Filed Under:
Tickers in this Article: RIMM, AAPL, PALM, MSFT, MOT, DELL, HPQ
Investors sheared a couple of points off the Research in Motion (Nasdaq:RIMM) stock last week. They were no doubt fretting about a slowing economy, weakening margins and mounting competition from Apple's (Nasdaq:AAPL) iPhone, but they may have gone too far. Over and above the general pummeling that the Blackberry maker's stock has taken over the past few months, this latest hit puts the stock at a level worthy of consideration. Trading below the $50.00 mark, Research in Motion looks cheap.

For years, Research in Motion's stock price had an astonishing ability to defy gravity and reason. It was only in August that shares were as high as $133 a piece, trading at more than 40 times trailing earnings. Now at $48 and change, it's at a much more reasonable 15.3 times trailing earnings. Research in Motion's earnings growth is estimated at more than 30%, putting it on a forward price-to-earnings multiple of just about 10.

Research in Motion's enterprise value is about $27 billion and by my calculations the company will generate about $1.4 billion of free cash flow this year. Trading at about 20 times free cash flow, I'd say the stock is approaching a floor. (For more reading on free cash flow be sure to check out Free Cash Flow: Free But Not Always Easy.)

Consider a discounted cash flow analysis. Let's say Research in Motion grows its free cash flow of $1.4 billion by 20% over the next four years, then by 10% through year ten, and 5% for years 11 through eternity. Assuming a discount rate of 10%, this scenario generates a share valuation of $65.40. (To learn to do this analysis yourself, read DCF Valuation: The Stock Market Sanity Check.)

Fundamentals in Place
To drop any further, the Research in Motion's business would have to really fall apart. That's not impossible, but it seems unlikely. The company still has only a tiny share of the overall global market for smart phones, leaving it heaps of room to grow. Wireless data global adoption is still early and at a tipping point. Research in Motion's global carrier and distribution channels are just beginning to ramp up.

What's more, Research in Motion is rapidly launching new phones, like the Bold, Storm, Thunder and Kickstart to enter consumer markets and address different needs and price points. These should boost Wall Street confidence in estimates for the third quarter ending in November and the fourth quarter ending in February.

Of course, the next few quarters will likely be tough ones. Growing competition from Apple, Motorola (NYSE:MOT), Palm (Nasdaq:PALM) and others in the smart phone space is pushing down product prices and margins. That being said, even if margins get slashed, Research in Motion's potential earnings growth should still be compelling.

Apple's iPhone may make further gains in the broad smart phone market at Research in Motion's expense. But Research in Motion won't be capitulating any time soon - especially in the corporate market. Many corporate customers' IT departments don't support Apple phones. Those customers that have Research in Motion email servers installed will make it easier to stick with them.

Bottom Line
Normally I am loath to speculate on potential buyouts, but Research in Motion could be ripe as a takeover candidate. M&A teams at cash-rich Microsoft (Nasdaq:MSFT), Dell (NYSE:DELL) and Hewlett Packard (NYSE:HPQ) should, at the very least, be taking a look. It's not every day that a top-tier technology company can be snapped up at such a low price.

To continue reading about this subject, see Trademarks Of A Takeover Target.

comments powered by Disqus

Trading Center