I think it was Peter Drucker who said there are really only two aspects of business: innovation and marketing. Research in Motion (RIMM, Financial) is in need of both and 2012 may be the year they get it.
The company has introduced a new operating system, Blackberry 7, and is releasing new phones coming out all over the world. People still like the full keyboard feature and the company now has over 75 million users worldwide, up from 55 million in December 2010. Who cares if Android and Apple are growing faster if Research In Motion can keep pounding out cash? The entire industry is getting bigger.
Last March the company's stock was traded for $69.80 per share before making the long slide down. Today the stock is up a buck to $15.60. However, how much money will it need to earn in 2012 to justify this price?
$1.50?
$2.00?
As I see it, they could earn $4 a share this year without much effort, but let's look at the stock from a long-term financial standpoint and ask some very important questions.
1. Has the company been consistent?
Yes! While RIMM doesn't have 10 years of profits yet, they have literally blown up its sales and earnings like a helium balloon. In 2002 the company did $292 million in sales losing $28 million. Last year, RIMM did $19.9 billion in sales, earning $3.4 billion.
The income statement shows us a lot of great aspects from a fundamental standpoint.
- High Gross Profits (50%)
- Low SG&A Costs (15%)
- Low R&D Costs (15%)
- High Net Profit Margins (15%)
Of course, the company has been in trouble because they haven't spent enough money on research and development to bring new phones to market as quickly as their competition.
2. Is the company piling up cash?
Yes! The recent quarterly balance sheet shows RIMM with $1.3 billion in cash and zero long-term debt. Since 2002, their cash pile has grown 280%. The net current asset value of the company is at least $3.55 billion, which is still half the market cap. A closer look at their financial statements shows RIMM still has the ability to continue piling up cash based on its ability to turn over inventory at fairly high rates. Plus, into the future, financial engineering could boost the stock price via share buybacks.
3. Do they have high returns on capital?
Yes! RIM historically earns well over 20% a year on their capital (ROE or ROA) and has seen an increase in its book value by 950% in the last decade. It has been able to do this by keeping capital expenditures under 50% of their net income, allowing retained earnings to grow.
These and other factors have made RIMM a stock value investors want to own, among them, Prem Watsa, who has over 11% of his firm’s assets in the company’s stock. This could be a burden or a blessing in the coming years considering he paid around $26 per share for his position. If you are a buyer at this price, by the time he’s breaking even, you’re up 73%. Other guru investors that own the stock include; Ray Dalio, Joel Greenblatt, and Donald Yacktman.
In closing, the question to answer is whether or not RIMM will be around in 10 years selling the same products. Ten years ago, I was a newly licensed broker with a hot new Nokia cell phone. Today, the hot phones are Android or Apple phones. That's the hard part about valuing technology, because while I think Research In Motion could double in value from its current price, over the long term who knows what could happen to within the industry.
Disclaimer: I do not hold a position in RIMM.Also check out:
The company has introduced a new operating system, Blackberry 7, and is releasing new phones coming out all over the world. People still like the full keyboard feature and the company now has over 75 million users worldwide, up from 55 million in December 2010. Who cares if Android and Apple are growing faster if Research In Motion can keep pounding out cash? The entire industry is getting bigger.
Last March the company's stock was traded for $69.80 per share before making the long slide down. Today the stock is up a buck to $15.60. However, how much money will it need to earn in 2012 to justify this price?
$1.50?
$2.00?
As I see it, they could earn $4 a share this year without much effort, but let's look at the stock from a long-term financial standpoint and ask some very important questions.
1. Has the company been consistent?
Yes! While RIMM doesn't have 10 years of profits yet, they have literally blown up its sales and earnings like a helium balloon. In 2002 the company did $292 million in sales losing $28 million. Last year, RIMM did $19.9 billion in sales, earning $3.4 billion.
The income statement shows us a lot of great aspects from a fundamental standpoint.
- High Gross Profits (50%)
- Low SG&A Costs (15%)
- Low R&D Costs (15%)
- High Net Profit Margins (15%)
Of course, the company has been in trouble because they haven't spent enough money on research and development to bring new phones to market as quickly as their competition.
2. Is the company piling up cash?
Yes! The recent quarterly balance sheet shows RIMM with $1.3 billion in cash and zero long-term debt. Since 2002, their cash pile has grown 280%. The net current asset value of the company is at least $3.55 billion, which is still half the market cap. A closer look at their financial statements shows RIMM still has the ability to continue piling up cash based on its ability to turn over inventory at fairly high rates. Plus, into the future, financial engineering could boost the stock price via share buybacks.
3. Do they have high returns on capital?
Yes! RIM historically earns well over 20% a year on their capital (ROE or ROA) and has seen an increase in its book value by 950% in the last decade. It has been able to do this by keeping capital expenditures under 50% of their net income, allowing retained earnings to grow.
These and other factors have made RIMM a stock value investors want to own, among them, Prem Watsa, who has over 11% of his firm’s assets in the company’s stock. This could be a burden or a blessing in the coming years considering he paid around $26 per share for his position. If you are a buyer at this price, by the time he’s breaking even, you’re up 73%. Other guru investors that own the stock include; Ray Dalio, Joel Greenblatt, and Donald Yacktman.
In closing, the question to answer is whether or not RIMM will be around in 10 years selling the same products. Ten years ago, I was a newly licensed broker with a hot new Nokia cell phone. Today, the hot phones are Android or Apple phones. That's the hard part about valuing technology, because while I think Research In Motion could double in value from its current price, over the long term who knows what could happen to within the industry.
Disclaimer: I do not hold a position in RIMM.Also check out:
- Donald Yacktman Undervalued Stocks
- Donald Yacktman Top Growth Companies
- Donald Yacktman High Yield stocks, and
- Stocks that Donald Yacktman keeps buying
- Joel Greenblatt Undervalued Stocks
- Joel Greenblatt Top Growth Companies
- Joel Greenblatt High Yield stocks, and
- Stocks that Joel Greenblatt keeps buying
