Research In Motion Earnings Preview: $10 Or $20 Next?

| About: BlackBerry Ltd. (BBRY)

On Thursday, Research in Motion (RIMM) will announce its fourth quarter and full year results. Expectations for the company are very low, which is why the company is a little more than a dollar away from its 52-week low. Shares of the Blackberry and Playbook maker have been crushed as the company keeps taking down estimates, as sales are declining and earnings are plunging. I expect a big move in this stock on this report, which should continue into early April. The real question is, will we see the stock plunge to $10 and perhaps single digits, or will a good report force shorts to cover and spark a massive rally back to $20?

Let's look at what is expected. First, let's look at the guidance given by the company when it reported its third quarter results in December. RIMM gave the following Q4 estimates:

  • Revenues of $4.6 billion to $4.9 billion. At that time, the average analyst estimate was for $5.12 billion.
  • Gross Margins of 38% compared to the previous year's Q4 gross margins of 44.2%.
  • Blackberry smartphone shipments of 11 million to 12 million units.
  • Earnings per share of $0.80 to $0.95. At that time, the average analyst estimate was for $1.18.

Now obviously, analyst estimates have come down since then. Obviously, Research in Motion is getting killed by Apple (NASDAQ:AAPL), which is selling tens of millions of iPhones each quarter and will sell plenty of iPads this quarter and in the future. Not only is RIMM selling less phones, but they are selling cheaper phones. Apple is netting more than $600 in revenues per iPhone. Research in Motion is selling its phones for half that, approximately. That leads to lower margins, and in turn, lower profits.

Current analyst estimates have RIMM coming in at $4.55 billion in revenues for the fourth quarter, down about 18.1% over the prior year period. The company also guided to 38% gross margins, down from 44.2% in the previous year period. Current analyst estimates for earnings per share are $0.82, substantially down from the year ago period of $1.78.

But the worse issue for RIMM is the longer-term trend. Estimates have been coming down again and again for the company. The following table shows how the revisions have occurred in past months, for the fiscal year that just ended.

End Feb. 2012 Revs. Growth EPS Growth
September 19th 2.0% 20%
December 14th -2.5% -30%
December 15th -3.7% to -5.2% -32% to -34%
February 10th -5.2% -35%
March 5th -5.3% -35%
March 25th -5.6% -35%
Click to enlarge

Earnings estimates have stayed flat recently, but revenue estimates have still been cut a little. Now, this trend gets even worse when looking at the current fiscal year. Note, all estimates on here are based off of the current estimates for the current fiscal year. So the February 10th numbers are based off of the expectations for 2012 at that point, and the March 25th numbers based off expectations at that time. You get the idea.

End Feb. 2013 Revs. Growth EPS Growth
September 19th 8.0% 2.0%
December 15th -1.8% -7.7%
February 10th -5.4% -29.3%
March 5th -5.8% -30.6%
March 25th -7.5% -33.2%
Click to enlarge

In the fiscal year that ended in February of 2011, Research in Motion did $19.91 billion in revenues and $6.34 in earnings per share. For the fiscal year that just started, Research in Motion is only expected to do $17.38 billion in revenues and $2.76 in earnings per share. Contrast that to Apple, who is growing revenues at about a 50% clip this year and even higher than that in earnings. These two companies are going in completely different directions.

Now, it is completely possible that RIMM will beat on the 4th quarter numbers. Last quarter, the adjusted earnings per share figure beat by 8 cents, and the company has beat in three of the past four quarters. However, it is the guidance that has done them in, and that could be the problem yet again. For their fiscal first quarter, analysts are expecting revenues to drop 13% from $4.91 billion to $4.27 billion. Earnings per share are expected to drop by 50%, from $1.33 to $0.67. I also expect the company to issue full year guidance, but that's not a definite at this point.

So what happens to Research in Motion? Well, I'm leaning towards the short side, and that's not because of the fourth quarter results. This company usually takes a hit on weak guidance, and if that is the case here, we could see single digits next month. A new CEO is at the helm, but if revenues and earnings keep dropping, it won't matter who is leading. I would caution you though, if you want to play the short side, you might want to see if there is some options strategy you could do instead where your dollar losses would be less, just in case something good happens. Because if the company has a good quarter and guidance is decent, the shorts will scramble, and longs will be calling this the turnaround of the century. With a good or even great report, $15 is a definite and we probably get closer to $20 before too long.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.