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A Lot Not to Like About RIMM

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September 15, 2011 – Comments (0) | RELATED TICKERS: BBRY

Location: Zaegs's CAPS Blog

Author: Zaegs

I must admit, when I saw that Research in Motion (RIMM) was reporting earnings on Thursday, I sat down to write about staying as far away from the stock as possible.  After all, they have disappointed on earnings and have not released any new products that are exciting when compared to the competition.  And all of that after delays in releasing the products in the first place.

Like many people, I enjoyed RIMM's success over the years.  I particularly enjoyed the middle of 2009 where I was able to ride it from the $60's to the $80's...twice.  Because I tended not to hold RIMM stock too long after its big run-ups, I was also fortunate to avoid the ride down.  Now, I need to decide if I should bury the stock and throw away the map, or give RIMM one last chance.

Market Share

It would be nice to see RIMM come out with a product that entices individual users, but I don't see that happening anytime soon.  After many years of exciting Blackberry offerings earlier this decade, they have consistently unimpressed with their new products.  It's not that their products are bad per se, but other companies have simply produced better.  It has become increasingly clear the RIMM's products have not been able to keep up with the big dogs in the mobile technology space...unless you look in the corporate world.  RIMM still has a clear, dominant position in the corporate mobile phone market.  It will be quite some time before RIMM relinquishes that market share dominance.  For the next couple years, they will be able to keep this market share as long as they can keep producing solid product improvements.  However, as technology and corporations adjust, they will need to come out with a game-changing product or their competitors will figure out how to penetrate that market in a scalable fashion.

Growth

Last quarter they reported revenue growth of 16% over Q1 last year, but slightly lower earnings than prior year.  They also guided lower for the remainder of the year, estimating $5.25-$6.00 in 2011 earnings.  For reference, they earned $6.36 in 2010.  Right now, international sales continue to drive their growth.  That is not a huge surprise given the product saturation in North America.  I expect that international will continue to drive that growth.

Costs

Besides creating a more impressive product, the most important thing RIMM needs to do is control their costs.  You can successfully grow revenue at 16% (for a while) as long as your costs are held in check.  On their last earnings release, they announced a cost cutting initiative for these purposes.  I think even they realize that their period of high growth is gone until they can come out with a product that is going to excite the market.

Valuation

Here is where things get really interesting.  For so long, RIMM was able to get a significant premium valuation because of their tremendous growth.  Now, with a P/E under 5, we have to change our thinking on RIMM from growth stock to value stock.  Is this an opportunity or a value trap?

Most any time you see a P/E this low, the market is estimating zero or negative growth and/or terrible company fundamentals.  My issue with this valuation for RIMM is twofold:

1. They still have revenue growth.  It may not seem like it here in the US because we see so many other impressive products, but their international growth story continues.  The key here is for management to get their costs under control as they have stated they intend to do.

2. They still have good operating cash flow.  Their trailing 12-month cash flow per share is $7.50.  That's a good chunk of change for a $30 stock.  That would have to drop significantly for the current valuations to make sense.

Conclusion

There's a lot not to like about RIMM.  Whenever a technology company goes from market dominance to just another player in a mature space, it's tough to get excited.  Even I'm not all that excited about them until they can produce a spectacular new product.  However, the current low valuations are pricing in a near-term death of the company.  Continued revenue growth at current levels and cost cutting can fix their short-term woes.  In the long-term, they need better product.  I'm interested to hear what they have to say at the earnings call on Thursday.  Unless they have something awful to say, I think we'll find that the current valuations of this company are too low.

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