I consider myself a "value investor." Although that description has many meanings (depending on who you ask), there is no substitute for being rewarded for having made a good investment decision. I often mention that price should always be distinguished from value. They are not to be considered the same. Value is the result of having paid a fair price in exchange for a good or a service. However, when it comes to our investments, value is increasingly important. This varies however from sector to sector.
Technology is one sector where some may argue to value means very little. I can’t help but agree with the premise that “growth” is what moves technology stocks like Research In Motion (RIMM), Apple (AAPL) and Cisco (CSCO) whereas “value” is often proven to not matter. I have found myself in such a predicament when attempting to apply strictly conventional methods of evaluating these tech companies. It has resulted in a lot of second guessing between “value plays” and “value traps.”
Cisco is one that fits the criteria; one that is tough to not value. It is a company with such strong fundamental standing. The stock price neither reflects its market share status nor fundamentals. If we look deep into the numbers, we can see a company that trades at attractive valuation multiples. It stands solidly with a market cap of $87 billion as well as 58 billion in EV and trades at a modest forward P/E of 9. How can a company with $43 billion in cash not be considered, especially one that has amassed almost $10 billion in free cash flow each year? One can argue that there is no other company that has been able to leverage its balance sheet better than Cisco. It only seems now that investors are starting to give it a second look.
I am not suggesting that cash flow analysis and other means of fundamental scrutiny do not work, I am only saying that it has become increasingly challenging to arrive at a figure and project a valuation that is remotely realistic. Either I am completely wrong about the valuation or the market just doesn’t care. In either case, it warrants a different perspective.
Let’s take Research In Motion as another example. The company is due to report second quarter earnings on Thursday 9/15. As I noted previously, I am now long the stock after having been short for most of the year. My decision to be long has had to do with what I perceived to be tremendous value at a price below $25; as the stock reached a low of $21.60. But as noted above, the interesting dynamic is that RIM is a tech company; where only “growth” seems to matter. So the question now, is whether the company is primed for growth.
To answer this very important question, I looked back recently at its first quarter earnings report, one that was considered somewhat of a disappointment. For the quarter ending on May 28, the company reported net income of $695 million, or $1.33 per share, compared with net income of $769 million, or $1.38 per share, for the same period the previous year. Revenue grew by 16% to $4.9 billion.
The company also said it shipped 13.2 million smartphone units and 500,000 units of its new PlayBbook tablet. Analysts had been expecting smartphone shipments of 13.3 million and Playbook shipments of 436,000. For the fiscal year ending next February, RIM said it now expects earnings to come in the range of $5.25 -$6 per share. RIM had previously maintained a full-year EPS forecast of $7.50, though consensus estimates had the number at $6.31. Guidance (at the time) also came in below Wall Street's estimates for both the current quarter as well as the fiscal year ending next February.
What to look for in the numbers
I think RIM has setup investors with low expectations and the company will over-deliver. I think investors will be pleased with this report and it will end a string of consecutive earnings disappointments. What many fail to realize is that RIM actually grew by 38%. Despite growing challenges during that time, RIM has managed to grow earnings every year since 2005 and this year should be no different; even with management's lowered outlook. The fact of the matter is RIM’s devices still make up 42% of the smartphones currently in use in Canada.
For all of that criticism and skepticism that RIM continues to absorb regarding its lack of competitive sense against Apple and Google (GOOG), I continue to look at the stock and realize that all of the negativity has already been baked into the price. There is nothing more that can be revealed that would be much of a surprise to anyone. But I sense that bears should brace themselves for a few things that may prove astonishing this coming Thursday. If RIM beats its earnings estimates and decides to raise its previously lowered guidance, I think investors should expect the stock to approach the $35 to $40 range by the end of the year.
RIM’s stock price is still trading incredibly cheap relative to its peers. The company still has a strong fundamental standing and a solid brand that resonates in the enterprise market. Nobody expects RIM to be Apple or Google. I think investors and analyst will be pleased if RIM can simply become the “next RIM” or in other words, find a way to re-invest its capital and possibly re-invent itself. Speaking of re-investing capital, Sirius XM (SIRI) looks incredibly cheap these days. I have said it before, RIM should consider acquiring Sirius to not only allow it to better leverage its BBM music service, but to establish its dominance in the automobile market; where both Google and Apple and to a lesser degree Pandora (P) seem to be making some headway.