Keeping RIM in Sight for 2009

The market reaction to Research In Motion (RIMM) Friday wasn't pretty, following their earnings release Thursday evening after the market close. Concerns over margins were raised as gross margins fell. RIM is an interesting stock for a number of reasons, beyond the fact that the fundamentals of its business model are very strong and growing. [click to enlarge image]

Despite significant competition in the consumer market, job losses and cuts in spending by financial institutions on the corporate side of business, RIM continues to meet both revenue forecasts and new subscriber targets in each successive quarter. The premium on this growth stock has recently dropped dramatically as a number of investors consider the short-term effects of various risks.

But RIM makes a superior business product, has a dominant software infrastructure and their market share outside of North America is still low and growing. The company has proven that it can continue to innovate and meet the demands & expectations of its customers with new products and has diversified itself away from just one product line.

At a conservative target of $3.55 EPS for 2009, RIM currently trades around 21x forward earnings which does seem high at first glance. But there's been no tangible decrease in demand, costs continue to meet management's targets and the company's products continue to penetrate the consumer market. As consumers begin using features of a blackberry that they've never had access to before, early adoption is leading to more usage of their products.

While I continue to see RIM as over-valued, I will likely take some time this weekend to examine the company more closely. They have various products in development at the company and the upcoming product pipeline has both depth and diversity for its target markets.

This is a wonderfully managed company with strong relationships with its target market and although many investors view this as a one-stock-show (Apple (AAPL) vs. RIM), I continue to see strength in the operations of both.

The consumer market is difficult to predict on frequent occasions, but RIM does a good job of always leaving consumers wanting just a little more in the next updated Blackberry. They have the unique ability to capture a market and then keep them using their products for sustained periods of time. Competition is healthy for any company and RIM certainly has lots, but at less than 20x 2009 EPS, this value investor might begin to raise an eyebrow towards RIM as a prospective investment for 2009.

Disclosure: No positions

Comments

[alphatechwatch:]

You seem to be making the same mistake as all the other commentators when you say RIMM is expensive. RIMM is in the third quarter of fiscal 2009 which ends in February 2009. You are therefore quoting a calendar 2008 multiple in largest part. On a calendar year 2009 basis (ie the forward multiple) the stock is trading closer to 15 times forward earnings. I am not sure why the pundits are so quick to describe RIMM as richly valued, but it isn't doing common shareholders any favors.

2008 Sep 28 05:44 PM

[Brad Ferris:]

alphatech,

I'm applying a 2009 multiple that brings RIM closer to the valuation NOK held a few years ago. NOK is a much more global company and RIM currently is entering markets where NOK has dominant market share. If they make significant inroads there then I would expect them to trade on par with Nokia's 2002-2004 P/E range.

I have no doubt that RIM can continue to make significant cashflow, but its well documented that when any company enters the consumer market after dealing with a professional niche that price needs to come down in order to reach scale. RIM is also commiting a significant amount of their cashflow to R&D and I don't expect this to stop. After further analysis over the weekend I have a target price I'm comfortable with in mind.

If you believe that RIM offers considerable value at this time than I encourage you to buy. As a value investor I look for a higher MoS, so I'll hold off for now.

2008 Sep 29 08:33 AM

[alphatechwatch:]

Nurseb911,
Got it. My point was merely that the multiple was 15x (now lower versus 2009 consensus) not 21x. Of course, if you are using a lower F2010 (CY09) EPS than consensus, you need to justify that also. That aside, you make good points. Today's sell-off did not seem stock-specific, so I guess this quibbling really doesn't matter at the moment, anyway.

2008 Sep 29 10:54 PM

[alphatechwatch:]

Nurseb911,
Got it. My point was merely that the multiple was 15x (now lower versus 2009 consensus) not 21x. Of course, if you are using a lower F2010 (CY09) EPS than consensus, you need to justify that also. That aside, you make good points. Today's sell-off did not seem stock-specific, so I guess this quibbling really doesn't matter at the moment, anyway.

2008 Sep 29 10:54 PM