There is no classic paired trade opportunity with Apple (NASDAQ:AAPL), and Research in Motion (RIMM). The success of the iPhone, despite the “bad connection” with AT&T, is proof that there is room in this market for both types of products: consumer and business.
Apple is lead by magician Steve Jobs who I think I bought the Brooklyn Bridge from for a hefty price, recently. But with the continuing upward value of N.Y. real estate, I don’t even feel like I was ripped-off. Seriously, the crack-berry addicted business user base of RIMM, compared to the more personal, and niche use of the iPhone, is hauntingly familiar.
Just like the Mac/PC war has proven, winners, and smaller winners can co-exist. Let’s look at some of the facts in order to make an educated assessment of the situation.
Take a look at the six and 12 month charts of AAPL and RIMM, and let me know which stock you would want to own for your investors:
AAPL vs RIMM 6-month chart:
AAPL vs RIMM 1-yr chart:
The smart answer perhaps is both, but with my multi-factor models pointed squarely at my head - my one answer is RIMM.
The Ontario-based company Research in Motion was founded in 1984, and has been one of the fastest growing companies in the mobile communications market. To keep up with growth in demand for its products, the company has gone from 200 employees in 1998, to 6,200 today. With a market capitalization of about $40 billion, and annual revenue in excess of $3 billion, RIMM is one of the largest companies in the wireless market, and continues to grow rapidly.
Initially when Apple announced its plans for releasing the iPhone back in January, RIMM’s stock appeared to be adversely affected by this news, as evidenced by slight stock price declines in the weeks following the announcement. Eventually investor sentiment turned positive as the realization that the introduction of the iPhone could be a potential benefit to RIMM, even though the iPhone would compete with RIMM products in certain markets.
Odd as this may seem, investors began to think that the introduction of the iPhone would bring a great deal of new attention to an industry that RIMM already holds a leadership position in, ultimately producing more business for RIMM. RIMM’s stock has continued to rise, in part by the mega news that its proposal for entering the vast market in China has been approved, thereby creating the opportunity for billions more tired fingers!
RIMM’s fundamentals back up its stock performance beginning with its year-over-year revenue growth of 57.57%, along with a net income growth over the same period of 99.48%, which demonstrates just how quickly this company is growing. Its profitability measures are also encouraging for the company boasted a net profit margin of 20.63%, over the trailing twelve months compared to its peer group average of 5.60%.
RIMM posted a Return on Equity [ROE] of 29.72%, which exceeded the industry average of 8.30%, over the past year. Despite its track record for growth, RIMM has still managed to run its business with low leverage. This is demonstrated by a Total Debt-Equity ratio of just 0.25%.
Along with its strong fundamentals, RIMM still appears to be growing at a reasonable price. Its Price-to-Earnings (P/E) ratio is high at 56.17, but when factoring in growth we calculate a Price-to-Earnings-to-Growth [PEG] ratio of only 0.57. This is an indication that given its growth rate, the stock price is relatively low.
Don’t get me wrong, I am an Apple fan, and with a P/E of about 42, AAPL with its wide range of hardware, and software offerings still may be a good buy. But, for our concentrated portfolio, at this time, we are investing in business users, China and RIMM.
Disclosure: Mr. Corn is CEO of Clear Asset Management Inc. Research in Motion (RIMM) is a holding in the actively managed Clear Large Cap Growth portfolio. Mr. Corn owns shares of RIMM directly through his participation in the portfolio.