Reporting on RIMM (Research in Motion)

Research in Motion (RIMM) makes the high-end BlackBerry smartphone which is extremely popular with business customers, and with President Obama.

RIMM is an outstanding growth company that’s heads-and-shoulders better than its Industry Averages on FIVE fundamental metrics.  Perhaps best of all, RIMM also satisfies my demanding SSG Buy criteria.

RIMM Compared to Industry Averages: 

With Morningstar-Hemscott data:

• EPS growth, 5 year average: RIMM is much, much better than its industry average (52.8% vs 2.6%, Diverse Communications Industry) and ranks 1^st out of 49 companies;
• Sales growth, 5 year average: RIMM is much, much better than its industry average (69.1% vs 13.3%) and ranks 4^th
• Debt to Equity, 2009 average: RIMM is much, much better than its industry average (-0- vs 134.2%) and is tied for 1^st
• Pre-Tax Profit Margin, 5 year average: RIMM is much better than its industry average (27.8% vs 12.7%) and ranks 2^nd, although this is the only metric of the five where the company’s trend is down
•  Return on Equity, 5 year average: RIMM is also much better than its industry average (29.3% vs 16.4%) and ranks 3^rd

With S&P data:

• EPS growth, 10 year average: RIMM is much, much better than its industry average (150.8% vs 1.9%, Communications Equipment Industry); there is no company-by-company listing for S&P data and therefore no rankings are possible;
• Sales growth, 10 year average: RIMM is much, much better than its industry average (65.9% vs 13.4%);
• Debt to Capital, 5 year average: RIMM is much, much better than its industry average (0.2% vs 26.0%); 
• Pre-Tax Profit Margin, 5 year average: RIMM is better than its industry average (28.1% vs 20.5% and, again, this is the only metric where the company’s trend is down;
• Return on Equity, 5 year average: RIMM is much better than its industry average (29.3% vs 16.4%).

###  To learn more about Investigating Industry Info, click here.

Company Background:

– In 2009, Fortune magazine ranked Research in Motion the fastest growing company (#1 out of 100) as it had a three-year average annualized growth of 84% EPS, 77% Sales, and 45% Total Return.

– RIMM is a Canadian company and, according to its latest Annual Report, explained that the Blackberry phone was designed to deliver a “push” based user experience that also offers advanced security, manageability, spectral efficiency, and power management [PDF page 9].

** Sales grew 35% last FY (ended 2-28-10) to $15 Billion and EPS grew 31% to $3.30.  The number of Blackberry’s sold increased by 41% or 10.7 Million.

– The S&P Stock Report observed that RIMM had over 41 Million subscribers by the end of FY 2010 and over 16 million additions since the end of FY 2009.

** While initially focused on the business or so-called enterprise market, RIMM in recent years has introduced new consumer-oriented products and, according to S&P, has increased its subscribers to over 50% consumers.

– Morningstar, however, was skeptical of the Blackberry’s sustainable appeal to consumers despite RIMM’s clear success:

** The company’s most durable advantage, according to Mstar, is the business or enterprise market which, unlike consumers, is most attracted to the Blackberry’s always on e-mail and its end-to-end security.

– In RIMM’s latest quarter (Q4, ending 2-28-10), Sales grew 18% and EPS grew 40% based on S&P data. 

** The company’s press release reported that a record 4.9 Million net new subscribers were added in the quarter and that the BlackBerry was the #1 selling smartphone in the U.S. at the end of CY 2009.

SSG Discussion:

– The following table compares the SSG by JaniceC, which I got from BI’s First Cut page, with two of mine and with Take Stock.  Both my SSGs use the same judgments, but Armin-1 uses S&P data (like Janice) and Armin-2 uses Morningstar-Hemscott data.

– Take Stock is a computerised, one-click program at the StockCentral website designed to produce a conservative result.

– After the table, I discuss several SSG issues and then examine RIMM’s declining Pre-TaxProfit Margin and its Financial Condition.

Research In Motion (RIMM)	JaniceC	Armin-1	Armin-2	Take Stock
Date	4-7-10	4-22-10	Same	Same
Data	S&P	S&P	Hemscott-Morningstar	Same
Price	$69.83	$71.40	Same	Same
52 week High &          Low Price	$88.08 & $54.30	Same &                Same	Same &             Same	Not Used
Last Quarter of     Reported Data	Q4 ending       2-28-10	Same	Same	Same
Software Used	TK 5	TK 6	Same	TS Online
Project Growth      From End of	Last Q	Same	Same	Last FY
Sales Growth	12.00%	10.00%	Same	20.00%
EPS Growth	11.00%	10.00%	Same	20.00%
High PE                          (outliers)	30.0                   (no outliers)	26.1                      (06-07-08 out)	25.1                   (Same)	30.0
High EPS	$7.36	$7.04	$6.95	$10.73
High Price	$220.80            (23% > VL)	$183.70               (2% > VL)	$174.40	$321.90                  (79% > VL)
Value Line Estimated High Price =$120-180 as of 3-12-10
Low PE	13.0	10.6                      (from 2008)	11.2	11.1
Low EPS	$4.38 (ttm)	Same	$4.30 (ttm)	Same
Low Price	$30.10              (ave low last 5 years)	$35.10           (recent severe low price)	$35.30 (Same)	$47.73                     (low PE x             low EPS)
Upside/Down	3.8	3.1	2.8	10.5 (imputed)
Total Return	25.9%	20.8%	19.6%	35.1%
SSG Buy Under	N/A	$72.21	$70.04	$116.27
RV/PRV	51.2/51.7       (no outliers)	88.6/80.5            (06-07-08 out)	91.2/82.9 (Same)	Not Used
RV/PRV                          (no outliers)	57.2/51.7	58.6/53.3	61.5/55.9	Not Used
Quality	N/A	S&P = B               5th of 8 grades	TS = 3.2 (fails)	TS = 3.2            (fails)
PTPM – 5 yr ave	28.1%               Trend down	Same                 Same	27.8%             Trend down	Same                   Same
ROE – 5 yr ave           Ending Year Equity	29.0%               Trend up	Same                 Same	29.3%               Trend up	Not Used
ROE – 5 yr ave            Begin Year Equity	N/A	39.1%                    Trend up	39.4%            Trend up	Same            Trend N/A
Debt to Equity –          5 yr ave	N/A	0.20%                 Trend even	Same       Same	Not Used

Janice C’s SSG:

– Janice estimated future growth at 12.00% Sales and 11.00% EPS based on implying those rates from Value Line’s dollar data.

** While VL usually estimates a future EPS growth rate, it did not do so for RIMM.

** Implying a VL rate is tricky as there are at least two methods (VL’s and the traditional approach to CAGR) that result in different outcomes.  Janice used a third, unexplained method.

– She also used 30.0 as her Forecast High PE that was mid-way between 40.53 (RIMM’s average High PE for the last 5 years) and 24.0 (VL’s estimated average PE for the next 3-5 years).

** Seeing a downtrend and wanting to be conservative, she used 13.0 as her Forecast Low PE but did not explain why she decided on that value.

Armin’s SSG:

– When I did my SSG, the six analysts I checked were estimating long-term EPS at an average of 19.38% with Morningstar high at 21.70% and Reuters low at 16.99%.  VL, as I mentoned, made no estimate.

** Reuters 12 analysts ranged from 30.00% high to 9.70% low.

 ** I decided to use 10.00% EPS for the next 5 years based on the very lowest of all the estimates (9.70% from the one Reuters analyst, rounded).

### To learn more about Estimating EPS, click here.

– And, after eliminating 2006-2008 High PEs as outliers, I used the resulting average as my Forecast High PE.

– I thought 2009 was atypically low, so I used 2008 as my Forecast Low PE, the lowest Low PE in the last four years.

Take Stock:

– Take Stock estimated 20.00% future Sales and EPS growth, the maximum it is programmed to allow.

– It also estimated a Forecast High PE of 30.0, another maximum limit, and 11.1 as its Forecast Low PE.

Final Results:

– The SSG Buy criteria that I use require a 3.0 Upside/Downside Ratio AND a 15.0% Compound Annual Total Return for the next 5 years.  In additiom, I also don’t want to substantially exceed Value Line’s High Price estimate:

• Janice got a 3.8 U/D, a 25.9% TR, and a Forecast High Price that was 23% greater than VL’s High Price estimate;
• Armin-1 (with S&P data) got a 3.1 U/D, a 20.8% TR and a Forecast High Price that was only 2% greater than VL;
• Armin-2 (with Hemscott data) got a 2.8 UD, a 19.6% TR and a Forecast High Price that was less than VL;
• Take Stock doesn’t use U/D, got a 35.1% TR and a Forecast High Price that was an unbelievable and irrational 79% greater than VL.

– Armin-2 came close, but only Armin-1 satisfied all three of my SSG Buy criteria.

 Pre-Tax Profit Margin (PTPM):

– VL and S&P reported declining profit margins because RIMM’s prices for consumer phones are less expensive.

– Janice saw that RIMM’s average PTPM for the last 5 years was trending down with the last two years sharply down.  She also found a PTPM downtrend for RIMM’s competitors, but provided no details except to identify three competitors.

– I’ve already shown that RIMM 5 year average PTPM with Morningstar-Hemscott data is much better than its industry average (27.8% vs 12.7% and ranks 2^nd and. with S&P data, is also better than its industry average (28.1% vs 20.5%).

– The table below compares RIMM and the three competitors identified by Janice: Cisco, Qualcomm and Juniper (note that RIMM is the only phone-maker).  The table also includes the three close competitors identified by YahooFinance: Apple, Microsoft, and Nokia (two are phone-makers) and two more direct competitors and phone-makers identified by Morningstar: Motorola and Palm.

** Using S&P data, the PTPM of all of them is trending down except for AAPL

Pre-Tax        Profit Margin	2005	2006	2007	2008	2009	5 Year Trend
RIMM	2% up	5% down	2% up	5% down	2% down	DOWN
CSCO	1% up	1% down	.2% up	1% down	4% down	DOWN
QCOM	3% down	7% down	2% down	6% down	5% down	DOWN
JNPR	6% up	6% dn	even	2% up	5% down	DOWN
AAPL	8% up	2% up	6% up	.4% up	7% up	UP
MSFT	7% up	3% down	4% down	3% up	7% down	DOWN
NOK	8% up	.5% down	1% up	1% down	8% down	DOWN
MOT	2% up	3% down	9% down	4% down	3% up	DOWN
PALM	3% up	3% down	16% down	33% down	N/A	DOWN

Financial Condition:

– Both Morningstar and Value Line reported that RIMM has no debt and $1.6 -2.0 Billion in cash.  Morningstar added that the company sits on another $1 billion in long-term investments.  VL also gave the company an A+, its second highest rating, for Financial Strength. 

– The one-click Annual report spreadsheet by Bob Adams gave RIMM a 62 out of 100 with 10 Bullish and 9 Bearish findings:

** The Bullish-good things include: no debt, good Free Cash Flow, and a green flag (very good) ROE;

** The Bearish-not-so-goods include: the Cost of Sales is growing faster than Sales and Sales are growing slower than Cash Flow.

### You can get this super-duper, easy-to-use free spreadsheet along with an explanation of its many features by going to my Favorite Links page: click here.

Questions:

– Do you agree with Morningstar that consumers are not a sustainable market for the BlackBerry and that its always-on e-mail appeals primarily to business customers?

– Do you have a BlackBerry and what features do you like (or dislike) most?  Let us know if you are a business or consumer customer.

Armin

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