Too Good to Hold Back-ML reiterates BUY:
9/9/2003
RIMM positively pre-released sales and earnings estimates for the second quarter FY2004 ended August 30, 2003. Sales for the quarter are now expected between $123-$126M vs. our $112M, or up between 18 and 20% sequentially. The Company expects Pro-forma earnings for the quarter, which excludes patent litigation costs, to come in between $0.07-$0.11 per share, vs. our $0.00 estimate. GAAP earnings are expected between $0.02-$0.05 per share. Based on RIMM’s out-performance this quarter and our belief that the company will continue to build momentum we are upgrading our rating from Neutral to Buy with a $38 price objective.
Analysis
We believe the dramatic increase in RIMM’s quarterly performance resulted from better than expected momentum with carriers causing a surge in shipments. We are now forecasting 165K units shipped for the quarter versus our previous estimate of 135K. Combined with RIMM’s announced subscriber additions in Q2 ranging from 94-97K, well above the previously guided range of 80-90k, we have raised our revenue target to $124M from our previous estimate of $112M, Table 1. Our revised number reflects strong growth of 19% sequentially, or 70% YoY. In addition to robust subscriber additions and unit shipments, we believe the company will begin to experience positive momentum with their licensing program, which we have not yet factored into our estimates. For FY04E we have raised our revenue forecast to $518M, or up 69% YoY, versus our previous target of $464M, or up 51%. For FY05E we are forecasting revenues of $634M versus our previous estimates of $530M. On an earnings basis, we have raised our Q2 pro-forma EPS to $0.09, in line with management’s guidance and up from our previous flat level estimate. We believe that RIMM should achieve greater operating leverage with the new revenue estimates and therefore have increased operating margins to 3.3% from our previous estimate of -2.0%.
Valuation
From a valuation perspective, we believe there is 35% potential upside to current values. Applying a 4.5x price to sales multiple to our FY05 (Feb-05) estimate yields a $38 value. On an earnings potential basis, we are modeling net margins of 8% with an EPS level of $0.66 in FY05E. As a result, our price objective commands a premium valuation on our 05E estimate of 47x, however we note that there is potential for further upside to our EPS estimates from the core business as well as the soon to be launched licensing program. Based on valuation, we believe there is further upside potential in the stock. |
