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Fairfax’s Prem Watsa More Than Doubles His Position in Research-In-Motion

January 27, 2012 | About:
gurufocus

gurufocus

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We previously reported that Fairfax CEO Prem Watsa joined the board of Research-In-Motion (RIMM), and that he may buy more RIMM shares. Today, Fairfax’s filings show that it has more than doubled its position in Research-In-Motion (RIMM). Fairfax now owns more than 26.8 million shares of Research-In-Motion, or 5.12% of the company.

We asked our readers the question "Should Value Investors Follow Prem Watsa into Research-In-Motion?" The responses are far from enthusiastic. As pointed out by the readers, Research-In-Motion faces strong headwinds, and the demand for any tech products can evaporate quickly if a better product surfaces.

Before the recent purchase, Prem Watsa’s cost for RIMM was about $40 a share. The latest purchase will bring his cost down to about $25 a share. The stock is now traded at about $16. The stock has lost about 90% of its market cap since June 2008.

A look at the historical earnings of RIMM reveals some interesting phenomena about the stock market. For fiscal year 2008, when RIMM earned $2.3 a share, the stock was traded at above $140. For the past 12 months, the company earned $4.25 per share, but the stock was traded as low as $14. Of course, the outlook for Research-In-Motion has lost all of the brightness that it enjoyed in 2007. But is the stock market all about the future and outlook?

When everything was fine and bright in 2007, RIMM was traded with a P/E ratio of more than 100; today it is about 2.86. Apparently most investors think that the earnings power will continue to decline, maybe dramatically, and the company is heading toward death.

Prem Watsa certainly does not think so. He personally joined the board, and invested an additional $250 million in the company. Again, will you follow him into the company? Is RIMM cheap enough for you?

As we write this, Apple Inc. (AAPL), the company that killed RIMM, again claimed the title of the world’s most valuable company. Compared with RIMM, even at today’s price, APPL is traded at a P/E of around 16. If Apple enjoyed the same level of P/E ratio of RIMM at its highs, the market cap of Apple would be around $4 trillion, or 25% of U.S. economy.

From this point, Apple seems to be quite undervalued, considering its phenomenal annual earnings growth rate of more than 50% a year. Five years back everyone was excited about their new Blackberry. Today people can’t live without their iPhones and iPads. An unthinkable question is what if one day Apple’s growth slows down and iPhones and iPads are being replaced by something even fancier?

That mysterious Mr. Market!

About the author:

gurufocus
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.8/5 (15 votes)

Comments

mikewen
Mikewen - 2 years ago
When I saw the news, I knew RIMM is done.

What's the point to put 2 financial guys in the board when they need most is the software/device/hardware ?

The last chance of turnaround is gone.

Just when Nokia+Microsoft are making a big comeback.

JeanPierreSarti
JeanPierreSarti - 2 years ago
I wonder if Uncle Prem is letting national pride get in the way of rational deduction regarding the future of RIMM...
sww
Sww - 2 years ago
It's like BP in it's darkest hour of July 2010, making about $7/share the stock price is 30, pe<5. All fund manager think like they are not going to use oil in the future. they dump the stock is because everybody else are leaving, remember the story of oil man in the heaven by mr. Buffett. now everybody think business are going to stop using blackberry in the future.
ramands123
Ramands123 - 2 years ago
Its a very tough call... fact that Prem Watsa is invested heavily now , almost gurantee's return of capital even if firm is liquidated. Unless firm goes into long term bleeding..... but with Prem at helm and owners with heavy ownership it's really difficult to see that happening... Downside is pretty solid ..not sure about upside though.
sifton
Sifton - 2 years ago
this will be the greatest chance in your life to own a company as good as rimm.this company is real its here to stay.
batbeer2
Batbeer2 premium member - 2 years ago
You are of course aware that there 20 million cars (and growing) out there running on QNX ?

With RIMM's software, your car is a playbook.

That's an awful lot of playbooks out there that will be in service long after the iPad VI has been discontinued.

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