Research in Motion (RIMM) and Nokia (NOK) are two communication providers that produce and market mobile communication solutions worldwide. Both companies have in common that their stock prices are in decline for some time and most investors seem to have lost confidence in them. Both companies had their fair share of problems. NOK and RIMM have lost market share as their products are less attractive and competitive. RIMM and NOK are said to have lost their competitive edge even though they, at some point, were industry leaders based on their innovative products that once helped push the entire industry forward. The question investors are asking is, is RIMM or NOK a "buy" at these valuation levels? After all, both companies have lost shareholder value over a prolonged period of time and they must finally find their bottom.
RIMM has a market cap of $4 billion with earnings of $1.16 billion. The shares were off 19% on the last trading day last week following a series of bad news for shareholders. As the WSJ reported:
The company's shares fell 19% to $7.39 on Friday, driving the company's market capitalization to $3.81 billion, less than 1/20th of its peak value in 2008.
The selloff came a day after a series of ugly announcements that included a delay in the debut of its next BlackBerry phone, a larger-than-expected loss and as many as 5,000 layoffs.
Even though the company had $2.2 billion in cash available at the beginning of the month, worries increased that the company might burn its cash faster than anticipated and investors panicked about RIMM's liquidity, pushing the shares off the cliff.
I consider this to be an extreme version of pessimism, one that is usually a result of emotional overreaction. RIMM has a forward P/E of 13x and a P/B of 0.38. The discount from book value for this technology company indicates the pessimism that RIMM is confronted with. If investors strip out the cash from the market cap of $4 billion the entire (debt-free) company can be had for $1.5-2.0 billion including its substantial patent portfolio.
The company does not appear to be cheap on an earnings level, but it does so on an asset value level. With a discount from book of over 60% the market is extremely pessimistic about RIMM's future prospects both in terms of sales and margins as well as about its liquidity.
Investors who are optimistic about RIMM's management being able to catch up to its competition, should think about an investment in RIMM as investors are massively overreacting to recent events. Even though the company announced the postponement of its new phone, it does not imply any valuable information about the success of its product. Contrarian investors might find an investment in RIMM attractive as they buy on bad news and await a pullback from its recent sell-off.
Nokia is another investment that has fallen on hard times. Analyst earnings estimates are negative going forward raising red flags for investors. However, like RIMM, pessimism carries on for so long, that I think the skepticism is at extreme levels with a valuation approaching liquidation values. NOK has a P/B of only 0.57 and P/S of 0.18. NOK has huge value in its patent portfolio alone. Though NOK is not debt-free like RIMM, is has about $3 a share in cash providing investors somewhat of a valuation bottom. Presently, cash and patents alone are worth more than the equity valuation of the company. Buying at these levels means investors snatch up the entire business operations for free.
In addition, the market discounts the value of the Windows 8 partnership with Microsoft (MSFT) which should be profitable for both companies. On the other hand, I judge the market to be overly optimistic toward Apple (AAPL) and Google (GOOG) who are in direct competition with NOK.
NOK trades at both below book and cash value per share which contrarian investors might find interesting. Like RIMM investors, shareholder of NOK have faced huge losses since 2011: the stock is down about 80%. Even though NOK has hold up well in light of RIMM's recent sell-off, since the company trades at serious discounts to conservative book values, I have initiated a contrarian buy position at $2.16. The current stock market sentiment is not favorable to any stocks, however, I am convinced that this will change going forward. Based on a successful relationship with Microsoft and Windows 8, I have a 2014 earnings estimate of $0.54 on the stock. A reasonable forward multiple of 12 would give a fair value of $6.48 per share which represents about 200% upside from current depressed share values. I intend to hold NOK for 3-4 years.
Disclosure: I am long NOK.