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Holly LaFon
Holly LaFon
Articles (7945) 

Will Prem Watsa Lose Money on Research In Motion?

December 21, 2012 | About:

Once a leader in what would become a mobile revolution with the introduction of its BlackBerry smart phone, now crowded out of the market by bigger, faster, more innovative companies, Research In Motion (RIMM)’s stock price has ridden a rollercoaster over the past five years and become an object of infatuation by market commentators and big investors – not least, the “Canadian Warren Buffett,” Prem Watsa. This week’s earnings report and the launch of its new product, the BlackBerry 10, will prove critical for the future of the company and Watsa’s stake in it.

Over the past five years, Research In Motion’s stock price collapsed 91%, though it has tried to reverse its business setbacks recently.


RIMM data by GuruFocus.com In the first quarter of 2008, RIM enjoyed a 44.5% share of the U.S. mobile smart phone market. Apple (NASDAQ:AAPL), which released its first iPhone in June 2007, already held 28%, according to Canalys Research.

The launch of the iPhone was immediately disruptive for the space. “When you consider that it launched part way through the year, with limited operator and country coverage, and essentially just one product, Apple has shown very clearly that it can make a difference and has sent a wakeup call to the market leaders,” said Pete Cunningham, Canalys senior analyst.

“A broad, continually refreshed portfolio is needed to retain and grow share in this dynamic market,” he added. “This race is a marathon, but you pretty much have to sprint every lap.”

In the third quarter of 2012, the same research firm found Sumsung (SSNHY) cornering the worldwide market lead for the third straight quarter with a 32% share, followed by Apple with 15.5%, Sony (NYSE:SNY) with 4.5%, HTC with 4.8%, and RIM in last place with 4.2% -- a 38% decline quarter over quarter.

Prem Watsa began building a position in the third quarter of 2010 when the stock traded for $50 per share on average. He continued adding as the price continued falling. His largest buy took place in the third quarter of 2012 – he purchased more than 25 million shares at $7 per share.

Fairfax now has a lot riding on the RIM’s comeback as the position equals a 9.89% stake in the company, and a full 21% of their investment portfolio.

Unfortunately, Research In Motion’s third quarter results were mixed and injected volatility into the stock.

RIM announced a 47% year-over-year decline in revenue to $2.7 billion. Net income was $14 million, compared to $265 million a year previously. The company also bolstered its cash base by $600 million to $2.9 billion.

Earnings were better than expected, as the company forecast a loss last quarter due to a transition to its next generation of BlackBerry and the completion of its cost-reduction plan. Many investors, however, appeared more concerned with the decline in its BlackBerry subscriber base to 79 million users, from 80 million in the second quarter. RIM’s share price has dropped 21% since the earnings results announcement.

But Watsa has a more far-sighted and comprehensive view of the company. In an interview with GuruFocus, he cited one big reason: “They have lots of cash, huge cash flows,” he said.

Another less-known advantage of RIM is its leading market positions in other countries. RIM currently has a 60% of smart phone market share in Nigeria and 50% in South Africa, according to research from Canalys. South Africa and Indonesia are the company’s two biggest markets after the U.S. and the UK.

Asia Pacific in particular is a key market for demand. “Asia Pacific accounted for over 53% of the worldwide smart phone market. China has been a powerful driver behind volumes again for many vendors and the market broke through the 50 million unit barrier this quarter,” Canalys said.

On a long-term basis, the company has also been able to increase revenue at a rate of 58.7% over the past ten years, and book value at a rate of 29.1%. Introducing an ambitious new iteration of its once game-changing mobile device that led that growth will, it hopes, revive interest and sales going forward.

The new BlackBerry 10 features a touchscreen virtual keyboard, a “BlackBerry Flow” application grid for real-time multitasking in and out of programs. The BlackBerry “hub” keeps apps and messages together so users can respond to messages from any social networking platform from one place.

BlackBerry COE Thorsten Heins told the BBC in October that it was more than an update of previous phones. “We’re not just building a new update of a Blackberry sub – we’re building a whole new mobile computing platform. Don’t underestimate the dynamic that this platform is going to create in the market,” he said.

“What I see, in my markets, in the markets I’m in, outside of the U.S. – huge growth, huge commitment to BlackBerry, and in the U.S., we’re going to regain our market share with BlackBerry 10” he added.

The BlackBerry 10 is set to launch on Jan. 30, 2013. The company is expecting that sales of its BlackBerry 7 could slow until then as users hold off purchasing new phones until the new version is available. To compensate, it plans to use pricing initiatives the BlackBerry 7 devices and services fees to maintain its subscriber base. It will also increase marketing spending on the new phone in the fourth quarter. Consequently, RIM said it expects an operating loss for that quarter.

The first quarter, in which it will report BlackBerry 10 sales numbers, will therefore be a great determining factor in whether the company will be able to create momentum once more and whether Watsa will make money on the investment. At an average purchase price of $16.98, the stock would need to gain 34% more from today’s price of $11.15 to see an average profit.

See Prem Watsa’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Prem Watsa.

Rating: 3.5/5 (13 votes)


Superguru - 4 years ago    Report SPAM
I read that FAIRFAX is fully hedged. I do not understanding hedging much.

Does that protect them against losses?
Holly LaFon
Holly LaFon premium member - 4 years ago
'Fully hedged' means he is protected against general market risk, but not against losses on individual stock picks. If one stock loses far more than the market, hedges will help, but it won't limit all the losses.
Kfh227 - 4 years ago    Report SPAM
One of Prem's employees reminded everyone that RIMM represents a miniscule portion of the Fairfax portfolio. If RIMM fails, it won't effect Fairfax much.
Mo77 - 4 years ago    Report SPAM
The position in RIMM is approx. 570 million dollars.

Out of an approximately 24 billion investment portfolio as of 3Q 2012, that comes to about 2.375% of their total investment portfolio.

Looking at Guru trades on this site if you were to calculate his average cost basis purchase price, based on the average price for the quarter in which he purchased the stock it is about $14.25 (~ 740 million).

Based on that Fairfax's investment in RIMM is down ~30%.
Vgm - 4 years ago    Report SPAM
"Fully hedged means he is protected against general market risk, but not against losses on individual stock picks. If one stock loses far more than the market, hedges will help, but it won't limit all the losses."

I had the impression that Fairfax hedged against losses in their own stocks, not the market as a whole. I certainly recall Watsa talking about hedges on his stocks. I could be wrong.

Can anyone provide a definitive statement or quote from Watsa on this?


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