Research In Motion A Smart Phone Play

3/22/2010


  Recent Price
$75
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
19
  Shares (millions)
571
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$88.08 - $38.77

Don’t look for signs of a downturn in the smart-phone market. Nearly 43 million Americans owned one of these mobile gadgets at the end of January, up 18% from just three months earlier. Applications include e-mail, video games, music, and Internet access. Marketwide, smart-phone revenue is likely to grow at least 25% annually over the next few years.

One of the biggest players in smart-phones is Research In Motion ($75; RIMM), maker of the BlackBerry, launched in 1999 and popular for its wireless e-mail. RIM has delivered annualized sales growth of more than 65% and per-share-profit growth of 51% over the last five years.

That robust growth comes at an appealing price. The stock trades at 19 times trailing earnings, 48% below the five-year average P/E ratio. RIM is also discounted relative to historical norms based on sales, cash flow, and book value. Research In Motion, initiated as a Buy in the March 8 issue, is being added to the Long-Term Buy List.

Growth connection clear

Services (14% of 12-month sales) and software (2%) are auxiliary businesses for RIM. Devices (82%) drive the company. RIM sold 44% more devices in the first nine months of fiscal 2010 ended February than it did in the year-earlier period, though the average selling price declined 6%. Lower prices, and by extension tighter operating margins, reflect a shift in product mix more than pricing pressure.

RIM controls a 21% share of the global smart-phone market. In the U.S., that slice widens to 43%. RIM’s share of U.S. smart-phone subscribers rose by two percentage points in the three months ended January, extending its lead over Apple’s ($224; AAPL) iPhone, with a 25% share.

RIM has grabbed 63% of the large-business market, and growth opportunities still abound. Only 7% of the corporate market has been penetrated, and many companies plan to arm their employees with smart-phones. In one survey of technology executives, 43% considered mobile e-mail highly important to their companies’ technology budget.

Already a dominating player in the business world, RIM hopes to boost its presence in the consumer market. Promotions with Verizon Wireless, Wal-Mart Stores ($56; WMT), and electronics retailers have fueled growth for new BlackBerry devices less expensive than those designed for corporate customers.

The BlackBerry lags the iPhone with regard to applications, which programmers find more difficult to design for the Blackberry because of its embedded security features. However, those security options should help protect users as mobile banking gains popularity.

Conclusion

RIM’s balance sheet sparkles, with no long-term debt and nearly $3 per share in cash. The share count has declined by 2% in the past year, and the company announced a new $1.2 billion buyback plan in November.

February-quarter results should hit the market March 31. Wall Street expects per-share profits to jump 41%, and estimates are rising. An annual report for Research In Motion Ltd. is available at 295 Phillip St., Waterloo, Ontario, N2L 3W8, Canada; (519) 888-7465; www.rim.net.

RESEARCH IN MOTION
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Nov '09 $1.10 vs. $0.83 + 41% $88.08 -

$54.30

24 - 15
Aug '09 1.03 vs. 0.86 + 37% 86.00 - 63.36 24 - 18
May '09 0.98 vs. 0.84 + 53% 80.97 - 35.05 24 - 10
Feb '09 0.90 vs.

0.72

+ 84% 60.47 - 35.09 19 - 11
           
Year
(Feb.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $11.07 $3.43 $0.00 $148.13
-
$35.09 43 - 10
2008 $6.01 $2.26 $0.00 137.01
-
42.93 61 - 19
2007 $3.04 $1.10 $0.00 49.02
-
20.34 45 - 18
2006 $2.07 $0.84 $0.00 28.18
-
17.00 34 - 20
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
98 95 70 100 97 65 47

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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