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S&P's Research: In Motion

05/26/2006 12:00 am EST


Stephen Biggar

Director, Product Strategy, Argus Research Corporation

Drawing on a history of integrity dating back to 1860, Standard & Poor’s offers among the highest quality research available, with some 65 analysts along with director of US equity research, Stephen Biggar. Here’s a look at a recent "Stock of the Week" from S&P's The Outlook.

"Research in Motion (RIMM NASDAQ) has a premium valuation compared to peers. But its strong business model and performance make it a compelling stock. Founded in 1984 and based in Canada, the firm is best known for its BlackBerry wireless e-mail device. Introduced in 1999, BlackBerry has found popularity primarily in the enterprise market, or large corporations and government providing e-mail, phone, SMS messaging, Internet, and intranet-based applications.

"We at S&P believe RIM will benefit from the pent-up demand for BlackBerry units. With its patent lawsuit settled for $612.5 million in cash, we believe the company can now focus 100% on the business of driving its BlackBerry service. Recent product introductions from Motorola and Nokia may begin to gain share of the mobile e-mail and messaging market, in our opinion.

"In our view, the market for wireless solutions is still in the early stages compared to the broader wireless voice market. We also believe the market for mobile e-mail in the enterprise market is ready to take off. According to Nokia, there were more than 1.2 billion e-mail boxes worldwide at the end of 2005 and 650 million corporate e-mail boxes, but only eight million mobile e-mail subscribers.

"At the end of fiscal year 2006, RIM had five million BlackBerry subscribers. The company's BlackBerry service is tied to more than 55,000 enterprise servers that are linked to 250 wireless carriers. In April, Yahoo!, the most-used mobile Internet brand, and RIM expanded their strategic global alliance to bring Yahoo services to BlackBerry users around the world, including Yahoo Go for Mobile, Yahoo Search, Yahoo Mail, and Yahoo Messenger.

"We believe RIM has an attractive business model, with its BlackBerry contributing to more than 30% sales growth and low net margins in fiscal year 2007. With $1.2 billion of net cash and investments, the company should, in our opinion, be able to meet its working-capital requirements and still achieve return-on-equity in the mid-to-upper teens by fiscal year 2007 (February).

"We view RIM as a compelling communications-equipment stock in S&P's information-technology sector. We think the combination of high market-growth potential, new products, an expanding presence in emerging markets like China and India, and competitors that lack either RIM's focus, strong customer relationships, or resources to offer a full-service offering for wireless e-mail and Web-based applications, makes RIM highly attractive.

"We believe RIMM is well funded to address growing competition and its expansion plans. Applying a price-earnings multiple of 27.8 times our fiscal year 2008 earnings-per-share (EPS) estimate, slightly above peers, we arrive at our 12-month target price of $100. The stock carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy."

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