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Should Value Investors Follow Prem Watsa into Research-In-Motion?

January 24, 2012 | About:

Research-In-Motion (RIMM) is making a lot of news lately as the company shakes up its management team. Both the founder and the CEO have resigned from the top executive positions. The company has named its former co-COO Thorsten Heins as the new CEO. The market is certainly not convinced by the shakeup, as the company’s share price continues its free fall. It is now traded at $14.70, and has declined 90% from its all-time high of close to $150 in 2008.

Facing fierce competition from iPhone and Android phones , Research-In-Motion’s Blackberry is so last decade and user-unfriendly. Consumers quickly abandoned their Blackberry phones and switched to the new generations of smart phones. Now Research-In-Motion is facing similar problems that some of its earlier competitors have, like Nokia (NYSE:NOK) and Motorola. An interesting question here is, will Research-In-Motion face the same fate as Nokia or Motorola?

Research-In-Motion is certainly cheap. The company has no debt and has more than $1.3 billion in cash. It is now traded at a P/E ratio of around 3. This is the historical valuation of Research-In-Motion. It is traded at the lowest valuation from the perspective of all matrices such as P/E, P/S and P/B:

So should value investors buy RIMM, considering it is so cheap? Especially now, renowned value investor Prem Watsa has joined the board of the company and may buy more shares.

Being the founder of Fairfax who built his empire from almost nothing to a multi-billion dollar business, Prem Watsa knows how hard the process is and he holds tremendous respect to the people who have had a similar experience. During GuruFocus’ interview with him last year, he said this about RIMM: “… Research-In-Motion (RIMM), you'll find out we own some shares. Research-In-Motion is run by two guys, Mike Lazaridis, who's really the founder, and co-CEO Jim Balsillie. These guys have taken the company from 0 to $20 billion, and in our experience, that's not easy to do. It's very competitive, and yes they have some challenges ahead of them, but the guys who have taken it from 0 to $20 billion will be able to figure their way through this… For a similar reason, we bought Dell (DELL) when Michael Dell came back. Here's a company that went from 0 to $60 billion in revenue, and tons of hurdles he had to overcome with his management team, and we just figure that the guy who's done that, and still is a significant shareholder, so focused, will figure his or her way out.”

From what he said last year, it is unlikely that Prem Watsa pushed the change in the management of RIMM. Now the two people Prem Watsa respected have gone, and he himself joined the board. The situation has changed.

This is the holding history of Prem Watsa with RIMM:

He started to buy when the shares were around $50, and he continued to add to his positions with his average cost at about $40 per share. At today’s price, investors can buy the shares at $15, more than 60% lower. The question is, should you?

As we wrote before in What Type of Value Investor Are You?, There are three types of value investors as pointed out by Seth Klarman, those that:

1. Buy cigar butts at good prices

2. Buy great companies at great prices

3. Buy great companies at so-so prices

Prem Watsa is great fan of Ben Graham and clearly is the first type, which Seth Klarman said he himself is also. Warren Buffett has gone through the three stages and is now the third type of value investor, who buys great companies at so-so prices. The reason we think that Prem Watsa is the first type can also be seen from his purchase of the Bank of Ireland (IRE). When we asked the questions in What Type of Value Investors Are You?, many users responded that they would rather be the third type.

So should you follow Prem Watsa into Research-In-Motion? The answer becomes relatively clear. If you consider yourself the type of value investor who likes to buy cigar butts at great prices, Research-In-Motion might be a good choice at this point. It is certainly better than most other cigar butts. If you like to buy great companies at great prices, Research-In-Motion probably isn’t one of them.

Please share your thoughts.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.8/5 (17 votes)


Forexnutca - 5 years ago    Report SPAM
No mention of LVLT....wonder if there will be some synergy there. The combo of RIM's infrastructure and the fiber optics of LVLT could be something long term to think about. Fairfax has an average price below the one stated above. They have been buying it on the TSX as well.
Ramands123 - 5 years ago    Report SPAM

Headwinds are very strong for RIMM. I think there might be better bets with HP or Dell where head winds are not that strong and they generate almost same amount of free cash flow for the price.

However for someone who already has RIMM it might be worth while to hold it. You don't want to sell what Prem Watsa is buying :)
Ramands123 - 5 years ago    Report SPAM

Plus i don't want to compete with Apple or Prem Watsa.

So i will stay stay out of it unless it drops to 1 times the free csh flow.
Luishernadez premium member - 5 years ago
My problem is the earnings power, which could erode very quickly. They earned $2,5B in FCF last year and $4,6B in EBIT. So far they have earned around $1,7B in EBIT (9 months) so we could proyect around $2,5B in EBIT for the full year. What is very worrisome is the very fast gross margin erosion (43% beginning of year 2011, 28% last quarter). Maybe this just normal business as usual but I don't know enough about the business and I don't have any confidence in the future viability of the business. So lets figure that FCF is going to drop 40% (we get $1,5B) and the current EV is around $7B. So that gives us around 4-5 times FCF. The question is: can they hold the $1,5B in FCF for 5 years? Could it be higher for a couple of years if they stop investing in R&D and just run-off the business until is dead?

I don't think Nokia is going to be buying anything. I don't know about Mororola.

I think Blackberry should stay strong for a couple of years in third world countries, but I could definitely be wrong.

Tech products demand can evaporate over a very short period of time, so that scares me a little.

It is a tough call. I'm going to stay on the sidelines for now and watch developments closely. It is far from "cigar-butt" status.


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