RIM: How Long Can Investors Hold Their Breath Waiting for 10?

NEW YORK ( TheStreet) -- Research In Motion ( RIMM) investors received a somewhat unsurprising, albeit painful press release stating the warehouse is bulging at the seams and inventory writedowns are expected to wipe out this quarter's profit.

In August of last year, I questioned if RIM would survive another year. RIM was trading near $26 a share. Comments received included "ridiculous" to "This is one of the best articles that fairly and objectively describes RIM's position and market space." At the time, I remained bearish despite the "attractive" price-to-earnings ratio.

I believed that Google's ( GOOG) execution into the mobile space demonstrated near perfection and the overnight market-share penetration would erode RIM's ability to compete. As it turns out, Google ran laps around RIM, but Apple's ( AAPL) iPhone delivered what high-end consumers wanted also.

Since then, Apple overtook RIM for smartphone sales even in Canada, Google's Android remains at second place, and Nokia ( NOK) supported by Microsoft ( MSFT) and left for dead by almost everyone, is making a comeback (Read Rocco Pendola's insightful bullish article about Nokia and Microsoft).

RIM's stock price reflects the opinion of a company losing its way. However, does RIM also present an opportunity? By December of 2011, with shares trading for less than half at $12-13 a share, I believed all the negative developments and failings of RIM were fully priced in. BlackBerry may not be popular and sexy with North American investors, but around the world sales remained respectable. I will get back to global sales, but let's take a look under the hood for valuations based on hard assets.

When co-CEOs Jim Balsillie and Mike Lazaridis finally stepped down (pushed while kicking and screaming may be closer to reality), at least RIM could place Thorsten Heins at the helm. Selling RIM would not be the first large tech company he successfully liquidated.

I imagine Heins asked for and received wide latitude from the board of directors to right the ship. Heins has a lot of RIM assets to sell and the current stock price may not reflect the true value.

RIM has no long-term debt (thank goodness), and holds enough cash to either stop the bleeding or negotiate a favorable sale. Using the last annual balance sheet and adjusting based on my valuations:
Cash/short term $2.2 billion
Net A.R. $2 billion
Inventory $300 million
Other $300 million
Total Current Assets $4.8 billion
Long term Investments $325 million
Plant & Equipment $2 billion
Goodwill $20 million
Intangibles $2 billion
Total Assets $9 billion
Liabilities $4 billion
Stockholder equity $5.2 billion

RIM has 515 million shares outstanding leaving a valuation of about $10 a share using a discounted liquidation (back of the envelope) method of calculating "how low can it go." I admittedly use aggressive discounting when calculating my risk because there is almost always some unknown that pops up if a company actually is on the way down.

Who is willing to buy BlackBerry? While I would not look toward the usual suspects including Apple, Google and Microsoft, I will keep a watchful eye on maneuverings made. RIM does have valuable intellectual property any of the three others desire. Another obvious potential bidder stands like a bull in a china shop.

China Mobile ( CHL) is a $200 billion company, easily able to make an offer. Is the U.S. and Canadian governments willing to allow a free Chinese wiretap on government BlackBerries? Not likely, however, if broken up, RIM assets in India and the Asian region may be attractive. Along with mobile carriers, the China sovereign wealth fund may have an interest in parts. Again, it's a long shot as a total takeover would face a mountain of government resistance.

Other non-Chinese companies like HTC and Samsung make up the short list of many who will have at least a minimal interest. The point is not to "guess" or pick who will buy RIM, but more importantly the many options available to Heins in seeking a solution.

From RIM's press release on Tuesday:
Our global subscriber base continued to grow this quarter to approximately 78 million, driven primarily by growth in international markets, which is partially offset by high churn in the United States, and our BBM user base has grown to approximately 56 million users globally.

Global sales represent lower margins than in North America; however, the growth demonstrates the ability to execute in several large markets in the world. Expect RIM to report North America near 23% of RIM's revenue.

Perhaps the most striking facet of RIM is how unloved the stock is on Wall Street; meanwhile sales continue to improve in India, Indonesia, and Latin America. Along with RIM, Google's Android, and Nokia are likely to find greater success in developing markets compared to Apple due to price points in the near future.

RIM's stock price acted about as good as can be expected given the company earnings' update. Opening near the low of the day and a steady climb after is indicative of initial panic selling followed by value seekers. Given the high implied volatility, the real opportunity is in the options market.

For a conservative long approach the July $8 strike put for 30 cents looks attractive. A more aggressive position includes selling the July $10 strike put for 88 cents. Personally I like the $10 strike put more because of the round number price pinning during expiration, and for the relative risk-vs.-reward ratio.
Author does not hold a position in any stock mentioned.

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