Wall Street can be an unforgiving place. Research in Motion (RIM) has seen its stock crash 65% from highs of $147 in 2008. The maker of the BlackBerry has been struggling to keep pace with arch-rivals Apple and Google – with its share of the booming smartphone market dropping to 14% in the fourth quarter of 2010 from 20% a year earlier.
Worse still, recent products have lacked the iPhone’s panache. The Torch, a top-end device with a touch screen and a slide-out keyboard, hasn’t proved a blockbuster and the long-awaited PlayBook tablet only drew tepid reviews.
To cap it all, the board issued a shock profit warning a fortnight ago. It cited ageing handsets, poor US and Latin American sales and delays in developing cutting-edge models. However, despite these problems, I still believe today’s price presents a good entry point. Here’s why.
Firstly, RIM has excellent relationships with many mobile networks, boasts a loyal customer base of 60 million users and remains the gold standard for messaging/security with IT departments. The challenge for RIM is managing its transition to its next-generation platform, which is scheduled to be released this summer.
Research in Motion (Nasdaq: RIMM), rated OUTPERFORM by CIBC
In fact, the new version is said to be fast, fluid, “very powerful” and offers amazing multi-tasking. CEO Jim Balsillie adds that “interest from the carriers is extraordinarily high” and points out that “its interplays with Playbook is quite magical”. Research house IDC predicts that smartphone sales will soar by about 50% this year and by another third in 2012. If the new BlackBerries can just maintain their place at the table, then the volume lift could be gigantic.
In relation to the numbers, analysts are forecasting turnover and underlying earnings per share (EPS) of $24.0bn and $6.58 respectively for the year ending February 2012, rising to $26.9bn and $7.09 12 months later. That puts the shares on undemanding price/earnings (p/e) ratios of 6.7 and 6.2.
I’d rate the stock on a ten-times through-cycle earnings before interest, tax and amortisation (EBITA), assuming sustainable margins of 15% (versus 23% in 2010). After adjusting for $2bn of net cash, that delivers an intrinsic worth of about $72 per share. Earnings could be hit by tough competition, technological change, price deflation, government interference (eg, in UAE and India), currency fluctuations, and the not-insignificant task of refreshing its models.
Nonetheless, RIM has a terrific brand, operates in a technology hot-spot and frankly looks far too cheap. CIBC World Markets has a target price of $90.
Disclosure: I own shares in RWD.