With a large global constituent, Research in Motion is not ready to bow out. With a challenge ahead of it, the company is still in fight mode and this gives us an opportunity to make money. The bad news about earnings recently will provide an opportunity to make money this year!
Rough Times Continue for the Old Color Guard
Research in Motion (RIMM) will end up laying off about 5,000 employees and this roll up its sleeves, working with both JPMorgan (JPM) to generate $1 billion in cost cuts. This plan was already in motion when its (not so stellar) earnings came in. Losing $518 million versus a profit of $695 million in the year-ago period was disconcerting. Sales also fell from $4.91 billion to $2.81 billion as the company expects nothing but challenges in its immediate future. The next couple quarters are not going to be very good for the company. . The company also said that it expects the next several quarters to be very challenging. Both Apple (AAPL) iPhone and Google's (GOOG) Android have taken their toll on the stock.
Seemingly beginning to grasp the desperate situation in which it finds itself. The company is limiting summer vacations and ordering six-day work weeks for many of its staffed based in Ottawa.
Another Potential Revenue Loss
Research in Motion is also under heavy pressure to cut back on its carrier fees that customers like AT&T and Verizon (VZ) have to pay. If its agrees to the cuts it could see another 17-18% loss in revenues that the company generates from the fees and this is just not something it needs to see right now. These fees give carriers access to the server infrastructure of Blackberry. It all goes around! While RIMM faces pressure from these carriers, they in turn have to deal with the same pressure in reduced monthly charges from customers.
Thorsten Heins Reaches Out
The new CEO this year, Thorsten Heins says the company is taking the steps it needs to make its strategic transition and those steps are painful and difficult. The recent earnings report was painful but investors can expect a couple more quarters like this before a glimmer of light can be seen at the end of the tunnel (if there is one). The company is being slimmed down to focus on a few key products as it tries to keep the blackberry name alive. International markets may be growing, but they are all interconnected globally. RIMM must grow in North American. It is only a matter of time before the power of Apple and Android products spread and if the company is not growing in the western world, it will not maintain emerging markets.
Beyond the Blackberry 10 next year, there are no major products coming from the company in the next year save an updated tablet. It has to play a positive spin on its future. Can the company make it independently? Most analysts are skeptical and beyond the company being sold, they don't believe it will make it. But it does have 78 million subscribers and that is nothing to sneeze at, so if it chooses the solo journey for now, it will be around for a bit longer.
And this provides us with an income opportunity.
An Options Play
With 78 million customers, Research in Motion will be around for awhile longer. It still has room to fall and money can be made off the company. Look at a long term bear put spread. The stock is presently trading at 8.10
- Buy an October 2012 put with a strike of '8' (priced at $1.16)
- Sell an October 2012 put with a strike of '7' (priced at $0.69)
- Net Debit to Start: $0.47
- Maximum Profit: $0.53
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the Play
- Long term bearish pattern is in effect, so we play the pattern.
- A bad quarterly report with slowing sales means the next couple quarters will be just as bleak.
- There is no short term catalyst to turn the stock around.