Can We Go Back To Shorting Research In Motion Now?

| About: BlackBerry Ltd. (BBRY)

Last month, shares of Research in Motion (RIMM) plunged again as their latest earnings report and guidance were disappointing. I called the company Research in Backward Motion. Research in Motion has failed to meet expectations lately. However, after the stock hit rock bottom at $12.45, we've seen a strong bounce back. RIMM shares are up more than 23% from their 52-week low. There were rumors at times that companies like Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Nokia (NYSE:NOK) had shown interest in RIMM. We also know that suggestions are made that Apple (NASDAQ:AAPL) buys out RIMM, but we know that Apple usually doesn't make large acquisitions.

Now that we've seen a 23% plus bounce back, I think it's time we can start shorting RIMM again. The takeover chatter is nice, but we heard rumors of a buyout when this was at $30, then $25, then $20. With the stock now at $15, why would someone want to pay up now if the trend continues downward? Research in Motion has been struggling, and the numbers aren't getting any better. Let's take a look.

The first table looks at Research in Motion's three main margins over the last six fiscal quarters.

Margins Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011
Gross 44.48% 43.56% 44.15% 43.93% 38.68% 27.28%
Operating 23.41% 22.85% 22.32% 18.28% 9.76% 6.35%
Net 17.24% 16.58% 16.81% 14.16% 7.89% 5.13%

Notice a trend? I hope you can see it. Now, some may say that the last two quarters were just bad, but RIMM's net profit margin has been declining steadily over time. In the first quarter of 2010, it was at 18.15%. Now we are at 5.13%. Even worse, operating margins have declined for six straight quarters. Gross margins have not faired very well either.

Next I want to emphasize the past two quarters. The first is RIMM's fiscal second quarter. Look at these margins.

Q2 Margins 2008 2009 2010 2011
Gross 50.71% 44.09% 44.48% 38.68%
Operating 27.25% 18.49% 23.41% 9.76%
Net 17.83% 13.49% 17.24% 7.89%

If this doesn't say ouch, I don't know what will? Perhaps, their third quarter margins over that same time period?

Q3 Margins 2008 2009 2010 2011
Gross 45.63% 42.69% 43.56% 27.28%
Operating 23.02% 22.53% 22.85% 6.35%
Net 14.24% 16.01% 16.58% 5.13%

On a percentage basis, the third quarter falls are bigger. Is this going to get any better? Probably not. Let's look at the following timeline.

March 24, 2011:

  • RIMM projects 2011 first quarter (fiscal 2012) revenues of $5.2 to $5.6 billion and EPS of $1.47 to $1.55.
  • RIMM projects fiscal 2012 full year EPS guidance of $7.50.

April 28, 2011:

  • RIMM warns that Q1 revenues will be slightly below previous guidance range.
  • Warning also lowers EPS for Q1 to $1.30 to $1.37 range.

June 16, 2011:

  • RIMM reports Q1 revenues of $4.91 billion, a bit lower than expected, and EPS of $1.33, near midpoint of lowered range.
  • RIMM launches Playbook during quarter and ships approximately 500,000 units.
  • RIMM announces Q2 guidance of $4.2 to $4.8 billion in revenues and $0.75 to $1.05 in EPS.
  • Full year guidance range lowered to $5.25 to $6.00.

September 15, 2011:

  • RIMM reports revenues of $4.17 billion, below lower end of range.
  • EPS of $0.63, but adjusted to $0.80 for one-time charge. Both numbers below $0.88 expected and $0.90 midpoint given.
  • Approximately 200,000 Playbooks shipped.
  • RIMM projects Q3 revenues of $5.3 to $5.6 billion, and adjusted EPS in range of $1.20 to $1.40.
  • Company says full year guidance to be at lower end of $5.25 to $6.00 range.

December 2, 2011:

  • RIMM announces $485 million pre-tax, $360 million after tax charge related to Playbook inventory.
  • Announces revenues to be slightly lower than previous range.
  • Company states adjusted EPS to be at lower end to midpoint of $1.20 to $1.40 range.
  • Company says it no longer expects to meet full year guidance of $5.25 to $6.00.

December 15, 2011:

  • RIMM reports revenues of $5.17 billion, adjusted to $5.22 billion due to service interruption.
  • Diluted EPS of $0.51, adjusted to $1.27 after three adjustments. That number actually beat analyst expectations, which had been lowered to $1.19 after previous warning.
  • Company ships 150,000 Playbooks in quarter.
  • Gives Q4 revenue guidance of $4.6 to $4.9 billion, below analyst expectations of $5.12 billion. Current expectations are for $4.58 billion.
  • EPS guidance of $0.80 to $0.95, well below the $1.18 analysts were expecting. Current expectations are for $0.84.
  • No full year guidance given by company, but adding 4Q guidance gives estimated range of $4.16 to $4.31. Current estimates call for $4.31.

It's been a couple of weeks since the latest update, and we haven't heard anything else. I guess that's a good thing. The following table is a summary of analyst expectations, and this is only over the past three months.

EPS Est. 4Q 1Q FY 2012 FY 2013
90 days ago $1.49 $1.25 $4.80 $4.84
60 days ago $1.45 $1.22 $4.74 $4.72
30 days ago $1.19 $1.00 $4.45 $3.92
7 days ago $0.84 $0.70 $4.13 $2.95
Current $0.84 $0.70 $4.13 $2.95

Research in Motion, in fiscal year 2011 (ending in Feb. 2011), did $6.32 of EPS. That's expected to drop to $4.31 in FY 2012 and $2.95 in FY 2013, and that's just current expectations. I expect these numbers to come down even further. The company has been shipping less playbooks each quarter, and I just don't see the rebound anytime soon. Revenues are expected to be down 5.2% in both fiscal years. Now, just a few weeks ago, when I posted my latest article on the company, expectations were just for a sales decline of 1.8% in fiscal 2013. Now we are at 5.2%. If Research in Motion doesn't start improving, could it be possible that the decline hits 10%? Not likely at the moment, but they are trending lower.

It would be wrong if I didn't include a discussion of the M&A rumors that have been around, so here's some basic financial information (margins are trailing twelve months).

Mkt. Cap $83B $235B $19.5B $391B $8B
Cash+Inv. $6.3B $66B $14B $81B $1.5B
Gross Margin 22.52% 77.20% 29.82% 40.48% 38.54%
Op Margin 2.47% 38.78% 2.50% 31.22% 14.50%
Net Margin 2.00% 33.01% 1.58% 23.95% 11.23%

Research in Motion's enterprise value is currently about $6.5 billion, so if you gave them a 25% premium, you're talking about an $8 billion deal, which would be about $10 billion in equity. But let's subtract out that cash from the equity and leave it at $8 billion.

Apple, Microsoft, and Nokia have enough cash and investments on their balance sheet to easily make the purchase. Amazon doesn't, but it has enough assets and is large enough to finance a deal. Now we assume that Apple and Amazon would dump the Playbook since they have their own tablets, so you would expect that to help their margins. However, Apple doesn't do large acquisitions, and with many expecting them to see 30% profit margins in the next year or two, I don't see them acquiring the less profitable RIMM. Microsoft also would drag down its margins if it acquires RIMM, although they have made big purchases in the past. Amazon could definitely improve its margins by acquiring RIMM, but given their success with the Kindle Fire, I think that they would rather focus on improving internally then trying to go out and make a huge purchase. Nokia would seem the most logical to me, although they are the smallest of these names. It would be the biggest risk for Nokia in my opinion, but given what their stock has done lately, it may just be the move they have to make. Overall, I think there is a potential for a buyout here, but I think that any acquirer would want to wait. Why pay $8 billion if in a year you can get it for $5 billion or $6 billion. That's just my personal opinion.

RIMM has rallied 23% off its lows, but I believe that it is headed lower. The company right now, despite having a large customer base, just isn't performing. Blackberry shipments were up 33% in the third quarter over the previous quarter, but Playbook shipments were down, which led to a revenue increase of just 24%. Margins are well off their highs of a few years ago, and analysts are taking down estimates by the week. M&A rumors are nice, but I can't see anyone buying them at these levels. It just doesn't make sense to me. As I stated in my previous article, I think RIMM is going to $10 at some point in 2012. I think we are going to see at least one or two more bad quarters, and given their disappointing guidance, new lows seem like they are coming. It's just a matter of time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.