Valuation Wall Street Cannot Deny

Analysts on Wall Street have turned bullish on Research in Motion (NASDAQ:RIMM) since the beginning of October, most of them noting that the maker of Blackberry is simply too cheap. Shares of RIM dropped sharply after the company reported their second quarter results that were just a little bit light in terms of revenue. We wrote a blog on the topic that day, RIMM: Reports of Sales Death Are Greatly Exaggerated. The stock fell nearly 20% after the report, which we view as an opportunity for value investors.

It would appear that analysts on Wall Street agree, as the community has become much more bullish on Research in Motion over the last week. The stock was upgraded to Buy on the 5th of October by Needham. Two analysts initiated coverage at Buy ratings just two days later. Another upgrade to Buy came later in the week from R.W. Baird. Among all of this positive sentiment, there was one analyst going against the grain. Coverage was initiated at Bernstein and the analyst there believes RIMM will Underperform. Overall, the analysts are bullish on the stock and the median price target among the more than 40 analysts covering the stock is $90.

At Ockham, we have to agree that Research in Motion is quite attractive at the current price levels. The market and some analysts took a very pessimistic view of the earnings release, but having the time to digest the numbers the Street has come around; although, even the positive sentiment among analysts has not moved the stock higher. RIM is still growing rapidly, albeit not at the same breakneck pace of yesteryear. For example, RIM should see revenue growth of about 35% this fiscal year and that growth will be in the high teens in FY 2011. The company is trading for 13.8x fiscal 2011 earnings, which is far more compelling than competitors like Apple (NASDAQ:AAPL) trading for 27x 2011 earnings, Motorola (NYSE:MOT) selling for 30x next year’s earnings, and Palm (NASDAQ:PALM) which trades for 40x expected earnings one year ahead.

We are maintaining our Undervalued rating on these shares, and we think a price of $94 would more accurately reward the company’s extremely strong fundamentals. There is growing competition in the smart phone space, but with global smartphone shipments growing rapidly (about 27% in the second quarter) we think RIM’s market share should be attractive. The CEO discussed his “land grab” strategy in the conference call as a reason why they have lowered prices on many of their models. We think that this strategy will benefit the company over the long term, and should help shield it from some of the industry upstarts. This situation represents an opportunity; the analysts are starting to understand, but the market as a whole has lagged.

Research in Motion: Valuation Wall Street Cannot Deny

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

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