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Why Prem Watsa Sees Value in RIMM

January 27, 2012 | About:
Holly LaFon

Holly LaFon

250 followers
Though many investors have shunned Research In Motion (RIMM) stock as it lost over 80% of its market share in the last three years and competitors eroded its market share, Fairfax Financial CEO Prem Watsa has done the opposite. He bought a total of 11,789,300 shares from the third quarter of 2010 to the third quarter of 2011 at an average cost of $40 per share; then, this week, he more than doubled his holding to 26,848,500, at about $16 per share, and joined the board. He now owns 5.12% of the company.

Watsa still believes there is substantial value in the company and that its stock will rise again, for several reasons. Paul Rivett, Chief Legal Officer and Vice President, Fairfax Financial Holdings Limited, said in an email what Watsa sees in RIMM: “Trading at less than book, 75 million subscribers and growing, $700 million free cash flow in last reported three months, $1.5 billion in cash, No. 1 smartphone in many large growing markets, genius founders invested in company and buying more stock and seasoned operator in Heins.”

Trading at less than book

Each of RIMM’s P/E, P/S and P/B 10-year valuations have slid down to historical lows, at 3.3, 0.4 and 0.9, respectively. The company’s book value per share has been increasing every year since 2005, when it was at $3.49, to a record of $17.08 for 2011. In the fourth quarter of 2011, it increased to $19.45, higher than its Friday closing share price of $16.78.

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75 million Subscribers and Growing

Some of RIMM’s numbers don’t exactly look like those of a dying company. For instance, it has been shipping more BlackBerry smart phones each year since 2005. In 2011 the number increased to over 50 million, compared to under 40 thousand in 2010. In the third quarter of fiscal 2012, the total number of BlackBerry smartphones increased 35% year over year to almost 75 million. From the first to second quarter of 2011, its subscriber base increased 40% to more than 70 million. Blackberry wireless devices, software and services are RIMM’s primary source of revenue.

No. 1 Smartphone in Many Large Growing Markets

RIMM’s launch of its new BlackBerry 7 in 2011 did not have the hoped-for effect on market share in the U.S. RIMM’s market share in the mobile market declined from 7.1% to 6.5% between September and November, according to comScore. The rest of the market is divided up as: Android 47%, Apple 29%, Microsoft 5.2% and Symbian 1.5%.

Beyond the U.S., however, RIMM is going strong. International markets accounted for approximately 54% of revenue in fiscal 2011, compared to 37% in fiscal 2010. Blackberry products are available through 595 carriers and distributions channels in over 175 countries worldwide.

In their 2011 letter, Co-CEOs Balsielle and Lazaridis explain further global progress, “Prepaid BlackBerry service plans are also a significant growth driver, particularly in international markets where our partners have strongly embraced prepaid BlackBerry service offerings. The efficiency of the BlackBerry solution on both older and newer networks allows our partners to offer economical pricing plans for the messaging and social networking applications that matter most to end users. Offerings such as BlackBerry® Internet Service Social plans, which deliver unlimited BBM and social networking, are gathering momentum and are helping drive growth around the world. These offerings have had particular success in Asia Pacific and Latin America, and they are beginning to be adopted more broadly in Western Europe and North America as well.”

genius founders invested in company and buying more stock and seasoned operator in Heins.

The biggest news of the week for RIMM is its CEO switch. Formerly, the company was led by Mike Lazaridis, who founded the company in 1984, and Jim Balsillie, who joined him shortly thereafter. The company introduced its first Blackberry device in 1999. They grew RIMM into a large company whose stock price has increased 816% since its IPO. The price reached as high as around $145 per share in 2008, before the recession soon after the release of the iPhone.

Insider holdings of the company are also significant. Together, Balsillier and Lazaridis’ holdings of RIMM make them two of its largest shareholders.

Balsillie and Lazaridis are succeeded by Thorsten Heins as president and CEO, per their recommendation. Heins has 27 years of telecommunications experience. Prior to his new role, he was one of RIM’s two chief operating officers and, before that, senior vice president for the Handheld Business Unit. He played key roles in the creation of RIM’s product portfolio. Prior to RIMM, he was CTO of Siemen’s communications division, and held several executive roles there.

“Mike and Jim took a bold step 18 months ago when RIM purchased QNX to shepherd the transformation of the BlackBerry platform for the next decade,” Mr. Heins said. “We are more confident than ever that was the right path. It is Mike and Jim’s continued unwillingness to sacrifice long-term value for short-term gain which has made RIM the great company that it is today. I share that philosophy and am very excited about the company’s future,” Heins commented.

Lazaridis noted in the announcement that he was so confident in RIM’s future under Heins that he was gong to purchase an additional $50 million of the company’s shares.

Lazaridis will remain at the company as vice chair of the board, and Balsillie will remain a director.

$700 million free cash flow in last reported 3 months, $1.5 billion in cash

RIMM’s financials are for the most part strong and show a history of remarkable growth. The company’s revenue per share grew at an annual rate of 63.6% over the last 10 years, and cash flow grew at an annual rate of 29.5%. As Watsa notes, it also has $1.5 billion of cash sitting on its balance sheet, and a mere $276 million in long-term liabilities, with no debt. Free cash flow jumped to almost $3 billion in fiscal 2011, from $2 billion in 2010 and $618 million in 2009. In the last three reported months, it almost reached $700 million.

Though RIMM has had some troubles recently, Watsa believes it still has tremendous value. Since the start of 2012, RIMM’s stock is already up almost 16%.

See Prem Watsa’s portfolio here.


Rating: 3.4/5 (20 votes)

Comments

mikewen
Mikewen - 2 years ago
No. 1 Smartphone in Many Large Growing Markets

Which markets they are No. 1?

I can't even name one ?


I was always wondering why RIMM has only $1.5B cash when they had $3 billion free cash-flow in fiscal 2011 alone?

The ratio of their net cash to their book value does not make sense to me.

Most high-tech company's book values has large percentage of cash.

If you compare with CSCO, INTC, MSFT, etc, or even Nokia,

you know they are not very good at deploy capital.

RIMM is also pretty bad at logistics, which is a very big deal when their margin shrinks.

(You can run a stress test to see what will happen is their operating Margin drop to 10% or lower. )

kfh227
Kfh227 premium member - 2 years ago
In 2011 the number increased to over 50 million, compared to under 40 thousand in 2010. - article

Mean 40 million?

Which markets they are No. 1?

United Kingdom

Just Google for the info ... takes about 30 seconds to find it.

I was always wondering why RIMM has only $1.5B cash when they had $3 billion free cash-flow in fiscal 2011 alone?

This is not abnormal for any company.
kfh227
Kfh227 premium member - 2 years ago
Ya, people confuse market share with units shipped.

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