Sell Research In Motion Ahead Of Q3 2012 Earnings

| About: BlackBerry Ltd. (BBRY)

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 (NYSE:NOK), and at a substantial discount to Google (NASDAQ:GOOG) and Apple (NASDAQ: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
Cap

Enterprise
Value

P/2013
EPS

P/2012
EPS

EV/2013
Revenue

EV/2012
Revenue

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

Click to enlarge

Growth

Revenue
Growth

EPS
Growth

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%

Click to enlarge

Profitability

Gross
Margin

EBIT
Margin

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%

Click to enlarge

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%

Click to enlarge

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)

Click to enlarge

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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.