Hedge funds make a play for RIM's Playbook

TORONTO, CANADA: Research In Motion's shrinking North American market share has made the company a punching bag for short-sellers, but some top hedge funds are betting the BlackBerry maker is due for a strong rebound.

With its Playbook tablet computer due to ship soon and a broader BlackBerry smartphone refresh to follow, RIM saw its shares snapped up by funds of Richard Chilton, Christopher Shumway and Bain Capital's Brookside Capital Investors in the fourth quarter, according to data compiled by Thomson Reuters.

That made the stock one of the top new positions for the quarter in the portfolios of the "Smart Money 30," some of the largest stock-picking equity hedge funds.

For years, the Canadian company has been a favorite of short-sellers who see its dominance of corporate communication waning as consumer-friendly devices such as Apple's iPhone intrude.

Many investors have ignored RIM's tremendous international growth amid slipping market share in North America, where Apple and Google's Android grab most of the headlines.

"You've still got a lot of folks that are skeptics, and that in itself is reasonably compelling because it implies the potential for more demand for the stock," said analyst Matthew Robison of Wunderlich Securities, who has a price target of $76 for RIM shares.

RIM's revenue outside the United States, Canada and Britain more than doubled to $5.6 billion in the first nine months of the company's fiscal 2011. Revenue in its three major markets rose less than 6 per cent to $8.8 billion.

And the upcoming Playbook offers impressive technical specifications amid talk that its QNX operating system could get a boost by being able to run tens of thousands of apps made for Android. BlackBerry sales could also benefit from stumbles at Nokia, which abandoned its Symbian software to team up with Microsoft.

All that made for an appealing value play, in the eyes of the smart money. RIM could be bought for as little as $48 - less than nine times forward earnings expectations - early in the fourth quarter, days after it unveiled the PlayBook. Even after a strong run so far this year, with the shares up about 17 per cent to almost $68, RIM's earnings multiple remains under 11.

Wall Street may be catching on as well. Morgan Stanley and Citigroup analysts are among those who have changed their tune on RIM lately, upgrading ratings and raising price targets. Morgan Stanley analyst Ehud Gelblum expects the company to earn $7.23 per share in the fiscal year begun last month, including 40 cents to 60 cents from PlayBook sales.

"PlayBook is a very creative solution to a challenging issue for the company, both in terms of buying QNX and implementing a tablet with it, and creating a target for application developers utilizing a new operating system that can later be deployed in handsets," said Wunderlich's Robinson.

RIM paid C$200 million for QNX in a deal completed last April; PlayBook will be its first product to integrate the software, which is used in nuclear power stations, the largest Internet routers, and scores of vehicle infotainment systems.

RIM executives say future BlackBerry smartphones will also use QNX as well as other innovations such as swipe payments.

To be sure, the competition is only getting stronger. That was obvious on March 2 as Apple matched many PlayBook features with an updated version of the iPad. Apple's popular tablet single-handedly ignited the market for the devices perched between laptops and smartphones.

Worse, iPad 2 will ship on March 11 in the United States and to 26 more countries by March 25. RIM, which announced the PlayBook on Sept. 27, has not yet said when it will ship.

Some doubt RIM can rise much further, given expected pressure on its margins and a short-lived PlayBook bump.

"To me, RIM is very expensive because the sort of margins they are making today are not sustainable given their position in the market," said Pierre Ferragu from Sanford Bernstein.

By his pessimistic calculations for limited earnings growth in its new fiscal year, RIM cannot be considered a value buy.

"They are not meaningfully cheaper than Apple on earnings metrics," he said. "At the slightest weakness I would expect a lot of this money to get away very quickly."

Many analysts and investors have grown impatient waiting for the PlayBook as more and more competitors announce similar devices that are making it to market first.

But after a decade at the top of the pile and with a plan for the future coming into focus, wily investors may choose to gloss over immediate competitive concerns to see RIM repositioning itself for its next decade of growth.