Why I Believe Research In Motion Continues to Be a Short

Jun. 9.11 | About: BlackBerry Ltd. (BBRY)

When a company has a drop in price and appears to be in an almost free fall day after day, it is normally due to one of two things: either the company had a one off event that sent investors into a panic, resulting in shares going on "sale", or the landscape that the company finds itself in has shifted faster than the company could adapt. When companies don't keep up with changes, the value of the company diminishes, even with the value of the stock and the shares not "on sale". The trick, of course, is to know the difference between a stock becoming cheap relative to the value of the company or not.

Research In Motion Ltd. (RIMM) presents investors with this very challenge. Has the stock become a value that investors should buy, or is this the next PALM? Let’s take a look under the hood and see what RIMM is and what it is not. RIMM is a $20.42 billion market cap company. Research In Motion Limited is a designer, manufacturer, and marketer of wireless solutions for the worldwide mobile communications market.

Through the development of integrated hardware, software, and services that support multiple wireless network standards, RIMM provides platforms and solutions for seamless access to time-sensitive information, including e-mail, phone, short message service (SMS), Internet, and intranet-based applications. RIMM’s portfolio of products, services, and embedded technologies are used by organizations worldwide and include the BlackBerry wireless solution, the RIM Wireless Handheld product line, software development tools, and other software and hardware. Its subsidiaries include Research In Motion Corporation, Research In Motion UK Limited and RIM Finance, LLC. On June 2, 2010, Harman International sold its software operating systems unit, QNX Software Systems, to the Company.

Once we start to look at the numbers, we can see that the Quick Ratio for RIMM is 1.89 (the higher, the better). Basically, if the number is greater than 1.0, in most cases, it means that the company does not face immediate bankruptcy and is a good credit risk. There is a reason why the word "quick" is in the name. One interesting aspect of the performance is the ability to prove earnings estimates are too low. Here is a look at the last few quarters’ estimates versus actual results. Will RIMM be able to beat going forward? Maybe, but it is my opinion that if it does, it will have more to do with the bar being lowered than the company's great performance.

Fiscal Quarter Ending Month-YR

Estimate

Actual

Difference

Difference %

Feb-11

1.76

1.78

0.02

1.38%

Nov-10

1.65

1.74

0.09

5.58%

Aug-10

1.36

1.46

0.1

7.72%

May-10

1.34

1.38

0.04

2.81%

Feb-10

1.28

1.27

0.01

0.63%

Click to enlarge

Many other numbers look impressive as well. RIMM has rising revenue year-over-year (yoy) of $14.95 billion for 2010 vs. $11.07 billion for 2009. RIMM’s bottom line has rising earnings year-over-year (yoy) of $2.46 billion for 2010 vs. $1.89 billion for 2009, and rising EBIT year-over-year (yoy) of $3.24 billion for 2010 vs. $2.72 billion for 2009. The current trailing twelve months (ttm) P/E ratio is 5.947 and the forward P/E ratio is 5.54. RIMM has a price to book ratio (ttm) of 3.97 and a price to sales ratio of 1.78.

The annual growth rate of revenue is 5.5546%. The last fiscal year had accounts receivable to sales percentage of 0.2149%, compared to the same period a year earlier of 0.1873%.

These are some impressive numbers, and while I am normally (almost always) a contrarian type of trader looking to exploit emotion when it enters the market, it is not so with this one. This is a total train wreck and RIMM needs to be saved. The only thing that keeps the doors open is the great looking balance sheet. Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) figured out that there is money to be made with smartphones, and they are not what I would consider to be ordinary competition. On one hand, you have Apple-- with its devout followers that make the rapture believers giving away their money to Harold Camping appear liberal-- and on the other, you have Google -- who is giving away its software in order to build a critical mass of users (very successfully) and in the process, catapulting Andriod system to number one. Netscape found out what happens when a large competitor gives away the product you are trying to sell. RIMM is finding out now, and while the ice may appear strong, it is melting from below. Absent a very large saving, either internally or externally (which appears highly unlikely), RIMM will likely start to bleed. If that happens, it will not swirl around the bowl long before totally imploding in value.

The chart says it all. Take a look at how well RIMM stock price has done. In the last month, RIMM has moved in price -13.55%, with a one year ago move of 34.8%. Comparing to the S&P500 price change, RIMM's performance is better than the overall market by -9.50% vs. the S&P 500 from a month ago, and the one year difference is -46.02% vs. S&P 500 price change.

I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades. While not totally the same applies in longer swing trades to investments, the concepts used are similar. Based on my criteria, I have come to the following conclusion: This one is worth taking the time to investigate further for an ideal entry price to either write call options or short the stock. Of course, that in itself does not mean you should, but you may want to use this article as a starting point of your own research with your financial planner. I use Seeking Alpha, Edgar Online, Google Finance, MSN Money, cnbc.com, Zacks and Yahoo Finance for most of my data, and may or may not double check it with the SEC filings.

I would like to see some type of dead cat bounce before entering in a short, but I would not be surprised if it never materializes. I am fine with missing many trades as a risk reduction method, but could understand an aggressive trader getting short sooner rather than later.


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