The RIM Death Spiral!

Richard Croft
July 3, 2012
3 minutes read

Last week we bore witness to the final death spiral for what was once an innovative Canadian icon. It was not the fact Research in Motion (TSX: RIM, Friday’s close $7.54) reported its first quarterly loss. That was telegraphed to the market well ahead of time.

What was not telegraphed was the size of the loss which was three times greater than expected. That alone would have caused the market to shudder.

But when the company announced that phones running on the new Blackberry 10 operating system would not be available until January, missing the back to school and Christmas sales cycles and six months later than a time line that RIM’s CEO Thorsten Heins had confirmed only weeks earlier, it became clear that RIM had entered palliative care.

At one time this company controlled 41% of the US smart phone market. Today it has less than 4% market share with no end in site. The market has concluded this patient cannot be resuscitated and its death could come as early as January.

The remaining RIM bulls – and they are less of these everyday – would argue that the company’s huge cash horde (somewhere between $1.2 and $1.7 billion), pristine balance sheet and sizable installed user base make it attractive as a takeover candidate.

But consider this; Hewlett Packard (NYSE: HP) paid US $1.2 billion (less than 1/3rd of RIM’s current market cap) to buy Palm in 2010 and the market felt HP overpaid. And Palm was in a better position than RIM is today!

Ostensibly a buyout is not viable and even if one did emerge, it will not likely result in a premium to the current market price.

If you think the company can survive because of its balance sheet consider the cash horde within the context of US $200 million plus quarterly losses not to mention the costs associated with laying off 5,000 employees which the company said was part of its cost reduction program? This so-called cash cushion could be wiped out in 12 months.

I think it is possible the company has accepted its fate and Mr. Heins is simply trying to orchestrate an orderly demise. How else do you explain the missteps around an operating system that was suppose to “save the company?” To suggest it will be ready in January as the company eliminates 30% of its work force is simply not plausible!

If you want to play the “death by a thousand pin pricks” line of reasoning consider bearish option strategies on RIM. The first strategy is to buy RIM September 8 puts at $1.15 or better.

The second approach is to enter bear call credit spreads when you sell the RIM September 7 calls while simultaneously buying the RIM September 10 calls for a net credit of $1.00 per share or better.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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