Friday, November 4, 2011

Research In Motion And Book Value

RIM and "book value" (BV) are three words that you generally don't hear in the same sentence, until now. There has been much ta-doo, regarding the fact the RIM is trading below it's "book value". Many are now assuming/saying that RIM is a buy. For RIM to be a buy, we have to figure out what it's worth. The mere fact that RIM is trading around BV tells us little about what RIM is really worth - or it's intrinsic value (IV). Many confuse BV with  IV.  BV is what has been put into a business and IV is what can be taken out of a business over it's life. Book value, depending on the business, can be a good starting point in an exercise to figure out what a given company is worth. However, you have to closely examine what makes up BV. There can be a lot of fluff in the numbers. In the 1970's, the Pennsylvania Railway Co. had on it's balance sheet "assets" which included tunnels through mountains and old useless rail cars. While these "assets" contributed to the BV of the company by normal accounting conventions, they provided little in the way of value to the owners/shareholders of the business. This kind of fluff is not unusual. Thousands of companies maintain goodwill and intangibles on their balance sheet that, in many cases, offer little or no value. A quick review of RIM's financials show the following;

as of August 2011...

Assets               13.9B
Liabilities            4.0B
Equity/BV          9.9B or $18.70/share

However if you strip out goodwill and intangible assets od 2.9B ( yes, their brand and patents may have some value, but how much?) you now shrink RIM's owners equity or BV to 7.0B or $13/share. So, at $19/share, RIM doesn't look like such good value. For me it's easy pass. It is difficult to figure out what RIM is worth, as IV is dependent on many factors including a company's competitive position, growth, future prospects, asset values, management and earnings power. Many of these are extremely uncertain for RIM right now. This one is on the "too hard" pile.

Disclosure: No position in RIM

No comments:

Post a Comment