By Stockpickr Guest Columnist Notable Calls.
While most firms were positive on
Research In Motion
ahead of its fiscal second-quarter results, there was one sales desk telling clients to stay away from the stock.
Larry Zirkel, the head of sales at Avian Research, repeatedly told me he would stay away from the stock until it fell below $80. The stock was trading around $120-$130 back then.
On Friday, Avian published a call on RIM titled
Where Could The Bottom Be?
, an attempt to provide a framework for where to try and "catch this falling knife."
Here's a short summary of the call:
shares are now more than 55% off their highs on the recent margin reset, product delays and deteriorating macroeconomic backdrop. Avian's "bear case scenario" analysis suggests downside to low to- mid $50s. Avian would get aggressive near that level.
Avian's bear case scenario assumes:
- Handset industry unit growth of 0% in 2009 with a significant slowdown in smartphone shipments.
- Flat market share for RIM, vs. significant share gains in 2007 and 2008.
- A 10% ASP decline due to competitive pressures. Specifically, Avian is taking its fiscal 2010 ASP estimate down to $315 (-8% year over year) from $325 (-5% year over year) as they expect slowing enterprise/consumer demand coupled with increasing competition to lead to price concessions as handset OEMs look to drive volumes and protect/bolster market share.
- A 10% service ARPU decline (subscriber mix) and weak software sales (slowing enterprise).
- This results in revenue growth of 17% and EPS of $3.56 (-1% year over year).
- Avian applies a price-to-earnings ratio of 15 to arrive at its $53.40 bear case target.
Avian is not making any changes to its handheld unit shipments forecast of 37.5 million, which already implies a significant slowdown in unit growth to 42% year over year from 92% per fiscal 2009 estimates. By way of reference, year-over-year unit growth exceeded 100% in the most recent quarter (the fiscal second quarter of 2009, which ended August) while guidance into the current quarter implies year-over-year growth close to 80%.
The firm has some interesting comments on RIM's gross margins. According to Avian, 50% of the gross margin reset is a function of a higher bill-of-materials (BOM) on new device platforms. The higher BOM is a result of more embedded features, higher-priced 3G chipsets, increased royalty payments and greater reliance on sole-source vendors. On the pricing side, the company has only so much room to raise prices as it targets price-points necessary to drive mass adoption. As these platforms ramp to full volume over the next three to four quarters, Avian would expect the company to be able to claw back some margin on account of scale efficiencies and dual-vendor sourcing.
At current levels, RIM shares trade at 15 times the firm's well-below-consensus fiscal 2010 EPS estimate of $4.35 (9 times EV/EBITDA, 2.3 times EV/revenue). The PE of 14 compares to forecasted top- and bottom-line growth rates of 33% and 21%, respectively.
The company is on the front-end of a powerful product cycle, and Avian fully expects the Storm, Bold, and Pearl Flip to be hit products during the holiday season and into 2009. They also expect to hear about additional products in the pipeline before the year is through.
Avian now rates RIM shares positive with a 12-month target of $87.
Last week a very smart hedgie trader pinged me asking whether he should pick up some RIM shares for a longer-term hold. To put this question in context, this guy trades 100,000-share blocks and rarely holds overnight positions. I guess he too was amazed by the recent haircut RIM stock took.
Clearly, there is a lot to like:
- RIM is one of the few handset players showing meaningful growth. In fact, I suspect it's the only player showing 20%-plus bottom-line growth.
- With over two-thirds of revenue coming from the U.S., there is still room for RIM to grow internationally. Don't misunderstand me, however: I don't think RIM will see similar market penetration outside of the U.S. It looks like Apple is struggling with their iPhone in Europe, and the iPhone is a much cooler device than RIM's Blackberry.
- RIM offers a compelling economic model for carriers (highest ARPU per byte). Carriers will keep pushing RIMM's products.
- On the valuation side, the stock is trading within 7-8 points of Avian's very conservative target of $53.40 per share.
I think the RIM story is far from over. The stock is down meaningfully and looks poised for a bounce in the near-term. I would be an opportunistic buyer around current $60 levels and leave some powder dry in case the market decides to challenge Avian's bear case target.
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