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BlackBerry maker's stock is ripe for picking
Traders lopped 6% off Research in Motion's shares after a judge ruled against the company. But a settlement in the patent case seems certain, so now's the time to buy.
By Robert Walberg
There are times when bad news can actually bring about good results, and for Research in Motion Ltd. (RIMM, news, msgs) shareholders, yesterdays legal setback might be just such an event.
Research in Motion, embroiled in a nasty patent suit with NTP Inc., had hoped that its settlement agreement would be upheld by U.S. District Judge James Spencer. It wasnt. The company also tried to delay the case, and again was rebuffed by the court.
Considering the judges ruling that the parties do not have a valid and enforceable settlement, Research in Motion again faces the possibility of an injunction on U.S. BlackBerry sales and services. The company generates about 70% of its revenue in the U.S. The court had previously granted NTP a BlackBerry-crippling injunction only to have it stayed, pending Research in Motions appeal. It is the risk of a BlackBerry blackout, combined with the ongoing concern that the companys legal issues are adversely impacting growth, that compelled investors to cut and run yesterday.
The stock tumbled 5.8% Wednesday, closing slightly above a technical support level at $60. A break below that price would leave the stock vulnerable to a test of its 52-week low of $51. While such a decline wouldnt be pretty, the downside risk from here seems relatively modest because theres no way that Research in Motion is going to risk an injunction.
Is a settlement afoot?
If there is no injunction, then Research in Motion's upside potential is enticing. This is a company that posted year-over-year sales and earnings growth last quarter in excess of 55%. Gross margins remain strong at 56% and subscription growth, while below some of the more optimistic street projections, remains robust. Research in Motion expects subscriptions to grow from 3.65 million at the end of the second quarter to over 5 million by the end of its fiscal year.
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Basically this is a dynamic growth company in the midst of a powerful uptrend trading at 24 times estimated fiscal-year 2006 earnings, and a mere 18 times projected 2007 results. A company with Research in Motion's history and potential trading at a PE ratio lower than its growth rate doesnt come around very often. When it does, investors want to jump on board.
Yes, the injunction risk still exists, but it has a small likelihood. The more probable outcome from yesterdays ruling is that Research in Motion and NTP will sit back down and nail down settlement terms. With over $1 billion in cash -- not including the $450 million already earmarked for settlement -- Research in Motion has more than enough resources to strike a mutually acceptable deal.
In fact, CNBC quoted sources yesterday saying that a settlement agreement was afoot. Though the network indicated that it had no confirmation of any such settlement, NTPs lawyer, James Wallace, mentioned that he hoped today's developments would bring the parties back to the table."
A stock in motion
Research in Motion continues to act as if it doesnt want to increase its payout -- at least publicly. That would explain the nonsense about wanting to appeal to the Supreme Court (which is unlikely to hear the case given that it recently accepted a similar case involving eBay (EBAY, news, msgs) and MercExchange) and the rhetoric about a software solution that would enable the company to continue its BlackBerry services without worrying about patent issues.
Of course Research in Motion will use whatever leverage it can to keep the settlement as low as possible. But settle it will and sooner rather than later, as theres no reason to risk losing major accounts due to client fears of an injunction.
Several analysts on Wall Street have suggested that, given RIMM's cash position, it could go as high as $1 billion in a settlement. Considering NTP was close to settling back in March for $450 million, a little more than double that total should be enough to make this mess go away.
Whenever the legal cloud lifts, look for the stock to skyrocket. Yesterdays 5.8% decline will be minor by comparison. With the injunction threat out of the way, the stock will make a quick run toward $80. Assuming the settlement isnt above expectations, a break through that level would position the stock for a longer-term test of the mid- to upper-$90s.
Until the threat from the NTP case is removed, the stock could still trend lower. However, when you compare the short-term downside risk of 15% to long-term upside potential of 55% or more, this is a no-brainer. Todays perceived loss was actually a win in that it will force Research in Motions management to reach a settlement -- and when that settlement comes it will be the stock thats in motion.
Portfolio update
I will add the stock to my Street Patrol portfolio as of Thursdays close (assuming no settlement announcement comes prior to the close).
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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