Thursday, February 4, 2010

Adding Research in Motion (RIMM) to the U.S. Focus List [credit suisse]

The Credit Suisse Investment Policy Committee (IPC) is adding Research in Motion to the U.S. Focus List. Credit Suisse Telco Equipment analyst Kulbinder Garcha rates RIMM Outperform and has a 12-month target of $95, representing 40% upside from current levels. Please refer to his recent notes on the Credit Suisse Research and Analytics website for more details on the company and industry. Investment Thesis: We believe that RIMM has a compelling multi-year growth opportunity with under-appreciated volume and market share potential in the smart phone market. We expect 2010 results to exceed low investors expectations following last quarter’s very solid results.

After a detailed analysis on the evolution of Apple’s iPhone U.S. distribution strategy, we believe that a move toward non-exclusive U.S. distribution (i.e. the iPhone also being sold by Verizon) is now likely only in mid-2011. While this event could negatively impact RIMM’s U.S. market share, we think the magnitude of the impact is currently overstated by bears (there has been widespread speculation that AT&T could lose exclusivity this year). Given our view that a change in Apple’s US distribution is not imminent, it provides RIMM with more time to strengthen the offering (we believe an improved browser will debut soon) and potentially also benefit from a recovery in enterprise spending.

Longer term, we expect RIMM to continue to benefit from smartphone market growth (+27%/+26% yoy in 2010/2011) and believe that the company’s 21% global share is sustainable (particularly given recent International momentum). We also note that low penetration of the corporate market (7% globally moving to 20%+ over the next 5 years) bodes well for RIM, with its corporate smartphone share of >60% being sustainable given switching costs and its tried/tested functionality.

Estimates/Growth potential: We see revenue/earnings CAGR of 29%/27% (FY09-11) and sustainable margins (GMs and OMs of 43.5%/44% and 23.1%/22.8% respectively for FY10/FY11). Our FY10, FY11 and FY12 EPS estimates are well above consensus at $4.37, $5.32 and $5.95 (vs. $4.36, $5.05 and $5.29).

1) We expect the company to beat expectation over the next few quarters (FQ4 will be reported at the end of March) and 2) product announcements with new browser at the 2010 Mobile World Congress in Barcelona (Feb. 15 to 18). Balance Sheet/Cash Flow: The company has over $5 in net cash per share and is expected to generate $1.7BN in FCF in FY2010 (FCF conversion is improving as the
co. got to >100% for the first time in F3Q10). Quant. Score/HOLT: RIMM ranks in the top quartile of our technology coverage
universe on our Credit Suisse Alpha Scorecard®. The stock also appears to be embedding very low expectation on our HOLT® valuation framework.

Valuation: RIMM is trading at a P/E of 12.5x our FY11 EPS of $5.32 versus the peer average of 13.1x (NOK at 15x) and the market at 14.5x. The company has very rarely traded below a market multiple over the last 10 years. Risks to the call: Slower than expected growth in the smart phone market, loss of market share to competitors.

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