Research in Motion Outlook a Coin Toss - Citi

From Citigroup’s Jim Suva this morning comes the mother of all Research in Motion (RIMM) reports, 21 pages long, under the title “Outlook is Increasingly Binary.” Suva says that given uncertainty as to whether RiM’s recently announced new BlackBerries will hit the market in time for the holidays, there is a wide swath of estimate revisions that are possible, up or down, for the company’s earnings.

Writes Suva, “Investors are unsure if Bold will hit AT&T (T) and if Storm will be at Verizon [Communications’ Verizon Wireless] (VZ) in time/scale for the holidays.”

Suva provides a handy graphic, a flow-chart or decision tree, with possible outcomes. 25% chance RiM’s new products do not reach stores for the holidays, in which case, the stock goes to $45. More likely is that the products do make it in time, consumer uptake is strong, and profit margins improve as a result. That would an $80 price target. But there’s also a 19% probability in there that consumers are disappointed with the product, and a 45% chance that even with strong sales of Bold and Storm, profits don’t improve. The latter two scenarios result in stock prices of $52.50 and $72.50, respectively.

But there’s no doubt which way Suva thinks investor sentiment is likely to head: RiM is now a consumer company, and so its stock won’t be as rich as it has been in past.

As for the shares, Suva has a “Hold” rating, and is lowering his price target from $90 to $64. That’s just 12 times his projected $5.44 per share in earnings over the next four quarters, says Suva. That’s fairly low for RiM, historically, which Suva says is because “significant changes in RiM’s strategy and business model will likely cap the valuation investors awar RiM shares, as consumer-focused technology companies generally carry lower valuations due to the inherently lower margins and increased competition in the consumer sector.”

You could, of course, buy call options on RIMM stock, given that the price of RIMM calls is inexpensive, in Suva’s view. But given that the reward-to-risk ratio for buying the stock is four-to-one, according to the scenarios Suva is modeling, he thinks the better bet is just buying the stock outright.

RiM shares today are down 74 cents, or 1.37%, at $53.17.

Comments

[Michael Comeau:]

The best way to play RIMM from the long side might be to short puts. According to my handy dandy thinkorswim screen, you can sell the October $40's for ~$1.30. If the stock goes down I wouldn't mind being long RIMM at $38.70, and if it stays above $40 you're getting a decent return for a crappy market. IV readings are sky high so in my opinion out of the money puts make a lot of sense right now.

2008 Oct 21 07:08 PM

[Fremont Rea...:]

what's deal. Why aren't they able to ship the Bold and Storm?

2008 Oct 22 08:08 PM