Eric E. Ormsby, Alcosta Growth Report
Erick E. Ormsby is the President and Chief Investment Officer of Alcosta Capital Management, Inc. He brings a life-long passion for investing and extensive investment experience to Alcosta’s client list. Before founding Alcosta Capital Management, Mr. Ormsby was a financial consultant at Merrill Lynch,
and earlier was a securities analyst and member of the portfolio management team at Insight Capital
Research and Management.
Research in Motion (NYSE: RIMM)
Research In Motion (RIMM) designs, manufactures, and sells wireless solutions to the mobile communications market. The largest portion of their revenue comes from sales of their BlackBerry line of handheld devices. The company has benefited from many different trends. Two big secular themes that have persistently driven demand for their products have been growth of the Internet and growth in the popularity of smartphones.
The firm has an established reputation for reliability and security that other handset providers have found difficult to replicate. For this reason, demand from highend corporate customers such as executives, lawyers, and politicians who send secure emails to their offices and clients, has been extremely strong. Additionally, the smartphone market around the globe continues to be under penetrated. The market for wireless solutions that support data services is growing much faster than the wireless voice market. According to industry data, it is expected to expand at a 30% compound annual growth rate from 2006–2011.
Growth for RIMM’s products should continue to be high this year for several reasons. First, the company is planning on releasing a number of new products. Several next-generation BlackBerry devices are expected to be launched this May targeting the CDMA and Wi-Fi networks. Second, the company is likely to continue expanding their number of carriers and geographies. The Chinese government recently gave RIMM clearance to sell their products in the Chinese markets. In addition, India is another potentially fast-growing market opportunity. Next, expansion in the consumer segment is anticipated this year as growth from consumers begins to exceed growth from corporate customers.
Many of RIMM’s devices now include more “lifestyle” features like television, music players, cameras, and Facebook social-networking software for broad appeal in an effort to increase growth from mainstream consumers as opposed to exclusively targeting corporate executives. Finally, new marketing programs are expected this year that may include lower prices for data.
The trends in RIMM’s financials seem to be going in the right direction. Analyst revenue and earnings estimates for fiscal 2009 have been increasing over the past three months and are currently estimated to be $8.998 billion and $3.37 per share respectively. The company’s quarterly operating margin has increased over the past two quarters and is currently at a healthy 29%. Return on Assets (ROA) over the trailing twelve months is currently at 28% and has steadily increased in each of the past six quarters from 14%. The long-term estimated earnings growth rate has increased steadily over the past eighteen months and is currently at 32%. The P/E multiple on the fiscal 2010 earnings per share estimate is currently 19 which is remarkably low when compared to the estimated growth of 35% in that year. This gives the stock a price to earnings growth (PEG) ratio of just 0.54. With this extremely low valuation, RIMM could even provide some relative safety if the general economic environment should weaken.