RIMM – D Day for the company tomorrow

Regular readers will know that aside from Bumi which illustrates that no matter how well founded one’s research is, a “googly” can always be thrown by fraudulent activities, that the one Conviction Buy recommendation we have got wrong is RIMM. Results are due tomorrow and so here is a piece written by our 3rd party contributor – CFA chartered Filipe R Costa.

There was a time when Symbian and BlackBerry completely dominated the smartphone market. This time was 2008 and Research in Motion (RIM), the BlackBerry owner and manufacturer, was flying high with its shares valued above $140. Indeed, the BlackBerry was probably the most loved gadget a businessman or man about town could have at hand to help on day-to-day tasks. Unfortunately for RIM the world is constantly evolving and the BlackBerry has been outpaced by first the Apple iPhone and now a range of Android-enabled phones. A company that was worth $140 per share four years ago, is currently valued at $6.60, a drop in value of 95% and now at a slim premium to its net cash.

RIM was leading the world in smartphones but, it seems, forgot about updating and upgrading its software in line with its competitors and constantly delaying upgrades which has translated into a large loss of market share. At first it, it seemed that losing some market share and eroding profit margins were the issue but since last year the company has a new issue and that is the loss of top line revenue growth with revenues down 7.6% from the previous year and net profit being slashed by 66%. Unfortunately for the company, those drops aren’t the worst of the story either…

Market share in Q2 2012 was 4.8% down from an already not-so-shiny 11.5% in Q2 2011, and analysts are expecting the company to report just $10 billion in revenues (down from $18.4 billion over the prior full year) and a net loss per share of $1.51. Prospects for next year aren’t inspiring either as analysts anticipate a loss of $0.62 per share.

It is undeniable that RIM has fumbled the ball, nobody will deny that and it will likely take a couple of years for Thorsten Heins to completely right the ship and recover, if possible.  After considering all management, technical, and marketing errors from the Ontario-based company, we still see potential in this company however.

RIM makes profit out of BlackBerry sales and also from subscribers and software licenses. It will be a tough time for the company until it launches the new Blackberry 10 – due in Q1 2013, but at the current price, the company may be undervalued as almost all its price ratios point to.

The company has a strong balance sheet, full of cash and without debt. It may be a takeover target and if not, it can recover market share during next year with the new launch – wipeout is not assured, contrary to many media commentators assertions. The company is in the process of a corporate review in which, according to the CEO, “everything is on the table”, indeed it has just begun to sub license to other manufacturers including Samsung. Tomorrow is likely to be a watershed day for RIM  – stabilisation of market loss, preservation of cash and perhaps an unveiling of elements of the corporate review – these will likely send the shares skyward. Any further bad news and it’s dead money until Q1 2013 when clues to whether BB10 is going to be a success or not will be more prevalent.