The Way to Play Research In Motion

| About: BlackBerry Ltd. (BB)
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Overview: Research In Motion Ltd. (RIMM), founded in 1984, is best known for its BlackBerry wireless e-mail device. Introduced in 1999, BlackBerry has found popularity primarily in the enterprise market (large corporations and government institutions), but has recently had success penetrating the consumer market. Through the development of integrated hardware, software and services that support multiple wireless network standards, RIMM provides e-mail, phone, short messaging service (SMS), messaging, Internet and Intranet-based applications.

Prognosis: The stock has been battered despite rapidly rising revenue and earnings due to concerns that it is imperiled in the smartphone market by the onslaught of Apple’s (NASDAQ:AAPL) iPhone and to a lesser extent, Motorola's (MOT) Droid. RIMM has dropped over 40% since late summer 2009 on these concerns, even as earnings estimates have continued to be raised during this time frame. It continues to add approximately 5mm new subscribers per quarter

Valuation: RIMM is selling for approximately 9 times this year’s consensus earnings and 8 times next year’s projected earnings. It is selling at the low end of its five year range based on Price/Earnings, Price/Sales, and Price/Cash Flow. It has no long term debt and plenty of cash on its balance sheet.

Catalysts: There are several factors that we believe should provide support for a higher stock price in the near and medium term:

  1. Start of new product cycle as several important new models to be introduced in the next few months
  2. Service revenue continues to grow
  3. Company still enjoys stranglehold on the corporate email market
  4. Company is gaining international traction in EMEA, Asia Pacific and Latin America
  5. Robust growth should continue in the smartphone space

Recommendation(s): We believe the stock should be trading at a more reasonable rate of approximately 12-13 times next year’s projected earnings of around $6. Given the growth in revenues and earnings expected to take place over the next 12 to 18 months, our target price is $72-$78, up from the current price of $49.69.

Option Strategy: For investors that want to take some risk out of the trade and are concerned that the franchise will continue to erode in the face of competition from Apple and Google (NASDAQ:GOOG), I recommend the following option strategyto limit your downside risk. Buy a Dec 10 45 put for $4.25, offset some of the cost by selling a Dec 10 30 put for $1. We should know by the end of year whether RIMM is a viable long-term franchise and this provides some downside protection should RIMM continue its slide. Given valuation and prospects, I believe will have a much higher stock price by year-end.

Disclosure: Author holds a long position in RIMM