Jim Cramer is fond of saying that there are broken stocks and then there are broken companies. Broken stocks are defined by a falling share price of a company that is fundamentally sound. These are companies that you want to be involved with. You like the underlying strength of the business and have an opportunity to pick up the shares cheaply. Broken companies are fundamentally flawed institutions and have been beaten up by the market for valid reasons.
So now it is time to decide which of these categories Research In Motion (RIMM) falls in. RIMM's share price has been consistently. In the past year it was down $42.63, or just over 75%, and it is down 90.21% from its 5-year high of $148.13. This is clearly a stock that has fallen on hard times. It is trading at a depressed multiple of 5.5. The market cap has dropped all the way down to $8.6 billion dollars.
- Market Cap: $8.6 Billion
- Share Price: $15.51
- Price to Earnings: 5.5
- Price to Cash Flow: 3.0
- Debt to Equity: N/A
The Positive Spin
Zero Debt: Research In Motion does not have any outstanding debt. This is not a common signal of a company that is in trouble.
Depressed PE Multiple: Right now the company is trading at largely depressed PE multiple of 5. This is a far cry from the 5-year average PE ratio of 20.9. If you believe that Research In Motion is not a broken company that is doomed to death, than this is a solid buy sign.
Possibility of a Takeover: RIMM's share price took a nose dive last year and the company was constantly surrounded by rumors of a possible takeover. Many have hoped that these rumors would prove true and give a boost to the stock.
Bad News Baked In: Many analysts and investors feel that all the bad news about RIMM has been baked into the share price. They feel that additional negative news will not have a significant impact while a positive catalyst could send the stock shooting up. Some of these catalysts could include a senior management change or increased takeover speculation.
The Negative Spin
Declining Relevance in the Smart Phone Market: The writing is on the wall here. RIMM is no longer a dominant player in the smart phone arena. They continue to lose market share to both Apple (AAPL) and Android smartphones. For years Blackberries were the choice of leading business for their security and reliability. However, that is now changing. More and more companies are allowing their employees to use other devices.
Declining Quarterly Earnings Reports: This is another area of extreme disappointment for Research In Motion. Throughout 2011 the company has failed to hit its numbers, causing investors to treat the stock with justifiable disdain. These negative numbers have been caused by RIMM's shrinking share of smartphones and the failure of the Blackberry Playbook to gain any traction in the highly desirable tablet market place. The earnings reports make it very clear that Research In Motion is in serious trouble and has been for some time.
Delays in New Operating System: The Canadian tech giant really dropped the ball on the development of their new operating system. The recently renamed Blackberry 10. The operating system that was expected to be launched in the first half of 2012 but has been pushed back until the latter half of the year. This is just one more link in the negative chain that is choking the stock.
Road Blocks for Potential Takeovers: Recently rumors of potential buyers for RIMM have been thrown around by analysts and television pundits alike. The potential list of suitors includes Microsoft, Google, Facebook, Amazon and Apple. There are several reasons why I believe that there major obstacles between Research in Motion and a lucrative takeover.
The number one reason that a takeover is unlikely is because of the price tag of RIMM. Even at these depressed prices it would still take somewhere between $10 and $15 billion dollars in order to acquire RIMM. This limits the number of potential buyers to a select few. Also the company is one of the brand name companies based out of Canada. It has been suggested that the Canadian government would be reluctant to allow a foreign company to acquire one of its major franchises. A final reason that I think that an acquisition is unlikely is due to the fact that RIMM does not seem to want to be acquired. There are unconfirmed rumors abound that RIMM has already turned down offers from Amazon and Microsoft. The management of this company seems complicit in the destructive path that RIMM has been on for some time.
RIMM's Reluctance to Change: During the process of researching and writing this article news leaked out that Research In Motion will most remove Mike Lazaridis and Jim Balsillie from their co-chairman roles and replace them with Barbara Stymiest.
The restructuring of the corporate governance would normally be seen as positive news for a struggling company. However, it is my opinion that this is a highly symbolic move and will have very little impact on how RIMM operates. The two former chairmen will still hold their places as co-CEOs. Also Mrs. Stymiest has been a board member since 2007 and has sat by and watched the downfall of RIMM. Is this really the game-changing news that investors are looking for?
It seems that there are both positive and negative aspects to the Research in Motion story. As is always the case it is our jobs as investors to weigh these pros and cons against in order to gain some conviction about the stock; this is mine. I feel that the company's share price is extremely depressed right now for valid reasons.
Apple and Google are undeniably eating RIM's lunch in the tablet and smartphone markets. This combined with inept leadership and a reluctance to change leads me to believe that RIMM is not suitable for any but the most speculative investors. It is my opinion that only an unlikely takeover of RIMM will benefit its shareholders.