Why did 'Buffett of Canada' Invest in RIMM?
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It does not get any better for a company than to have Warren Buffett buy shares of the stock. For Canada's Research in Motion (NASDAQ: BBRY), it just got the next best thing: Prem Watsa, called the Warren Buffett of Canada, nearly doubled his stake in the BlackBerry smart phone maker to almost 10%.
Prem Watsa is not the only prominent investor who is bullish on Research in Motion, however. In a Fortune magazine interview earlier this year, Laslo Birinyi, who often writes about investments for Forbes and Bloomberg Personal Finance, is also a bull. Birinyi, who bought shares of iPhone maker Apple (NASDAQ: AAPL) in the single digits, is expecting Research in Motion to recover, stating that: “They’ve got a lot of loyal users, a lot of patents, and a real brand. I compare it to Apple. I recommended Apple at $7 in 1997 when nobody liked that stock, either. Now, I’m not looking for RIMM to go to $400, nor do I see it as a core holding. But I like the fact that nobody else likes the stock, yet the business is still there.”
There has been other support from the professional investor community, too. On May 30, JPM Securities raised its ratings for RIM to Market Perform from Market Underperform. UBS reiterated its Neutral rating on June 7 with a new target price of $11, more than 50% higher than the present price level.
Prem Watsa is now, by far, the largest shareholder in Research in Motion. He owns nearly twice as much as the founder of the company. A well-known value investor through his holding company, Fairfax Financial Holdings, Watsa has expressed his confidence due to is asset base, 78 million existing BlackBerry subscribers, $2 billion in cash, and no debt.
What is interesting about the investment of Watsa is that Research in Motion has been trying to sell itself for quite some time. But with smart phones from Apple, Microsoft (NASDAQ: MSFT), Nokia (NYSE: NOK), Samsung, and Google (NASDAQ: GOOG) dominating the BlackBerry, it is difficult to figure out the competitative advantage of RIM that Prem Watsa found so alluring.
At present, Samsung has 29% of the world's smart phone market. Not that far behind is Apple with 23%. Microsoft, in partnership with Nokia, is rolling out the new Windows Phone. Apple will be bringing out the iPhone 5 in the fall. Even Amazon is supposed to be entering the smart phone marketplace with a Kindle product. At the earliest, the Blackberry 10 will reach the market in January, completely missing the peak selling of the holiday season for technology products.
When Warren Buffett invested in Goldman Sachs, General Electric and Sante Fe Burlington Northern Railroad in 2008 and 2009, he was buying very solid companies in industries that were in disfavor due to the impact of The Great Recession. Research in Motion is in the exact opposite position. The smart phone industry is booming around the world and it is the company that is shunned by investors.
The sector leaders, Apple and Samsung, have posted very strong earnings with rising stock prices. Apple, for example, is up more than 53% for the last 52 weeks of market action. Over the same period, Research in Motion has fallen by more than 75%. Nokia has also plunged by about two thirds for the last year of trading. For the last week, Research in Motion has continued nosediving by a another 2%: so much for the Buffett premium, north of the border style!
Research in Motion, like Nokia, now has very attractive valuations. But these are misleading, based more on the collapse in the share price rather than the market undervaluing its assets. Nokia has a price-to-sales ratio of 0.17. But sales growth over the last quarter is down by 18.68%.
The same holds true for RIM. Sales growth for the last quarter is off by 42.67%. But the price-to-sales ratio is just 0.22. With a price-to-book ratio of 0.37, Research in Motion appears to be tremendously undervalued as Microsoft, by comparison, has a price-to-book ratio of 3.70 and a price-to-sales ratio of 3.34. But if this is true, than it seems logical that a buyer would have stepped forward long ago with RIM so actively seeking one and presenting such compelling sales and asset valuations.
What appears to be the most likely value that Prem Watsa is investing in is the patent portfolio. A recent article in Bloomberg Businessweek, "Investment Banks Seek Business in Patents," detailed how much more valuable these assets are proving to be than previously assessed. As an example cited in the article by Serana Saitto, Nortel Networks, another Canadian communications firm that went bankrupt, was able to sell its patent portfolio for $4.5 billion, with the help of investment bank Lazard to Apple, Microsoft, Google and RIM. The initital offer from Google to Nortel Networks had only been for $900 million. Moreover, it was the patent portfolio of Motorola that enticed Google to buy the company for $12.5 billion.
Like Motorola, Research in Motion has a very valuable patent portfolio. It is, after all, the company that introduced the smart phone to the world. With a shrewd investor like Prem Watsa now involved, maximizing the worth of the patent portfolio, Research in Motion could see far more value for its shareholders than its current market capitalization of $3.6 billion.
Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, Microsoft, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.