Q3 Preview: Research in Motion (RIMM): An Underestimated Name in Smartphones (AAPL, MSFT, NOK)

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Research in Motion Ltd (Nasdaq: RIMM) is trading lower ahead of the company's third quarter earnings report, expected out after the market closes tomorrow, December 16. Shares are down2.2% to $59.14.

RIM is expected to report an EPS of $1.64 on revs of $5.39 billion. The Waterloo, ON-based mobile manufacturer reported an EPS of $1.46 on revs of $4.62 billion, both beating the consensus calling for an EPS of $1.38 and revenues of $4.47 billion. Last year, the Apple rival reported earnings per share of $1.10 with revs of $3.9 billion, again edging out the Street consensus EPS of $1.04 and revs of $3.78 billion.

Shares of the company gained 40% through the quarter, to $61.83 at the end of November. Shares are down 1.8% since the end of the quarter, and nearly 8% lower on the year.

A simple valuation puts RIM trading for a forward P/E of 9.6c FY12 EPS estimates, compared to 14.5x for Apple (Nasdaq: AAPL), 10.1x at Microsoft (Nasdaq: MSFT), and 11.3x for Nokia ( NOK ).

Data from Bloomberg has 26 analysts with a Buy on RIMM, 21 with a hold, and 10 suggesting to Sell. The analyst price target average is $68, with a high of $92 and low of $40.

Analysts Through the Quarter
In September, JMP Securities initiated coverage with a Market Perform rating.

Goldman cut their price target from $50 to $45, maintaining a Sell rating. In November, Goldman picked the price target back up to $50, noting stronger sales of PlayBooks.

BGC Partners initiated at Sell, with a $38 price target.

In October, Jeffries started the shares at Hold, and $55 price target. They noted later that channel checks pointed to stronger sales trends, and that RIM is one of the most shorted tech names listed.

Late October saw a downgrade from Oppenheimer from Outperform to Perform, suspending their $58 price target on the shares.

Stifel Nicolaus downgraded from Buy to Hold in November, with a price target lowered from $65 to $45.

Summary
Bloomie put out an interesting piece saying that the Torch smartphone will actually add to their top and bottom lines. They note that they device shipped to dozens of carriers in August, and saw a half-price promotion in November from AT&T ( T ). Bloomberg notes that RIM has lost about 400 basis points of market share over the last year (of which they cite IDC for the data). Shipments in the quarter are expected to be 14.1 million BlackBerry devices, about the middle of their own guidance. The number would be in-line with what Apple says that they shipped in their quarter. Although RIM said that they will not report net subscriber adds this quarter, analysts are looking for 5.1 million net adds with an average selling price of $311, both at the low-end of the company's own forecast.

One fear highlighted is competition in their key business segment, as corporations loosen regulations of what sort of devices will now be able to store and transmit sensitive company data. Additionally, Microsoft's recent foray back into the mobile market with solid offerings could impact RIMs results (though Microsoft hasn't released any numbers about their new phones following the first month that they've been available).

Goldman Sachs recently increased their outlook for the quarter based on a smartphone survey and retail checks. Goldman is looking for an EPS of $1.62 and sales of $5.33 billion. They think that the Street isn't properly "modeling the ASP and margin declines in the smartphone market overall and for RIM in particular." They are modeling for a 12% decline in ASPs in FY12, compared to the Street's outlook for a more modest 6% decline. Reasons for the more somber outlook include: (1) the shift in RIM's business from mature to emerging markets, (2) rapidly increasing competition, and (3) much faster growth in the low end than the high end of the smartphone market.

Goldman maintains their Sell rating, and $57 price target.

Wedbush thinks Q311 results will be slightly better than expected. They are looking for a non-GAAP EPS of $1.69 and revs of $5.5 billion. The note that enterprise stickiness concerns, erosion in enterprise messaging, margins, and market share losses will be offset by international growth, new phones, the PlayBook, and stock buyback. Wedbush sees net sub adds of 5.3 million, at the higher-end of RIM's outlook for 5 - 5.4 million adds, and an ASP of $310. They expect Q411 guidance to be above the consensus.

Wedbush has a Neutral rating on the shares, and a price target of $58.

Kaufman Bros. thinks that numbers should be "decent" on international sales and good, but not great, Torch sales. They expect positive guidance, as the company tends to give. Kaufman is looking for net adds of 5.2 million and an ASP of $310. International sales, which account for 52% of their total revs, will be driven by text-based applications. U.S. business revs will be mixed with a transition to BlackBerry 6 offset by increased competition. Kaufman notes that this will be the last quarter that ASP and net sub addition data will be available.

Kaufman maintains a Hold and $60 price target.

Hapoalim Securities also believes that the Street is underestimating the growth in smartphones, and RIMs ability to hold/gain market share. HPS also is expecting margins to stay firm longer than expected, which means that the Street will be increasing their estimates over the next 12-months. Their checks indicate that Torch momentum began to fade through the quarter, but should provide a nice sequential boost. Retail space checks show an increase for RIM, while discounts have become more aggressive causing prices to drop about 9%. List prices, on the other hand, increased 3%, pointing to a richer mix on shelves. Hapoalim is looking for an EPS of $1.69 on revs of $5.357 billion.

Hapoalim is keeping a Buy on the shares.

Research in Motion is expected to release their Q311 earnings on Thursday, December 16, 2010, at approximately 4:00pm EST. Stay tuned to StreetInsider.com's EPS Central section to see our analysis of the highly-anticipated quarterly results within seconds of their release.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: AAPL , MSFT , NOK , RIMM , T

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