RIM’S ‘cash cow’ business expected to take a hit
Northern Securities has slashed its price target on Research In Motion Ltd. shares, saying the company’s “cash cow” services business is heading for a decline thanks to market share gains by rivals including Apple Inc. Analyst Sameet Kanade in a note to investors Monday said carriers are balking at paying what he estimates as the $5 (U.S.) monthly fee RIM charges for each of its 75 million subscribers. He argued that carriers are agitating for a lower rate after RIM failed to stem encroachments by Apple and Android devices onto the company’s traditional enterprise turf. RIM earned just under $1 billion from services in its most recent quarter, or about one-fifth of its total revenue. “We now firmly believe that RIM does not have the luxury of time on its side and expect a significant compression in service revenue from (the second half of 2012) onwards,” Kanade said. “This is expected to lead to net cash outflows, and may potentially erode RIM’S balance sheet strength.” He lowered his 12-month target on the stock to $7 from $24 and downgraded his recommendation to sell from speculative buy. “We have now elected to heavily discount such representations as we believe the core cash cow network service business of RIM is at risk of significant decline over the next 12 month period,” he wrote. “We admit that our acceptance of the company’s representations at face value was shortsighted, given the recent checkered past of management’s ability to comprehend and tackle competitive challenges to its position.
Northern is a wholly owned unit of Toronto-based Jaguar Financial, which has been among investors pressing for a restructuring of RIM that could include a sale.
RIM stock has tumbled by 14 per cent since mid-february to trade near eight-year lows after analysts suggested the company’s already reduced estimates for the quarter ended March 3 are still too high. Waterloo-based RIM, whose shares were trading on the Nasdaq at $13.23, down 56 cents midday, is scheduled to release its fiscal fourth quarter earnings report on March 29.
Canaccord Genuity’s Michael Walkley added to worries over a fourth-quarter warning in a research note late Sunday, indicating that RIM’S Be Bold marketing campaign has yet to produce results.