We recommend selling Research In Motion (RIMM) ahead of its 3Q'12 earnings release on September 27 for a short-term speculative trade. Our bearish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends and technical strength.
Valuation (overvalued)
We believe Research In Motion to be overvalued both on an absolute and relative basis. On an absolute basis, consensus analyst estimates expect the company to report a loss of $-1.50 in FY12 and $-0.64 in FY13, resulting in forward P/Es that are not meaningful. While shares trade at only 0.1x 2012 and 2013 EV/Revenue, analysts expect revenues to decrease by 45% in 2012 and a further 3% in 2013. On a relative basis when compared to its publicly traded comparables, Research In Motion is valued on par with Nokia (NOK), and at a substantial discount to Google (GOOG) and Apple (AAPL), on an EV/Revenue basis.
A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Research In Motion and its comparables:
Valuation Multiples
Market | Enterprise | P/2013 | P/2012 | EV/2013 | EV/2012 | |||
RIMM | 3,257 | 1,317 | N.M. | N.M. | 0.1x | 0.1x | ||
NOK | 10,165 | 4,305 | N.M. | N.M. | 0.1x | 0.1x | ||
GOOG | 245,070 | 211,470 | 15.2x | 17.6x | 3.9x | 5.0x | ||
AAPL | 646,747 | 619,097 | 13.1x | 15.6x | 3.2x | 4.0x |
Growth
Revenue | EPS | ||||||
FY13 | FY12 | FY11 | FY10 | FY13 | FY12 | ||
RIMM | -3% | -45% | -7% | 33% | -57% | -136% | |
NOK | -3% | -24% | -12% | -3% | -83% | -208% | |
GOOG | 27% | 12% | 29% | 24% | 16% | 18% | |
AAPL | 24% | 44% | 66% | 52% | 20% | 60% | |
Profitability
Gross | EBIT | ||||||
FY11 | FY10 | FY09 | FY11 | FY10 | FY09 | ||
RIMM | 35.7% | 44.3% | 44.0% | 10.0% | 23.3% | 21.7% | |
NOK | 29.3% | 30.2% | 32.4% | 0.0% | 4.9% | 2.9% | |
GOOG | 65.2% | 64.5% | 62.6% | 31.0% | 35.4% | 35.1% | |
AAPL | 40.5% | 39.4% | 40.1% | 31.2% | 28.2% | 27.4% | |
Source: Company filings, Yahoo Finance
Analyst Estimate Trends (bearish)
Current Analyst Estimates
Revenue estimates for Research In Motion's current quarter range from $2.21bn to $3.20bn, with an average estimate of $2.49bn (-40% from $4.17bn in 3Q'11), while EPS estimates range from $-0.72 to $-0.13, with an average estimate of $-0.47 in EPS (-159% vs. $0.80 in 3Q'11).
Research In Motion has missed EPS estimates in 3 of the past 4 quarters. Recent analyst EPS estimate revisions are bearish, with 3Q'12 EPS being revised down from $-0.06 (90 days ago) to $-0.46 (60 days ago), and further to $-0.47 (30 days ago).
EPS Surprise History (bearish)
2Q'12 | 1Q'12 | 4Q'11 | 3Q'11 | |
EPS Estimate | (0.04) | 0.81 | 1.19 | 0.88 |
EPS Actual | (0.37) | 0.80 | 1.27 | 0.80 |
% Surprise | -825% | -1% | 7% | -9% |
EPS Estimate Revisions (bearish)
FY14 | FY13 | 4Q'12 | 3Q'12 | |
Current | (0.64) | (1.50) | (0.42) | (0.47) |
7 Days Ago | (0.62) | (1.51) | (0.42) | (0.47) |
30 Days Ago | (0.63) | (1.52) | (0.42) | (0.47) |
60 Days Ago | (0.61) | (1.50) | (0.41) | (0.46) |
90 Days Ago | 0.53 | 0.30 | 0.11 | (0.06) |
Source: Yahoo Finance
Technical Strength (bearish)
We believe Research In Motion's underlying technical strength, as measured by its historical share price performance, to be bearish, with its Moving Averages and MACD technical indicators all under bearish signals.
Moving Averages
· 20-Day Moving Average: Bearish
· 50-Day Moving Average: Bearish
· 100-Day Moving Average: Bearish
MACD
· 20-50 Day MACD Oscillator: Bearish
· 20-100 Day MACD Oscillator: Bearish
· 50-100 Day MACD Oscillator: Bearish
Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
