It may seem strange to see discussion of a stock like Research In Motion (RIMM, Financial) on a value-oriented site. After all, the company would be better classified as a growth stock, as revenues have grown from $3 billion to $6 billion to $11 billion to $15 billion in its last four fiscal years. Furthermore, the smart phone market is expected to continue to grow at double-digit rates going forward, fueling expectations that RIMM's revenue and earnings will continue to increase.
But startlingly, RIMM does not trade at a high premium to its earnings. While profits throughout this downturn have continued to ratchet up (RIMM's operating profit grew 38% in its last quarter, year-over-year) RIMM's stock price has continued to fall, currently trading near its 52-week low. With a P/E of just 13, RIMM's price is in value territory. Considering the company has no debt, and almost $3 billion in cash and equivalents, the company's P/E after subtracting cash is just 12.
Unlike many other successful tech companies, however, RIMM historically hasn't held onto a large cash balance, instead investing it at a stellar rate (ROE was 36% in its latest fiscal year!) or more recently using some of it to buy back shares (one quarter ago, the company bought back $800 million worth of stock).
The likely cause of this apparent discount is the fact that RIMM is going to head-to-head in the smartphone space with what's likely a superior foe, Apple (AAPL, Financial) and its iPhone. But RIMM has advantages that it can continue to exploit, such as its preference among corporations, its more efficient use of bandwidth (resulting in higher profitability for its sellers, the carriers, resulting in favourable pricing), and its international growth.
In other words, in the growing smartphone market, there's enough room for everyone to keep increasing profits while maintaining above average returns on capital and equity. At this price, investors appear to be offered the opportunity to participate in this growth without having to pay much at all.
Disclosure: Author has a long position in shares of RIMM
Saj Karsan
http://www.barelkarsan.com
Saj Karsan
http://www.barelkarsan.com
