It is no secret that Research In Motion (RIMM) is not the favorite technology firm of Wall Street any longer. The Blackberry developer and manufacturer has struggled, failing to meet product launch deadlines, missing sales targets with its Playbook tablet and to this point it has failed to engage the application development community. With all of these negatives to consider, there is little doubt that Research In Motion is no longer the Canadian technology darling amongst investors that it was several years ago.
With all of these negative aspects considered, investors do need to look at the value of the assets behind the company as well as the potential value of patents and the enterprise services business. What kind of value does a sum of the parts analysis yield? Is Research In Motion worth more than its current market price?
First, the firm has substantial cash resources on the balance sheet. At the end of the 2012 fiscal year (March 3, 2012), Research In Motion had $1.5 billion in cash and cash equivalents. Viewed more broadly, the firm had a $3.7 billion working capital surplus at the year end. If we were to remove inventories from the working capital number, the firm is left with $2.7 billion in net working capital or approximately $5.24 per share. This represents real recoverable value in a liquidation event.
Research In Motion has no long-term debt, so all of the long-term assets are financed one-hundred percent by equity. This leads to the next stage of the valuation exercise, which is a look at the long-term assets of the firm. The corporation has $2.7 billion of property, plant and equipment on the balance sheet, of which $1.5 billion is the gross value of buildings and land that the firm owns. Assuming the firm can realize 75% of the value paid on buildings and land, this represents $2.91 per share in hard assets. Add the liquidation value of the physical assets to the cash on hand; we get to $8.15 per share in very realizable value. Even completely ignoring the value of Research and Motion's wide array of attractive security patents, and recently acquired firms, this is starting to approach the current trading price of the firm. This essentially sets a rational floor on the security price (not that this can't be breached).
In terms of the value of the security and other technology patents, there are a lot of numbers circulating about what the firm may fetch if they indeed sold some of these technologies. One of the most conservative estimates is from Jefferies analyst Peter Misek, who indicated in September of last year that Research In Motion's patent portfolio has a value of about $2.5 billion if the firm was solid in entirety. This value represents approximately $4.85 per share. Added to the value of working capital plus buildings and land and we've now reached a value for the corporation of $13 per share. The closing price on Friday for RIMM was only $10.99 per share, far less than even the most conservative analyst estimates for what could potentially be obtained in a sale. Interestingly, Misek seems to discount the real-estate or working capital further than this analysis, as his current target is $12 per share.
There are a number of potential upsides as well to Research In Motion's valuation. Many analysts seem to have ignored the value in the corporation's enterprise software. The firm will be adding new security features to the Fusion software that it has developed for Google (GOOG) Android and Apple (AAPL) operating systems, which enable the devices to meet security requirements for enterprise use. This segment has experienced substantial growth, with the company reporting services revenue up 28 percent to $4.1 billion for the year ending March 3, 2012. Adding this segment into the valuation would certainly boost the liquidation value of the firm far beyond its current trading levels, even if the handset business has zero value.
It is important to also remember that Research In Motion is still a profitable company. Expectations of earnings growth are certainly off the table at this point, but the company is not eroding equity value waiting for a transaction. The firm can certainly wait until an appropriate offer comes along, whether for the entire company or for specific high value patents.
How to Trade
It is always dangerous trying to catch a falling knife such as a Research In Motion, especially when it seems as though investors are unwilling to consider any positive element of the firm's story at this point. It does seem that RIM will have a hard time clawing back market share, and the future of the firm as a handset manufacturer is clearly in doubt. That said, the firm is trading below a liquidation value and is actually nearing the core value of its land, buildings and cash. If RIM were to fall below $8.50/share, it would undoubtedly be a buy.
Even if an investor affixes a value of zero the handset business, a strong case can be made that the enterprise services business has substantial value to the firm. If all of the patents, plus the enterprise service business, are worth a mere $1.5 billion, then Research and Motion is undervalued where it sits today. This does not mean the stock is a buy, however, as there may be an opportunity to pick this up lower yet if the negative sentiment continues around the stock.
One potential way to play this would be to write put options to "lock-in" the price today. The $12 December put options were bid $2.74 at the close on Friday, allowing an investor to establish a position at approximately $9.26/share. This seems to be an attractive entry point for the firm, with potential upside in the event of a takeover offer.
