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Declining businesses, cash cows or value traps?



November 20, 2011 – Comments (2) | RELATED TICKERS: BB

Most companies don't last forever. At some point, a company doesn't have attractive places to put earnings, so it should start returning them to shareholders either via dividends or stock repurchases. Later in the process the business will actually start to decline. At this point the business can be a great cash cow because there isn't any real capex and all the profits beyond normal maintenance can be returned to shareholders. But not that many businesses handle this stage very well.  

The problem is that it is pretty hard at an organizational level to admit that the business is in irrevocable decline and manage it accordingly. There is a strong belief that the CEO is paid to grow the business, so it is very easy to spend the profits on bad aquisitions or joint ventures that destroy value not create it. 

I think RIMM is entering this decline phase. While the Blackberry was widely known as the Crackberry and was the must have accessory for high powered corporate types at one point, it is now last weeks lasagna. Everyone now has an iPhone or a Droid and can do more things than you can with a Blackberry. The attempts by RIMM to move into the smarter phone business don't seem to be working out that well. I think the writing is on the wall. 

RIMM currently has 6.6B in net tangible assets, which means it is trading for about 1.4 times tangible assets. If the assets and cash were returned to shareholders in an orderly manner over about five years or so, this could be a decent buy. But I suspect that the institutional imperative will strike and that most of that money will be spent on stuff worth a lot less than what they will pay for it.

So I'm staying away.   

2 Comments – Post Your Own

#1) On November 20, 2011 at 5:08 PM, ikkyu2 (97.96) wrote:

You gotta make a distinction between a stagnant company whose outsize growth expectations make it a value trap; and a one trick pony in a world that has suddenly discovered full size horses.  Peter Lynch used to talk about "typewriter ribbons and buggy whips."  These are things that were once necessity-commodities but as of now, there is almost no market for them at all.  

I don't think of companies that make buggy whips as value traps.  I think of them as dead ducks.  There was an out for RIMM while Google was only a mobile platform OS vendor, but now that GOOG has bought MMI, that door is closed.  No one else stepped up to bid for MMI; no one else is going to bid for RIMM, so RIMM may well be a dead duck. 


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#2) On November 29, 2011 at 6:46 PM, BigFatBEAR (28.45) wrote:

What do you think about mature sectors like the ones JNJ, LLY, ABT operate in? COP, CVX, BP?

It seems like these are a bit more shareholder-friendly, but perhaps still not quite "preparing" for decline..?

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