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.