It is rare to find a sector where each and every company that competes in it is able to succeed over the long-term. Usually, a few companies emerge as the victors while the rest are marginalized. The smartphone sector seems to be no different. Apple (AAPL) has emerged as the sector's leader, at least in terms of profitability, and RIM (RIMM) has been marginalized. Over the past 5 years, since the iPhone has been released, RIM's BlackBerry business has suffered greatly, as has its stock price. The purpose of this article is to examine the company's balance sheet, to determine if there is a bottom in the stock.
Over the past 5 years, RIM has lost over 80% of its value. And yet, the company has been consistently profitable, posting GAAP EPS of $2.22 for fiscal 2012, which ended on March 3, 2012. While that is a steep fall from the $6.34 the company earned in fiscal 2011, it is nevertheless a solid profit.
RIM's stock has fallen due to worries about the company's future, and RIM's recent update has only served to accelerate those worries. After the markets closed on May 29, RIM announced that it expects an operating loss for the first quarter of fiscal 2013, and that it has retained RBC and JPMorgan to explore "strategic alternatives" for RIM. The stock plunged as a result, and multiple analysts issued downgrades.
And yet, from a cash flow standpoint, the first quarter of fiscal 2013 should be positive. RIM, though it is calling for an operating loss, stated that it expects to increase its cash position. The disconnect between increasing cash and the company's operating loss is almost certain to be due to inventory writedowns. Year-over-year, RIM's inventory increased by 66.18%, and Bloomberg is among the news organizations that believes a writedown is due. RIM already took a $465 million pretax writedown of its PlayBook inventories in December, due to slow sales, and it is likely to take another writedown when it reports results in June.
Given how far RIM's stock has fallen, we set out to determine if there is a floor in the stock, based on the company's balance sheet, and our analysis is below. Before we continue, however, we would like to make a comment regarding the scope of this article. The purpose of this piece is to analyze RIM's assets and liabilities, not comment upon the BlackBerry ecosystem or what the company is doing to try and reverse the decline in its market share and profitability. Our analysis will focus on what the company is worth based on its assets & liabilities, and the likelihood of a sale. Even though RIM has been coy about its intentions, Canadian investors see a sale as a distinct possibility, and pressure has been increasing on the company's board for an outright sale.
RIM's Book Value: It's All Relative
As of the end of fiscal 2012, RIM had a book value of $10.1 billion, which translates to a book value per share of $19.26 (based on 524.16 million outstanding shares). The stock is trading at $10.30 as of this writing, which means RIM is trading at a P/B ratio of 0.535. Doesn't that mean RIM is a great buy? Not quite. It is important to see just what makes up that book value, and we breakdown RIM's balance sheet below.
RIM Balance Sheet
|Line Item||Total||Value per Share (Rounded)|
|Short-Term Investments||$247 Million||$0.47|
|Accounts Receivable||$3.062 Billion||$5.84|
|Other Receivables||$496 Million||$0.94|
|Income Taxes Receivable||$135 Million||$0.25|
|Other Current Assets||$365 Million||$0.69|
|Deferred Income Tax Asset||$197 Million||$0.37|
|Long-Term Investments||$337 Million||$0.64|
|Intangible Assets||$3.286 Billion||$6.26|
|Accounts Payable||-$744 Million||-$1.42|
|Accrued Liabilities||-$2.382 Billion||-$4.55|
|Income Taxes Payable||-$10 Million||-$0.02|
|Deferred Income Taxes||-$232 Million||-$0.45|
|Deferred Revenue||-$263 Million||-$0.51|
*Differs from exact book value per share due to rounding
RIM's balance sheet, at the moment, is clean, with billions in cash & investments and no debt. But we do not think that the company's stated book value is adequate. Inventory writedowns are set to reduce the company's book value.
So how much is RIM worth? The answer to that question varies, based on when the company might bow to a sale. With RIM investors increasing their pressure, a sale is becoming more likely. While the company has denied a sale, that is simply a smokescreen, according to at least one large Canadian investor. Tom Caldwell, CEO of Caldwell Securities has said that, ""The best way to say you're considering a sale is to say you're not for sale. I think they're looking for a buyer for the whole thing."
A Sale of RIM: All About Timing
We think this is the best course of action for RIM to take, as it maximizes value for shareholders. Unless RIM is able to truly revitalize its business, something we think is unlikely, its billions in cash & investments will begin to burn away sometime this year, and that will diminish its appeal to an acquirer. The sooner RIM sells, the better.
RIM currently has $2.111 billion in cash & investments on the balance sheet, which works out to $4.02 per share in cash & investments. If the company can sell itself quickly enough, this value will be retained, as RIM is still cash flow positive. We breakdown RIM's value in a sale below, using the following assumptions:
- Inventory: Inventory is discounted by 75% to account for writedowns as well as the fact that RIM is currently holding BlackBerry 7 devices. As the company is currently transitioning to the BlackBerry 10 OS, these devices are rapidly losing their value.
- Accounts Receivable: We discounted this by 25% due to a preference to err on the side of caution.
- PP&E: RIM's server network, according to most analysts, is still worth billions. Cannacord Genuity, in a research report released after RIM's business update, estimates that the company's server and messaging business is worth $2.75 billion ($5.24 per share). For its part, Sterne Agee estimates the server network as being worth $1.3104 billion at the midpoint of its estimates ($2.50 per share) and the BBM messaging platform as having $1.57248 billion in value at the midpoint of estimates ($3 per share). For our estimates, we will value RIM's messaging service, networks, and email system at $5.24 per share (as it is carried on the company's balance sheet), which takes into account both a potential premium in a sale, as well as a possible discount. We do believe that RIM's network and services will have value, given the millions of subscribers around the world that depend on the company for secure communications services.
- Patents: Investors would be wise to remember that RIM holds billions in intangibles on its balance sheet, a good deal of which is patents. Given the current spate of patent wars in the smartphone industry, RIM's patent would be of value to an acquirer. Sterne Agee believes that current market expectations for RIM's patents are unrealistic. Given the mixed record that Android companies have had in defending against Apple, and the fact that RIM has been sued by NXP (NXPI) for infringement, a value of between $1 billion and $1.5 billion is realistic, the firm concludes ($1.25 billion, or $2.38 per share at the midpoint). However, MDB Capital, an investment bank specializing in intellectual property, thinks otherwise. Excluding the patents RIM bought from Nortel (they were bought as part of a consortium and therefore must be shared), MDB values RIM's patents at $2-$3 billion ($2.5 billion, or $4.76 per share at the midpoint). Given MDB Capital's expertise in the patent market, we will use its calculations, but will err on the side of caution and value RIM's patents at $2 billion, or $3.81 per share.
- Other Assets & Liabilities: We will include RIM's other receivables, discounted by 25% (like the company's accounts receivable), but will not include other assets in our valuation. We include RIM's $3.631 billion in liabilities, which works out to $6.93 per share.
Our breakdown of RIM's sale value, if it accepts reality and agrees to sell the company now, is below.
RIM Sale Analysis
|Component||Total||Value per Share|
|Cash & Investments||$2.111 Billion||$4.02|
|Accounts Receivable||$2.2965 Billion||$4.38|
|Other Receivables||$372 Million||$0.70|
*Range depends on rounding
Our analysis suggests that RIM is currently trading below its base sales value. And this valuation is fairly conservative. But, it is predicated on RIM's board of directors agreeing to sell the company soon. Should RIM choose to continue its attempt to restructure and revitalize its business, there is downside risk to our valuation as it is likely that the company's cash and investments will begin to burn away. In the event that RIM reaches a point where it is unable to continue as a going concern, its network and patents together would total just $9.05 per share. And when the company's liabilities are taken into account, RIM's value decreases to just $2.12 per share. Each quarter the company delays selling will likely reduce its value to an acquirer.
Our analysis does have another caveat. Should a bidding war develop over RIM's patents, their value would be pushed up past the $3.81 per share we used in our calculations, this providing some upside to our valuation estimate.
Wild Card: The Canadian Government
A wild card in a sale of RIM is the Canadian government. Given the fact that RIM is the most recognizable Canadian company in the world, as well as a key part of the country's technology sector. The Canadian government has shown that it is willing to block international deals if it feels that they are not in the best interest of Canada, as was the case with Potash (POT) and BHP Billiton (BHP). Though the Canadian government may have approved the sale of Nortel's patents, that company was already in bankruptcy, something that RIM is not yet facing. We fell that our conservative valuation is prudent, in light of the fact that the Canadian government may very well block a sale of RIM.
We expect pressure for a sale or another strategic transaction to increase, especially after June 28, when RIM reports its quarterly results. The faster the company sells, the more of a premium it can extract from a potential buyer. While RIM is still cash flow positive, as per its business update, the current trajectory of the company's business suggests that it will begin burning cash in the next several quarters if things do not turn around.
As a reminder, this article is meant to analyze RIM's financials and its potential sale value, not the BlackBerry ecosystem. At this point in time, we have added RIM to our potential buy list, for our valuation shows that the stock is trading below a conservative estimate of the companies value in a sale. But, that assumes that RIM will be selling, and we think that in the next several months that will become more and more of a possibility. RIM's board faces increasing pressure to consider an outright sale of the company, and should the board bow to investor pressure and agree to sell the company, even a small premium to the company's book value will yield decent upside. While we are fully invested at this point in time (and as a matter of policy do not like using cash reserves unless absolutely necessary), we plan on exiting several investments in the next few days, and RIM is likely to find a place in our portfolio at that time.
Disclosure: I am long AAPL.