Research In Motion Still Priced For Perfection

Jul.27.06 | About: BlackBerry Ltd. (BBRY)

Investopedia Advisor submits: Is Research in Motion (RIMM) worth buying? That’s a tough question. Since I last wrote about the maker of the Blackberry wireless email device in March, its shares have swung as high as $95 and recently as low as $60.

With the shares now trading down low, a lot of brokerage analysts reckon it’s the time to start buying.

So, to get a firmer idea of what investors are getting them selves into, I’ve been working on a discounted cash flow analysis. It looks like investors are still paying too much.

I’ve looked at slow, average and robust growth rates and I have even included Research in Motion’s $1.3 billion in cash into the mix.

My rosiest forecast show that Research in Motion will achieve free cash flow of $600 million next year, and will grow that number by 20% over the next four years, then by 15% through year ten, and 5% for years 11 through eternity. I’ve also assumed a discount rate of 10%.

This scenario – which asks an awful lot of the wireless messaging specialist -- generates a share valuation of $66.22, which is almost where Research in Motion trades today. In other words, stock is almost priced for best-case scenario growth.

My middle and low estimates, which assume growth of 15% over the next five years, 7% for years six through 10, 5% or 3% for the remaining years, give share values of $41.86 to $47.21. Most investors would regard these growth figures as very strong. Few companies produce this kind of growth for such a long period of time.

Of course, it could happen, and I am more focused on what Research in Motion must do to warrant its current price than trying to pin down a target price. But, even if Research in Motion does manage to deliver these numbers, they won’t be enough to justify its price tag.

For those who believe that Research in Motion can grow its free cash flows at 20% per year for the next five years and at double digits for five more years after that, there might be tad more value left in the shares. I have my doubts.

RIMM 1-yr chart:

By Ben McClure, Contributor - Investopedia Advisor

At the time of release Ben McClure did not own any shares in any of the companies mentioned in this article.