{"id":75,"date":"2012-03-30T10:00:34","date_gmt":"2012-03-30T14:00:34","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/03\/rimm-contrarian-opportunity-or-value-trap\/"},"modified":"2012-03-30T10:00:34","modified_gmt":"2012-03-30T14:00:34","slug":"rimm-contrarian-opportunity-or-value-trap","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/03\/30\/rimm-contrarian-opportunity-or-value-trap\/","title":{"rendered":"RIMM: Contrarian Opportunity or Value Trap?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

It can be a lonely life as a contrarian value investor.\u00a0 By definition, you constantly find yourself in the minority.\u00a0 And by betting against the herd, you are subtly (or not so subtly) sending the message that you are smarter than everyone else.<\/p>\n

This is not the sort of thing that makes your popular at a cocktail party.\u00a0 When you are right, your acquaintances are by definition wrong and you look like an insufferable know-it-all.\u00a0\u00a0 And when you\u2019re wrong?\u00a0 Don\u2019t expect any sympathy.<\/p>\n

Still, taking a contrarian mindset and, in the words of the great Warren Buffett<\/strong>, being greedy when others are fearful, is the only way to score outsized returns over time.\u00a0 To paraphrase another great investor, the late Sir John Templeton<\/strong>, you can\u2019t outperform<\/em> the market if you buy the market.<\/p>\n

Of course, once in a while, the herd is actually right, and a cheap stock continues to get cheaper until the bitter end.<\/p>\n

So, which is the case with Research in Motion (Nasdaq:$<\/span>RIMM<\/a>)<\/strong>?\u00a0 Is the former tech darling the contrarian buy of the decade?\u00a0 Or is it a value trap, luring hapless investors with its siren song of cheap earnings multiples?<\/p>\n

RIMM released its quarterly earnings yesterday after the market closed, and the news was mixed. The number of subscribers rose to 77 million, and RIMM\u2019s cash balance continues to rise, up by $610 million to $2.1 billion. Yet revenue fell 19% for the quarter to $4.2 billion, and the company posted a net loss of $125 million.\u00a0 Adjusting for good-will impairment and other one-time charges, the company saw earnings-per-share of 80 cents a share, a penny shy of analyst expectations.<\/p>\n

Investors have gotten used to disappointing earnings announcements from RIMM, so none of this should come as a shock.\u00a0 But this<\/em> is where it gets interesting.\u00a0 RIMM finally appears to be taking its problems seriously, and major management changes are in the works.\u00a0 Jim Balsillie, former co-CEO and the man perhaps most blamed for the company\u2019s recent turn of fortune, is resigning from board.\u00a0 He will certainly not be missed by RIMM\u2019s beleaguered shareholders.<\/p>\n

Additionally, two other high-level executives, chief technology officer David Yach and chief operating officer for global operations Jim Rowan, will be leaving the company.\u00a0 CEO Thorsten Heins is cleaning house; it\u2019s a shame it wasn\u2019t done sooner.<\/p>\n

Surprisingly little was said about BlackBerry Mobile Fusion, which I continue to believe is the company\u2019s best (and perhaps only) chance at staying relevant over the long haul (see prior article<\/a> for a longer discussion of Mobile Fusion).\u00a0 However, Heins did make it very clear in the post-announcement conference call that the company would be looking to refocus on its strengths in the enterprise market and look to new partnerships to address its weaknesses.<\/p>\n

Some analysts took this to mean that the company is looking to eventually exit the handset business and focus instead on its core services business.\u00a0\u00a0 I, for one, would encourage such a move.\u00a0 IBM (NYSE: $<\/span>IBM<\/a>) <\/strong>made the painful decision to largely exit the hardware business a generation ago, and it certainly proved to be the right one.<\/p>\n

Heins also refused to rule out an outright sale of the company, and given the RIMM\u2019s price I view a sale as a real possibility and a potential floor on the stock price.<\/p>\n

RIMM is one of the cheapest companies in the world.\u00a0 It trades for 5 times forward earnings (which are, admittedly a bit of a moving target) and just 0.36 times sales.\u00a0 Value investors should take note that RIMM trades for substantially less than book value.\u00a0 At just 0.69 times book, RIMM could be sold off for spare parts and be worth more than its current market price.<\/p>\n\n\n\n\n\n\n\n
\n

Research in Motion<\/strong><\/p>\n<\/td>\n

\n

Key Statistics<\/strong><\/p>\n<\/td>\n<\/tr>\n

Price \/ Earnings<\/td>\n\n

5.01<\/p>\n<\/td>\n<\/tr>\n

Price \/ Sales<\/td>\n\n

0.36<\/p>\n<\/td>\n<\/tr>\n

Price \/ Book<\/td>\n\n

0.69<\/p>\n<\/td>\n<\/tr>\n

Price \/ Cash<\/td>\n\n

3.34<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

A large chunk of RIMM\u2019s book value is its cash in the bank.\u00a0 RIMM has more than $4 per share in cash and investments.\u00a0 At its current price of $13.40, that amounts to nearly 30% of the value of the company.<\/p>\n

RIMM\u2019s portfolio of technology patents\u2014which have real value and can be sold\u2014are estimated to be worth anywhere from $2 to $7 billion.\u00a0 To be conservative, we\u2019ll assume they are worth no more than $2 billion.\u00a0 At that value, $4 billion of RIMM\u2019s $7 billion market cap is in cash and patents.\u00a0 That means that everything else\u2014the property, plant and equipment, the inventory, the receivables and the going-concern value of the business\u2014is being valued at just $3 billion, or $5.72 per share.<\/p>\n

For a company that still has 77 million subscribers, a dominant position in the enterprise market, and over a billion dollars per quarter in cash flow from operations, that is crazy <\/em>cheap.<\/p>\n

I continue to recommend RIMM as a contrarian buy.\u00a0 At current prices, it is simply too cheap for me to ignore.<\/p>\n

A word of caution is warranted, however.\u00a0 You have to have thick skin to own this stock.\u00a0 Take a look at some of the banter in the Tweetosphere, and you\u2019ll see what I mean: RIMM StockTwits feed<\/a>.<\/p>\n

You also have to have faith that management won\u2019t erode the value of the company\u2019s assets before RIMM either turns it around or sells out to a larger buyer.\u00a0 Given the company\u2019s recent track record, there are no promises on that count.<\/p>\n

Still, you\u2019re not going to score quick triple-digit gains by buying what everyone else is buying.\u00a0 And at current prices, I believe that RIMM presents a fantastic opportunity for returns of 100-200% over the next year.<\/p>\n

Disclosures: RIMM is a current recommendation of the Sizemore Investment Letter<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter It can be a lonely life as a contrarian value investor.\u00a0 By definition, you constantly find yourself in the minority.\u00a0 And by betting against the herd, you are subtly (or not so subtly) sending the message that you are smarter than everyone else. This is not the sort of thing that … <\/p>\n

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