Research In Motion: Increased Spending Should Produce Benefits Later in Year

Research in Motion (RIMM) is aggressively investing to become a more significant player in the handset market, says UBS analyst Jeffrey Fan, so he’s not too worried that the Waterloo,Ont.-based maker of the BlackBerry has increased its Purchase Obligations by 53%, to C$3 billion, compared to the previous quarter.

In a research note, Mr. Fan says RIM indicated that C$2.1-billion of the purchase obligations are related to purchase orders with contract manufacturers, which supports his view that the increase “appears to support our view of a large upcoming ramp in units.”  However, he noted that there isn’t a strong correlation between purchase obligations and units, so the figures offer “better directional rather than absolute” indications for what may lie ahead.

Mr. Fan still reiterates his $165 target price and buy recommendation, saying he believes the benefits of this spending will materialize this year. His target price is based on 35 times his EPS estimate of $4.69 (including options). RIM shares have fallen back from the $140 range to trade at about $120 after it posted quarterly results last week that were good, but not as robust as had been expected.