RIM Shares At Book Value Are Too Cheap To Pass Up

Nov.17.11 | About: BlackBerry Ltd. (BBRY)

A few months back I published an article recommending long-out call options on Research In Motion (RIMM). The stock was trading around $22 then, and it promptly went to $32 within a few weeks. Since then, the stock has fallen on more hard times, trading at a seven-year low of $17.17 recently.

There are certainly some problems at RIMM. As everyone knows, the company has an aging product line and is losing marketshare to Apple's (NASDAQ:AAPL) iPhone and devices powered by Google's (NASDAQ:GOOG) Android operating system. Additionally, annoyingly persistent service outages have enraged customers the world over. On top of these considerations, RIMM's foray into the tablet market fell flat on its face as the Playbook failed to excite customers despite decent reviews.

Despite these concerns, the fact remains that in the BlackBerry, Research In Motion has one of the most recognizable brands in the world. Also, the company has no debt on its books and trades at a laughably low p/e ratio. The stock was upgraded at Goldman Sachs today on a valuation basis--it said that based on a "sum of the parts" evaluation, the stock is now fairly valued.

Apparently, Goldman is evaluating RIMM based on its liquidation value and not on its earnings, as though the company were going out of business tomorrow and will never sell another handset. According to Goldman, the valuable parts of the company are the fee-based BlackBerry e-mail system, the company's patents, and its cash. While fees, patents, and cash certainly are valuable core assets, the fact remains that Research In Motion is a going concern and should be treated as such.

A quick look at the company's financials for the fiscal year ended February 28, 2011, indicates that RIMM had its best year ever in virtually every category. Revenue, operating income, net income, cash flow per share, total cash flow, and earnings per share were the highest they have ever been. The company has been debt free since 2008. The company's price to sales, price to EBITDA, and price to pretax income were drastically lower than they have been in at least the last three years, and the average number of shares outstanding has declined every year since at least 2008. The company's return on equity was the highest its ever been at 41.2%, and RIMM's return on assets was near an all time high at 30%.

RIMM's trailing twelve month price-to-earnings ratio is 3.5 and its forward p/e ratio is currently around 5. Needless to say, I believe these ratios are far too low. If all this is not enough to convince you, consider this: The company trades right at book value.

As for the company's aging product line, investors might want to take a look at the leaked pictures of the rumored BlackBerry London. Not only does the phone look great, but the specs aren't bad either. In addition to being the first BlackBerry to run RIMM's new BBX operating system, the phone is rumored to have a 1.5 GHz dual-core TI OMAP SoC, 1 GB of RAM, 16 GB of storage, and both a front and rear facing camera. The probelm of course, is that the phone isn't due out until the third quarter of 2012 making RIMM a little more than fashionably late to the party.

Also worth mentioning is a new report which shows that increasingly, businessmen and women are using their iPhones at work. While the report was intended to demonstrate the declining popularity of the BlackBerry among professionals, it was paradoxically percieved as a positive development for the BlackBerry maker, as it showed RIMM only losing 2% of its marketshare in the business world over the past year, far less than many had anticipated given the growing popularity of the iPhone and Android powered devices.

Given all of this I highly recommend taking a look at shares of Research In Motion. While I would caution that their earnings report (due on December 15) could cause the shares to fall if it doesn't live up to analysts' expectations, I still maintain that at their current level, the shares are just too cheap to pass up.

I found the January 2013 37.50-strike call options to be intriguing. Although they are well out-of-the-money, they trade for around 1.00. To me, this is an extraordinarily cheap bet to make on RIMM shares rebounding above $40 sometime in the next 14 months.

Disclosure: I am long RIMM.