Has Tom Astle gone mad?
Byron Capital’s head of research addressed that concern early in a report to clients this morning in which he initiated coverage of Research in Motion with a BUY rating and $12 target.
Astle said he is just mad enough to believe that a company that has had every piece of negative news reported through a magnifying glass for two years might be actually be a contrarian play. Astle notes that, not including his rating, Thomson One/First Call has 11 SELL ratings, 25 HOLDS and four BUYS on RIM. Apple, he points out, has no SELLs, four HOLDS and 50 BUYS.
The Byron analyst says make no mistake, much of the derision of RIM has been deserved. But he now feels the stock has much more room to improve than it has to decline.
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Astle says tech turnarounds are notoriously difficult to call, but a number of things are shaping up as major positives for RIM. First of all, he expects the new BlackBerry 10 devices, which he has tried and likes, will not only catch up with iOS and Android, but will surpass them in some areas. He thinks this might drive a major upgrade wave to existing users, who are desperate for a modern phone.
Astle also says critical carrier support should not be a problem as many are looking for alternatives to Apple and Samsung. RIM, he points out, has been a carrier partner for nearly twenty years, and isn’t trying to steal their voice revenues with Skype, Facetime or Google Voice.
The Byron analyst also says RIM’s recently announced strategic review could result in some interesting partnerships.
As for risks, Astle says the next two quarters could be “disastrous”. he also points out that RIM’s competitors; Apple, Google and Samsung, aren’t exactly chopped liver and that BlackBerry’s apps, cloud services and interaction with other devices run far behind these names. There is a risk that RIM’s user base has simply become more low-end, he says.
That said, Astle thinks 25% of RIM’s current user base of 80-million will upgrade next year. The key to RIM’s financial picture, he says is just how far the company’s margins have eroded. RIM used to command margins as high as 35%, but Astle is using 20% gross margins on BB10 devices with a $400 average sale price, well below the approximately $600 average price of an iPhone, he notes.
Astle expects RIM will lose $866 million in fiscal 2013 on revenue of $10.54-billion, but will bounce back in fiscal 2014, earning $118-million, or $.23 a share on revenue of $15.17-billion.