Wednesday, June 23, 2010

RIM poised for big move up in coming weeks

Research in Motion (RIM), the maker of the BlackBerry, will announce its earnings results tomorrow after markets close. Consensus expectations are for $4.35 billion in revenue and profits of $1.34 per share. Investors have been quite bearish with the stock lately. For example, RIM's closing share price today was C$62.01, which is only 10 times next year's earnings. Analysts' comments have been bearish as well, citing competition with Apple's new iPhone 4 and Android smartphones.

However, given the current share price and the company's prospects, analysts are overly bearish and the stock is clearly undervalued. Last quarter, RIM missed consensus estimates for earnings by US$0.01, and shipments was 0.5 million less than consensus. 

However, that was caused by an inventory run-down at Verizon, as the carrier sold down the Tour 9630 in anticipation of receiving its replacement, the Bold 9650. In fact, while Verizon accounted for about 28% of RIM's total sales in the previous quarter, last quarter saw that number fall to the low single-digits, as a result of the one-time inventory move. Despite the move by its biggest customer, RIM still only missed consensus estimates by US$0.01. 

This quarter, inventory factors should be the opposite, as the brand-new Bold 9650 was being stocked up by carriers such as Verizon and Sprint. In addition, the Pearl 3G was also released this quarter, making its way into various carriers.

With the overall bearishness that analysts have relative to previous quarters, RIM has been set up to beat consensus estimates. My prediction is that RIM will beat earnings estimates by US$0.05, which makes profits of US$1.39.

However, what is far more important than tomorrow's earnings will be the imminent release of several new products by RIM. Widely expected to be released in July are the new web-kit browser and OS 6. While RIM's current internet browser has lagged behind rivals Apple and Android, the web-kit browser, which was publicly shown in February, is expected to put the BlackBerry on par with its rivals. In addition, the new operating system OS 6 also revolutionizes the current browser, and adds many new features.

In addition, RIM is also expected to announce the Bold/Torch 9800 at around the same time, which will be RIM's first ever qwerty keyboard-and-touchscreen smartphone. The Bold 9670, which has a clam-shell design, will be released at the same time. Both smartphones will have the new web-kit broswer and OS 6. 

As a result, a satisfactory earnings announcement tomorrow, and the timely announcement of a list of new software and smartphones should clear the bearishness surrounding the shares, and boost shares above their 52-week high. Currently at only a P/E ratio of 12.5 for the Canadian-listed shares, the shares represent a significant discount to the historical P/E ratio of 18. Add in a host of new products that will be announced this summer in the coming weeks, and RIM is clearly at a price that is very attractive.

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