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These 3 Catalysts Make Research In Motion a Buy

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I was wrong!

I recommended taking a closer look at Research In Motion (Nasdaq: RIMM  ) in late March after the company's guidance then did little to thrill investors. The stock responded with a near-precipitous downtrend, culminating in the epic sell-off we witnessed on Friday following the company's second earnings warning in as many months.

But you know how the old saying goes: "If at first you don't succeed, try, try again!"

Very little has changed in RIM's overall growth plans to merit this dramatic sell-off. With that being said, I have established three potential catalysts that could push this stock higher from what I consider to be bargain basement levels.

Catalyst No. 1: Growth
This isn't a magic formula or a smoke and mirrors campaign. Research In Motion has real double-digit growth figures backing up sales of its BlackBerry phones and new tablet, the BlackBerry PlayBook. The market and investors, however, are pricing the stock as if sales of these products were contracting -- and that just isn't the case.

It'd be foolish -- in the bad way -- to ignore the signs that the BlackBerry has lost market share to Apple's (Nasdaq: AAPL  ) iPhone, but it'd also be crazy to think that RIM has less momentum than current dead ducks Nokia (NYSE: NOK  ) and Microsoft (Nasdaq: MSFT  ) in handheld devices. Nokia has unsuccessfully tried to turn its aging handheld division around for years, while Microsoft's Windows Phone 7 has wowed gadget junkies, but lagged in the results department.

RIM's forward P/E has slumped below seven while its PEG ratio sits at a mere 0.5. Compare this to the largest handheld device maker, Nokia, which is losing market share hand over fist and sits at a forward P/E of 12 and a PEG ratio of 2.5. Sugarcoat it all you want, RIM still has momentum in the handheld space and is one of the few non-Android companies with a differentiated product that's in a strong enough financial position to make a dent into Apple's widening share of the handheld device market.

Catalyst No. 2: Takeover candidate
Due in large part to RIM's history of double-digit growth and prudent cash management, I'd have to think that the possibility exists that RIM could get a buyout bid from one of these aforementioned struggling handheld device makers. These scenarios are plausible, but at this point it's mere speculation on my part.

Microsoft is the most ideal match because the company has more than $30 billion in net cash. This makes the possibility of an all-cash buyout a reality for RIM shareholders. Microsoft has failed miserably at practically every attempt to enter the handheld device market, and a buyout would allow Microsoft to gain instant handheld market share. Also, as an added bonus, it would likely be accretive to earnings almost immediately. The main downside is Microsoft's commitment to its Windows Phone 7 platform after a major deal with Nokia, which brings me to ...

Nokia could be another potential white knight for RIM. Without question, Nokia would have to tap the equity markets for capital or make a tender offer for RIM using its own shares or a share offering as collateral. Nokia does have $10 billion in net cash to sweeten a potential buyout offer, but I cringe at the thought of shareholders voting for the acceptance of Nokia shares -- so this deal appears less likely. Again, though, with Nokia moving toward Microsoft's Windows Phone 7 platform, an integration of this size would be problematic and further complicate a company that has been criticized for lacking focus and developing too many operating systems at once.

One dark horse that could make a surprising run at RIM could be Google (Nasdaq: GOOG  ) . Google's Web services coupled with the BlackBerry's infrastructure could actually be a feasible model to battle Apple's iPhone. But even I admit that the combination between these two companies wouldn't be without its hurdles. Currently, the two are pitted against each other in a potential bidding war for the intellectual property patents of the now-bankrupt Nortel. It also remains to be seen if Google is even interested enough to enter the fiercely competitive handheld device market when it has been so successful supplying Android software that's becoming increasingly ubiquitous.

Catalyst No. 3: Shareholders come first
I'm sure some of you just spit most of what you were drinking on your monitor after reading this statement, given how wrong the company has been on issuing guidance recently. But I can assure you RIM cares about its shareholders and has been doing well by them for years.

As the market fell deep into recession in 2009 and steadily rebounded, share buybacks at many S&P 500 slowed or dried up completely -- but not at RIM. In the period from 2009 until now, share buybacks increased to more than $3 billion, as compared to just $595 million in the 2006 to 2008 time frame. By reinvesting money directly back into the company, management is sending a strong signal to investors that it believes in its growth model.

Prudent fiscal management has also led to a cash-rich balance sheet. After bringing in just over $4 billion in operating cash flow over the trailing-12 months, the company now sits on a $2.1 billion cash pile. This cash gives RIM the flexibility to research new products without going into debt. More importantly, it gives RIM shareholders hope that at some point in the future RIM may be able to pay a dividend, given its strong cash position.

It remains to be seen if RIM can deliver on its growth prospects, but I believe the groundwork has been laid to provide shareholders with long-term growth.

Would you buck the trend and buy RIM shares here? Share your thoughts in the comments section below and consider adding these and your own personalized portfolio of stocks to My Watchlist.

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Google and Microsoft are Motley Fool Inside Value selections. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a bull call spread position on Apple, and a diagonal call position on Microsoft. The Fool owns shares of Apple, Microsoft, and Google. Alpha Newsletter Account LLC owns shares of Microsoft.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that never texts while driving.

Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 02, 2011, at 5:14 PM, jopow wrote:

    Okay, I used to say the same things back in 2009 and 2010, and it did not work then and it will not work now.

    Because Mike and Jim are hucksters, they cajoled some new longs to jump into the stock when it was at the bottom of $42 and over a long time, it got to $70. But, the house of cards came crumbling down awful fast.

    First, you just don't understand--the margins are shot. RIM has to keep reducing sales prices for old products, while its imput costs will just rise. You really did not hear Jim in the phone call last week: I wish I had the new stuff to sell because we only have the old cheap stuff to sell.

    Second, forget about Microsoft, because they are now married to Nokia. Microsoft also just does not gamble on new acquisitions, because, if they did, they would be bigger plays in tech growth. Actually, the RIM systems are really its own hodgepodge of innovations that even Microsoft would not even figure out to operate.

    Third, if they cared about shareholder value, they would have executed correctly since the Apple Iphone and Androids came out. But, Mike and Jim were brainwashed that they were immune and had the best stuff to sell in town. Even now, they claim they have the best stuff in town (except their new products), yet, we are $48 a share as proof they are wrong.

    Lets just be realistic, the company is dead in the water and will eventually become more and more irrelevant in the space.

  • Report this Comment On May 04, 2011, at 7:51 PM, mracz425 wrote:

    RIMM needs a new innovation team. Period end. Its the same old products from them year over year.

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