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RIMM – Value Investing Contest Submission Follow Up

December 15, 2012 | About:

kfh227

5 followers
In July, I wrote an article highlighting RIMM as a misunderstood company with a horrible negative media bias. But in reality, nothing I was finding in my research depicted the media bias that was out there. It

is horrible for people who don't do research, yet a wonderful thing for those who do. Value investors should thrive on irrational negativity.

You can read the article I wrote when RIMM was trading at about $7 per share. It can be found here: http://www.gurufocus.com/news/183485/time-to-buy-research-in-motion

Since then, RIMM has rebounded just over $14 per share at close this Friday. More interesting is that the options I recommended in the article are now up 700% since RIMM was at $7 per share.

Since writing the article, I have continued to follow RIMM. I continually get upset with inaccuracies, lack of basic knowledge of the company and outright lies in articles that are published throughout the Internet. It becomes obvious that people are writing articles based on knowledge gained from other articles and no actual research or independent thought.

The crowning jewel in my observations was a statement by an analyst saying that the QWERTY keyboard version (having a physical keyboard) of RIMM's new BB10 phone will not be out until July. This was news to me since RIMM has constantly said that the keyoard will come out shortly after the touch version of their BB10 phone, but more like a month later. Right now it is becoming evident that the new flagship touchscreen smart phone will be coming in February and the QWERTY version in March or early April. Crackberry.com even noticed this comment and spoke with RIMM. While RIMM didn't give an official date in questioning the analyst's statement, it was inferred that the analyst did not have a clue on what he was saying. We'll know release dates at the end of January when RIMM offically launches BB10.

Also, another analyst said that he was expecting BB10 to be dead on arrival. I thought it meant that he didn't see consumer adoption as being a likely outcome. Fair enough. Now it turns out that he thought carriers wouldn't even carry it. Strange, since anyone watching RIMM clearly knew that carriers were on board. So this was another analyst making comments based on no real knowledge or research.

As much as this bothers me, it was a wonderful time to be thinking independently and doing actual research. The lies were amazing. And this made for a potential investment idea as a value investor. Good for us, bad for Lemmings.

However, something strange is happening in the media. For the past year up to maybe a month ago, more than 90 percent of all articles were negative. But now people are changing and realizing that things are not that bad. Today, I'd say that over 50 percent of articles about RIMM are positive.

Valuation:

This is just a follow up article. But I will conclude with an answer to a question. From here ($14 per share), what does RIMM have to do to be a 10 bagger? That means, have its share price go up 10x. I did the math earlier when RIMM was at $13.79. Here is the answer.

How can RIMM take the share price from $13.79 to $137.90? That would mean the market cap has to go from $7.2 billion to $72 Billion.

I'll take the market cap though. Let's make some assumptions. Cash horde stays at $2 billion and share count remains fixed. If RIMM can grow free cash flow from the current level of about $2.5 to $7 billion, it will be worth $137.90 per share. Why?

Here is my back of the napkin fair value math:

fair value = cash + 10 * FCF

plug in my numbers from above $2B + 10 * $7B = $72 billion

There's your answer, RIMM needs to take FCF to $7 billion from $2.5 billion. Funny how math works with undervalued stocks. To get a 10x return, the company needs to grow FCF by just 3x.

A 10x FCF multiple is good for boring good stocks like JNJ that grow about 7% annually. Not hard to imagine for RIMM given the world market. So, let's assume 7% growth and a 10 multiple is good. BB10 needs to bring a big jump in FCF though. The thing is, if BB10 is adopted better than most expect, and FCF actually hits $7 billion in one year's time, growth for a few years will probably be more than 7%. People might be multiplying FCF by 20, not 10. Things can get crazy. Scenarios like this could bring the stock price well over $200.

Even today with FCF at $2.5 billion, RIMM is worth $30 to $40 per share. That just assumes moderate BB10 success.

Conclusion:

There is still time to buy RIMM. I highly recommend reading my article and reading about RIMM from a world market perspective. Do your own research. Use articles as a starting point. But verify and invalidate what articles say with your own research.

Disclaimer:

I own stock and call options in RIMM.

UPDATE:

There is some conversation in the comments section. Please be sure to read through that also.

About the author:

kfh227
Karl is currently a software engineer in Connecticut with a bachelors of science in electrical engineering from Clarkson University. He has been investing since 2001 and interested in value investing since 2005. Karl is continually striving to learn more about investment.

Rating: 4.0/5 (28 votes)

Comments

vgm
Vgm - 1 year ago
Great call kfh227 !! Congrats.
ecotycoon
Ecotycoon premium member - 1 year ago
RIM is such a interesting story, pretty funny to read analysis comment and the way they can change their mind so fast... :)

"Buffett says he only reads analyst reports when he needs a laugh."

Source: The Winning Investment Habits of Warren Buffett & George Soros, Mark Tier (Author)
ramands123
Ramands123 - 1 year ago
I am not sure if your 10 x calculation would true because all assumptions used are so up in the air.

However fundamentally i agree with you that RIMM is a great buy,_I got in at 7$. I believe it is atleast worth 30 $ . RIMM is certainly better brand and technology than HTC. BB10 appears to be a smooth product as good as iphone or Samsung. HTC trades at 10 times the earnings. Being very conservative , lets assume normalized earnings for RIMM over product cycle is 3 $ ( it was around 6 $ in 2011). That would imply a conservative price of atleast 30 $.

My only concern right now is that BB10 looks so good and neat that Apple might sue it as soon as it comes out. Icon on second screen looks very similar to iphone. Other than that BB10 appears to be a very good product.
BEL-AIR
BEL-AIR - 1 year ago
It is not over yet, just because a stock went from $150 to $6 back to $14 does not mean anything.

With technology you never know, we will see in 12 months or 24 months if it was a good business to buy or a dead cat bounce,
kfh227
Kfh227 premium member - 1 year ago
Anecdotally:

I know many people that switch from iPhone to Android and visa-versa. Some do just for a change. Some do just because they think at the time that the other one is better at the time. Yet these same people seem to think that they will never consider BB10. Seems to be an odd thought process. It's kinda like Honda and Toyota owners would not consider Hyundai if they make a BMW quality car at the cost of a Honda or Toyota.

FWIW; BB10 hardware is very similar to the Samsung Galaxy S3. The only real unknown about BB10 is that there is no info on the memory that will come with it or what the storage will be. It will have a removable battery which many business customers like that travel alot. The benefit of carrying a charged spare battery is wonderful for thosethat need it.

I can't wait for BB10. It looks impressive. I think about how I switch apps on my Droid right now and comapre it to demos I have seen for BB10 and it is much easier and faster to do simple things liek check e-mail and bounce around different applciations. One gesture and you are at e-mail. One gesture and you can choose any of hte last 8 apps that you have opened up. My current phone is ready for refresh. I am waiting for BB10 before I decide what phone I upgrade to as my Motorola Droid 3 is garbage. A problem with Android fragmentation admitadly but that is not my problem, it is Google's. BB10 looks much more impressive than iOS or Android.

Ramands,

I'm probably more optimistic about RIMMs future than other people but the more research I do, the more my smile grows. I see FCF up to $7B as an easy outcome. New to RIMM will be a cut from their own advertising engine and a cut of app sales that they do not currently enjoy like Google and Apple enjoy. Same goes for the movie and music marketplace that RIMM is bringing to the table. If people start adopting BB10 it's just more icing for the cake. Sure $7B is an unknown but there are to many revenue generators on the way.

That 10 bagger scenario was in response to a question someone posed on the crackberry.com forums. It's a quick and sloppy calc but I think it is a fair back of envelope calculation. I'm not necessarily saying that is what will happen. I am stating what it would take for it to happen. Quite frankly, if RIMM gets to $5B in FCF quickly, I think people will see it and treat RIMM as a "growth stock" and price in a premium. I don't think it even needs to hit $7B in FCF for it to hit $137.70
ramands123
Ramands123 - 1 year ago
Kfh227, nothing would give more happiness than to see your analysis come true. No doubt RIMM is a great buy.
MarcelBarkhuysen
MarcelBarkhuysen - 1 year ago
KFH 227, Your suggestion in your original article about the Jan 2014 $35 calls turned out very profitable and may well do much better in the coming year, congratulations. I did however wonder about the high implied volatility embedded in the option price at the time. At my calculation it was north of 80% at the time, which in isolation indicates an overvalued option price despite the clear undervaluation in the stock price itself. In the end I did not buy the options because of the risk that any down 'mean reversion' in the implied volatility could more than offset the up 'mean reversion' in the stock price, to the detriment of the option price itself.

As it turned out, the implied vol did come down a bit, but the doubling of the stock price catapulted the option price upward from 10c to its current 73c.

I would be interested to get your (and others on this thread) thoughts on the dynamic between high implied vol and and a undervalued stock price when evaluating taking an option position here in future.
ramands123
Ramands123 - 1 year ago


I will be very carefull trading on options. This is a turn around story and turnarounds can take a long time.
haoafu
Haoafu - 1 year ago
Is it just me? Why I see a lot of speculation in the articles insead of real insight?

The timing (for now) is good though.

superguru
Superguru - 1 year ago
rimm was my best investment of 2012
superguru
Superguru - 1 year ago
Awesome, down 10% after hours. We, value investors, are happy when stock we like falls.

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