Markets & Finance

Marcial: Two Thumbs Up for RIM


The BlackBerry maker's shares have been unfairly trashed after its "disappointing" profit report, and represent a compelling buy

Research In Motion (RIMM) is getting a lot of static, and its stock is under siege. That, to me, represents a golden opportunity.

Shares of the maker of the ubiquitous BlackBerry, a wireless e-mail and phone device, have been in a funk since June 25, when it posted its first-quarter results. The stock has tumbled from $142 on June 25 to $115 on July 3. But if you know the company—or have studied the historical behavior of its stock—you would be buying shares at these depressed levels.

So why is the stock reeling? It has gotten entangled in the market's bearish web, for sure, and it's been ensnared by Wall Street's intricate and puzzling ways of sizing up a stock. Often, the Street is tough to please.

Here's what happened. On June 25, RIM posted record first-quarter results that many companies would kill for in these times of economic hardship. Revenues streaked up 107%, to $2.24 billion, and profits soared 115%, to 84¢ a share. But they weren't large enough to impress the Street: The consensus analysts' estimates projected revenues of $2.27 billion and per-share earnings of 85¢—a penny more. The company attributed the lower-than-expected results to increased R&D and operating spending to position the company for future growth, and in anticipation of fiercer competition, mainly from Apple's (AAPL) revolutionary iPhone.

To an objective observer, the gap between the actual results and forecasts would seem insignificant. But on Wall Street, a penny can spell the difference between a big advance or scary drop in a stock's price. So the day after RIM posted those "disappointing" results, the stock sank.

Were the analysts' forecasts overly optimistic, or did the company simply stumble?

Picks Itself Up, Dusts Itself Off

First let's get a handle on RIM and its stock. RIM has come under siege so many times for a variety of reasons since 1999, when the stock started trading at a split-adjusted $1 a share. Each time the stock catches its breath and moves higher, some unfavorable news or event kicks it down. But each time that happens, the stock manages to pick itself up and move to higher levels. By the end of 1999, it had bumped up to 10.

But that was just the beginning of the ups and downs, and for the faint of heart, the stock delivered some scary moves. But for investors willing to brave the volatility, the rewards were bountiful: The stock hit 133 by November 2007. Before reaching that peak, however, RIM went through some trying times and hair-raising events, including a lawsuit claiming the company's BlackBerry was based on a patent owned by an outfit called NTP.

That claim rocked RIM's stock because if NTP won the patent litigation, RIM would have lost its entire No. 1 product. RIM settled the case by paying NTP $612.5 million.

I mention all these things to point out that RIM has been through the mill of traumatic, challenging events and come out each time stronger than ever, with the stock forging ahead. This time around, the setback from its "disappointing" first-quarter earnings shouldn't be too devastating. That's because management is highly focused on coming up with new products that will rival, if not best, the competition. RIM's top people are as tenacious, innovative, and forward-looking as Apple's smart and visionary team. RIM aims to battle with Apple on a product-by-product basis, if need be.

Ignore the Street

"The hyper-growth at RIM is still being driven by international expansion, aggressive carrier promotions in the U.S., new consumer awareness, economies of scale, and steady new product innovation," says Barry Richards of Paradigm Capital, who rates the stock a buy, with a 12-month price target of 210. Referring to the company's first-quarter results, Richards, who owns shares, says that "overall, it is still hard to complain too much when both revenues and earnings more than doubled from a year ago."

Forget the Street's disappointment over the first-quarter results. It just marks another opportunity to buy RIM at prices below its recent all-time high of 148.13 on June 19, 2008. Financially, RIM is in a strong position, with total cash on the balance sheet rising from $2.1 billion to $2.3 billion, bolstered by robust operating cash flow. With cash accounting for 43% of total assets, RIM's balance sheet is liquid, indeed. Value Line (VALU) analyst Lester Ratcliff says RIM carries an A+ rating under Value Line's financial strength measure. The stock also ranks No. 1 in "timeliness" according to Value Line's valuation benchmark.

A Must-Own Stock

RIM's opportunity for strong growth remains entirely intact, as does its ability to execute, notes Paradigm's Richards. At 35 times Richards' 2010 EPS estimate of $6 a share, is the stock's price-earnings ratio steep? Given the fast rise of earnings and revenues in the latest quarter, "the earnings multiple is more than fair," argues Richards.

For all of 2008, Richards expects RIM to earn $2.26 a share on revenues of $6 billion, and for 2009, he forecasts $4.01 a share on revenues of $11.3 billion. For 2010, Richards expects RIM to earn $6 a share on $16.7 billion in revenues. These are huge numbers compared with what RIM did in 2007: Earnings of $1.11 a share on revenues of $3 billion.

In sum, RIM, like Apple, is a must-own stock in the technology sector based on its strong fundamentals. Rob Sanderson of American Technology Research is one of the analysts who emphasizes this. "We strongly encourage investors to take advantage of the [stock's] pullback to build or add to positions," says Sanderson. "We have a high conviction in a big second-half ramp of new products—we see top line growth driving operating margin expansion beginning in the November quarter." RIM is capable of sustainable extraordinary growth for some time, says Sanderson.

The stock closed at 115.04 on July 3. Has it seen a short-term bottom, at least? If that isn't the bottom, it should be close. Some analysts including Nick Agostino of Research Capital, who rates the stock a buy, figure it has support at its current levels. "We would encourage investors to step in on any price weakness," says Agostino. That, indeed, is one BlackBerry message worth heeding.


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