In the mean time you can look about the station and do an ad hoc smartphone market share survey. One must do anything one can to try to avoid confirmation bias. You see I have undertaken a long position in RIMM.
There is no analysis at $17/share that doesn’t work at $27/share; the difference is news. The bet is the same, the market is just offering you the endless-shit-news-discount. Its just a question as to weather you take it. Endless-shit-news-discounts, in my opinion, should be lifted when they are confirmed by fear.
In a column from Howard Gold at Marketwatch from October 21st titled “Big-name money Gurus aren’t too big to fail”, after listing some of the stocks that have been the woe of John Paulson, he cheekily writes “He even lost money on HPQ … Does he own NFLX? Or Research in Motion too? Just kidding”. The Mockery!
Bloomberg news recently had more of the same “HTC tops smartphone sales in US market” … “Rims bleak outlook” … “declining to 9% from 24% a year earlier” … “the biggest decline of all smartphone makers”
RIMM downgraded to hold by Barclays, Nov 8th
RIM tries Buy 2 Get 1 free to sell playbooks in desperate move, Nov 2nd, TREFIS
RIM shares fall as Playbook OS is delayed, October 17th, Marketwatch (MW)
BASIS files BBX Complaint against RIM, October 26th, Businesswire
RIM crafts damage control as service returns, October 13th, MW
RIM: Emergency response not affected by job cuts, October 13th, MW
RIM Co-CEO: “Nobody’s gone home since Monday”, October 13th, MW
RIM Co-CEO apologizes for outage, October 13th, MW
RIM Co-CEO apologizes: issue not fully resolved, October 13th, MW
RIM Co-CEO: We’ve let many customers down, October 13th, MW
Kiss hopes for any RIMM deal bye bye, October 13th, MW
RIM detailed outage cause, but no timetable, October 12th, MW
RIM’s Blackberry Service Disruptions a blow to its turnaround, October 12th, MW
RIM outage may threaten remaining value, October 12th, MW
Poor roaming service effecting Middle East Blackberry Nwk October 12th, PR Newswire
Investor banking on a RIMM shake-up Might be Disappointed, October 11th, TREFIS
Blackberry services disrupted in Europe, October 10th, MW
RIM share down as Blackberry outages continue, October 10th, MW
RIM jumps on rumor; analysts say unlikely, October 5th, MW
In blogs you can find 2nd hand accounts of inner turmoil, project roadmaps with missed deadlines, firings, the business generally at 6’s and 7’s.
Such is the cloud hanging over the company.
In my view we have rampant pessimism on the one hand and the unknowable on the other hand. The 7.1% market share number that RIMM dropped in the US in Q3 was a real egg, but RIMM laid a 6.4% and a 7% in the last half of calender '09 and they went on to do $9bn of EBITDA over the next 7 quarters. Then too we had receivables and for a while finished goods racing ahead of profitability.
It it my belief that you just can't know the future here and therefore a distribution of outcomes is most valid driving an expected value. See Sensitivy below
Business Description
RIM is a more-than-half-way-decent designer, manufacturer, and marketer of wireless solutions for the worldwide mobile communications market. Through the development of integrated hardware, software, and services, that support multiple wireless network standards, RIMM provides platforms and services for access to information, including Email, voice, instant messaging, SMS, internet based applications(alas too few) and browsing.
Revenue includes sales of Blackberry Smartphones and Playbook tables(hopefully),the server software (usually installed at the enterprise level though sometimes on personal computers) that they run on, as well as monthly access fees (from carriers) for the now 70+ million subscribers to the RIM infrastructure. The company also makes money on non-warranty repairs, sales of accessories, and some engineering development engagements.
Merits
1. Though the shorts have been right on price action, and so much more none of them predicted that the business would still look this decent on an LTM basis after Q1’12. Revenue Growth of 84%, 35% and 33% in the last 3 years - stock down 83% from mid-'08 reminds me how wonderfully prospective great stock investors are! Have they now gone too far?
2. Think of RIMM as an EMEA/APAC smartphone maker with a declining business in the US. Do you feel better now? ... November 3rd '11, Dow Jones Newswire "Research in Motion's Top Exeutive in India Quits"...shit
3. This is not Nokia and it sure as hell is not Palm, I have only ever known 1 person who owned a Palm and he also liked CMGI @ $163.50/share. For Palm worldwide market share topped out at 2.4% in 2007, held there in 2008, before declining 0.1% where it is today (tucked somewhere deep within HPQ). I wish this was NOKIA and that people worried only about margins - here the fears are of obsolesence. It would be devine to be considered a Motorola Mobility and to be snapped up at 2.3x book(not picking 26.5x EBITDA). Say we are AAPL and we dive and recover spectacularly to a 10x valuation. Say its Nortel and we just get money from patent sales and the Statutory Rate times our Net Operating Loss balance which will be quite big by then, would 2.3bn be the right number, that would suck. On a subscriber basis RIMM has fallen from the lofty heights of $4,000/sub (End of Fiscal 2008) to about $111/sub today; this Service revenue estimated at 84% gross margin. God, RIMM should go fabless, R&Dless, SG&A less and never make another new phone and see how long they can hang onto some of subs 70mm subs when all they have to offer is the 2011 model phones. Seriously is $111/sub the right number? Afterall subs pay ~$5.00/month.
| Expected Value | ||||||||||||||
| LTM EBITDA | 5,220.9 | 100% | ||||||||||||
| Current Book Value | 9,917.0 | 100% | ||||||||||||
| EV multiple | Price/Book | |||||||||||||
| Nokia | 6.5x | 34,188.9 | 35.0% | Margins Collapse, volumes hold up better (lowest multiple in last 5 years) | ||||||||||
| Apple | 9.6x | 50,120.3 | 1.8% | Company storms back with winning handset after winning handset | ||||||||||
| Motorola | 26.5x | 2.3x | 22,809.1 | 25.8% | GOOG Acquires MMI for 12.5bn (2.3x book/ ~1x Rev) 5% world market share or ~26.5x 12E EBITDA | |||||||||
| Nortel | 0.4x | 2,307.0 | 20.0% | Nortel got 4.5bn for its patents in Bankruptcy recently, of which $750mm went to RIMM | ||||||||||
| HP Palm | 0.2x | 1,200.8 | 17.5% | HPQ acquired Palm for $1.2bn when they has market share of about 0.1% | ||||||||||
| 19,388.1 | ||||||||||||||
| Shares Outstanding | 524.1 | $ 36.99 | ||||||||||||
| 12.5% | 15.0% | 17.5% | 20.0% | 22.5% | Palm | |||||||||
| 20.0% | 20.0% | 20.0% | 20.0% | 20.0% | Nortel | |||||||||
| 41.3% | 33.5% | 25.8% | 18.0% | 10.3% | Motorola | |||||||||
| 1.3% | 1.5% | 1.8% | 2.0% | 2.3% | Apple | |||||||||
| $ 36.99 | 25.0% | 30.0% | 35.0% | 40.0% | 45.0% | Nokia | ||||||||
| % of LTM | 90% | $33.0 | $33.2 | $33.4 | $33.5 | $33.7 | ||||||||
| EBITDA | 80% | $29.5 | $29.6 | $29.8 | $29.9 | $30.1 | ||||||||
| 70% | $25.9 | $26.0 | $26.2 | $26.3 | $26.4 | |||||||||
| 60% | $22.3 | $22.4 | $22.5 | $22.7 | $22.8 | |||||||||
| 50% | $18.8 | $18.8 | $18.9 | $19.0 | $19.1 | |||||||||
[Sirius = $560/sub (ARPU $12/month, churn 1.8%/month with 45% of freebees converting to payers); AT&T ~1,600/sub; VZ ~$2,000/sub; T-Mobile ~1,300/sub; Looking at some per user valuations, USER that is, who knows when you can get $5/month out of them. Linkedin $70/user. Skype (PF for MSFT) $12/user.]
4. OK so Icahn is not involved in RIM afterall so we wont have the immediate unlocking of shareholder value that would describe Icahn activism (most of the time), but wasn't Icahn's involvement soo plausable and ISNT THAT THE REAL STORY. If people ever stop hating RIMM, it might get good to be in the stock.
5. With the untimely passing of Steve Jobs (RIP) you could be forgiven for thinking that the unstoppable conveyerbelt of awesome hardware out of Apple may stall. I know I like what Mr Jobs made and I really liked who he was, but I dont know about Tim Cook. The leader of #1 player in the industry has passed away, will the industry #1 therefore be at 6s and 7s?
6. The barriers to entry in this business have increased in the last couple years with the IP landgrab and the Sue counter-sue patent wars - proforma for the Nortel deal, RIMM is patented up to the gills
7. No Debt, but a max IG bond deal and a big dividend would be lovely.
8. security leader (should be strength #1)
Weaknesses
1. Highly visible market share losses; US, CAD, & EUR and declining volume and slowing growth in the rest of the world.
2. For the past 5 consecutive quarters bad things have been evident in an analysis of the working capital namely, finished goods have been growing faster than revenue, so too accounts receivable is growing faster than EPS. Clearly Playbook has been a failure and notwithstanding the working capital nightmare, it will continue to hurt the margin profile of RIMM materially. What may mitigate what seems to be the coming avalance of write downs is record channel through-put which leads one to believe that plausable cash generation and not just inventory write-downs will result. If the money buried in working capital isnt lost forever RIMM has a chance whatever the ASP.
3. ASPs are declining - will this be mitigated by the Blackberry 7 release? This technology hardware, price erosion is everywhere all the time. It would take some amount of money printing to effect this.
4. Earnings misses, lots of them
5. Strong competitors
6. Key enterprise customers now supporting the iPhone
7. Enormous service outage covering 3+ full days
8. This is the same management team that backdated options
9. With the possible exception of Silver Lake, there is no Private Equity home for a busted RIMM and who are the would-be strategic buyers, god knows.
Valuation:
The distribution of outcomes proposed on the sensitivity tab drive $26ish valuation, does that pass for analysis? See sensitivity tab.
Come on now, in the last 3 years RIMM has had average Gross, EBITDA, EBIT and Net Margins of ~45%, ~28%, ~24%, and ~17%. Nokia for the last 6 years averaged Gross and EBITDA Margins of ~33% and ~13.5%. HTC Gross and EBIT margins for the last 3 year have averaged ~31% and ~17.5%. Apple gross and EBITDA margins in the LTM period of are ~56% and ~33% respectively. This is a long way of saying Rim WAS a decent business. In their effort to stay a decent business they have all of the money that they have sunk into R&D and Capex in the last 3 years (>50% of what Nokia(2.5x the size of RIM) invested, ~3x more than what HTC invested, $1bn more than MMI invested, about 50% of what AAPL invested over all of its 6 products combined) and all that they will sink in before they close the doors - so why are people so sure they are history?
Today's ~1.5x LTM valuation currently can be be described as follows: EBITDA is down 25% next year followed by 5 consecutive years of -65% EBITDA growth, with a growth rate to perpetuity of -2%; so if you have a required return of 20% you may pay 1.5x LTM EBITDA which is today's proposition. I think I am getting an endless-shit-news-discount here.
| ($ in millions) | Hist. FYE February | Proj. FYE February | ||||||||||
| Summary Hist. and Proj. Financials | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
| Units Shipped | 2.4 | 4.0 | 6.4 | 14.0 | 26.0 | 37.0 | 52.3 | 51.3 | 49.1 | 49.2 | 49.8 | |
| Revenue | $1,350.4 | $2,065.8 | $3,037.1 | $6,009.4 | $11,065.0 | $14,953.0 | $19,907.0 | $18,722.2 | $16,397.7 | $15,103.2 | $14,232.9 | |
| % Growth | 53.0% | 47.0% | 97.9% | 84.1% | 35.1% | 33.1% | (6.0%) | (12.4%) | (7.9%) | (5.8%) | ||
| EBITDA | $702.9 | $933.2 | $1,908.5 | $3,049.9 | $4,122.6 | $5,566.0 | $3,981.0 | $2,580.1 | $1,965.1 | $1,566.2 | ||
| % Margin | 30.7% | 31.8% | 27.6% | 27.6% | 28.0% | 21.3% | 15.7% | 13.0% | 11.0% | |||
| % Growth | 104.5% | 59.8% | 35.2% | 35.0% | (28.5%) | (35.2%) | (23.8%) | (20.3%) | ||||
| EBIT | $806.8 | $1,731.2 | $2,722.0 | $3,507.0 | $4,639.0 | $2,507.4 | $1,460.7 | $934.6 | $595.5 | |||
| % Margin | 26.6% | 28.8% | 24.6% | 23.5% | 23.3% | 13.4% | 8.9% | 6.2% | 4.2% | |||
| % Growth | 114.6% | 57.2% | 28.8% | 32.3% | (45.9%) | (41.7%) | (36.0%) | (36.3%) | ||||
| Adj. Net Income | $631.6 | $1,293.9 | $1,893.0 | $2,457.0 | $3,411.0 | $1,895.7 | $1,049.6 | $683.9 | $439.2 | |||
| % Growth | 104.9% | 46.3% | 29.8% | 38.8% | (44.4%) | (44.6%) | (34.8%) | (35.8%) | ||||
| Adj. EPS | $1.10 | $2.26 | $3.30 | $4.31 | $6.34 | $3.62 | $2.00 | $1.30 | $0.84 | |||
| Capex | $254.0 | $351.9 | $834.0 | $1,009.0 | $1,039.0 | $1,184.2 | $1,147.8 | $1,057.2 | $996.3 | |||
| % of Revenue | 8.4% | 5.9% | 7.5% | 6.7% | 5.2% | 6.3% | 7.0% | 7.0% | 7.0% | |||
| Acquisitions | 116.2 | 0.0 | 736.3 | 564.0 | 1,051.0 | 1,713.0 | 800.0 | 800.0 | 800.0 | |||
| Cash Interest | (52.1) | (79.4) | (79.0) | (28.0) | (8.0) | (23.6) | (20.9) | (23.4) | (22.0) | |||
| Cash Tax | 32.1 | 216.1 | 946.0 | 1,082.0 | 1,053.0 | 635.3 | 431.9 | 274.1 | 178.3 | |||
| Changes WC | (203.3) | (318.7) | (616.0) | 12.7 | (301.0) | 332.2 | 356.0 | 177.2 | 114.9 | |||
| Misc. Ops | 14.2 | (123.6) | 114.9 | 46.3 | 211.0 | 367.0 | 0.0 | 0.0 | 0.0 | |||
| FCF | $365.4 | $1,224.8 | ($118.3) | $1,462.0 | $1,919.0 | $437.2 | $577.2 | $34.3 | ($271.5) | |||
| % of Revenue | 12.0% | 20.4% | (1.1%) | 9.8% | 9.6% | 2.3% | 3.5% | 0.2% | (1.9%) | |||
| Unrestricted Cash | 677.1 | 1,184.4 | 835.5 | 1,551.0 | 1,791.0 | 2,139.2 | 2,716.4 | 2,750.7 | 2,479.3 | |||
| Gross Debt | 6.3 | 7.3 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Leverage | 0.0x | 0.0x | 0.0x | 0.0x | 0.0x | 0.0x | 0.0x | 0.0x | 0.0x | |||
| Tangible Book/Share | $4.3 | $6.2 | $8.6 | $11.3 | $14.2 | $17.3 | $19.3 | $20.6 | $21.5 | |||
| TEV/EBITDA | 9.0x | 4.1x | 2.7x | 1.8x | 1.3x | 1.7x | 2.4x | 3.2x | 4.2x | |||
| TEV/(EBITDA - Capex) | 12.3x | 5.0x | 3.7x | 2.4x | 1.6x | 2.5x | 4.4x | 6.9x | 11.5x | |||
| P/Adj. NTM EPS | 7.6x | 5.2x | 4.0x | 2.7x | 4.8x | 8.6x | 13.2x | 20.6x | 35.9x | |||
| P/Adj. NTM EPS (Cash Adjusted) | 7.1x | 4.6x | 3.7x | 2.3x | 3.8x | 6.6x | 9.2x | 14.3x | 26.0x | |||
| FCF Yield | 4.0% | 13.6% | (1.3%) | 16.2% | 21.3% | 4.8% | 6.4% | 0.4% | (3.0%) | |||
| FCF Yield (Cash Adjusted) | 4.4% | 15.6% | (1.4%) | 19.6% | 26.5% | 6.3% | 9.1% | 0.5% | (4.1%) | |||
| Tangible ROIC | 55.7% | 56.4% | 56.3% | 57.0% | 53.9% | 24.4% | 13.1% | 7.7% | 4.5% | |||
| ROE | 22.7% | 30.8% | 32.4% | 32.3% | 36.3% | 16.3% | 8.6% | 5.2% | 3.2% | |||
| Case Sensitivities 1 Exit | |||||
| ($ in millions) | |||||
| Base | Downside | Upside | |||
| '13 Revenue | $19,056.1 | $16,397.7 | $22,426.4 | ||
| Adj. '12 EBITDA | $3,634.1 | $2,580.1 | $4,772.3 | ||
| Adj. '12 FCF Per Share | $2.13 | $1.10 | $4.17 | ||
| Adj. '13 EPS | $3.15 | $1.30 | $5.38 | ||
| LTM EBITDA Multiple | 4.5x | 3.0x | 6.0x | ||
| TEV | 16,353.6 | 7,740.3 | 28,634.0 | ||
| Cash | 2,412.1 | 2,139.2 | 3,153.7 | ||
| Debt | 281.0 | 281.0 | 281.0 | ||
| Minority Interest | 0.0 | 0.0 | 0.0 | ||
| Equity Value | 18,484.6 | 9,598.5 | 31,506.7 | ||
| Shares | 524.1 | 524.1 | 524.1 | ||
| Share Price | $35.27 | $18.31 | $60.11 | ||
| P/NTM '13 EPS | 11.2x | 14.0x | 11.2x | ||
| % Gain/(Loss) | 104.8% | 6.4% | 249.1% | ||
| % IRR | 53.5% | 3.7% | 111.0% | ||
| Case Notes | |||||
| Revenue Growth 2yr CAGR | (2.2%) | (9.2%) | 6.1% | ||
| Adj. EBITDA Margin FYE '12 | 19.1% | 15.7% | 21.3% | ||
| Adj. EBITDA CAGR FYE '12 | (19.2%) | (31.9%) | (7.4%) | ||
| NI CAGR FYE '13 | (21.5%) | (41.5%) | (6.2%) | ||
| FCF Yield ('12 FCF/Current Eq Val) | 12.4% | 6.4% | 24.2% | ||
| FCF Yield ('12 FCF/'12 Eq Val) | 6.0% | 6.0% | 6.9% | ||
Email me and I will send you my financial model
