Financials after lagging the market since beginning of this year are now coming alive. Now I believe that they are poised to outperform the market in the near term as they play catch up game with the rest of the market.
Goldman Sachs (GS) set all time high level today by breaking above $220. I continue to believe that my target of $250 is not only reachable in 07, but it may turn out to be very conservative. I expect the equity market will have another stellar year in 07. The liquidity into the stock market remains still very favorable. The valuation of the stock market also remains reasonable. The bears continue to see economy in trouble as the housing and auto sectors will take the economy into recession. Also spillover effects from the sub-prime mortgage was claimed to severely affect the consumer buying power. However, so far earning reports from the industrial and financial companies reveal sub-prime effects are largely contained and spillover effects are negligible. Also in the face of favorable employment rate and wage growth trend, consumers are able to cope with rising energy cost as well as possible negative effects from tightening credit. Thus, the economy appears to be still in a good shape.
Because there are many shortsellers who betted on the market decline, the market is not awarding GS much multiple. Many expect GS cannot sustain the earning momentum in 07. EPS estimate have come down and PE multiple are at just above 10. I believe that the market is grossly underestimating the earning power of GS in 07. The private equity and M&A activities are rampant. Oversee markets especially in Pacific Rim where GS has a strong presence is exploding. The economies in Asian countries are outpacing the growth in the US and GS is seen to be primary beneficiary of rapid growth in the Asian nations such as China, India, Korea, Japan, Taiwan as well as Singapore.
I continue to believe that hot commodity and energy market coupled with boom in the private equity and M&A activities will help GS to beat the earning estimate by a wide margin. I see May estimate of roughly $4.8 can be beat easily by as much as 50 cents. I see the market finally awarding higher multiple for GS once this happens. If the market multiple expands to 12 from lowly 10 level. GS may trade to $270 based on $22.50 EPS estimate that I think is reasonable for the company in 07.
The news of GS underwriting $2.5 Billion TSMC ADR along with JP Morgan hit the news wire after the market close today. Last two months, I don't recall a day without hearing some news of M&A, underwriting, private equity, etc. This market has been nightmares for shortsellers. The fact that there are so much shortsellers out there and so much put buying may continue to fuel this market to the upside as the shortsellers scrambled to cover to minimize their loss.
For this reason, I see sustained short term rally and I especially like financials at this point. Among the brokerage names, I like GS the best and among the bank names, JP Morgan seems to be the one to have.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
Tuesday, April 24, 2007
Tuesday, April 17, 2007
JPM: it will be a shining star in a cloudy market.
With Dow’s advance this morning, DOW is now 15 points below record close. When the market corrected in late Feb/early March, people sold everything in sight. However, all emerging markets that include China have not only recovered but are trading at a record level. The US DOW now sees record close in sight. Heading into the April earning, I expressed my opinion that the market bottomed and asked you to start buying back shares more agressively.
see http://investorhives.com...)
JPM amid the concern over the sub-prime loans fell during the corrective period. Also the banking sector in general has lagged this recovery. With Citi beating the consensus estimate yesterday and giving some support to the theory that financials earning outlook is not as grim as it is feared, I believe the financials will finally catch up with the rest of the market. I emphasize that not all financials are created equal. I do believe that sub-prime loan is a serious earning concern for specialty names in mortgage loan business. However, large integrated bank/ brokerage names will continue to see modest growth environment. As the street has discounted the steep earning drop into the share price, these names can surrpise/comfort the street by simply coming inline and the share price can rally thereafter. This is what happened to Citi yesterday.
JPM will report its earning before the market open tomorrow. I continue to love JPM's outlook. The consensus number for JPM tomorrow is $1.02. I expect JPM is one of only a few numbers that will actually beat the consensus estimate meaningfully. I expect the company to deliver 3 to 4 cents above the estimate. I believe that this performance will force several firms to hike 07 and 08 estimate despite difficult business environment of the financial sector. This is likely to lead to TP revision by analysts and the stock could be set to show nice buying interest.
Why am I bullish on the firm? JPM's earning leverage is just unfolding from many ROE metric improvement initiatives that have been implemented under the leadership of Jamie Dimon. JPM in my opinion will grow the revenue and EPS will grow faster than the revenue due to much improved bottom-line structure just after Bank One acquisition period.
Investment Bank is likely to deliver another exceptional Q for JPM. C, GS, Morgan Stanley and UBS earning all supports robust environment in the IB sector and I see no reason why it should not be the case for JPM. Furthermore, JPM has been emphasizing trading investment opportunities in energy/commodity. As oil and commodity price once again soared this Q, JPM IB business could deliver elements of surprise from trading revenue.
Retail banking segment of JPM is heading into Q with much lower expectation. Last Q. JPM sold large portion of sub-prime loans, taking some loss. This action was smart as it has lowered the exposure to the sub-prime market and stabilizing the business outlook in this sector. JPM has one of the lowest sub-prime exposures of all large/mid size banks and given the bad sub-prime market hangover, the bank is poised to outperform others.
The firm has bought back 21 mil shares in last Q and currently has authorized cash to buy additional 107 mil shares (3% of outstanding). I expect JPM will work this cash continuously throughout the Q shrinking share count basis and accelerating EPS performance. In addition, better performance in generating cash is likely to result in hike in dividend and I believe this may be imminent any day.
In conclusion, JPM has another 30 to 40% upside from here. I think the stock is headed to mid-60 level towards the year end. As people continue to worry about the mortgage and sub-prime market and as the market continue to climb a wall of worries, JPM is poised to ser new highs throughout 07 and love the stock at current level.
I would be a buyer heading into the earning tomorrow morning.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
see http://investorhives.com...)
JPM amid the concern over the sub-prime loans fell during the corrective period. Also the banking sector in general has lagged this recovery. With Citi beating the consensus estimate yesterday and giving some support to the theory that financials earning outlook is not as grim as it is feared, I believe the financials will finally catch up with the rest of the market. I emphasize that not all financials are created equal. I do believe that sub-prime loan is a serious earning concern for specialty names in mortgage loan business. However, large integrated bank/ brokerage names will continue to see modest growth environment. As the street has discounted the steep earning drop into the share price, these names can surrpise/comfort the street by simply coming inline and the share price can rally thereafter. This is what happened to Citi yesterday.
JPM will report its earning before the market open tomorrow. I continue to love JPM's outlook. The consensus number for JPM tomorrow is $1.02. I expect JPM is one of only a few numbers that will actually beat the consensus estimate meaningfully. I expect the company to deliver 3 to 4 cents above the estimate. I believe that this performance will force several firms to hike 07 and 08 estimate despite difficult business environment of the financial sector. This is likely to lead to TP revision by analysts and the stock could be set to show nice buying interest.
Why am I bullish on the firm? JPM's earning leverage is just unfolding from many ROE metric improvement initiatives that have been implemented under the leadership of Jamie Dimon. JPM in my opinion will grow the revenue and EPS will grow faster than the revenue due to much improved bottom-line structure just after Bank One acquisition period.
Investment Bank is likely to deliver another exceptional Q for JPM. C, GS, Morgan Stanley and UBS earning all supports robust environment in the IB sector and I see no reason why it should not be the case for JPM. Furthermore, JPM has been emphasizing trading investment opportunities in energy/commodity. As oil and commodity price once again soared this Q, JPM IB business could deliver elements of surprise from trading revenue.
Retail banking segment of JPM is heading into Q with much lower expectation. Last Q. JPM sold large portion of sub-prime loans, taking some loss. This action was smart as it has lowered the exposure to the sub-prime market and stabilizing the business outlook in this sector. JPM has one of the lowest sub-prime exposures of all large/mid size banks and given the bad sub-prime market hangover, the bank is poised to outperform others.
The firm has bought back 21 mil shares in last Q and currently has authorized cash to buy additional 107 mil shares (3% of outstanding). I expect JPM will work this cash continuously throughout the Q shrinking share count basis and accelerating EPS performance. In addition, better performance in generating cash is likely to result in hike in dividend and I believe this may be imminent any day.
In conclusion, JPM has another 30 to 40% upside from here. I think the stock is headed to mid-60 level towards the year end. As people continue to worry about the mortgage and sub-prime market and as the market continue to climb a wall of worries, JPM is poised to ser new highs throughout 07 and love the stock at current level.
I would be a buyer heading into the earning tomorrow morning.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
Thursday, April 12, 2007
RIMM: summary of analysts' comment on earning
Notablecalls are out with a nice summary on analysts comment on RIMM. As I outlined in my previous message on RIMM, several buy side analysts are defending the stock, claiming that the stock is a good buy on the pullback.
(see http://www.investorhives.com...)
Buy-side analysts continue to stick with their aggressive estimate (possibly raising some in their future forecast). The stock will continue to have the burden of beating the estimate as the expectation builds up again heading into the next Q. The psychology and enthusiasm has broken down somewhat after the disappointing current Q result. The stock could be in a real trouble if RIMM fails to surpass the once again getting lofty expectation next Q. The company is executing well on growing the revenue and sub add fronts. However, the investors continues to expect this trend and this caps the share price upside potential as all the good news will be a once again built-in. Any slight negative news will serve as a catalyst to push share price lower. I don't like the risk to award ratio here and continue to recommend the playing the stock on the short side.
Bee below for the notablecalls summary.
http://notablecalls.blogspot.co...
Research In Motion (NASDAQ:RIMM) getting plenty of comments following quarterly report.
Merrill Lynch notes that Feb Q sales were up 66% YoY to $930.4mn, shy of their $942mn forecast, as ~100K handset shipments were delayed. EPS of $1.01 was inline with strong gross margin of 53.5%, offset by increased spending on stock options investigation. Firm estimates these temporary effects cost RIM about $33mn in lost sales (100K handsets at $336 ASP) or 4-7c in EPS. While inline results could disappoint short-term investors, firm believes long-term trends remain solid.
May Q outlook on sales ($1.05bn), subscribers (1.14mn), handsets (>2.25mn) and EPS ($1.05) was largely inline with their recently raised estimates. However, pent-up demand for RIM's new product launches (Verizon Worldphone, T-Mobile WiFi Blackberry) could drive meaningful EPS upside (+4c to10c) during the May quarter. New applications/partner launches during RIM's analyst day (May 7 - coincides with WES Conference) could also create positive headlines, in firm's view.
CIBC says that while RIMM came in a bit below their aggressive expectations, they see growth opportunities and a strong foundation for the company. But with the stock priced for perfection, the in line quarter and outlook are likely to weigh on investor enthusiasm and question the possibility of near-term upside.
Firm expects a modest pullback in the share price and remain comfortable with their SP rating. This reflects the strong outlook, but is balanced by the opex increase and changing mix and risk profile. Depending on the magnitude of the pullback, a buying opportunity could arise.
With respect to stock options review, ThinkEquity notes that they previously interpreted the company's no "intentional misconduct" language in conjunction with the lack of high-level employee departures as a sign that the future impact from ongoing regulatory investigations would likely be benign. The SEC's escalation to a formal investigation suggests that things on the stock option pricing front will likely get worse before they get better.
Firm says that senior management's handling of the pricing investigation expenses, while well-meaning, is one of the strangest things they have seen on the management/governance front. It appears to us more an admission of guilt than a good faith gesture and it has an aftertaste of "too little too late."
Cowen notes that guidance for the May ending quarter is somewhat uninspired, capturing standing GAAP EPS consensus of $1.04 (new range os $0.99-$1.07). Lower GMs, higher legal & administrative costs associated with the ongoing OSC/SEC inquiries and a higher tax rate keep a lid on earnings forecasts for a second straight quarter. Higher revenue is driven by sub guidance (1.125-1.15MM) , hardware units.
Firm's EPS estimates are essentially unchanged despite a much higher top-line. At ~34X their standing C08 EPS estimates - and little upward movement to numbers - firm sees RIMM's multiple coming in a bit.
Notablecalls: RIMM's in-line results and guidance were disappointment for the buy-side. Looks like there's more of the same to come as higher opex and options overhang push out the margin expansion. Add higher risk associated with the options investigation and you can see why the stock is trading at the lower multiples today than it was yesterday. See no reason to hold the shares at the current pre-market levels of around $136.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
(see http://www.investorhives.com...)
Buy-side analysts continue to stick with their aggressive estimate (possibly raising some in their future forecast). The stock will continue to have the burden of beating the estimate as the expectation builds up again heading into the next Q. The psychology and enthusiasm has broken down somewhat after the disappointing current Q result. The stock could be in a real trouble if RIMM fails to surpass the once again getting lofty expectation next Q. The company is executing well on growing the revenue and sub add fronts. However, the investors continues to expect this trend and this caps the share price upside potential as all the good news will be a once again built-in. Any slight negative news will serve as a catalyst to push share price lower. I don't like the risk to award ratio here and continue to recommend the playing the stock on the short side.
Bee below for the notablecalls summary.
http://notablecalls.blogspot.co...
Research In Motion (NASDAQ:RIMM) getting plenty of comments following quarterly report.
Merrill Lynch notes that Feb Q sales were up 66% YoY to $930.4mn, shy of their $942mn forecast, as ~100K handset shipments were delayed. EPS of $1.01 was inline with strong gross margin of 53.5%, offset by increased spending on stock options investigation. Firm estimates these temporary effects cost RIM about $33mn in lost sales (100K handsets at $336 ASP) or 4-7c in EPS. While inline results could disappoint short-term investors, firm believes long-term trends remain solid.
May Q outlook on sales ($1.05bn), subscribers (1.14mn), handsets (>2.25mn) and EPS ($1.05) was largely inline with their recently raised estimates. However, pent-up demand for RIM's new product launches (Verizon Worldphone, T-Mobile WiFi Blackberry) could drive meaningful EPS upside (+4c to10c) during the May quarter. New applications/partner launches during RIM's analyst day (May 7 - coincides with WES Conference) could also create positive headlines, in firm's view.
CIBC says that while RIMM came in a bit below their aggressive expectations, they see growth opportunities and a strong foundation for the company. But with the stock priced for perfection, the in line quarter and outlook are likely to weigh on investor enthusiasm and question the possibility of near-term upside.
Firm expects a modest pullback in the share price and remain comfortable with their SP rating. This reflects the strong outlook, but is balanced by the opex increase and changing mix and risk profile. Depending on the magnitude of the pullback, a buying opportunity could arise.
With respect to stock options review, ThinkEquity notes that they previously interpreted the company's no "intentional misconduct" language in conjunction with the lack of high-level employee departures as a sign that the future impact from ongoing regulatory investigations would likely be benign. The SEC's escalation to a formal investigation suggests that things on the stock option pricing front will likely get worse before they get better.
Firm says that senior management's handling of the pricing investigation expenses, while well-meaning, is one of the strangest things they have seen on the management/governance front. It appears to us more an admission of guilt than a good faith gesture and it has an aftertaste of "too little too late."
Cowen notes that guidance for the May ending quarter is somewhat uninspired, capturing standing GAAP EPS consensus of $1.04 (new range os $0.99-$1.07). Lower GMs, higher legal & administrative costs associated with the ongoing OSC/SEC inquiries and a higher tax rate keep a lid on earnings forecasts for a second straight quarter. Higher revenue is driven by sub guidance (1.125-1.15MM) , hardware units.
Firm's EPS estimates are essentially unchanged despite a much higher top-line. At ~34X their standing C08 EPS estimates - and little upward movement to numbers - firm sees RIMM's multiple coming in a bit.
Notablecalls: RIMM's in-line results and guidance were disappointment for the buy-side. Looks like there's more of the same to come as higher opex and options overhang push out the margin expansion. Add higher risk associated with the options investigation and you can see why the stock is trading at the lower multiples today than it was yesterday. See no reason to hold the shares at the current pre-market levels of around $136.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
RIMM: investor expectation too high for the stock
It has been a while since I was able to post message. I am having a bit of break from torrid day time job work load.
RIMM has reported its April Q earning result after the market close today. RIMM (Research in Motion) is a famous blackberry handheld email/phone maker that all business men are supposed to be addicted to. We have initiated RIMM last Nov into filthyrich core list as a short candidate.
Previous posts on RIMM:
http://www.investorhives.com...
http://www.investorhives.com...
http://www.investorhives.com...
http://www.investorhives.com...
The initiated price was $133.61 with TP at $95 a share. Since the coverage in our universe, the stock price has remained extremely volatile. The stock traded anywhere between high 110's to mid- 140's. Ahead of the earning, investors were anticipating another blowout Q and bid its share price to the another all time high level just below $150. Analysts were raising TP and the earning estimates prior to the earning date revised higher. The stock was heading into the earning with very lofty expectation on the revenue, EPS, as well as the sub add metrics. RIMM also needed to guide higher on all financial metrics in order to justify surreal PE that is approaching 32 based on 08 earning number. From a risk to award point of view, the stock had more downside than upside; most of the good story was baked into the share price and RIMM had to almost destroy all the consensus earning numbers to see further buying interest.
The stock is tanking hard after-market. RIMM has failed to exceed on most of the earning metrics. The company reported 930 mil in revenue, a little shy of the consensus number of 935 mil. Some folks were actually talking about company delivering above 1 billion. EPS of 99 cents was just a penny shy of $1 expected. The company essentially came in line with the bottom line number. The sub adds number was 1.02 mil, lower than the company guidance of 1.12 to 1.15 mil. Some estimate called for this number to be as high as 1.2 mil. So this is a disappointing result. The company continues to paint bullish pictures for the coming Q with 1.12 to 1.15 mil sub adds and the revenue number of 1.02 to 1.07 billion. Since there are so many bullish analysts out there, I believe that they will focus on these slightly better than expected guidance number and give defensive remarks tomorrow. This may serve to limit the downside somewhat. However, current Q earning was unimpressive nevertheless and I expect to see a lot of selling pressure tomorrow.
Other than the earning metrics number, I also saw some additional areas of concern for RIMM. Notably, there were signs of inventory build with the channel inventory rising by 250K in Q4. Although RIMM released additional new products this Q, new products failed to improve gross margin which has been steadily declining over last two Q. GM is now below 52% versus 56%. Pearl with lower ASP has a lower gross margin than other RIMM legacy product lines and as Pearl ramps and replaces some older RIMM products, GM continues to erode.
The heart of the argument for higher PE multiple for RIMM lies in the company's ability to go after highly lucrative recurring data plan revenue, especially that associated with corporate customers. However, although RIMM is growing its revenue nicely, high margin revenue may be harder to come by for the company. For instance, the company's hottest selling product Pearl is only seeing 20 to 30% data plan sign up at T-mobile. As RIMM penetrates consumer market, the company could rely too much on the one time hardware sale for growing the revenue. The pitfall of this situation is that hardware is never a high margin business. And as competition hits up with Apple entering the smartphone market in June, it becomes harder and harder to justify the premium multiple that RIMM is getting compared to its competitors such as Nokia, Motorola, Palm, LG, and Samsung.
As a last point, informal SEC investigation in option practice has turned into the formal status. This may also have near term negative impact on the share price.
In conclusion, RIMM has failed to deliver this Q and selling pressure is expected tomorrow. I see stock trading lower, possibly to high 120's before analysts come out and start defending the stock more aggressively. However, with slower seasonal period coming up for the company as well as with increasing hype on Apple iPhone entry, I see few catalysts to own RIMM shares given the disappointing earning performance this Q. RIMM will get the benefit of the doubt this Q from so many analysts who recommended this stock. However, if it repeats similar performance again next Q, it will raise some eye brows and more serious damage can occur to the share price. I continue to stand by my recommendation to take short position on the stock with TP of $95. TP of $95 is arrived by assigning general EPS estimate of $5 for 08 with PE multiple of 20 for the company, which are more appropriate for the well executing hardware tech company.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
RIMM has reported its April Q earning result after the market close today. RIMM (Research in Motion) is a famous blackberry handheld email/phone maker that all business men are supposed to be addicted to. We have initiated RIMM last Nov into filthyrich core list as a short candidate.
Previous posts on RIMM:
http://www.investorhives.com...
http://www.investorhives.com...
http://www.investorhives.com...
http://www.investorhives.com...
The initiated price was $133.61 with TP at $95 a share. Since the coverage in our universe, the stock price has remained extremely volatile. The stock traded anywhere between high 110's to mid- 140's. Ahead of the earning, investors were anticipating another blowout Q and bid its share price to the another all time high level just below $150. Analysts were raising TP and the earning estimates prior to the earning date revised higher. The stock was heading into the earning with very lofty expectation on the revenue, EPS, as well as the sub add metrics. RIMM also needed to guide higher on all financial metrics in order to justify surreal PE that is approaching 32 based on 08 earning number. From a risk to award point of view, the stock had more downside than upside; most of the good story was baked into the share price and RIMM had to almost destroy all the consensus earning numbers to see further buying interest.
The stock is tanking hard after-market. RIMM has failed to exceed on most of the earning metrics. The company reported 930 mil in revenue, a little shy of the consensus number of 935 mil. Some folks were actually talking about company delivering above 1 billion. EPS of 99 cents was just a penny shy of $1 expected. The company essentially came in line with the bottom line number. The sub adds number was 1.02 mil, lower than the company guidance of 1.12 to 1.15 mil. Some estimate called for this number to be as high as 1.2 mil. So this is a disappointing result. The company continues to paint bullish pictures for the coming Q with 1.12 to 1.15 mil sub adds and the revenue number of 1.02 to 1.07 billion. Since there are so many bullish analysts out there, I believe that they will focus on these slightly better than expected guidance number and give defensive remarks tomorrow. This may serve to limit the downside somewhat. However, current Q earning was unimpressive nevertheless and I expect to see a lot of selling pressure tomorrow.
Other than the earning metrics number, I also saw some additional areas of concern for RIMM. Notably, there were signs of inventory build with the channel inventory rising by 250K in Q4. Although RIMM released additional new products this Q, new products failed to improve gross margin which has been steadily declining over last two Q. GM is now below 52% versus 56%. Pearl with lower ASP has a lower gross margin than other RIMM legacy product lines and as Pearl ramps and replaces some older RIMM products, GM continues to erode.
The heart of the argument for higher PE multiple for RIMM lies in the company's ability to go after highly lucrative recurring data plan revenue, especially that associated with corporate customers. However, although RIMM is growing its revenue nicely, high margin revenue may be harder to come by for the company. For instance, the company's hottest selling product Pearl is only seeing 20 to 30% data plan sign up at T-mobile. As RIMM penetrates consumer market, the company could rely too much on the one time hardware sale for growing the revenue. The pitfall of this situation is that hardware is never a high margin business. And as competition hits up with Apple entering the smartphone market in June, it becomes harder and harder to justify the premium multiple that RIMM is getting compared to its competitors such as Nokia, Motorola, Palm, LG, and Samsung.
As a last point, informal SEC investigation in option practice has turned into the formal status. This may also have near term negative impact on the share price.
In conclusion, RIMM has failed to deliver this Q and selling pressure is expected tomorrow. I see stock trading lower, possibly to high 120's before analysts come out and start defending the stock more aggressively. However, with slower seasonal period coming up for the company as well as with increasing hype on Apple iPhone entry, I see few catalysts to own RIMM shares given the disappointing earning performance this Q. RIMM will get the benefit of the doubt this Q from so many analysts who recommended this stock. However, if it repeats similar performance again next Q, it will raise some eye brows and more serious damage can occur to the share price. I continue to stand by my recommendation to take short position on the stock with TP of $95. TP of $95 is arrived by assigning general EPS estimate of $5 for 08 with PE multiple of 20 for the company, which are more appropriate for the well executing hardware tech company.
The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)
Please check out the archives for past posting on individual stocks. Also market commentary and weekly communication on the core holding list are available at www.investorhives.com on a membership basis. The membership is free for everyone. Simply apply for filthyrich hive membership at www.investorhives.com. Thank you for visiting my blog.
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