Special Feature
It tells me that the primary analyst community, and that is North American predominantly, is hamstrung, as is so often the case with “group-think” mentality; a group-think mentality that is still very negative on the RIMM and is unprepared to even acknowledge any glimmers of light. This spells opportunity to those lone dissenters and contrarians assuming that the fundamentals of the company give you a cushion of comfort. The company ended the second quarter of fiscal 2013 with more cash and higher revenue than expected. For the six months ending September 2012, net cash produced from operating activities revealed a 17% positive change compared to last year. RIMM reported revenue of $2.9 billion. Even though revenue figures showed a significant drop on a year-over-year basis, still the total revenue exceeded analysts’ median estimate of $2.48 billion by quite a wide margin. Also, RIMM shipped approximately 7.4 million smart phones while analysts predicted about 6.9 million. Are we seeing a common theme here? The negativity surrounding the stock looks to us to have reached excessive proportions, and like with profit warnings that generally come in threes, surprises to the upside generally get followed by more surprises. RIMM also recently won an important U.S. security certification which will allow the Blackberry 10 to be used by government agencies. This is the first time the company device has been certified prior to its launch. A decisive factor in the company’s future performance is the QNX component of the new Blackberry 10 — a highly regarded operating system that management hopes will provide a successful turnaround for the company and that was acquired in 2010.
The software runs the security, info-tainment and hands-free system in General Motors cars and also runs routers and switches on Cisco’s networking systems. BB10 embeds the best features from QNX’s operating system and provides a reliable shift away from “monolithic” designs. The new operating system is in the final stage of testing before its launch in Q1 2013. The improved operating system is expected to deliver an optimum user experience by combining high quality security parameters and usage innovations which include simultaneously working profile applications. Something of particular interest from a valuation perspective is that the company is also considering licensing its new operating system seeking for additional cash flows.
Summary During the last three months, the stock has performed nicely by returning more than 10 percent as the chart below illustrates, and we expect this upward trend to continue, especially in anticipation of the release of the new handsets. RIMM’s valuation metrics suggest a compelling value opportunity to us, even more so than when we made the stock a Conviction Buy at the beginning of the New Year. The shares trade over 50% below book value and from a balance sheet perspective have a healthy quick and current ratio of 1.7 and 2.2 times; and being completely debt free, in fact sitting with current cash reserves of over $2.4bn — over 50% of the current market capitalisation. Additionally, the company has committed to purchasing $1.2bn of its stock back — a very powerful tail wind to any short covering that also occurs.
40 | www.financial-spread-betting.com | December 2012