The Valuation Gap Between RIM and Motorola Mobility Is Too Ridiculous to Ignore

 |  Includes: BBRY, GOOG
by: Chad Brand

It continues to amaze me how much investors hate Research in Motion (RIMM) stock. Maybe no company that competes with a highly successful Apple product will be able to win over Wall Street's heart, but the recent share price action of RIMM really boggles the mind.

This is not the first time I have written about RIMM. Back in September 2010 I really loved the stock around $47 (in a piece called "RIMM: 76% Earnings Growth for Under 10x Trailing EPS"). My bullish investment case previously had been that with the stock trading at 10x earnings, the company did not have to overtake Apple (NASDAQ:AAPL) (or anything near it) in order for the stock's risk-reward to be favorable. That first call proved a good one, as the stock reached $70 in February, for a gain of 49% in 5 months.

When you have an entire globe making the switch from regular cell phones to smartphones with data plans, the pie will get so much bigger that each slice can grow too, even the second-tier players. If you pay 10x times earnings, multiple compression is minimal and earnings are likely to continue growing, even if not at the same pace as Apple.

And yet, here we go again. The stock's action lately has again presented investors with an intriguing entry point. Last week RIMM guided earnings for the current fiscal year (which began March 1st) to "at least $7.50" when the consensus estimate was previously only $6.81 per share. And yet, the stock has gotten crushed as the news headlines fussed over the fact that the first quarter isn't going to be as strong as the last three quarters of this year.

Really? Who cares how they divide up the $7.50 in earnings? Longer term investors certainly shouldn't. I didn't see a single headline that said "RIMM expects to blow past earnings estimates this year." Now the stock sits around $56, which is an astonishing 7.5 times this year's profit forecast.

The bears have been saying that RIMM's stock is a dog because earnings will fall off a cliff, but this has not happened (and does not appear to be in danger of happening anytime soon). They are shipping nearly 60 million phones a year, and are strongest overseas, even though U.S. investors barely notice that with the strong foot traffic at their local Apple store.

Until things change, I will continue to beat the bullish drum every time Wal Street reacts to a RIMM earnings report this way. The stock simply does not deserve to trade at 7.5x earnings.

Consider Motorola Mobility (NYSE:MMI), a stock I am short in my Wealthfront portfolio. MMI is expected to earn $0.96 this year (I'll take the "under" on that one, by the way) and trades at $26 per share, for a P/E of 27. Really? MMI should trade at almost 4x the multiple of RIMM? No chance.

Even if you use the 2012 earnings forecast for MMI ($1.93 -- again, extremely aggressive, in my view), Motorola trades for 13.8 times 2012 earnings, versus 7.5x 2011 earnings for RIMM. Even if you combine Motorola's earnings for 2011 and 2012 ($2.89), it still trades at a 20% premium to RIMM stock!

People must really think consumers are going to buy the Motorola Xoom tablet for $600 when they can get an iPad for $500. Or maybe they'll choose a Motorola Atrix over an iPhone on AT&T (NYSE:T). Highly unlikely on both counts, in huge volumes anyway.

As a result, I will likely be adding RIMM to client accounts in the near future, as I suspect the same value that was offered back in September is once again manifesting itself today. And even if you are not sold on RIMM's ability to keep growing, you can still arbitrage RIMM and MMI and make money, while assuming less risk. The dichotomy here is simply too obvious to ignore.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIMM over the next 72 hours.