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Life After RIMM

July 14, 2012 | About:
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Gordon Pape

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It was not a bunch of happy campers who turned up at last week's annual general meeting of Research in Motion in Waterloo. The shareholders were restless and made their displeasure known to management and the directors in no uncertain terms.

Pointed questions were asked as to why the company hadn't reacted more quickly to deal with its deteriorating situation. There was much breast-beating over the delay of the launch of the BlackBerry 10 until next year. Although all the directors were re-elected, an unusually large percentage of votes were withheld as investors protested the decline of the company's fortunes.

Recently-appointed CEO Thorsten Heins tried to placate the capacity crowd with soothing words but many shareholders seemed unconvinced judging by the media reports afterwards. No wonder they were skeptical. First-quarter financial results, released two weeks earlier, were a disaster. Year-over-year revenue dropped a stunning 33%, to $2.8 billion. The company posted a net loss of $518 million ($0.99 a share). Sales of BlackBerry phones plunged to 7.8 million while only 260,000 Playbook tablets were sold raising questions as to whether the Playbook can ever be competitive or even viable in the world of iPad and Samsung Galaxy.

As the company announced massive lay-offs, there was much speculation as to whether it can survive and talk that it could be the next Nortel. It's too soon to be writing obituaries but it's clear this is a company in deep trouble.

If RIM goes down, or is taken over by a foreign competitor, what's left in Canada's shrinking information technology sector? Not much! The S&P/TSX Capped Information Technology Index consists of only six stocks and four of them are having rough years. Besides RIM, the other laggards are Celestica (CLS), Open Text (OTEX), and Wi-Lan (WILN). With so many of these stocks struggling, it's surprising the index is only down 10.3% so far this year, as of Thursday's close.

The reason it has not done worse is because of the performance of the remaining two companies. Let's take a look at one of them.

MacDonald, Dettwiler and Associates Ltd. (TSX: MDA, OTC: MDDWF)

MacDonald, Dettwiler is about as different from RIM as chalk and cheese in terms of the nature of the business. But both companies are in the very large information technology tent.

MDA is a world leader in sophisticated information systems for satellites, aerospace, surveillance systems, environmental monitoring, robotics, and more. So important has the British Columbia-based company become to Canada's defense and information technology sectors that the federal government vetoed the sale of its Information Systems and Geospatial Services operations to a Minnesota company in 2008 for reasons of national security - one of the rare times the Harper government has done this.

The company's activities are on the leading edge of international technology. It is a major supplier of satellite antennas and electronics and produces communications satellites for business and military customers around the world. MDA is Canada's leading participant in the space industry, having provided several components for the Mars rovers, the International Space Station, and NASA's OSIRIS-REX asteroid mission.

MDA designed, developed, and built the now-iconic Canadarm under contract to the National Research Council of Canada. The first arm was Canada's contribution to NASA's Space Shuttle Program.

There is so much more to the company's complex business that it is impossible to include a full list of its activities in this space. Some highlights include providing electronics for unmanned aerial vehicles (UAVs), or drones as they are more commonly known; supplying surveillance equipment for the monitoring of icebergs and hurricanes; doing advanced work in surgical robotics; and more.

Many of the products this company produces would have been the stuff of science faction only a few years ago. Yet surprisingly, most Canadians have never heard of it. To make it even more attractive to investors, MDA is comfortably profitable and pays a respectable dividend.

First-quarter results showed operating earnings of $29.1 million ($0.92 a share) compared to $26.8 million ($0.65 a share) in the same period of 2011. Net earnings were $33.4 million ($1.05 a share), up from $28.2 million ($0.69 a share) last year.

Revenues were a little soft at $172 million compared to $206 million for the first quarter of last year. However, the company said that after pass-through items are excluded, revenues were comparable year-over-year. The funded backlog was $765 million as of March 31 compared to $805 million at the end of December.

The number of outstanding shares was reduced by about 23% year-over-year after MDA bought back over 9.4 million shares last October at a price of $53 under a substantial issuer bid.

The balance sheet is sound. As of March 31, the company had $228.8 million in cash and $27.3 million in short-term investments while total long-term debt stood at $101.7 million.

The company's stock took off in late June after it announced the purchase of Space Systems/Loral, a Palo Alto, California-based satellite maker, for US$875 million. CEO Daniel Friedmann called the acquisition "a game-changer" for MDA, saying it would give the company "critical mass" in the U.S. market.

"Space Systems/Loral's business is fundamentally driven by the worldwide demand for television, digital audio, broadband internet, mobile communications, and voice telephony," he said. "Billions of people around the world depend on these services and demand continues to increase. By acquiring one of the major companies that enable these essential communications services, MDA will move immediately to the forefront of this growing business."

Once the takeover is completed, MDA expects to have combined annual revenues of $1.9 billion and a combined order backlog of $2.8 billion.

Although MDA is much more diversified than RIM, which is pretty much a single product company, it would be vulnerable to a general economic slowdown. The stock fell more than 50% during the crash of 2008-09. Also, the company depends to some degree on government contracts, which could be cut back during periods of austerity. So at current levels the stock is best suited to more aggressive investors.

The company pays a semi-annual dividend of $0.65 a share ($1.30 per year) to yield 2.3% at Friday's closing price of C$56.63, US$54.10 (last OTC trade was July 12).

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.4/5 (8 votes)

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