Tuesday, 17 April 2012

Research In Motion (RIMM) – Dirt Cheap But Worth Your Bet?

This post is written not to discuss whether we think Blackberry will survive or not given what had happened. Nor is it written to debate on whether IPhones or Android Phones will take over the smartphone world.
But rather, it is to simply show you how amazingly cheap the company is traded at, given the company’s financial position and the amount of cash flows they are still churning out. 

Picture this: Just 1 year ago, RIMM is valued at $38Bn in the market. Fast forward till today, at a share price of $13.32, you can buyout the company with just $7Bn!

Income Statement:

Net Income
Cost Optimization
Service Disruption
Inventory Provision
Goodwill Impairment
Adj. Net Income

For their fiscal year ended March 3, 2012, RIMM reported a net income of $1164 mils and EPS of $2.22, which was a drop of almost 65% from their previous year of EPS $6.34. However, digging deeper into the numbers, there is substantial amount of one-time expenses incurred through the year and includes the items shown above. (We shall not go deeper into each items, you can read further in the annual report.)

After adjusting for all the one-time expenses, we arrive at a net income of $1,962 mils, which translate to an EPS of $3.74 and P/E of just 3.56. Although still a substantial drop from previous year peak earnings, the adjusted EPS shows how low they are being valued at in the market. At current price level, you are getting a company with 28% in earnings yield.

Furthermore, taking the average from 2005 to 2010, the historical P/E the company use to trade at is 21.65. This is way above today’s multiples of just 3.56, and if they ever trades back up to their historical level, that’s a return of almost 500%!

If you take a look at their cash-flow statements, RIMM is still churning out good money and their latest year operating cash flow is almost $2.9Bn. Amortization of their PPE is $0.637Bn, and intangibles of $0.459Bn, which adds to a total of about $1.1Bn in maintenance Capex that is required to sustain the business going forward. This will give us a FCFs of almost $1.8Bn a year if revenue remains at current level, giving you a company with FCFs yield of 26%!

Balance Sheet:
On their books, RIMM has Cash & Cash Equivalents of $1.5Bn, Short-term Investments of $0.25Bn, and Long-term Investments of $0.34Bn, giving a total of about $2.1Bn in liquid assets. This translates to a per share of $4.03, which is 30% of the current share price of $13.32. With no debts on their books, essentially, the market is valuing the company at only $5Bn.

The above table shows the historical P/B for the past decade. Taking the average from 2001 – 2006 and 2008 – 2010, we have an average P/B of 3.98. With current equity of $10Bn, RIMM has a book value per share of $19.27. This translates to a price to book value of only 0.69. 

If we breakdown the equity, RIMM has $0.3Bn in goodwill, and $3.3Bn in intangibles. To be on the conservative side, we take away the goodwill and intangibles, leaving us with a tangible equity of about $6.5Bn, which translates to $12.42 per share and a price to tangible book of 1.07.

If you are still not convinced on how dirt cheap RIMM is being valued at in the market, let us summarize.

At a price of $13.32, you are buying a company that is trading at 0.69 price to book, 1.07 price to tangible book, with a FCFs yield of 26%. Even with today’s dismal results, they are earning a return on tangible equity of 18% and adjusted return on tangible equity of 30% if the one-time charges are added back.

Factoring in their liquid assets of almost $2.1Bn, they are only valued at $5Bn in the market. With a FCFs of $1.8Bn per year, the company can take themselves private in 2.8 years time. (Please tell us how crazy is that.)  

Bonus - Potential Catalyst
An added bonus to owning shares of RIMM, we have our dear Prem Watsa, the Canadian Warren Buffet, doing his best for the shareholders. He owns a huge stake in RIMM and in recent months, had bought even more shares of the company. He was elected to the board and could be the driver behind many of the moves made by the company recently. A new CEO was installed and they are exploring strategic opportunities that include partnerships, joint ventures, licensing, etc.

(P.S. To Prem Watsa, why don't you consider buying out RIMM?)

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