May 29, 2012
Recommendation: Strong Sell
Welcome to the Stock of the Day for May 29, 2012. It wasn't too long ago that Research in Motion Ltd. (RIMM) was considered a leading player in the mobile market, with its line of BlackBerry smartphones becoming a near necessity in the business world. However, lately the company has fallen in a rut due to increased competitive pressure, so let's review the situation and determine whether the company's bold restructuring plan should breathe new life into it or whether Research in Motion will become the next Betamax.
Company Overview: Based in Ontario, Research in Motion Ltd. has been in the telecommunications business since 1984. In the early 2000s, the company enjoyed a meteoric rise in popularity as its line of BlackBerry smartphones gained more traction; at its peak, the company managed to grow profits by 84% over three years despite the recession. Research in Motion also managed to nearly double sales for each of the years between 2003-3009. However, the company's top- and bottom-lines have been slowing down since then; the company brought in just under $18.5 billion in 2012. The last time I covered this company in a blog post, I recommended that you sell this stock after it posted lackluster operating results for the first quarter. Since then, the stock has continued to gap down 17%.
Workforce Shakeup: Before the opening bell today, Wall Street received word that Research in Motion is likely going to cut over 2,000 jobs in conjunction with a significant restructuring plan. he layoffs are rumored to begin in early June. Considering that the company currently employs 16,500 worldwide, this round of layoffs would reduce the company's workforce by over 12%. Research in Motion has already restructured its executive team significantly, including the exodus of its founders and former Co-Chief Executive Officers, its Chief Technology Officer as well as the Chief Operating Officer of Global Operations. In total, it is possible that the company will cut as many as 6,000 jobs as part of its restructuring efforts.
Competitor Breakdown: One of the reasons that Research in Motion has fallen on hard times is that the company has to contend with the likes of tech powerhouses Apple Inc. (AAPL) and Google Inc. (GOOG). While Apple and Google are both enjoying double-digit sales growth, Research in Motion clocked in a 25% year-over-year drop in sales in the last quarter. Additionally, Research in Motion's operating margin (11%) is significantly lower than Apple's (36%) and Google's (32%), as is its gross margin (36% vs. 44% and 65% respectively). The only other mobile phone player that is in RIMM's league is Nokia Corp., which has also been struggling lately; Nokia posted a 30% drop in sales, and it actually recorded a negative operating margin in the last quarter.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. The past year has not been good to this stock; over the past 12 months, RIMM has failed to break out of sell territory. This is due to a combination of rock-bottom buying pressure and abysmal fundamentals. In fact, the only areas that Research in Motion excels at are its cash flow and its return on equity. All other fundamental metrics, including sales growth, earnings growth and operating margin growth, are D- or F-rated. This company just hasn't been able to firm up its fundamentals due to the competitive mobile phone market, and it doesn't look like Research in Motion will be able to recover anytime soon. RIMM receives a D for its Fundamental Grade and an F for its Quantitative Grade.
Bottom Line: If you currently hold shares of RIMM, I strongly recommend that you find a good time to part ways with this stock.
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