Everyone wants a bargain, but how do you know what's a great deal and what isn't? Is Research In Motion (RIMM) a bargain basement stock? Is RIM under $13 the deal of the century?
I like bargains. I thought about it. But I took a look and I don't think it's a bargain yet.
When you see a stock trading at below book value, it looks tempting. CNNMoney, Bloomberg, and Yahoo! Finance show the company trading at about 67% of book value, placing that value at around $19.30 per share (with the stock closing Wednesday at $12.76).
However, RIM's "book" needs some editing. It needs a few chapters cut out to eliminate all the fluff - stuff like "goodwill", "other" assets, and especially those assets classified as "intangible."
That would give us the "tangible book value," which YCharts.com pegs at around $13.50 per share.
But I'm a tough editor. I'm cutting more out. I'm discounting "inventory" by 75%. Yes, some of it is actually raw materials, but other portions are "work in process" What's that worth?
So in my scenario, RIM's tangible value is more like $11.50 per share.
In fairness, I might add back some of the intangibles, such as technology that has any real value or patents that someone might actually buy. The only problem is, I have no idea what that stuff is worth, and I contend that nobody really does until a willing buyer comes to terms with a willing seller.
Say the intellectual property is worth $5 billion. That adds about $9.50, which brings puts the stock back into the $19-$20 range. But it could be worth very little or even nothing. So that's why I'm steering clear of RIM as any sort of a value play.
To clarify, I'm not suggesting shorting this stock. Who knows? It could be the turnaround story of the decade like Apple (AAPL) was last decade. But it's not a growth story now. Sure, a buyer may emerge, but that could be a really time-consuming and complex transaction involving multiple governments.
In a recent Bloomberg article, analyst Matt Thorton said that a people may be "kicking the tires," but that's about all for now.
"RIM, as well as any potential acquirers, are going to watch and see what happens to RIM's subscriber base this year and how the new version of BlackBerry does this year and whether there's anything worth owning," Blair said. "Any potential suitors are going to wait and see how that's received by consumers. Nobody knows just how bad this could get."
The Bloomberg article (not quoting anyone specific as near as I can tell) speculates on an earnings-related price for an acquisition:
Still, an acquirer could pay as much as $18.37 a share for RIM and value the company at only 6 times last year's earnings, less than all of its peers, which trade at a median of 18 times, data compiled by Bloomberg show.
Sorry, I'm just not buying into it. Unless there's growth, the PE is ratio is irrelevant.
People talking "book value"? That's a danger sign
For most technology stocks, book value is mostly irrelevant. But when people start talking about price-to-book on what was once a hot tech stock, that's the sign that you have to take a much closer look at the book itself.
There's one interesting thing I found while looking at RIM. The company marked down its "goodwill" last quarter from $659 million to $304 million. That's about 58 cents per share now.
So RIM now has a "price to goodwill" ratio of only 22.4. As a comparison, Apple carries less than $1 billion on its balance sheet as goodwill, so its ratio is well over 600!
But even with its astronomical price to goodwill ratio, I'd choose Apple over RIM.
Disclosure: I am long AAPL.
