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RIM's new BB10: Return to profit or 'false hope'? Add to ...

These are stories Report on Business is following Thursday, Nov. 29, 2012.

Follow Michael Babad and the Globe’s top business stories on Twitter.

RIM surges on Goldman
A strong vote of confidence from Goldman Sachs Group Inc. put more juice into shares of Research In Motion Ltd. today, at the same time highlighting how divided analysts are on the stock.

Shares initially surged, then pulled back somewhat.

Goldman analysts upgraded RIM to a "buy" from "neutral" and boosted their 12-month price target on the shares to $16 (U.S.) from $9. Other analysts have also boosted their targets on better-than-expected carrier support for RIM's new BlackBerry 10 devices, which will be launched at the end of January, and projections on BlackBerry upgrades by existing users.

One of the things that stands out in today's report from Goldman is the forecast that RIM will return to profitability in its next fiscal year. For the first time in three years, the analysts said, they believe the estimates of others are too low as they fail to catch the potential of the BB10 devices.

This comes, of course, amid heightened competition from Apple Inc.'s iPhone and its iOS, and the Google Inc. Android system.

"We now assess a 30-per-cent chance of success for BB10 given positive early reviews, broad-based carrier support, attractive features, and interest by carriers and consumers in broadening the field beyond Android/iOS; this lifts our 12-month price target to $16 from $9, implying 44-per-cent potential upside."

Goldman believes that RIM's financial results will top analyst estimates over the next four quarters.

"In fact, we now estimate that RIM will turn profitable in FY14 (Feb.) vs. the consensus view of continued losses," it said of other analysts.

Analysts are divided on what BB10 will mean to Waterloo, Ont.'s great hope.

Recently, for example, Jefferies & Co., CIBC World Markets and National Bank have all issued positive research that has helped drive RIM shares.

Morgan Stanley and Wedge Partners, on the other hand, have questioned how successful BB10 will be, the latter's Brian Blair suggesting in a research note that the recent buzz is giving investors "false hope."

“We believe the run-up in the stock miscalculates the reality of consumer demand for BB10 next year,” Mr. Blair said, according to Forbes.

“We think every piece of positive sentiment around BB10 recently is a stretch and we don’t see any scenario where the new device could make a meaningful dent in the consumer or enterprise market next year in the face of strengthening competition from Apple and the boatload of Android licensees or the growing cadre of hardware players selling Windows-based phones."

He drew a comparison to the optimism that met the PlayBook launch. Sales of that tablet, of course, didn’t exactly go well.

Economies turn
We’re getting a sense this week of how the U.S. and Canadian economies are faring, and how fortunes are changing.

The U.S. Commerce Department today revised its earlier reading of third-quarter economic growth to an annual rate of 2.7 per cent, much better than the initial 2 per cent and the best showing in about three years.

That was driven by inventories, stronger exports and construction.

Of course, looming large is the so-called fiscal cliff, the combination of tax hikes and spending cuts set to go into effect automatically at the beginning of next year in the absence of a budget deal.

The U.S. report will be followed tomorrow morning by Statistics Canada’s look at gross domestic product in the third quarter, and it’s expected to show the economy basically stagnating.

Economists believe tomorrow’s report will show the economy expanding at an annual rate of below 1 per cent – for Canada, on weaker trade – compared to 1.9 per cent in the second quarter.

Current account deficit widens, services at record
Canada’s current account deficit widened in the third quarter by $500-million, hitting $18.9-billion, Statistics Canada said today.

That was on a faster decline in exports, which have been hurt by a stronger dollar and softer demand amid the global uncertainty.

The current account is the broadest measure of trade.

Where goods are concerned, the trade deficit grew to $4.8-billion in the third quarter from $3.6-billion in the second, pushed up by energy. Exports fell by $3.7-billion, Statistics Canada said, marking the third quarterly decline in a row.

"While the deterioration in the nominal goods balance in Q3 was relatively modest, and smaller than expected, this still left the overall deficit at its second largest level on record, surpassed only by a $19.4-billion deficit in the third quarter of 2010," said economist Nathan Janzen of Royal Bank of Canada.

"Moreover, the deterioration in Q3 was led by a decline in the nominal goods balance that, with prices falling faster for imports than exports, understated the deterioration in the volume balance," he said in a research note.

"As a result we continue to expect net trade, in real terms, will subtract a sizeable 1.7 percentage points from Q3 GDP growth, to be reported tomorrow."

On the services side, the deficit widened to a record $6.3-billion.

“Although the reading is better than expected, it would still peg the current account as a share of GDP at roughly 4 per cent, a reminder that despite continued foreign investment inflows into the [Canadian dollar], trade fundamentals continue to suggest overvaluation [of the loonie],” said Emanuella Enenajor of CIBC World Markets.

RBC profit jumps
Royal Bank of Canada today kicked off the latest round of bank earnings with a 22-per-cent gain in fourth-quarter profit and a record year.

RBC’s profit climbed 22 per cent in the quarter to $1.91-billion or $1.25 a share, compared to $1.57-billion or $1.02 a year earlier, The Globe and Mail’s Grant Robertson reports. That was on better showings in its investment banking and retail banking units.

For the year, RBC earned $7.5-billion.

Chief executive officer Gordon Nixon said he's confident the bank will weather the challenges of next year in the financial services industry.

Gildan hikes dividend
Gildan Activewear Inc. today posted record fourth-quarter financial results thanks to lower cotton costs, a more favourable product mix and higher selling prices for its branded apparel, The Globe and Mail's Bertrand Marotte reports.

The Montreal-based manufacturer of t-shirts, fleece, socks and underwear earned $89-million (U.S.) or 73 cents a share, compared with profit of $48.5-million or 40 cents a year earlier. Revenue climbed almost 17 per cent to $561.7-million, and it hiked its quarterly dividend by 20 per cent or 9 cents.

(Canada is becoming known for underwear and yoga pants. Just sayin'.)

Tiffany posts lower profit
Breakfast at Tiffany’s might just have to be an Egg McMuffin.

Tiffany & Co. shares tumbled today in the wake of disappointing third-quarter results today and a move by the luxury retailer to cut its forecast again.

Tiffany earned $63.2-million (U.S.) or 49 cents a share in the quarter, compared to $89.7-million or 70 cents a year earlier. Revenue climbed to $852.7-million, but was weaker than forecast by analysts.

“Three months ago, we had anticipated that third quarter results would be affected by continued economic weakness in many markets as well as by challenging comparisons to last year when net sales were up 21 per cent and net earnings had increased 52 per cent excluding nonrecurring items,” said chief executive officer Michael Kowalski.

“However, gross margin was weaker than we expected and Tiffany’s effective tax rate was higher than we expected. As a result, net earnings were below our expectations.”

The company also cut its profit projections for the year to between $409-million and $435-million, $3.20 a share to $3.40.

“We continue to maintain a cautious near-term outlook about global economic conditions,” Mr. Kowalski said.

Inmet headed for bidding battle?
Analysts are betting that Inmet Mining Corp. has put itself into play for a bidding war, confident its Cobre Panama project is a prize worth fighting for as rivals scour the globe for new sources of copper, the metal that helped feed ravenous development in China for the past decade.

The Toronto-based miner said this week that in the past month it received two takeover offers from First Quantum Minerals Lt., Canada’s largest pure play copper producer, the latest one valuing the company at $4.9-billion, or $70 a share.

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