Sunday, September 27, 2009

Research In Motion Is A Compelling Buy

As promised on Friday, here is a copy of my coverage of RIMM's conference call from

Research In Motion (RIMM) reported a mixed quarter in terms of both results and guidance. EPS came in 3 cents ahead, which wasn't bad, but revenue was light at $3.53 billion. Gross margins were solid at 44.1%, ASPs were in line at $345, and new subscribers and handsets were a touch light at 3.8 million and 8.3 million, respectively.

Guidance was also a bit of a mixed bag. EPS for next quarter is forecast in the range of $1.00 to $1.08 (vs. $1.05 consensus), and revenue is projected to be in the range of $3.6 billion to $3.85 billion (vs. $3.92 billion consensus). I believe the double whammy of missing top-line estimates this quarter and then issuing revenue guidance below Street estimates is what is hitting the stock in after-hours trading. Traders seemed primed to sell the stock on anything but a blowout quarter, so this news has given them ample reason to sell, and probably reason for the shorts to pile on.

However, there were some solid aspects to guidance as well. Gross margins are forecast to be strong again at 43%, and total handsets shipped are forecast to be 9.2 million to 9.9 million, nicely higher than current Street estimates (which are around 9.30). Also, while ASPs are expected to come down, the CEO made the point that the higher ASP products that are launching next quarter aren't scheduled to ship until later in the quarter, and that will make ASPs look a little low on paper, due to the mix.

The CEO was also quick to point out to the analysts who were focusing on ASPs not to lose focus of the big picture. Smartphones are going "mainstream," he said, and the company is focusing on the "land grab." What I inferred from this was that the big picture is that there is a huge pie out there to take advantage of, and they want to get their share. So they will continue to roll out smartphones at the low, medium and high ends of the spectrum in order to grab as much share as possible.

RIMM's management does seem slightly less polished than those at some other big tech companies. I think this idea, combined with the fact that their quarterly results are sometimes "less clean" than others (think Apple (AAPL) ), is one of the main reasons for the discount valuation in the share price. But I don't want that to let me lose sight of the bigger picture, and that is that the secular growth in the smartphone market is strong enough that this company will continue to see solid growth and profitability going forward.

As for the stock, it will surely be down tomorrow, likely in the low $70s. I would not be surprised to see several analyst downgrades that will add additional pressure to the shares. I view this decline as a good buying opportunity. I think it is likely the company can earn $5 a share next year, which makes the current P/E near 15 times. That is too cheap for this company, and I think the stock can trade up to $100 over the next year. That makes RIMM now one of the most attractive buy candidates on my radar.



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