RIMM – Greenblatt is probably seeing a special situation

I have said in the past that I think that RIMM is a basket-case, and yet here we see Greenblatt taking a position in RIMM. It seems unlikely that Greenblatt is taking a punt that the new Blackberry is going to be a smash hit. That doesn’t seem to be his style. It’s complicated tech, and I doubt that Greenblatt has an opinion on that. maybe he’s even hoping that the whole thing is a pile of junk in order to hasten corporate action.

It seems that the whole hardware/services division theory seems much more likely.

Well, in TTM, RIMM had Revenues of 16.3b USD. (http://www.gurufocus.com/financials/RIMM#bs) . It has a market map of 3.38b USD. It has net cash of 1.938b USD, no debt.

According to
hardware accounts for about 75% or revenues, and 25% in services. Let’s call hardware the “bad” (aka “toxic”) business, and services the “good” business. I don’t know how much profit each of these generates.

Services therefore generates 4.1b (0.25*16.3) in revenue. What kind of price multiple might we put on that? Dunno, prolly between 1 and 2, something like that.

Let’s say we could split out RIMM into the good business and bad business. Maybe we give the cash to the bad business, and spin it off for 0, just to stop it draining us further. We’re left with the good services business, which we hope wont deteriorate. So maybe we have a business worth 4.1b for 3.38b – a 20% upside, which isn’t great. But it could be worth double that, possibly more at a stretch, and then you’d be looking at a very high upside of nearly 150%. PLUS, you’d effectively get a free option on the hardware. If you did more work, you could probably get a better gauge on the likely fair value.

Let’s look at it from a net profit viewpoint. What sort of net profit margin might you expect? 20% would be really great. You know, niche business, maybe. Let’s not say more, but not unfeasible. Let’s call it, I dunno, 15%, though. So on 4.1b you could make 0.615b. Slap on a multiple, well maybe let’s call it 10X, to come up with a value of 6.2b. That’s an upside of 180%.

OK, OK. This is all just pure speculation on my part. There’s absolutely no guarantee of a spinoff. If it doesn’t happen, then the whole idea could be in jeopardy. But remember, Prem Watsa has a seat of the board, so I’m sure he’s dead keen on doing the logical thing. Your valuation will also depend on which business you think gets the cash. I’ve assumed it will be the hardware division, as that’s the one that will likely need it most. If the board do a crafty, and park the cash in the good business, then of course services would likely be far more valuable. 1.9b in cash on a market cap of 3.4b is a very comfortable cushion. Also, when I’m giving an upside, I am of course merely splashing numbers around. I’m not expecting you to take them seriously.

Another angle I looked at was NOK, using at as a hedging strategy. Greenblatt doesn’t seem to have a position in it, so I assume that this particular idea of mine is wrong. TTM, NOK has a market cap of 10.4b, revs of 44.2b, and net cash of 6.7b (12.1-0.4-5.0). So its EV/Sales is 0.08 ((10.4-6.7)/44.2). Doing that calc for RIMM is 0.09 ((3.4-1.9)/16.4). OK, they’re about the same. I was thinking initially that if NOK was at a higher rating than RIMM, and you wanted a protective feature against AAPL killing everybody in the smartphone arena, then you could go long RIMM and short NOK. But that idea doesn’t really work.

It must be said, there’s a big IF about my analysis, but I’m wondering if that’s what Greenblatt is really seeing here. No doubt he’s going to deliver a masterclass on how spiical situations should be done. Interesting, no?

About mcturra2000

Computer programmer living in Scotland.
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3 Responses to RIMM – Greenblatt is probably seeing a special situation

  1. mcturra2000 says:

    A couple of refinements here …

    Let’s suppose that hardware gets the net cash of 1.9b. I’m now going to assume that the hardware business could be spun off for at least that. In fact, if we look at NOK and apply an EV/Sales of 0.08 to revenues of 12.2 (75%*16.3) then we end up with an additioanl 0.976b. So maybe Hardware is worth 2-3b.

    I’m presuming here that you’re a cautious investor, and not interested in a risky punt on the hardware side. Maybe AAPL will crush you, maybe not. Dunno. So you could cash that side in. Given the market cap of 3.38b, lop off what you might get from the hardware side. Let’s say that you don’t get 2-3b, let’s say you get 1.38b, meaning you’re paying a nice even 2b for services.

    That changes things dramatically. Even if you expect to apply a multiple of 1 to revenues of 4b on the services side, that still leads the possibility of doubling your money. Maybe you even quadruple it. And maybe more, if you can generate some decent sustainable margins from the business.

    Again, I must stress, there’s a lot of assumptions here – not least being a spinoff – which has only been hinted on – there’s no actual plans. And I’m also assuming that I’m using the right currencies here! I’m using GuruFocus, which I take is using USD consistently throughout.

  2. valueprax says:

    It’s a cool idea. Great job thinking it through. I am not sure I have an intelligent answer as to how close to something real you may be but I enjoyed reading it either way.

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