With Research In Motion (RIMM) shares closing at $13.58, one must ask themselves if a stock with a book value over $19.00 per share that earns positive cash flow deserves such a low price. With a price of $13.58 the market is saying that despite solid previous earnings the shares are worth less than book.
Research In Motion is either in a significant amount of trouble or the market has it wrong. In 30 years will be people be talking about a collapse, a flat, or a rebound story for Research In Motion? Consider the past financial data of RIMM - EPS, excluding extraordinary items, are as follows:
- 2011: $6.32
- 2010: $4.53
- 2009: $3.30
- 2008: $2.26
Not bad at all. RIMM might never see the $4.53 or the $6.32 EPS for many years or ever again, which begs the million dollar question of what the EPS will be for 2012 and 2013. Will RIMM be able to still have market share down the road? If the company is able to maintain positive cash flow and innovate with new products, this could be the best time to buy Research In Motion.
Warren Buffett once said "be fearful when others are greedy, greedy when others are fearful." Everyone seems scared of RIMM, so according to Warren it might be the time to load up.
Let's say that RIMM is, and continues to be, a third tier player in the smart-phone market and that the security and other proprietary functions are lost in the bunch. If the company doesn't lose any money and doesn't engage in any wasteful acquisitions (or other unforeseeable cash burning mechanisms) and continues to be profitable, Research In Motion will still be trading for less than book value - even if we remove goodwill completely from our valuation.
(Total Assets - Goodwill - Total Liabilities / # of Shares Outstanding)
(14037 - 659 - 3840 ) /515.7 = $18.49
Assuming that RIMM earns $2.25 a year would give the shares a P/E ratio of about 6 times earnings. The shares would be trading at below book value, with the book value of $18.49
At such a reasonable valuation it could be argued that RIMM trading at $13.58 presents a good entry point. Even if the company only delivers $2.25 in yearly EPS, the shares and price would represent a reasonable valuation. At these levels, and with technology changing as fast as it does, RIMM could potentially come up with that next big thing or at least be a part of it. At the very least the company could sell the Blackberry for the next 30 years.
The reason that I do not think that RIMM is going to be obsolete is because people still love their Blackberries - not to mention the fact that millions are still on contracts extending years. Furthermore, users are used to the hard physical keyboard and prefer it for typing as opposed to the iPhone (AAPL). There are also the emerging market users who do not necessarily have sufficient disposable income for expensive data plans, but can use SMS text through their Blackberry, which enables them to communicate cheaply.
As such, RIMM doesn't have to be a shining star in order for the company to do well by investors. Assuming the metrics used above in earning of $2.25 per year, management could pay a strong dividend and investors would be paid off while waiting for management to deliver on technological innovations to increase earnings.
Maybe if we do not look at Research In Motion as a growth company but rather as a value play the argument can be made that the shares are reasonably priced. Research In Motion benefited from gaining access to patents previously owned by Nortel (NRTLQ.PK), and the company may deliver on future innovations while investors are paid to wait. All that needs to happen is for management to issue a $.50 cent dividend which would equate to about 3.7% at today's share price.
If management is smart and declares a dividend investors will have a reason to buy the stock. The company has enough cash that the only question is not doing anything with it until broke. By paying investors to wait, the company will ensure demand for the shares while having the time necessary to innovate and bring new technologies to market.
If I was the CEO of RIMM, I would pay the investors to wait and pay the $.50 cent per year dividend. I would innovate in specific niche markets such as healthcare and defense communication technologies, while dumping highly elastic consumer driven products such as the Playbook.
Forget the past. If RIMM management is smart they will look at this company for the strengths that it has. RIMM has a strong balance sheet, solid infrastructure, concrete distribution, and excellent R&D prospects. Pay the investors a dividend and you have the beginning stages of a growing business, with loyal consumers who enjoy RIMM products.
The company is set up for the next big thing. The question is whether it will be capitalized in order to execute in time. There is no shame in being a small player in a large growing market when the small player pays its shareholders, innovates, and ultimately increases revenue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.