Research In Motion's Slide Just One Bad Sign for Canadian Market

If fresh doubts about the U.S. Treasury Department’s $700-billion bailout plan for the financial industry and the largest failure of a U.S. bank – Washington Mutual Inc. (WM) – weren’t enough to send the markets into yet another tailspin on Friday, Research In Motion Ltd.’s (RIMM) second quarter $0.01 miss might be the catalyst that does it for Canada’s benchmark index. The technology giant made up 3.77% of the S&P/TSX composite index when the market closed on Thursday and was the sixth largest company by market value.

The 20% after-hours drop in RIM shares may be compounded by analyst downgrades, earnings revisions and price target cuts that came after lower-than-expected guidance among other disappointments.

RBC Capital Markets downgraded RIM from “outperform” to “sector perform” and slashed its price target from $165 to $90 on reduced visibility to recovering margins and increased risks to growth as a result of the macroeconomic environment.

Analyst Mike Abramsky said the company continues to have strong fundamentals and momentum from its product cycle, but its push to grab more market share put surprising pressure on gross margins and therefore raises valuation risks.

Steven Li at Raymond James cut his price target from C$140 to C$110 but told clients that the share price haircut finally makes it interesting to take a look at RIM.

Mr. Li added that smartphones are expected to grow at least three times faster than the overall handset market and said:

We believe high-end smartphones remain the much more attractive segment in a slowing handset market. With arguably the most successful end-to-end wireless data solution and a growing BlackBerry brand that has now crossed over to the mainstream consumer market, RIM new product launches positions them well for significant share gains.

UBS meanwhile, cut its price target from $165 to $88, also reducing its 2009 earnings per share estimate from $3.76 to $3.65, as well as reducing its forecasts for 2010 and 2011.

The firm’s analysts said:

[The] lower growth and competitive sentiment impact [is] unlikely to result in premium multiple near-term. Revenue growth conviction [is] also difficult in current environment. Despite the sell-off, we find it difficult to recommend investors step in at current  levels given headwind expectations & our lack of conviction to rev growth upside both near-/med-term. Although downside may be limited (market neutral), we do not see any upside catalysts.