RIM as ‘Wounded Puppy’ Trails Book Value With Faith Fading

Research In Motion Ltd.’s decline below book value for the first time in nine years leaves the BlackBerry maker worth less than the net value of its property, patents and other assets in a sign of investors’ lowered faith.

“This is a wounded puppy,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York, said in an interview. “They’ve been losing business, there’ve been operating technology problems. There isn’t a lot of customer loyalty anymore.”

RIM fell 2.9 percent to $18.37 at 10:27 a.m. New York time, trailing the book value of $18.92 a share at the end of last quarter, according to data compiled by Bloomberg. The measure comprises a company’s assets including cash, inventories, real estate and intellectual property minus its liabilities.

The company helped create the smartphone market a decade ago with its first e-mail device and now must compete against Apple Inc. and devices that run Google Inc.’s Android software. The market-share decline has put pressure on RIM to shake up management, and investors such as Jaguar Financial Corp. have called for RIM to divide split up, seek a merger or sell itself.

“The market, at book value, seems to be saying not only is RIM going to not get bigger in the future, but it’s actually going to shrink,” said Richard Fogler, of Kingwest & Co. in Toronto, who personally manages about C$1.5 billion. He sold his RIM shares in the third quarter. “Everyone’s frightened of what’s going to keep happening tomorrow.”

Asset Liquidation

Peter Misek, a Jefferies & Co. analyst in New York, cut his price target on the stock to $18. He rates RIM “underperform.”

If a private-equity investor were interested in buying RIM, book value would be a useful indicator to gauge the company’s worth if the buyer then sold the assets, said Matt Thornton, an Avian Securities LLC analyst in Boston.

“It really comes into play for somebody looking for downside protection,” said Thornton, who rates RIM “neutral.” “If we liquidate or sell off the assets, what’s our downside protection, that’s when it becomes a more meaningful metric.”

The Waterloo, Ontario-based company’s U.S. market share sank to 9.2 percent in the third quarter from 24 percent a year earlier as consumers opted for Apple’s iPhone and Android phones from Samsung Electronics Co. and HTC Corp., according to research firm Canalys.

‘No Faith’

RIM posted its first quarterly revenue decline in nine years in September and is struggling to move its BlackBerry lineup onto a new operating system and reignite interest in its PlayBook tablet computer. The PlayBook went on sale in April without dedicated e-mail, stirring criticism that RIM said it would remedy this summer. RIM last month said that e-mail software upgrade won’t come until February.

“The market has no faith in its current model, that is what the market is telling you,” said Neeraj Monga, an analyst at Veritas Investment Research Corp. in Toronto. Monga, who has a “sell” rating on RIM, says there’s a 50 percent chance the stock will drop below $10 within 12 months.

The stock had already dropped 67 percent this year before today, cutting RIM’s market value to $9.91 billion. RIM had a book value of $9.92 billion on Aug. 27, the end of its most recent quarter. Major investors who have sold all their shares in recent months include Brookside Capital Investors Inc., Greystone Managed Investments Inc., Janus Capital Management LLC and Montrusco Bolton Investments Inc., according to Bloomberg data.

Former Leader

John Goldsmith, a money manager with Montrusco in Toronto, said the declines show RIM has lost its competitive advantage.

“RIM was a market leader in terms of smartphones,” he said. “There are a lot of guys out there able to commercialize a product at a significantly lower cost.”

Goldsmith said the book value may be artificially high because it includes technology patents that might not be worth as much now, considering there are so many competitors.

“The book value, is it well stated? A lot of stuff has happened over the past five to 10 years,” he said.

RIM last traded below book value in 2002, when it was losing money. The company earned $329 million, the least in four years, in the quarter ended in August. RIM shares peaked at 24.3 times book value in November 2007.

Fighting Nokia

The MSCI World Information Technology Index trades for 2.7 times book value, with 19 of 147 of its stocks below 1, according to data compiled by Bloomberg. RIM’s rival Apple costs

4.8 times book value.

Analysts estimate RIM’s book value will rise 7.7 percent to $20.38 a share in the quarter ending this month, according to the average of seven forecasts in a Bloomberg survey.

Nokia Oyj, which has also been losing smartphone market share, saw its shares fall briefly below book value in August and now trades at about 1.4 times that level. Nokia said it would shelve its Symbian operating system in February and struck a deal with Microsoft Corp. to build handsets on its Windows Phone platform to try to regain market share from Apple and Google.

Nokia Chief Executive Officer Stephen Elop told Bloomberg News on Nov. 1 that he plans to introduce Windows phones with multiple U.S. carriers in early 2012. RIM had said that it planned to have the first BlackBerrys built on its new BBX platform early next year. However, co-CEO Mike Lazaridis didn’t reiterate that goal at a BlackBerry conference last month in San Francisco, and analysts say those new phones may come too late.

Apple and Google are the dominant smartphone platforms and there is really only room for one more, said Veritas’s Monga. When Nokia was reorganizing, RIM had its chance to establish itself as the third. It may have lost the opportunity, he said.

“Eighteen months ago, RIM was fighting but had a fighting chance,” he said. “Now, the problems RIM has on its software platform seem to be insurmountable.”

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