YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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Lately, Research In Motion (RIMM) just can’t get any love. Analysts all over the place are already pronouncing the company dead. To be sure, the mobile phone graveyard is filled with cases of Original Equipment Manufacturers (OEMs) that had a significant product but failed to follow structural market shifts (ex: Motorola, Nokia, Sony-Ericsson, LG, and Palm). Yet RIMM isn’t iced on the coroner’s table just yet.

There’s no doubt that RIMM and its Blackberry mobile phone are in trouble. In fact, domestically RIMM’s once-dominant market share in the mobile phone market has dropped to 13% and is in danger of extinction. However, RIMM still has a strong international market as well as a decent stronghold on commercial and governmental IT departments. Factors such as the Blackberry’s secure Network Operations Center (NOC) and emailing system has made the mobile phone a favorite amongst companies who desire control and security for their company phones. In addition, corporate executives who are attempting to increase the productivity of their workforce may even see the lack of consumer applications such as Angry Birds as an advantage. Even as Apple and Google continue to improve their competing products’ security, Blackberry maintains a barrier to entry in the large corporate world due to the difficulty for the IT departments of switching operating systems or managing multi-platform applications. This moat surely isn’t impenetrable, but it will definitely slow down the level of attrition on RIMM’s market share in the corporate world as compared to the consumer world.

Regardless, RIMM is still definitely in trouble. Much of RIMM’s future hinges on unlocking the value of its NOC and the success of its new QNX operating system being properly integrated into its mobile phones as a competitive alternative to Android or iOS. However, despite the fact that RIMM has a rocky future ahead, at it’s current price it is hard to ignore.

RIMM is trading at a mere 4 times estimated future earnings once you strip out their huge cash pile. Furthermore, they have a healthy balance sheet with no debt. Add on an aggressive share repurchase strategy and you’re looking at a company that can potentially reap very high investment returns as long as it remains alive. In this situation, just a little good news can go a long way.

Furthermore, at its current price, RIMM could be a potential takeover target. The situation would be similar to HP’s purchase of Palm, except that in RIMM’s case there is no debt to be dealt with. While we certainly don’t purchase stock in hopes of a takeover, the coincidental fact that RIMM could be a target marks just how cheaply priced it is at the moment.

We definitely see RIMM as a high-risk situation in a cutthroat industry, so we’re not saying to bet the farm on this one. However, the higher risk/higher reward situation is definitely worth a look when it gets cheap enough. After all, at some price you can still make money in a bleeding company.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | June 17, 2011 | Permalink

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