There’s no question Research In Motion had one of its most challenging month’s in the company’s history. After its Q1 results came in below analyst expectations, the stock price plummeted and people began calling for its CEO’s heads. With RIM’s share price down about 15% since June 16, the day it announced its results, it’s clear many investors want nothing to do with the Waterloo-based BlackBerry maker.
This past May, though, Canadian Business put the company on its Top Canadian Picks for 2011 list. In late April I spoke to two managers who thought the stock was a stellar value play—the company was cheap, it’s price-to-earnings ratio was a low 8.8 times, and it was still growing. (According to Bloomberg, its estimated price-to-earnings ratio is now 5.7 times.)
Here’s what I wrote in our Investor 500 issue:
“It’s the company everyone loves to hate, which is why BlackBerry maker Research In Motion is dirt cheap. It has a P/E of 8.8 times and is trading at 7.5 times cash flow—far lower than the double-digit multiples it saw years ago. With Apple now the hot tech company, many people think RIM’s best days are behind it. But Zohny says that’s simply not true. While its North American business has slowed, RIM’s seeing 30% to 40% growth overseas. “It’s all coming from the outside,” says Zohny. Anderson also likes the company. With unique selling points like BlackBerry Messenger—which saves people texting fees—and its own secure network, it’s still a must-have for many businesses. Revenues continue to grow, too; it made $5.6 billion in revenue in Q4, up 36% from the same time last year.”
Were these managers nuts? Nope, says Youssef Zohny, a portfolio manager with Vancouver’s Van Arbor Asset Management. I followed up with him to see if his thoughts have changed. They haven’t.
“We still own RIM and we have been accumulating during the recent share price weakness,” he wrote in an e-mail.
He says he’s not surprised that sentiment continues to turn against the company. RIM is undergoing a transition to their new platform (QNX operating system) and new products, and it’s taking too much time for many people. “I’m not surprised that investors have lost patience,” he says.
He also points to unrealistic expectations around RIM’s market share as a reason for the negativity. As everyone knows, the BlackBerry was once the only smartphone on the market. Now, every phone company has at least one, if not a whole slate of smartphone products.
As more smartphones come online, it’s only natural that RIM would lose some of its market share, says Zohny.
“The main problem is that people are seeing their extremely high smartphone market share go from an unsustainable plus 60% share to 35% and extrapolating to the future of it going to 5%. I think that market share should stabilize, as consumers do like choice and business customers see no reason to switch en masse,” he says.
Despite many consumers and business execs switching to the iPhone, Zohny says many users are still loyal to the BlackBerry. Once RIM’s new products come to market, “a renaissance in 2012 is likely.”
He sticks by his original comments that most of its growth will be driven by non-North American sales. “International sales are up 67%, so you can get an indication where growth will come from,” he explains.
One other point he makes, which didn’t come up when I spoke to him in April, is that large tech company may now buy RIM and investors should expect a takeover premium to start building into the stock price.
He says companies like Google, HP, Cisco, Oracle and Microsoft would love to have the company’s business customers and cash flow.
It may take a while, but the stock price will bounce back, he says, so buy now when the company is cheap. “We don’t expect a quick recovery,” he says, “but with any value pick, timing isn’t as important as getting a good price.”