RIMM: 76% Earnings Growth for Under 10x Trailing EPS

The market’s initial reaction to last night’s earnings report from Blackberry maker Research in Motion (RIMM) made sense to me. The stock popped about $4 after-hours to over $50 per share after the company blew past analyst estimates for their latest quarter. Earnings per share came in at $1.46 (est: $1.35), revenues were $4.62 billion (est: $4.47 billion), and subscribers grew 4.5 million to over 50 million.

This morning, however, those gains from last night have all but vanished (the stock is up less than $1 as I write this). I have been bullish on the stock at recent prices (in the mid 40’s) based on a ridiculously low valuation (10 times trailing earnings) for a company that is still growing like a weed, despite the introduction of the iPhone and an ever-growing selection of phones running Google’s Android operating system. Given how fast the smartphone market is growing, coupled with nearly 40% market share for the Blackberry, it is my belief that RIM can still grow quite nicely, which if true, should eventually result in solid gains for the stock, due to its low P/E.

Last night RIM reported sales growth of 31%, earnings per share growth of 76%, subscriber growth of 56% and unit shipment growth of 45% versus the year-ago period. To me, these figures illustrate that my thesis (the company can still grow thanks to a strong position and a growing end market) remains intact. If users were really shifting in droves from RIM to the iPhone, the Droid, and HTC, etc and the company was in the process of fading like Palm did in recent years (as many are predicting), there is no way they could have posted these kinds of numbers. Not only that, RIM guided earnings per share for the current quarter to between $1.62 sand $1.70, well above analyst estimates of $1.39.

As a result, I continue to like RIM stock, believe the company can continue to grow earnings per share, and think the market is overreacting to the competitive threat. At $47 per share, RIM is trading at 9.4x trailing earnings. Since there is very little room for the stock’s P/E to contract further, I am not sure how the stock can stay this low for too much longer (barring a drop in earnings per share from here). Assuming $6 of earnings in the coming year, RIM stock could fetch $60 to $72 per share (P/E between 10x and 12x). That would represent a gain of anywhere from 28% to 53% from current levels. I even think that P/E range is on the low end of what makes sense for the company (why can’t RIM trade at a market multiple?). Perhaps Microsoft will even wake up one day and finally decide to pull the trigger, buy RIM, and expand its dominance in enterprise computing.

Full Disclosure: Long RIMM at the time of writing but positions may change at any time.