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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Research in Motion

October 2nd 2009 Research in Motion
Nasdaq Symbol: RIMM
Industry: smart phones
Price as of 10/2: $65.42

The third quarter just ended and what a quarter it was. It was the best quarter for the major averages in 12 years led by the tech sector. The Nasdaq rose 15% in the quarter and is up a whooping 33% for the year. In the last week, the techs and the broader market have entered a, hopefully, mild correction. The Nasdaq is down 5% from its highs from two weeks ago thanks in part to disappointing earnings from this weeks featured stock, Research in Motion. For any other company, Research in Motion had stellar earnings with sales up 36%, but investors were not happy due in part to guidance that was in line at best. The long term fundamentals still look good for the smart phone maker, and a number of analysts have come out to defend the firm, but the stock is still down 25% in the last two weeks. The recent sell off gives investors looking for growth stocks an opportunity to buy a stock trading for less than its' growth rate.
Last week, Research In Motion beat earnings estimates by 3 cents, but sales missed expectations. Revenue rose 36.8% year over year to $3.53 billion verse the $3.62 billion consensus. Guidance for the third quarter earnings was in-line, but revenue forecasts were below consensus. Research In Motion reports net subscriber of 3.8 million in the second quarter verse 3.8-4.1 million guidance. Second quarter margins were 44.1% vs 43.6% consensus in line with guidance. Research in Motion's third quarter guidance was for $1.00-1.08 verse $1.05 consensus. Third quarter revenue is expected to be $3.60-3.85 billion which is less than the $3.92 billion consensus. Research in Motion third quarter gross margins are expected to be approximately 43% vs 42.6% consensus. Research in Motion's net new subscriber additions for the third quarter are expected to be in the range of 4.0-4.3 million. The revenue breakdown for the quarter was approximately 81% for devices, 14% for service, 2% for software, and 3% for other revenue sources. In the quarter, the company shipped approximately 8.3 million devices. At the end of the quarter, the total BlackBerry subscriber account base was approximately 32 million. Mangement indicated they were pleased to report a strong second quarter with excellent financial performance, successful product launches and accelerating growth in the international markets and new market segments. Research in Motion is entering the second half of the fiscal year and approaching the holiday buying season with an impressive product portfolio, continuing business momentum, and strong marketing support from their partners around the world. But as mentioned, investors were not impressed, dropping the stock 25% in the last two weeks.
Due to the sell off, the valuation is compelling. Research in Motion is trading for 2 times sales and 13.5 times earnings. The company has over $1.5 billion dollars in cash and cash equivilents and no long term debt. Due to the disappointing earnings, a number of analysts downgraded the stock, but a few maintained buy recommendations. The analyst at Kaufman finds the risk-reward compelling with Research in Motion. The analyst believes the long-term competitive advantages remains intact. The analysst at Canaccord Adams was caught offguard by the conservative sales guidance, but they also believe the issue is structural and reiterate a buy with a $110 price target. The analyst at Broadpoint Amtech lowered his price target following earnings to $85 a share from $99 with a favorable rish/reward buying range between $65 and $70 which is where the stock is now. Research in Motion is not a conservative stock, but is a top notch tech stock trading for less than its' growth rate.