NBF hits sell button a 2nd time on RIM

First they went to US$16 at National Bank Financial on tech giant Research In Motion (RIM:TSX, RIMM:Q), now Analyst Kris Thompson says US$10 is the right number. Here’s the skinny that comes with the headline “Turnaround Unlikely; Service Cash Flow in a Secular Decline; M&A a Stretch; Patents?”:

We are lowering our target price to US$10/sh after revisiting our market share forecast. Our revised F2013 EPS estimate is now $1.74 (down 38%) and is based on 7.5% market share in calendar 2012 (down from 9.0%). We discuss how F2014 EPS could breach the $1.00 mark in the absence of a material cost restructuring. We would not invest in RIM on the basis of a sum-of-the-parts valuation. The Service business could soon peak, M&A candidates are few, and valuing RIM’s IP is challenging. We expect F2013 to be very challenging for RIM as BB7 handsets become artifacts and the new BBX-based smartphones will face intense scrutiny in the marketplace. Remain Underperform.

Ouch, say we shareholders. What was most unusual in the note was the M&A discussion. According to Mr. Thompson, “M&A Theory: Catching a Falling Machete is Risky. This would be a brave transaction. Takeover candidates are limited and a significant premium is unlikely, in our view.” For years, research analysts such as Peter Misek have claimed on CNBC or privately that firms like Microsoft and Cisco had standing offers for RIM at prices like $35. With the stock now at $17, I’m sure some mark-to-market folks are asking the question: “where’s my $35/share bid”?

I bought the Playbook when it went to $200, and you know what? The form factor is all wrong. Go full-size (as in the iPad), or don’t bother. You’d think, and rightly so, that 70 million RIM subscribers would be a decent install base to draw upon for a tablet. NBF projects just 3% of us actually buying the Playbook in fiscal 2012, and after a couple of weeks of comparing the two products it is hard to say that NBF is barking up the wrong tree.

NBF projects $573 million of actual cash outflows during fiscal 2012 (ending in February), with 2013 earnings being about 27% of 2011’s…. However, find me another meaty, profitable tech company trading at 1.8x current year EBITDA. If Silver Lake thinks they can make a silk purse out of Yahoo!, why not RIM?

MRM
(disclosure – I own RIM)