Research In Motion: Target Price of $88 ReachableTim Long of BMO argues that the distribution channels of RIMM are encouraging. He expects strong demand from Latin America, Europe, Asia and Africa, which should easily offset the stable growth of USA. Torch price levels should provide more revenues to RIMM. Several stock analysts focus on the USA markets, while international represents now two thirds of its sales and it's growing at a three digits level. It has changed quickly.
The average price of a Blackberry is around $300, while iPhone is at $600 and Nokia (NOK) at $200. However, the OS of RIMM is much better than the one of Nokia and its ecosystem is growing faster. Some argue that RIMM could sell more than 1M additional devices in the Nokia-Microsoft (MSFT) transition. For Kris Thompson of National Bank Financial, this transition could bring $1.3 billion more revenue for 2012 (around
.30-
.40 more EPS).
RIMM recently acquired the start up Gist for the possibility to re-invent the phone address book and make it integral to its core offering. It is related to its core strength - namely, messaging. By making the address book more networked and more social, RIM can build a social inbox, much like the one being promoted by Facebook. Research in Motion is betting that its present customers (and new customers) would like to be shown this kind of information about their contacts quickly and easily. [Source: ReadWriteWeb]
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RESEARCH IN MOTION
Current P/E
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Industry
|
Market
|
|
11.9x Trailing
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69.2x Trailing
|
21.7x Trailing
|
|
10.3x Forward
|
16.0x Forward
|
14.6x Forward
|
|
11.1x 2011
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16.5x 2011
|
14.7x 2011
|
|
10.5x 2012
|
14.4x 2012
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12.5x 2012
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Consensus Target Price of 44 Analysts: US$70.36
Consensus Information - EPS US$
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Periods
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Date
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# Ests.
|
Mean
|
High
|
Low
|
|
2011
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Feb.
|
55
|
6.31
|
7.03
|
5.94
|
|
2012
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Feb.
|
56
|
6.68
|
7.84
|
3.98
|
|
LTG %
|
|
9
|
21.46
|
45.00
|
6.00
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Source: Forecasts provided by Thomson Reuters I/B/E/S - Updated weekly
Assuming RIMM’s P/E ratio reaching the average of the industry, it would give a P/E ratio of 16X. With an average forecast of $6.31EPS by 44 analysts, it would give a valuation around $101. With a share price of $67.42, it represents a 50% upside potential, in one year to 18 months. A conservative forecast would give half of this P/E ratio increase at 14x Fiscal 2011 EPS.
A target price of $88 seems reachable in one year. This would provide a 31% growth potential over the February 22th share price.
I believe RIMM has a decent business model, with revenue growth driving its earnings gains and operating cash flow. RIMM is investing in research and development to benefit from demand for smartphones, with a variety of new devices, unlike peers which are rebuilding their product pipeline while looking to reduce their cost structure. The company has $2.5 billion of cash and short-term and long-term investments and nearly no long-term debt. In the November 2010 quarter, RIMM repurchased 2.9 million of its shares for $133 million.
In the enterprise vertical, data center consolidation, server virtualization, and cloud computing are gaining widespread acceptance. S&P forecasts that the industry is undergoing a technology shift toward convergence, where customers require a product platform that offers computing, networking, storage, and other applications all in one box. Thus, market segments have blurring, with traditional data networking companies like Cisco Systems (CSCO) finding themselves in competition with server and computing players. The need for integrated solutions should continue to push companies to aggressively partner or acquire missing technologies to cope with those trends.
Sources: Financial Post, First Call, Standard & Poor’s
Disclosure: I am long RIMM.