RIM Looks Good Despite Bad News

10/11/2010


  Recent Price
$50
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
10
  Shares (millions)
546
  Long-Term Debt as % of Capital
0%
  52-Week Price Range
$76.95 - $42.53

Rivals snatch at its clients, countries pry into its encrypted messages, and skeptics doubt the vitality of its long-term business. Research In Motion’s ($50; RIMM) BlackBerry smart phone, first released in 1999, has built a strong following among corporations. But bad news swarms RIM like crows feasting on a berry bush.

While the bad press has contributed to RIM’s stock-price decline of 29% over the last six months, the company is far from dead. For the six months ended August, revenue jumped 27% as RIM sold 23.3 million devices, up 45%. At just 10 times trailing earnings, the stock trades 71% below its five-year average and 49% below the average communications-equipment stock in the S&P 1500 Index.

An Overall Quadrix score of 100 reflects ranks of 94 or higher for all categories except Performance. RIM is a Buy and a Long-Term Buy.

Competitive position

At the end of August, RIM held a roughly 34% share of the North American smart-phone market, down from 41% at the end of May. That share could decline further if Android-based devices continue their rapid growth and the iPhone becomes available to multiple carriers.

RIM is vulnerable to the rise of new technologies that will let iPhone and Android-based devices perform complex business tasks. Until recently, rival technologies have been hampered by cumbersome security and limited multitasking ability.

International uncertainty

About 45% of the more than 50 million BackBerry subscribers operate outside of North America. In the six months ended August, RIM’s U.S. sales slipped 5%, while sales outside of the U.S. jumped 87%. Markets outside the U.S. generate 52% of RIM’s revenue.

Several countries have threatened to ban BlackBerry services unless RIM helps them circumvent its security measures; RIM appears to be addressing this issue. Security concerns hampered subscriber growth in the August quarter, so resolution could give the company a lift in coming quarters.

Long-term prospects

Research firm Gartner ($31; IT) sees BlackBerry’s global share of smart-phone sales slipping to 12% in 2014, down from 20% last year. Crucial to reversing that trend are new products. RIM’s latest BlackBerry, the Torch, features an improved Web browser. The PlayBook, a tablet PC slated for release in early 2011, is geared toward corporate users.

Conclusion

Per-share-profit estimates are on the rise, with the consensus projecting 37% growth in fiscal 2011 ending February and a conservative-sounding 4% in fiscal 2012. While the consensus calls for profits to rise at an annual rate of 13% over the next five years, investors seem to put little faith in those projections, as the stock’s PEG ratio is just 0.62, less than half of the PEG for the median communications-equipment stock in the S&P 1500. To calculate the PEG ratio, we divide the P/E on the current-year consensus by the estimated long-term growth rate. An annual report for Research In Motion Ltd. is available at 295 Phillip St., Waterloo, Ontario, N2L 3W8, Canada; (519) 888-7465; www.rim.com.

RESEARCH IN MOTION
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Aug '10 $1.46 vs. $1.03 + 31% $62.91 -

$42.63

13 - 99
May '10 1.38 vs. 0.98 + 24% 76.95 - 57.51 18 - 13
Feb '10 1.27 vs. 0.90 + 18% 72.00 - 57.89 18 - 14
Nov '09 1.10 vs.

0.83

+ 41% 88.08 - 54.30 24 - 15
           
Year
(Feb.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2010 $14.95 $4.38 $0.00 $88.08
-
$35.05 20 - 8
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
100 94 95 99 95 99 6

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


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