Wednesday, June 9, 2010

Research In Motion

It may seem strange to see discussion of a stock like Research In Motion (RIMM) on a value-oriented site. After all, the company would be better classified as a growth stock, as revenues have grown from $3 billion to $6 billion to $11 billion to $15 billion in its last four fiscal years. Furthermore, the smart phone market is expected to continue to grow at double-digit rates going forward, fueling expectations that RIMM's revenue and earnings will continue to increase.

But startlingly, RIMM does not trade at a high premium to its earnings. While profits throughout this downturn have continued to ratchet up (RIMM's operating profit grew 38% in its last quarter, year-over-year) RIMM's stock price has continued to fall, currently trading near its 52-week low. With a P/E of just 13, RIMM's price is in value territory. Considering the company has no debt, and almost $3 billion in cash and equivalents, the company's P/E after subtracting cash is just 12.

Unlike many other successful tech companies, however, RIMM historically hasn't held onto a large cash balance, instead investing it at a stellar rate (ROE was 36% in its latest fiscal year!) or more recently using some of it to buy back shares (one quarter ago, the company bought back $800 million worth of stock).

The likely cause of this apparent discount is the fact that RIMM is going to head-to-head in the smartphone space with what's likely a superior foe, Apple (AAPL) and its iPhone. But RIMM has advantages that it can continue to exploit, such as its preference among corporations, its more efficient use of bandwidth (resulting in higher profitability for its sellers, the carriers, resulting in favourable pricing), and its international growth.

In other words, in the growing smartphone market, there's enough room for everyone to keep increasing profits while maintaining above average returns on capital and equity. At this price, investors appear to be offered the opportunity to participate in this growth without having to pay much at all.

Disclosure: Author has a long position in shares of RIMM

31 comments:

tscott said...

I agree the low PE is tempting. However this company has a 33% ROE; how sustainable is that? let alone maintaining its existing revenue. All it takes is one failed product or better competition and the company could begin a decade long decline.

Wade Garett said...

I was actually thinking of asking about RIMM after it fell when the iPhone 4 was announced.

Although their growth rate is unsustainable, I believe that has already been factored into the price.

At this valuation the markets expected growth rate is ~2%. With margins increasing and good secular prospects I also can't see the reason for the low valuation.

Wade Garett said...

Forgot to compliment you on your site Barel :)

ak said...

A buddy of mine has a start up business dealing with smart phone applications. And he told me Blackberrys still has the highest smart phone market shares then its apple and android fighting it out for 2nd and 3rd. RIM seemed to have gone under the radar since the iphone came out, but it is still the most popular smart phones.

Anonymous said...

How about Nokia ? 5 % dividend yield with current price ?

maxi said...

I will ask something quite irrelevant for the moment but just for educational purpouses.
I can see that during the year 2006 RIMM shares outstanding oscillated quite hard from quarter to quarter. Could that be some kind of earnings manipulation? After that period of oscillations RIMM prices skyrocket.

Saj Karsan said...

Hi Maxi,

I'm not sure I understand the link between earnings manipulation and volatile stock prices. What connection are you drawing there?

ak said...

Hey Saj, i was looking at RIMM revenue recognition on their phones and it says they are recognized when the contract is fully awarded. So does this mean they are following the old format where they spread their revenue over the lifetime of the cellphone contract? Or they following Apples new bs accounting trick and recognizing full revenue after the sell.

So I guess to simplify it, are they amortizing the revenues or just booking it full one time.

Saj Karsan said...

Hi AK,

From my understanding, they are booking the revenue once the customer has the Blackberry (as Apple now does it). Regarding software charges though, they amortize these.

ak said...

Thank you for clarifying Saj.

ak said...

What is your take on the failure of their new phone? Unlike simple nuts and bolts companies, this could mean a big deal. Not like cellphone companies can release a new phone model every month til they find a successful one. This may affect RIMMS long term profits. Maybe take another year or two to release a new model. Also not to mention the RD money they will have to sink in to create a new model.

Saj Karsan said...

Hi ak,

If you have been following this site for a while, you know that I don't buy/sell shares based on 3-day guesstimates of new product sales.

As such, the article above still describes my viewpoint of this stock. Summarizing: low P/E, returns cash to shareholders, generates high ROE, and is a significant player in a growing industry

Paul said...

saj,

looks like you're in some great company!

Fairfax also bought some RIMM.

http://www.sec.gov/Archives/edgar/data/915191/000095012310104863/o66554ae13fvhr.txt

Philbert said...

I own RIM and think they make good products and are greatly underappreciated in the market. Plus, I'm so sick of hearing about Apple. However, it seems that RIM managment has not executed very well in the last 6 months. Their execution on the Playbook was terrible. They were talking about it in the fall and only released it recently. And then when it was released it was missing many essential features. I like the stock, I like the product, but the management is underwhelming me.

Saj Karsan said...

I would agree with that assessment, Philbert. The execution has been weak.

Anonymous said...

Got to your site from Canadian business online. I was wondering what you think of RIMM today.

Saj Karsan said...

Hi Anon,

I think the company faces some competitive challenges, however, I still think it is far too cheap. That said, this is the tech industry so things can change very quickly (either for the better or for the worse).

Anonymous said...

Saj,

Any updates on your RIM analysis? Your insights would be much appreciated.

Anonymous said...

Here is a link to a very good paper written from Tweedy, Browne. This is required reading at the Heilbrunn Center for Graham & Dodd Investing at Columbia business school.

http://www.tweedy.com/resources/library_docs/papers/WhatHasWorkedInInvesting.pdf

Basically, shows that though PE ratio is important, what's more important is the price-to-book. I think all investors should consider both (as well as other financial and non-financial factors) when making a purchase.

The PE of RIMM is even "better" now, but the PB is still around 2. Granted this is a tech company so you would expect this, but is there a margin of safety here? I'm not sure even at today's price of $27.50. Maybe at a PB of 1.5?

Best,
Justin

Anonymous said...

No, there is no margin of safety apart from tangible book value and its slipping brand value. That's why it was shocking that Watsa would take such a gamble. This is such a fast-moving industry that previously demonstrated earning power counts for very little. There is a substantial earnings decline reflected in today's price and so expectations are low but it all comes down to competing forecasts and that's not value investing. Another thing to note is that RIM has rather high capex compared to peers that overstates real owner's earnings. So overall you may think probabilities are in your favor at this price but it remains a highly speculative stock.

Saj Karsan said...

hi anon1,

yeah i'll write my thoughts on this in a post in around a week or so

Anonymous said...

Awesome. Looking forward to it!

Anonymous said...

Saj,

Are you still holding on to RIMM. Or taking losses and moving on.

Saj Karsan said...

Hi Anon,

I'll summarize my latest thoughts on RIM in a post within the next 1 or 2 days.

gsakk said...

Saj, any thoughts on RIM?

gsakk said...

Saj, any new thoughts on RIM?

Saj Karsan said...

Hi gsakk,

Plenty. Most are summarized here

Anonymous said...

Saj,

I think "Research in Motion" is long overdue for your "value fail page", while "Blackberry" may deserve a fresh value thesis. It's not just semantics.

Here are some reasons why:
(1) third round of CEO, much of the senior team replaced,
(2) failed buyout search,
(3) a difficult to understand product strategy up to this point, and
(4) a completely reconfigured product landscape, with BBM for iOS, and enterprise software and services facilitating the deployment of iOS and other devices in the enterprise environment.

In isolation, these are not changes that rise to the level of a structural change, but at some point a line needs to be drawn as to what constitutes a failed value thesis. Holding on longer in the hope of a recovery --- even if it happens under the new CEO, an entirely new management team, and a fresh company strategy --- would not necessarily justify classification as a successful value investment.

A successful exit on Blackberry as an investment in 2014 or 2015 would not be “value in action” --- at least not based on the originally stated thesis and underlying assumptions conceived in 2011 or even 2012 by many value investors (including myself). Rather, much of the substance of those theses have been substantially invalidated, particularly the valuation.

I would enjoy seeing Blackberry recover to its former glory. I love the Blackberry keyboard for email in a professional environment. The new CEO is promising and a clear and laser focus on enterprise seems likely to occur under his leadership. The share price is moving towards attractive, although I suspect the next earnings report will reveal a dramatic decline due to alienation of the enterprise segment during the "for sale process" and BB10's apparent neglect for the cost of deploying an entirely new device (including technical support and employee retraining). In my view, these factors may contribute to a significant decline in earnings, leading to further decline in the share price (although Mr. Market is often erratic, so it's difficult to predict what the share price will do) and an attractive valuation for brave value investors. However, as indicated above, holding on to- or buying into- Blackberry at the present juncture would be substantially rooted in a new value thesis.

Hope my thoughts spark some ideas and debate. I would enjoy reading your thoughts on the above and... perhaps after the next quarterly report... a fresh value thesis on Blackberry.

As always,
Big Fan

Saj Karsan said...

Hi BF,

I think you may have a point. At the same time, some of what were originally identified as RIM's strengths (good B/S, security, enterprise) may be the reason BBRY still lives to take another shot. Without those factors, I may never have purchased it! I definitely do feel this was a fail, however, as per articles on RIM I have since written; so don't worry, I won't be calling it an unqualified success should the share price rise, as I bought in much higher.

Anonymous said...

Saj- thought you might like this, if you haven't seen it already. Cheers, BF

Anonymous said...

Here's the link:

http://seekingalpha.com/article/1984531-blackberry-positive-catalysts-for-2014

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