Research in Motion Ltd. (Nasdaq: RIMM ) - maker of the ubiquitous BlackBerry - is likely to consolidate and increase its market share.
Almost all of our “Buy, Sell or Hold” recommended stocks started out on the right foot here in the New Year. And our strategy of building up a position gradually up to year-end - to avoid the downward pressure of tax-loss selling, and other volatility - seems to have worked. This has left some cash on the sidelines to take advantage of any sell-offs that are sure to come in the first quarter.
In this environment, plagued with uncertainties, we are going to focus on companies that have bulletproof balance sheets (meaning they require no outside financing), enjoy a sustainable competitive advantage, regularly record high profit margins, and execute their strategies well.
<map name="Map"> <area href="mailto:editor@moneymorning.com" shape="rect" coords="5,289,194,311" target="_blank" /> <area href="http://www.moneymorning.com/2009/01/06/rimm/#" shape="rect" coords="6,227,144,249" target="_blank" /> <area href="http://www.moneymorning.com/category/buy-sell-hold" shape="rect" coords="40,312,172,333" target="_blank" /> </map> The Waterloo, Ontario-based Research in Motion meets all of these requirements and pops up in our quantitative and qualitative screens prominently. And it helps a lot to have seen this Canadian company handily beat its third-quarter results.
RIMM has a solid, highly defensible franchise in its core market, the enterprise mobile phone segment. You see, the Blackberry line of smartphones has become the “must-have” gadget of managers in Corporate America. And not just because it’s a cool sign of corporate status - the phones are true productivity enhancers among corporate systems managers.
I called the experts just to verify this. First, I queried a friend who runs systems for a Fortune 50 firm. For obvious reasons, my friend requested anonymity, both individually and for the company.
“If I had to implement a system now, the BlackBerry is the safest choice,” my friend explained.
And because the BlackBerry was specifically designed for this audience - a lucrative market segment - the device features many capabilities that just aren’t available in competing products. And if they are available, the features aren’t as well integrated into those rivaling devices.
To further buttress my research, I also called my good friend Brenda Lewis, a principal with the Greenwich, CT-based Transactions Marketing Inc ., and a venture manager who has launched many mission-critical wireless businesses and who lives and breathes mobile phones.
Lewis is an independent thinker and isn’t “married” to any particular technology, and she was equally bullish: “RIMM has been innovative - ahead of IT officers’ requirements in security and in their ability to accommodate corporate applications.”
And not only did she confirm the technological edge and superior capabilities that the Blackberry platform has over the competition, she went on to elaborate on a market rumor that has been going around for some time - that Microsoft Corp. (Nasdaq: MSFT ) will buy RIMM.
“The probability of Microsoft acquiring RIMM is exceptionally low,” Lewis said.
I am not sure I concur, since the Windows and Blackberry market shares would comprise a very small percentage of the overall market. Earlier in 2008 the market shares were hit by:
“lack of personal discretionary income in most markets.”
She was right.
Subsequently, industry researcher Gartner Inc. (NYSE: IT ) predicted that global sales of mobile phones would dip between 1.0% and 4.0% - even with 308 million mobile phones being shipped in the third quarter. Gartner’s forecast was consistent with a forecast by IT researcher IDC . IDC predicted a drop of more than 2% globally, despite a 9.0% sales pickup in smartphones for 2009.
But even in a generally cautious environment for wireless devices, this pickup in smartphone sales bodes well for the rulers of the space: Apple Inc. (Nasdaq: AAPL ) and Research in Motion. Apple had been outpacing RIMM in sales the quarter before, but RIMM’s launching of three new “must have” Blackberry models should pay some major dividends. The BlackBerry Storm - RIMM’s first touch-screen smartphone - is a direct counterpunch to Apple’s iPhone 3G , which allegedly poses some security risks that become problematic in the corporate environment. And the Storm, together with the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 will probably propel RIMM as the major market share gainer in the market in the current quarter, as evidenced by the success of the Storm on Black Friday.
In fact, with this early success already well underway, RIMM projected a large increase in revenue this quarter, to as much as $3.3 to $3.5 billion. Both Apple and RIMM trail mobile device king Nokia Corp. (NYSE ADR: NOK ) in market share. With its focus on the consumer - and not the corporate - market, Nokia leads the world with a 40% market share in the smartphone market, followed by Apple with 17% and Research in Motion with 15%. So the bottom line for both Apple and RIMM is that they will gain market share from Nokia and other makers in a smartphone market that is growing at a 9.0% annual clip.
Research in Motion is poised to do very well for the follow reasons:
- It’s selling into a market segment that’s continuing to grow at a hefty single-digit pace.
- It is technologically dominant in the big-spending corporate market.
- It stands to boost its market share in both the overall smartphone segment and in the corporate segment.
- It has three new models on the market in the BlackBerry Storm the BlackBerry Storm 9000 and the BlackBerry Pearl Flip 8220 - which should enable it to snag additional market share.
All in all, these factors and others should enable Research in Motion should do well in this quarter, and throughout this year in general - despite the negative developments in the global economy.
RIMM shares bottomed at about $36 on Dec. 3, the day it downgraded its outlook. It has rallied some 20% from that quick bottom and has since been repeatedly testing these levels. At these levels, the stock is already back to the range out of which it started 2007 and proceeded to log in a 250% climb.
Research in Motion shares closed Friday at $41.92, and have traded as high as $148.13 in the past 52 weeks.
So with all the aforementioned competitive advantages, the stock correction that seems to have run its course and a valuation that results in the lowest PEG (Price/Earnings to Earnings Growth Rate) ratio among its comparable peers (Apple, Nokia and Microsoft), RIMM is a compelling buy.
Recommendation : Buy RIMM shares immediately. But don’t purchase your entire intended position all at once. Leave some firepower to buy a second block of shares during a strong pullback in the stock or in the general market - should one occur - or after the company reports results from the current quarter.
$46.68 (01/06/09)
