Is RIMM Undervalued?

“So what should we expect? Today they’re out talking about app-world, this new thing where you can buy applications just like the iPhone as a driver of long-term revenue potential is what the Co-CEO of RIMM said about the app-world.

And if you look at stock itself, yes, it’s made a move into these earnings. But it’s also been getting hit to the downside pretty big. I still like the upside for Research in Motion here. I think you finally have it at a level that you’d want it into the earnings, if the earnings aren’t great and it pulls back, that’s another opportunity. Because going forward I think Research in Motion, their new three products are phenomenal. They were just behind when they finally released them.” CNBC’s Fast Money 4/1/2009.

Research in Motion’sThe traders on Fast Money discussed their thoughts on the appropriate way to play Research in Motion’s (RIMM) earnings announcement, which will come after the bell on Thursday. The panel was in agreement that this stock has a lot of upside, as it has been crushed recently dropping about $100 from its 52-week high set last June. That two-thirds decline has made a lot of value investors start to become pretty interested in RIMM shares as they are still arguably the premium smart phone maker in the world. Research in Motion has faced stiff competition from Apple’s (AAPL) iPhone and others, but RIMM is innovating with three new phones in the last year and overall sales have been strong. Sales have nearly doubled for RIMM from just over $6 billion in fiscal 2008 to an expected $11 billion in fiscal 2009, this growth has come in what was otherwise a very painful year economically. Clearly, the demand for smart phones has been fairly immune to the recession.

At Ockham, we have to agree with the Fast Money traders that RIMM is Undervalued. We certainly like any company that is selling so much more attractively than it was last year. As we already touched on sales have improved markedly, but cash earnings are also expected to be more than 50% better than last year’s. All this improvement in fundamentals has taken place while the stock has taken a huge haircut of more than 58% since the close of fiscal 2008.

Options activity has been highly bullish for RIMM as well, as traders are snatching up large amounts of $50 and $55 near term call options. Research in Motion has already started to see some bullish momentum and if they can deliver on earnings we would expect that momentum to take them even higher. With the introduction of the application store yesterday, RIMM is taking a page from Apple’s book to make their devices even more functional and also diversify their revenue stream. The company issued a profit warning in February, but the stock has recovered to where it was prior to that warning. We think that there is significant value in RIMM shares at current levels, even given the recent price appreciation.

Traders Eager for RIMM’s Report

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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.

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