Research In Motion Ltd (BBRY) Gets Upgrade On Strong Margins

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Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB) has received a much welcomed upgrade from Well Fargo Securities analysts, as BlackBerry 10 (BB10) continues to romp, while negative margins from BB7 diminish. Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB)’s stock has been rallying since the company announced the prospective launch date of BB10. The company is expected to ship about 40 million units within the next twelve months, with 2.6 million destined for Canada.

Research In Motion Ltd (BBRY) Gets Upgrade On Strong Margins

However, the company has remained unprofitable over the subsequent quarters, as BB7 gross margins slid to negative territories upon decreasing market share. However, Research in Motion seems to be heading at the right direction, after launching its BB10 on January 30, which is expected to début in the U.S in mid March. The device also launched in Canada on February 6th and the U.K on January 30. According to reports, BB10 has already blown out all sales records set by its predecessors.

In a report published Thursday, February 7, Wells Fargo Securities analysts, Maynard Um and Munjal Shah, upgraded Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB) from Equal-weight to Overweight, pointing to the company’s improving gross margins as a key factor. The analysts believe that Research in Motion’s stock price tends to follow the direction of the company’s gross margins. The analysts also raised their price range expectation on the company from $11-13 to $19-20 per share, with a time frame stretched to FY14.

In the report, the analysts wrote, “Our Outperform rating is predicated on the view that gross margin will improve as the mix of BB10 devices ramps and the existing BB7 portfolio (negative gross margin) declines. We note that BlackBerry shares have generally trended in the direction of gross margin”.

The analysts also noted that enterprise service revenue, which accounts for 52 percent of Research in Motion’s service revenue, is not likely to be impacted materially until FY15, given the timing of the release of the BES 10 service pack. However, they were also precautionary on the challenges the BlackBerry maker faces, including lack of business model transparency, long-lived market acceptance, business model transitions that make modeling challenging, and competition.

Additionally, the analysts noted, “there is likely to be more volatility around [Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB)] shares, but ultimately [we] believe the valuation does not fit the current potential window of opportunity. While it may very well turn out that demand for BlackBerry 10 is limited, we believe the valuation already discounts some level of failure and think the risk/reward at this juncture of the BlackBerry 10 cycle is attractive”.

The analysts increased FQ4 for year 2013 revenue and earnings estimates from $2.9 billion to $3.0 billion, and $0.38 to $0.23 respectively. The consensus estimate is currently pegged at $2.9 billion and $0.29. FY2014 revenue and earnings were also increased to $12.7 billion and $0.22 from $10.9 billion and $1.44 respectively, compared to street’s estimate of $12.7 billion and $0.57. This implies that despite the improvement in margins, Research in Motion is expected to report a net loss for at least the next two years. This is quite a massive window to enjoy tax asset benefits.

The initial BlackBerry Enterprise Service 10 (BES 10) release does not, based on our discussions and research, have all the features that enterprises currently enjoy on BES 5. The BES 10 Service Pack, schedulaed to be released in May 2013 ,should add a number of key features. The analysts believe that this could be a limiting factor to early enterprise Z10 and Q10 adoption..

However, this is also likely to limit the near-term transition risk ,in the services model, where enterprise subscription account for 52 percent of the services revenue. Nonetheless, displacement by competitors still remains a risk. The analysts wrote, “We believe enterprises that choose to move to BES 10 will likely select higher end features that they will be required to pay BlackBerry for (like security), which may offset service revenue decline. We have not modeled this in our revenue forecasts”.

Research in Motion Ltd (NASDAQ:BBRY) (TSE:BB) closed at $16.96 on Thursday, February 7.

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