Wednesday, December 8, 2010

RIMM downgraded by 3 analysts in 2 days

RIMM has been downgraded by 3 analysts in 2 days.  Yesterday, Dec. 7, Gleacher & Co. analyst Mark McKechnie downgraded RIMM from "Buy" to "Neutral", but raised his target price from $60 to $70. 

Meanwhile, CLSA (formerly Credit Agricole) analyst Steve Fox downgraded RIMM two notches, from "Buy" to "underperform".  However, like McKechnie, he also raised his target price, from $65 to $68.

Today, Town Hall Investment Research analyst Jamie Towsend downgraded RIMM to "Sell" from "Avoid".

Strong results expected in Q3 and Q4

It is unusal for an analyst to raise a company's target price significantly, and yet downgrade their rating.  But that is exactly what McKechnie did, raising RIMM's target price by 16.67%, while downgrading the stock to Neutral.

The analysts increased their price targets due to their improved outlook for RIMM in Q3 and Q4, due to strong sales of the Torch, Bold 9780, Curve 3G and the Style.

For example, McKechnie's Q3 earnings estimate is above the Street's (EPS of $1.69 versus consensus of $1.63).  In addition, he raised his Q4 estimate. 
However, these analysts downgraded RIMM because of their pessimistic outlook for the PlayBook, QNX OS and competition.

What upgrade cycle?

McKechnie stated “We believe the near-term strength will prove temporary, as the upgrade cycle completes and competition accelerates.” 

It is questionable for McKenchie to use the term "upgrade cycle", since even he states that smartphone shipments will increase 31% in 2011. 

What is happening is that feature phone (non smartphone) users are dumping their phones for a smartphone.  This is not only happening in the U.S., but actually at a quicker pace in other regions, such as Middle East, South-East Asia, Latin America and South America.  The pace is only going to increase.  In fact, many research firms estimate that by mid-2011, half of cell phone users in the US will be carrying a smartphone. 

RIMM is taking advantage of this growth.  An article in Bloomberg on Nov. 11 showed that RIMM is currently the number 1 brand in Latin America, beating out Apple's iPhone.  The resolution of encryption issues with the UAE and Saudia Arabia in Oct. means that RIMM will continue to be highly popular in the Middle East.  Meanwhile, RIMM continues to be extremely popular among other countries in Latin and South America, such as Mexico, Venezuala and Brazil.  Furthermore, RIMM is promoting the BlackBerry as a consumer device in China (currently mostly used by enterprise users) which opens up a market of 1.3 billion consumers.

In other words, the "upgrade cycle" that McKenchnie states is actually non-existent.  Smartphone sales will continue to grow at 25 to 35% in the forseeable future, while RIMM's revenue and earnings will continue to grow at 20% plus.

PlayBook and QNX OS

Unlike analysts who have a $90 target price for RIMM, these analysts are far more pessimistic on the PlayBook and QNX OS.  For example, McKechnie states that QNX is not a "game changer".  Fox shares a similar view, saying that the PlayBook will have "limited" EPS impact.

Thus, to some analysts, a tablet that beats the iPad in every specification is not a "game changer" (e.g. front- and rear- facing cameras versus no cameras at all, 4 times as much RAM as the iPad, etc). 

In addition, they believe that the first available professional-grade tablet, with legendary RIMM encryption, and an operating system that also powers the robotic arm on the space shuttle, nuclear powerplants from AECL and Westinghouse, and unmanned aerial vehicles currently in combat in Afganistan, will have "limited" EPS impact.  Afterall, the QNX OS was designed from inception to multi-task, be reliable, high performance and support multi-core processors.   

Their tortured logic doesn't end there.  According the Barron's, Townsend states that "the use of the QNX operating system makes the device significantly different from a BlackBerry so that corporate IT manager’s won’t rush to embrace the thing out of loyalty to the existing platform." 

Thus, what Townsend implies is that IT managers will be willing to switch from the Blackberry platform to a new platform (i.e. to the iPad or Android) but not to the newer Blackberry QNX OS, out of loyalty to the existing Blackberry platform.  If this does not make any sense to you, don't worry, because by definition, it does not make any sense. 

RBC analyst offers hope

Thankfully, not all analysts are clueless.  RBC Capital Markets analyst Mike Abramsky today reiterated his "Top Pick" rating and $90 target price for RIMM.  He also published a 14-page note about the QNX Tablet OS.  He states QNX will “deliver a powerful, fast, true multitasking tablet and smartphone experience”.  He also sees the PlayBook appealing to enterprise, "pro" consumers (such as avid gamers) and people with greater productivity demands that cannot be satisfied by the iPad and other tablets.

For more reasons why RIMM will outperform in the months and years ahead, take a look at 5 Reasons to Buy RIMM Now, published on Nov. 14.

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