Recession Would Bruise These Handset Stocks

Includes: BB, CELL, GOOG, PALM
by: Eric Savitz

Wireless handset companies could get hit hard in a recession, Citigroup’s Jim Suva warned in a research note this morning.

The bottom line, he says, is that no mobile phone vendor is immune from a recession; all players would see “deteriorating fundamentals and stock price declines,” he writes. But Suva notes that companies with the highest North American exposure “are likely to suffer most.” I would point out here that he is not saying the following things are going to happen; he did not change any ratings or price targets. He’s just trying to tell you what could happen if the economy turns further south.

  • Research in Motion (RIMM), he says, “faces double-barreled risk,” with high exposure to the North American market and a high P/E multiple. HE says that in the worse-case scenario of a global recession, the stock could drop to $63; in a U.S. only recession, he thinks the downside is to $75.
  • For Motorola (MOT), he says the stock is likely to react more to news flow on Carl Icahn’s activist activities and progress on the disposition of the handset business. While a recession could delay or complicate a deal, he says downside is likely limited to $9.50.
  • As for mobile phone distributor Brightpoint (NASDAQ:CELL), he notes that recessions are not good for distributors, and that in a downturn its margins and valuation is likely to deteriorate. He sees downside to $10 in a global recession.
  • Palm (PALM), he notes has 75%-80% exposure to the North American market, and may be the single player in the industry most at risk to a domestic or global recession. He thinks the stock could drop to as low as $3-$4 in a downturn.

Citi today trimmed its estimate for 2008 mobile handset unit growth to 10% from 11%, though the units forecast actually increased to 1.255 billion from 1.233 billion, reflecting higher than expected 2007 unit sales. But Citi also provided some scenarios on what happens to unit growth if we get downturns in the three largest handset markets: the U.S., Asia Pacific and Europe. Again, they are not saying this is necessarily going to happen, but rather they are laying out a picture of what could happen if things turn ugly.

A U.S. slowdown, Citi contends, could result in a 10% decline in replacement units, with reduced net customer adds; in that event, their forecast of a 5% year-over-year increase in units would drop to a 9% unit decline.

A European slowdown, they find, would flip an expected 2% rise in units to a 13% drop.

An Asian Pacific slowdown could be the most damaging; a slowdown in key markets like India and China could drop net adds by 40%, and transform an expected 19% year-over-year growth in units to 7% decline.

This morning:

  • Palm is down 18 cents, or 3%, at $5.84.
  • Brightpoint is up 19 cents, or 1.6%, at $12.45.
  • Research In Motion is up $1.40, or 1.7% at $85.50.
  • Motorola is up 9 cents at $11.56.