPhone and especially Android are gaining share while the BlackBerry’s base of loyal customers is being eroded. As such, we believe it is fair to say that the market does not believe forward earnings consensus.

· We believe the stock is reflecting a 45% cut to forward EPS. Using Nokia and Motorola as benchmarks, we believe that shares are currently reflecting a forward EPS of around $3.30 as opposed to current consensus of close to $6.00.

· Investors have punished RIM far more aggressively and far more quickly than we saw with either of Nokia or Motorola. As of August 31, RIM’s stock has dropped 50% relative to the NASDAQ from its recent peak in September 2009. What did Nokia and Motorola look like after their respective 50% share price declines?

· It took RIM 342 days to fall 50%. It took Nokia 772 days and Motorola 383 days. At the 50% retracement level, Nokia’s device revenues had fallen 27% and operating margins were down 11 percentage points. Motorola’s device revenues were down 36% and operating margins were down 18 percentage points. RIM’s device revenues are up 17% and operating margins are up 7 points.

· Yes, RIM is losing market share but investors selling the stock today are pricing in a collapse akin to Nokia/Motorola. Yet, RIM’s fundamentals are vastly superior to Nokia/Motorola’s at the time of their 50% retracement levels.

· Maintaining BUY rating. RIM’s competitive positioning has clearly weakened. Now the question is are we going to see a recession scenario akin to Nokia or Motorola or are we going to see a soft landing whereby RIM’s fundamentals do slow but not irreparably. We are in the soft landing camp for the following reasons: i) Torch sales have been disappointing but not disastrous. Torch should in fact cause AT&T’s BlackBerry shipments to grow 50%+ in the coming months; ii) Various OS 6 products, including Torch in other geographies, should help to offset the deterioration in the core business, iii) The Tablet remains a significant unknown variable. While it is too early to gauge success, we would be hard pressed to say that any upside whatsoever is being reflected in the shares, iv) well positioned in emerging markets like India, China, Latin America and others given the NOC infrastructure and prepaid capabilities.

· We rate RIM a BUY/High Risk with a US$65 target based on our DCF. The stock currently trades at 7.7x our FTM EPS forecast.

MRM
(disclosure – I own RIM)