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Morgan Stanley downgraded Research In Motion (RIMM) from equal weight (Neutral) to underweight (Sell) yesterday, as it foresees a gloomy future for the company. Morgan Stanley said that the company's fundamentals had weakened, and the only way out is a divestiture of the Canadian company, which will reduce its earning potential. RIMM's shares fell by 8% yesterday to 8-year low levels (December 2003) of $8.97.

On June 8, 2012, we forecasted a further downfall in RIMM shares as a result of an uncertain future, loosening market share, and an expected unsuccessful launch of the BB10 operating system. Since then, the stock has fallen by nearly 17%.

We continue to predict gloomy prospects for the Canadian-based mobile phone manufacturer, as a result of rapid cash burnout arising from poor earnings prospects in coming months. The street is focusing on whether RIMM will be able to sustain operations with speedy cash burn till the launch of its new upcoming BB10 operating system and smartphones by fall. Therefore, RIMM is focusing on cost-cutting efforts by significantly reducing its workforce to reduce the cash burn rate. RIMM is currently debt free, but a further cash burn can result in borrowing at unfavorable terms or issuance of dilutive shares at steep discounts to current share prices.

The company hired JP Morgan and RBC Capital Markets a month ago for a strategic review of the business. Banks are expected to advice RIMM on possible reorganization, restructuring or divestiture of its segments. In addition, the banks will also help RIMM in evaluating a partnership and licensing opportunity related to its BB network. There are also reports that RIMM is considering the sale of poor performing handset units to generate cash, and focus on licensing its blackberry network services.

Consistent delay in the announcement of the BlackBerry 10 launch date has made investors wary of RIMM, as more and more analysts are now forecasting a full year 2013 loss. JP Morgan analyst Gelblum is forecasting worsening fundamentals for RIMM in the next few years and said, "The only way RIMM remains a viable entity is at a fraction of its current size, a transformation that erases much of its earnings power."

Analysts are expecting tomorrow's 2Q2012 earnings announcement to include revenues of $3.15 billion (25% YOY decline) on top of a loss of 8 cents per share, in a poll by Reuters. We still foresee a depressed outlook for RIMM and reiterate our June 8, 2012 conclusion that the Blackberry 10 launch will be unsuccessful, and RIMM may face bankruptcy early next year if it fails to find a suitable buyer. The stock is currently trading at 14 times forward earnings at $8.96.

We recommend investors to buy Nokia (NYSE:NOK) as Windows Phone 8 can help the company turnaround.

Read our analysis on NOK in the following two articles:

Source: Why We Were Right On RIM And Nokia