{"id":4126,"date":"2011-04-29T12:49:30","date_gmt":"2011-04-29T18:49:30","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=4126"},"modified":"2018-09-21T02:06:55","modified_gmt":"2018-09-21T06:06:55","slug":"in-defense-of-research-in-motion","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/04\/29\/in-defense-of-research-in-motion\/","title":{"rendered":"In Defense of Research In Motion"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">Research in Motion (ticker: RIMM) announced that it expects second quarter earnings per share to by between $1.30 and $1.37, rather than between the range $1.47 of $1.55 that it just promised a month ago.\u00a0 Stock analysts hate this kind of revision and many who follow RIMM have drastically cut their ratings on the maker of BlackBerry phones in the last day.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">For me this is an illustration of just how stock analysts so often get it so wrong.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">First, let&#8217;s just look at the numbers of the situation.<\/span>\n<ul>\n<li><span style=\"font-size: 16px;\">RIMM has 521,120,000 common stock shares outstanding.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">RIMM reduced its earnings outlook from a maximum of $1.55 per share to a minimum of $1.30 per share, or a potential maximum reduction of $1.55 &#8211; $1.30 = $0.25 per share.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">That equates to an absolute drop in the value of the firm of 521,120,000 shares outstanding \u00d7 $0.25 earnings per share reduction = $130,280,000.\u00a0 Remember, this represents the worst case scenario for the firm, assuming that it can at least deliver on $1.30 per share for its first quarter earnings.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">RIMM&#8217;s total firm value = market capitalization (i.e. value of all stock) + value of other sources of financing (i.e. debt, preferred stock, warrants, etc.).\u00a0 Actually calculating the value we have: ($48.99 price of RIMM stock \u00d7 521,120,000 shares outstanding) + ($31,000,000 other liabilities + $276,000,000 deferred long-term liability charges) = $25,529,668,800 + $307,000,000 = $25,836,668,800.\u00a0 RIMM actually has no long-term debt!\u00a0 How many firms or individuals can say that?<\/span><\/li>\n<li><span style=\"font-size: 16px;\">So the maximum reduction in the earnings per share figure from RIMM represents $130,280,000 \u00f7 $25,836,668,800 = 0.5% reduction in firm value.\u00a0 In absolute dollar terms the maximum reduction in earnings estimates has lowered the value of the RIMM by half a percentage point.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Yet, the stock is down to $48.99 (as of the time of this writing) from last night&#8217;s closing price of $56.59 yesterday.\u00a0 This represents a reduction in firm value of $48.99 \u00f7 $56.59 &#8211; 1 = 13.4%!\u00a0 In absolute dollar terms that reduction is worth ($56.59 &#8211; $48.99) \u00d7 521,120,000 share outstanding = $7.60 \u00d7 521,120,000 = $3,960,512,000!<\/span><\/li>\n<li><span style=\"font-size: 16px;\">In summary, a reduction in earnings per share of $130,280,000 has resulted in a $3,960,512,000 reduction in total firm value.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">You could look at this on a P\/E multiple basis, too.\u00a0 The multiple assigned to these incremental earnings is: $3,960,512,000 \u00f7 $130,280,000 = 30.4\u00d7\u00a0 This compares to RIMM&#8217;s previous day P\/E multiple of: $56.59 price per share \u00f7 $7.50 expected annual earnings per share = 7.55\u00d7.\u00a0 Note: $7.50 is the total year earnings per share, whereas the earnings per share range of $1.47 to $1.55 was just expected earnings per share for the <em>second quarter<\/em> alone.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">In summary, the incremental earnings were being assigned a 30.4\u00d7 multiple, but the entire firm itself was only being assigned a 7.55\u00d7 multiple.\u00a0 If the market sell off response today was rational then the sell off ought to have been closer to that 7.55\u00d7 multiple, rather than the 30.4\u00d7 multiple.\u00a0 Why?\u00a0 Analysts are clearly seeing the reduction in earnings expectations for the second quarter as being indicative of a greater problem at RIMM: competitiveness with Apple&#8217;s (ticker: AAPL) iPhone and Google&#8217;s (ticker: GOOG) Android phones.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<ul>\n<li><span style=\"font-size: 16px;\">Second, it is certainly a legitimate concern whether or not BlackBerry can remain a competitive product relative to Apple and Google offerings.\u00a0 That RIMM, even yesterday was valued at a 7.55\u00d7 multiple as compared to Google&#8217;s 19.8\u00d7 P\/E multiple and Apple&#8217;s 16.8\u00d7 P\/E multiple is evidence that investors think of RIMM as having a less competitive offering.\u00a0 But the real questions are:<\/span>\n<ul>\n<li><span style=\"font-size: 16px;\">Can RIMM stabilize sales of its products and maintain its market share going forward?\u00a0 Consider Avian Securities LLC&#8217;s Matt Thornton who said, &#8220;The sales on their existing devices must have fallen off a cliff.&#8221;\u00a0 Meanwhile, Cannacord Genuity Ltd&#8217;s Michael Walkley says, &#8220;Higher-end phones have not sold so well.&#8221;\u00a0 Yet, RIMM&#8217;s revision to earnings per share still showed the company was strongly profitable and that revenues continue to grow.\u00a0 When a company continues to grow revenues and remain profitable, but is losing market share it simply means that competitors are growing faster.\u00a0 I would counter that BlackBerry has always been a specialized product for a specialized market: the traveling business executive.\u00a0 In that niche, BlackBerry continues to grow, as indicated by growing revenues and profits.\u00a0 Which brings me to the next question RIMM management and analysts ought to be asking?<\/span><\/li>\n<li><span style=\"font-size: 16px;\">For whom are we making our products?\u00a0 If RIMM wants to stay apace with Apple and Google it has a long way to go.\u00a0 Its phones have very small screens compared with Apple and Google.\u00a0 Yet these small screens are why the battery life of a BlackBerry is excellent.\u00a0 This does matter if you are out of the office for an entire day or two.\u00a0 Apple and Google phones need constant recharging.\u00a0 This is why if you walk midtown Manhattan &#8211; home to Wall Street these days &#8211; you will see BlackBerry phones everywhere.\u00a0 If you walk Soho or the Village you see Apple and Google phones in droves.\u00a0 Yet, maybe RIMM can re-focus itself on its core business market and carve out a permanent niche that Apple and Google cannot ever penetrate.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Over what kind of time frame are investors and analysts evaluating RIMM?\u00a0 The analyst quotes in today&#8217;s news seem to indicate that RIMM is about to go bankrupt compared to Apple and Google.\u00a0 Consider the Wall Street Journal&#8217;s Cody Willard&#8217;s blog headline of, &#8220;RIMM is Truly Dead.&#8221;\u00a0 How can such an assessment be made while RIMM is still demonstrating high profit margins and revenue growth in the face of very strong competition.\u00a0 Motorola very famously led the cell phone market back-in-the-day with its flip phones.\u00a0 Then Motorola lost its edge.\u00a0 Everyone thought that the company was dead.\u00a0 Then something unexpected happened: two years ago, Motorola started making products that every user and evaluator thought were superior to those of its chief nemesis Apple.\u00a0 My point: one quarter&#8217;s disappointment does not a bankruptcy make.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-size: 16px;\">Third, RIMM has no long-term debt, yet stable operating cash flows.\u00a0 What this means is that RIMM can borrow money to purchase what it is lacking in internal research and development and accelerate the development of new product offerings.\u00a0 Those steady cash flows can be used to make interest payments.\u00a0 After all, Apple just designs phones and then outsources the manufacturing.\u00a0 Same with Google.\u00a0 So RIMM has the balance sheet fire power to make for a brighter future.<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Fourth, there is no getting around the fact that you can today buy RIMM for less money than you could yesterday.\u00a0 In fact, as a company, RIMM is almost $4 billion cheaper today than it was yesterday.\u00a0 And as I demonstrated earlier, this is with only slightly less profitability than was previously expected.\u00a0 At current prices, RIMM is trading at a 7.7\u00d7 P\/E.\u00a0 This low price is for a company that has profit margins in excess of 15% and operating margins in excess of 20%!\u00a0 How can it be said that &#8220;RIMM is Truly Dead?&#8221;<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Fifth, some analysts are calling for a change to the executive structure of RIMM, which features two chief executives.\u00a0 Huh?\u00a0 On what basis can an analyst, truly removed from the day-to-day operations of any business, possibly know what makes sense for an executive structure?\u00a0 In fairness, it isn&#8217;t as if boards of directors often make a good call on this either!<\/span><\/li>\n<li><span style=\"font-size: 16px;\">Sixth, Mike Abramsky of RBC Capital Markets lowered his price target on RIMM from $90 to $55 and lowered his rating on the company from &#8220;top pick&#8221; to &#8220;sector perform.&#8221;\u00a0 Frankly, this is an example of why when I was a portfolio manager I did all of my own proprietary research.\u00a0 Your average financial analyst for a &#8220;sell-side&#8221; investment banker has his head up his butt.\u00a0 Because of a reduction in value of 0.5% (as demonstrated earlier), Abramsky has lowered his enterprise value for RIMM by $18,239,200,000 (!), or by 38.9%!\u00a0 Ridiculous.\u00a0 I also love the &#8220;day late, dollar short&#8221; rating change from &#8220;top pick&#8221; to &#8220;sector perform.&#8221;\u00a0 If analysts truly had insight into the goings on of a company &#8211; such that they could make a recommendation as to executive structure &#8211; then why is it that they can&#8217;t see that a &#8220;top pick&#8221; is truly just a &#8220;sector perform?&#8221;\u00a0 That&#8217;s a huge change in the rating of the business based on what RIMM announced.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\">In conclusion, analysts are often blind harpies that eat upside and downside hype for dinner.\u00a0 I do not own shares of Research In Motion, but I am now strongly considering such an investment.\u00a0 If I do, you will be the first to know.\u00a0 By contrast, I have owned Apple shares in the past and currently own shares in Google.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Research in Motion (ticker: RIMM) announced that it expects second quarter earnings per share to by between $1.30 and $1.37, rather than between the range $1.47 of $1.55 that it just promised a month ago.\u00a0 Stock analysts hate this kind of revision and many who follow RIMM have drastically cut their ratings on the maker [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-4126","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4126","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=4126"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/4126\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=4126"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=4126"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=4126"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}