Research in Motion: Downgrade Is Too Late

“I thought the downgrade should have been made 20 points ago. You’ve got a 14 times earnings stock in the 50s. I’m not going to back away from it at this level. I’d rather buy it than sell it. It’s really down a lot.” — CNBC’s Mad Money 11/2/2009

Not much has been going right for Research in Motion (RIMM) investors recently with the stock down about 33% in just under 6 weeks time. The most recent sell-off was sparked by a downgrade to “Sell” from Citi (C) analyst Jim Suva related to stiffening competition particularly from smart phones running on Google’s (GOOG) Android operating system. The stock was down about 6% on Monday mainly due to this downgrade news.

We have to agree with Cramer’s assessment above that the downgrade is probably too late as the stock has fallen hard already on concerns over increased competition. Research in Motion has dropped considerably even as earnings have continued to increase significantly over the last few quarters. So, relative to a market that has seen substantial P/E expansion, RIMM has seen its multiple contract. This is an interesting phenomenon especially considering RIMM operates in a particularly hot sector of smart phones where most other stocks have enjoyed a very nice run over the past few months. For example, over the last six months Research in Motion has fallen 21%, whereas competitors like Apple (AAPL) has increased 48% and Motorola (MOT) is up 64%. Even Palm (PALM) which is expected to make a profit until fiscal 2011 is just about even over the past half year.

This seems to us to be a perfect example that has fallen deep out of favor with the market, and in most cases we see that as an opportunity to value investors. The stock has continued to drop as the fundamentals have strengthened; a fact that we believe the market will eventually take into account. Not surprisingly, we have RIMM rated Undervalued and if the price falls any further it may be an upgrade to Greatly Undervalued in next week’s rating review. For an example of just how undervalued Research in Motion is, we looked at the past eight years of price-to-sales for RIMM and it has normally traded within the wide range of 3.7x to 12.1x revenue per share. That metric now sits at only 2.04x, which is incredible for a company that is expected to grow revenue at 34% this fiscal year and 23% in the next.

Cramer is correct that this is a stock that investors should more readily buy than sell. The Citi downgrade was piling on with the bad news and the resultant drop should be viewed as an opportunity.

Original post

Comments

[Peter Mycro...:]

The Analyst downgrade of RIMM shows you the poor quality of Wall Street analysis these days. How can someone give the stock a strong buy with a price target of $100 and then reverse his position and give it a strong sell with a price target of $50. In my worst nightmare I could never do such a poor job as that analyst did. I think its all market manipulation going on as as RIMM has;

2010 Free Cash Flow per share of $3.30

So it basically trades at 17 times its 2010 estimate.

With Zero debt on its balance sheet and Total Capital of $19.36 you have a FROIC or Free Cash Flow return on invested capital employed of 17%.

So though not super, the numbers are well above average.

I have no idea how this analyst still has his job, unless he was taking orders from his superiors.

Disclosure; No position in RIMM

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Nov 03 12:01 PM

[JamesApple:]

Tech companies are not like financial institutions judged by their financial metrics. Tech companies have much faster tempo heavily dependent on the technologies and updateness in the product and service offerings giving them the ability to compete for market shares profitably. The Dot Com bust was an illustration of this highly combustible nature. Nortel was a tech company with solid financial performances for over 100 years but it only took a short few years for it to crumble and Canadian tech companies have a notororious and long list of quick demises.

The actual severe drop in Rim share price started back in September when Rim took a series of double-digit single day drops clearly abandoned by the big cap investors with insider information on Rim's future being severely challenged by formidable new competition from all levels and market segments. Rim has demonstrated its inability to compete and innovate as the smartphone market continue to emrge with product and service offerings superior to Rim. iPhone market share had risen from 2% to 30% in merely 2 years versus Rim market share dropping from 52% to 40% in the same time period. Android addressing the same enterprise businesses as Rim, but Android has its heritage from the long established industry standard Unix community with the support of industry giant Google which has enormous technical and financial resources which along with Applecan perfectly capable of putting Rim out of business in a short order of time.

Nov 03 12:36 PM

[JamesApple:]

Rim shares without big cap investors interested have left millions of smaller investors out in the dark holding the downtrodden Rim stock looking for opportunities to salvage as much $ as they can before the dismal sales of Rim this Christmas further torpedo a rapidly sinking Rim besieged by more emerging giants. Moto Droid is seeing a lot of great reviews. Verizon's heavy promotion of Droid is going to help Verizon in stemming its subscription loss a little until Android gains more traction at Rim's expense. November is the last stop for Rim shareholders to offload their stock in any salvaging effort because after December, there are a whole lot of free falls for the Rim stock as global demand weakens leaving only bargain basement buyers looking for newer Samsung, LG, Nokia offerings, or high end quality brand names like the iPhone.

Nov 03 01:52 PM

[User 507290:]

JamesApple, do you work for AAPL or something? You seem to exist only to bash RIM.

Nov 03 04:18 PM

[BertNo!:]

Sorry James... I don't buy it. Long RIMM at $55.70. I still see the iPhone as a consumer toy. My work phone has to WORK. 100k plus apps of Pizza Hut, Venice Maps, Farts, Crying Babies, Shazam, Facebook, etc. isn't going to make my employer switch. Those are acutal reasons to NOT switch. We'll spend as much time blocking iPhone apps as we do on the PCs.

Nov 03 04:34 PM

[JamesApple:]

IBM PC has over 8000 games. The most dedicated game machines are PCs equipped with Intel i7, 8 gig of ram, and $700 PC graphics cards. Using your rationale, your company should remove PCs from your desktops because the PCs can play over 8000 games. Of course I would not be surprised if your boss plays a game or two on his Windows 7 PC in his spare time, but it is not your place to rip the PC off your boss's desk declaring the PC a toy unfit for work, and dump all your Dell and HP stock.

Your rationale is flawed, and your concepts are warped. iPhone is a general purpose smartphone capable of executing Accounting applications as well as any other set of apps installed and configured on it. In fact, the iPhone is a lot more capable than the stereotyped blackberrys.

Nov 03 08:43 PM

[JamesApple:]

User. What I had just said were already on billboards, said in chats, on thousands of web pages all over the world. What is happening most often everywhere are Rim user denials.

Nov 03 09:37 PM

[User 502487:]

If you walk to most financial districts in North America, RIM's Blackberry is the business standard. "Security" is a main focus of RIM, leading the devices to be a solid business device. Though for the average consumer, I could see the Google Android and Apple iphone to be more flexible with their applications. RIM is coming out with new models this quarter*


On Nov 03 08:43 PM JamesApple wrote:

> IBM PC has over 8000 games. The most dedicated game machines are
> PCs equipped with Intel i7, 8 gig of ram, and $700 PC graphics cards.
> Using your rationale, your company should remove PCs from your desktops
> because the PCs can play over 8000 games. Of course I would not be
> surprised if your boss plays a game or two on his Windows 7 PC in
> his spare time, but it is not your place to rip the PC off your boss's
> desk declaring the PC a toy unfit for work, and dump all your Dell
> and HP stock.
>
> Your rationale is flawed, and your concepts are warped. iPhone is
> a general purpose smartphone capable of executing Accounting applications
> as well as any other set of apps installed and configured on it.
> In fact, the iPhone is a lot more capable than the stereotyped blackberrys.

Nov 04 12:38 AM

[JamesApple:]

Security you say? Rim employees themselves use a NSA dongle key on a notebook computer for remote login to Rim for work, they don't use blackberrys because blackberrys are not secure.

For true security NSA is the standard, not anything from Rim.

Nov 04 12:56 AM

[oghowie:]

Where's future growth? Enterprise or consumer? RIM is losing the consumer race.

Nov 04 12:04 PM

[oghowie:]

The only people I know who haven't switched to iPhone / Android / webOS are because their companies won't let them. I think that's actually a pretty bad sign.

RIMM already has the enterprise market locked down but I don't think that will be enough anymore.


On Nov 03 04:34 PM BertNo! wrote:

> Sorry James... I don't buy it. Long RIMM at $55.70. I still see
> the iPhone as a consumer toy. My work phone has to WORK. 100k plus
> apps of Pizza Hut, Venice Maps, Farts, Crying Babies, Shazam, Facebook,
> etc. isn't going to make my employer switch. Those are acutal reasons
> to NOT switch. We'll spend as much time blocking iPhone apps as
> we do on the PCs.

Nov 04 12:07 PM

[LaChic:]

rimm was a sell at 85.00 and still a sell, that stock is going to trade at around 35 in the near future. If you have not locked in profits you should do it now while you still have the chance.

Nov 04 05:21 PM