Is RIMM undervalued?

You must be curious as to what the valuation on RIMM is. After all I talked about it in my last post but I did not give you a valuation. So let me try to give you a valuation on RIMM and you'll see how I did what I did.

Let us begin with the usual. The financial statements. The balance sheet is outstanding. Long term debt is practically non-existent. Cash is at $2 billion which covers 2/3 of total debt. There is no bad debt on the balance sheet at all. The majority of the debt is accounts payable. So this company's balance sheet is given an A+.

Now the income statement. Although the last 3 full years have been profitable, we know that there have been losses in the last several quarters due to pathetic (yes I said it) phones. It would have been better if they were cheaper, but RIMM wouldn't even give that. Now the profit margins in those three full years were 16.4% (2010), 17.1% (2011), and 6.3%. As there have been losses in the last few quarters we have to give them a D. I know the grade may be low but also remember if they can significantly improve this back to 16% profit margins it would still be a buy.

Now we come to the cash flow statement. Here we notice that all three years the free cash flow has been positive, but in 2010 and 2011 FCF was lower than net income while in 2012 it was higher than net income. Interesting to note. What people fail to realize is that with the exception of quarter 4 2012 RIMM has had a positive FCF in every quarter including the last 2. Which is good but of course the amount has been going down. As it was not negative in the last 3 quarters we can give this a D+. Bad financial statements but if it has a legitimate plan to turn it around, we can expect a profitable year.

So how will it be turned around? First we have to ignore the buyout rumours. Thorsten Heins said he is not selling. Instead he wants to stake the company's future on the Blackberry 10. I think it's a good idea and quite frankly  Of course that depends on the specifications of the phone. Luckily they leaked out and we learned that they intend to release several Blackberry 10 very quickly one after the other. It's a good idea if the products are significantly better and fast. Let us see the specifications for the Blackberry 10 London first.

So what are the specs of the Blackberry London? And do I like it? That is what I'll try to answer here. The Blackberry London has a 4.2 inch screen. That's small compared to a lot of phones but still bigger than the Iphone 5. It has a dual core processor even though many phones nowadays have a quad core, however, if we compare it to the Iphone 5, Apple's latest flagship phone still has a dual core processor. It has an 8MP camera with a 2MP front facing camera. Now notice that this phone is not competitive with Samsung but is competitive with Iphone 5. Problem is, Iphone 5 came out months ago and this will come out in the next month and a half to 2 months. So the next Iphone should be better. That sounds like bad news, but luckily RIMM knows what they're doing this time and expects to release other phones within months. Now those should be able to compete with the next Iphone and maybe even the Samsung Galaxy S4. But don't take my word for it. Let's discuss them next.

So what is the best expected phone from the Blackberry 10 line? It is the Blackberry Aristo. Aristo is Greek for best. So when specifications of this phone leaked out, I realized it should be the best Blackberry 10 that comes out. When I looked at the specs I was actually impressed. The screen size is 4.65 inches. I hope they make that bigger as that is kind of small compared to Samsung S3 or especially the Note 2. However, it is huge compared to the Iphone 5 and will probably be huge compared to the next Iphone. As for the processor it is 1.5 GHz quad core. Not bad. Cameras are the same and to be fair, after 5MP I failed to see an improvement but they have an 8MP camera with a 2MP front facing camera. So these specs show that they can compete with Samsung Note 2, but by then the S4 will be out, so the only question is whether that is vastly improved from the Note 2. Hard to say but I would expect it to at least be better than the Aristo. As a result I see this as being better than the new Iphone and worse than Samsung. Also we haven't really talked about the lack of apps, but if Android can build up their app store as fast as they did, Blackberry should be able to follow suit.

In case you were wondering I gave their strategy an A because the specs are competitive. Now, what can we expect in terms of profits. If these phones cannot be as good as the  next Iphone then I would expect low profits. Maybe $1 billion but that's a conservative estimate as these phones are better than everyone other than Samsung and Apple at that point. What I expect is for the next generation blackberries to be better than Iphones and weaker than Samsung's, so I expect it at $2 billion at that point. If that is the case valuation of RIMM is $40. At the current price I would recommend buying. If they can beat Samsung's specs, then the profits will be off the charts. So I would recommend a buy on RIMM with a price target at the moment of $40 but changing depending on sales when BB10 comes out.