Monday, June 28, 2010

Buying What Management's Selling

Research in Motion (RIMM) co-CEO Jim Balsillie is very bullish about his company's prospects in the second half of RIM's fiscal year (i.e. starting around August/September of 2010). He has been touting this time period for several months now on company conference calls, with comments like:

"...[Y]ou are going to see a lot of stuff in the fall. If you saw the roadmap you would be blown away."

"[W]e feel very, very strong and optimistic about what you're going to see coming out of us throughout the rest of the fiscal year."

"If you saw what we're coming along with for the back half of this calendar year, that's lined up and queued up..!"

"[O]nce you see the new platforms, like you'll be all very surprised."

"I'll think you'll just be amazed that how it's a quantum leap over anything that's out there.
I just wish I could wind the clock forward a few weeks, would all say, I get it now...When you see the pieces come together, you'll say, now I see what they were doing...I can't say much more, but I couldn't feel better."

" And we might have a couple of surprises up our sleeves in addition to that...So yes, we feel fantastic about the business. We feel fantastic about the product set."

But should investors trust the outlooks of this nature that executives push? The market certainly isn't buying it, as RIM's stock fell more than 10% following the release of its first quarter results last week, despite the fact that year over year earnings were up on the order of 40%.

Perhaps a look at Balsillie's outlook history can be of help in evaluating whether he's talking up the stock or whether he means what he says. By looking at previous conference calls, it's clear that he has been optimistic about upcoming products, which have turned out to bump up sales and profits. But its fair to say that in previous conference calls, he has never been so excited about the product pipeline as he is showing to be now. As such, he appears to be making a huge bet with his reputation and his credibility, something he probably does not take lightly.

Should RIM's new products be anywhere near as great as Balsillie is making them out to be, shareholders will likely see great rewards, because expectations appear to be low. But if the products turn out to be just ho-hum, typical new introductions with a few more features, the downside risk appears minimal: RIM is the market leader in an industry expected to grow at double-digit rates (and has been doing so through a recession!) for the foreseeable future, but it trades at a P/E of just 10*! But investors appear to be pricing this security as if profits are in perpetual decline. As such, this stock may represent an investment opportunity where the downside risk is far outweighed by the upside potential.

Disclosure: Author has a long position in shares of RIMM

* The P/E ratio was arrived at by dividing the company's current market cap ($28.8B = 552M * 55.23) minus its cash and investments (much of which is currently being spent on share buybacks) by its earnings over the last four quarters ($2.6B = 769M + 710M + 628M + 476M)


Paul said...

Also of positive note, assuming the link is accurate, the execs have a very, very large position of the stock themselves.

Lazaridis with $1,807,089,152 and Balsillie $1,747,229,952

editor said...

ya rim is really looking cheap now...