Research in Motion (RIMM) 200 PE Stock?

[adios]

I haven't looked at the financial statements in detail and I realize that RIMM has hot product with their Blackberry device. Also I'm aware that the demand for this type of wireless technology will grow a lot for a long time. My brother-in-law is an IT manager for Snohomish County just north of King County in Washington state. The county is using them a lot for many applications just to give an example. Tremendous productivy improvements have resulted according to him. Anyway RIMM is trading at a 200 PE or thereabouts. I used a two stage dividend discount model and plugged in some numbers to see what kind of parameters would indicate a 200 PE. Here's what I came up with:

High Growth Rate Period:

15 years

Earnings Growth Rate of these 15 years:

50% (that's on compounded basis)

Return on Equity for the High Growth Period:

60%

Growth Rate for the stable period (ad infinitum after high growth period):

10%

Return on Equity for the Stable Growth Period:

20%

Yahoo has a RIMM beta of 2.663.

These absurd numbers seem to point to a gross overvaluation. Any kind of what I would consider reasonable numbers doesn't even come close to a 200 PE being indicated.

I plugged in what I would consider very rosy numbers that have a more realistic chance of being true and came up with a PE of 35 using a beta of 1.0 for the stable growth period:

High Growth Rate Period:

15 years (A lot of years of high growth, very optimistic)

Earnings Growth Rate of these 15 years:

15% (I still a sustained growth rate in earnings on a compounded basis of 15% is very high over a 15 year perid.)

Return on Equity for the High Growth Period:

25% (a very optimistic number)

Growth Rate for the stable period (ad infinitum after high growth period):

8%

Return on Equity for the Stable Growth Period:

12.5%

[FatOtt]

[ QUOTE ]
Earnings Growth Rate of these 15 years:

15% (I still a sustained growth rate in earnings on a compounded basis of 15% is very high over a 15 year perid.)

Return on Equity for the High Growth Period:

25% (a very optimistic number)

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How does the company have a constant 25% ROE but only grow earnings at 15% per year? Are they paying the rest out in dividends? They shouldn't be, because their reinvestment rate (25%) is higher than your equity discount rate (20%).

Something's wrong here - see what happens when you set your earnings growth equal to the ROE (which makes much more sense in this example).

[adios]

[ QUOTE ]
How does the company have a constant 25% ROE but only grow earnings at 15% per year?

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I don't know, I was trying to figure out numbers that might constitute a 200 PE. I agree that if that the numbers aren't realistic. I'm just trying to figure out how a 200 PE is warranted. Upon further review I saw that RIMM earnings are expected to increase a lot in the next couple of years also I made the mistake of looking at trailing earnings instead of forward looking earnings. When I do that RIMM's valuation makes more sense. Btw RIMM's ROE is listed at around 4% on Yahoo but I assume that it will increase.

I went and looked at some other tech stocks, CSCO, MSFT, LLTC and INTC with the model. Some interesting results and I'll post them when I validate projected earnings growth rates as best I can.

[citanul]

I trade RIMM stock fairly actively.
It has had a HUGE run-up in the last 8 months or so. (maybe more, maybe less, I'm lazy right now.)
The general concensus amongst traders is that no intelligent investor is putting money into this stock here. However, news/short covering/earnings/etc really moves this stock. Now, it's not to say that this is in any way a safew point to be short the stock either, as it's just now re-testing the top of it's range.

So, yes, very good product that everyone who uses it loves. However, they are soon to not be really the only thing in the sector, as Palm is soon bringing out a competing device (they say).
Also, this isn't a product everyone out there has, or even wants. The vast majority of people with these toys are given them by their company, not people who go buy them at the store.

Anyway, mostly, hedge funds and the like are not looking to put new money here, nor are others.

They generally don't necessarilly think that it is overvauled, but that they don't really feel a direction currently to the stock, and prefer not to have their money tied up in stocks that may or may not be ranging, and have run up huge in the near past.

Anyone out there work in a hedge fund?

citanul

[Senor Choppy]

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High Growth Rate Period:

15 years

Earnings Growth Rate of these 15 years:

50% (that's on compounded basis)


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People made estimates like these for Cisco a few years ago. Their 5 or 10 year projections lasted for about a year or two.