The Blackberry makers have faced quite a few challenges to their handheld devices with the strong headwinds of new touch-screen mobile technology coming into the market, such as the iPhone of Apple (NASDAQ:AAPL) and Android of Google (NASDAQ:GOOG).
RIM (RIMM) was once an $80 billion enterprise; now it is worth $14.5 billion, only around 18% of its high within five years. Its price plunged further right after it released second-quarter sales and profit forecasts below analysts’ estimates. The second quarter of 2012 is expected to have revenue around $4.2-$4.8 billion and (EPS) of $0.75-$1.05 diluted. For fiscal 2012, the EPS is expected to be around $5.25-$6.00 diluted, excluding any one-time charges or share repurchases.
So is the stock really cheap? Or is it still overvalued?
RIM offers greater security with its own e-mail servers whereas Apple and Android are famous for so-called entertainment and information. So the business has been targeting the niche market and still got the dominant position among corporate clients. However, new products coming out from competitors have affected the company in big way. According to an analyst of Sanford C. Bernstein & Co. in London, the market share in North America has reduced from 54% to only 13%. Apart from that, the analyst also commented that the customer base would expect to increase to 77 million by the end of next fiscal year, from 42 million last year, and around one fourth of those customers would be corporate users.
Some key executives have just left the company. Brian Wallace, RIM's vice president of digital marketing and media, left the BlackBerry maker for Samsung Telecommunications America. Four months ago, Keith Pardy, chief marketing officer for two years, has left and Paul Kalbflesich, who has been with the company as vice president of brand creativity for 11 years, left early this year.
It currently has $2.1 billion in cash on its balance sheet — no short- or long-term debt. The main liability is the accrued marketing costs, warranties, salaries, etc. With the book value of $8.9 billion, the level of total financial leverage of 1.4 (Asset/Equity), and the free cash flow standing at $2.8 billion, RIM financial health is currently in very good shape.
With the current price, RIM seems to be the cheapest of its competitors if we look at the P/E trailing twelve months.
Even with the adjusted estimation, if the earning is from $5.25-$6, the leading P/E is still around 4.5–5 only.
RIM is now widely thought of as the target for acquisition by either Microsoft (NASDAQ:MSFT) or Dell (DELL). For Microsoft, it builds its share in smart phones and gains a device to complement its Windows 7 platform. And as Dell has tried to get into the hand set business with Venue Pro products but seemed to face difficulty, the acquisition of Rim could help Dell penetrate into the smartphone market very rapidly. Even at $40 a share, RIM would be valued at around 7.5 times next year's earnings. That’s still less than the average communications equipment provider, which trades at about 15.4 times
As the technology industry changes extremely fast, the big winner today can be a loser tomorrow if it cannot adapt the new trends flexibly and fast enough. The investor should think and do his/her own research very carefully before initiating the position in RIM, even though it might be seen as somehow undervalued.
Disclosure: The author owns no shares in RIM at the time of writing this article.