One thing that has become increasingly obvious in recent years is that
investors tend to overreact to news, especially if it is bad.
In my view, that's exactly what happened on Friday when the markets
savaged the shares of Research in Motion (TSX: RIM, NDQ: RIMM) after
the company issued what was deemed to be a disappointing second-
quarter report.
By the time the bloodbath was over, RIM shares had dropped $15.12 on
the TSX, a decline of 16.8 per cent. In New York, the loss on Nasdaq
was US$14.15 or 17 per cent.
So what was in the report that so terrified investors? Did RIM
announce a multi-billion dollar write-off? Did management say the
company is on the verge of insolvency? Was there a suggestion that no
one wants BlackBerries any more?
Actually, none of the above. The Waterloo-based company announced
second-quarter revenue (to Aug. 29) of $3.53 billion, up 3 per cent
from the first quarter and 37 per cent year-over-year. (Note that RIM
reports its results in U.S. currency.) Adjusted net income, which
excludes the cost of a one-time $112.8 million patent infringement
settlement, was $588.4 million ($1.03 per share, fully diluted).
Including the cost of the settlement, EPS was $0.83 compared to $0.86
for the same period a year ago.
The company shipped 8.3 million devices during the period and opened
3.8 million new BlackBerry accounts.
Co-CEO Jim Balsillie, taking a breather from his pursuit of the
Phoenix Coyotes, described the quarter as "strong" saying it was
highlighted by "excellent financial performance, successful product
launches, and accelerating growth in international markets and new
market segments."
He added: "RIM 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 our partners around the world."
So what got investors so fussed that they dumped almost 100 million
shares? The company missed estimates, that's what. These days, that's
the kiss of death for a stock. Analysts had been expecting revenue of
$3.6 billion so the underperformance wasn't much but when the numbers
come up short investors' reaction tends to be brutal. Actual earnings
per share were well below the consensus estimate of $1 but adjusted
EPS was actually slightly better. Shipments and new subscriptions were
also below estimates – RBC Capital Markets had forecast 8.7 million
new devices and 4.1 million sign-ups.
You might have thought that RIM's positive outlook for the third
quarter would offset at least some of the dissatisfaction but that
didn't turn out to be the case. The company said it expects third-
quarter revenue to be in the range of $3.6 to $3.85 billion. Gross
margin is projected at approximately 43 per cent. Net subscriber
account additions are forecast to be in the range of 4 to 4.3 million
while earnings per share are expected to come in at $1 to $1.08.
These are not bad numbers and if RIM can deliver on them the stock
will be back to its previous level in a hurry.
I have no reason to doubt that RIM will meet its targets, but even if
they fall short, it is not the end of the world. The company continues
to demonstrate rapid growth. It has excellent margins and is sitting
on a ton of cash: $2.5 billion as of the end of the quarter. The
balance sheet is debt-free.
In a report issued on Sept. 25, RBC Capital Markets analyst Mike
Abramsky and associate Paul Treiber described the second-quarter
shortfall as a "speed bump" as opposed to a fundamental change. They
maintained their "outperform" rating on the stock with a target of
$150 and advised their clients to "accumulate on weakness".
Well, we sure got the weakness in the Friday trading. The last time we
saw RIM shares this low was in July. RBC now estimates the company
will earn $4.26 a share this year which would be up 23 per cent from
the last fiscal year. The brokerage firm is looking for $5.43 a share
in fiscal 2011 and $6.40 in fiscal 2012. These figures are in U.S.
dollars.
With RIM closing in New York on Friday at $68.91, that means the
shares are trading at 16.2 times expected current year earnings and
12.7 times projected fiscal 2011 earnings. Those are very attractive P/
E ratios for a high-growth company with no debt.
Some aggressive investors may want to take advantage of last week's
panicky sell-off to buy some shares. Talk to your financial advisor to
see if the stock is a good fit for your objectives.