RiskReversal readers and viewers of Options Action know that I am not a fan of RIMM‘s products, strategy or their management. There is not much to add at this point about the magnitude and the breadth of the competitive issues they face, but the I believe management’s reluctance to address them with any noticeable sense of urgency brings me to the conclusion, much like PALM last year, that these guys have one way out, and that is to sell themselves……
At this point it may be out of their control as activist investors will be flocking to the name in the coming months given the rock bottom valuation and their steadily declining market share…….something needs to be done fairly quickly (the next 6 months) before they get taken under, essentially like PALM.
The company has an ~$11bil market cap with about 10% in cash and no debt, and trades at about 4.5x next years earnings, 50% of next years sales with price to book below 1. Now that is all predicated on next years estimates being accurate and at this point I think it is safe to assume that they are too high, but even discounting by ~20% which would be a huge cut you get a cheap stock……This could all be a big value trap and I am not sure just being long the stock is the right move…..
I want to look to a Diagonal Calendar Call Spread. This is a fairly sophisticated trade structure and it is not for all of you because deal or no deal it will take some trade management. I think this is a highly speculative trade and not for those who don’t like to dedicate a portion of their portfolio to punts. There is a simpler call spread below.
TRADE1: RIMM $21.25 Buy Mar12 / Jan13 25/32.50 Call Spread for a .30 credit
-Buy March12 25 call for 2.20
-Sell Jan13 32.5 call at 2.50
Break-Even on Mar12 Expiration:
Profits:
BEST CASE: there is a cash deal for the company above 25 and below 32.50 (which is up 52% from current levels) the Jan13 32.5 calls should trade with little extrinsic value and you should be able to close out the spread for a nice profit of nearly the difference btwn the Mar12 25 call and the Jan13 32.5 call.
BASE CASE: Stock 25 or below on Mar12 expiration and the 25 call expires worthless, so you have a decision as you put the spread on for a .30 credit and now you have to either buy another call and turn into a call spread or you need to cover the upside call and thus lock in a loss on the trade. on March12 expiration if the stock was here, Jan13 32.5 call would prob be worth a bit more than 1.00
The main point for Trade Management here is that as long as you are not naked short the Jan13 call you do not have tail risk.
OR LESS COMPLICATED CALL SPREAD
TRADE2: RIMM $21.25 BUY Mar12 27.50/32.5 Call Spread for .80
-Buy Mar12 27.50 call for 1.60
-Sell Mar12 32.5 call at .80
Break-Even on Mar12 Exp:
Profits; btwn 28.30 and 32.50 make up to 4.20, above 32.50 make 4.20
Loses: btwn 27.50 and 28.30 lose up to .80, below 27.50 lose all .80
YOU WOULD ONLY DO EITHER OF THESE TRADES IF YOU AGREE THAT THE MOST LIKELY CHANCE FOR THIS COMPANY’S CONTINUED RELEVANCE WOULD BE TO TAKE THE MONEY AND RUN BEFORE THEY RUN OUT OF POTENTIAL SUITORS……THIS IS ALSO NOT A FUNDAMENTAL CALL ON THE COMPANY, I THINK THEY WILL CONTINUE TO SUCK, MERELY A CALL THAT ACTIVISTS AND THE MANAGEMENT’S DECLINING FORTUNES AND CREDIBILITY CAUSE THEM TO REACH THE LOGICAL CONCLUSION TO LET SOMEONE ELSE DEAL WITH THEIR PROBLEMS BEFORE ALL THE CHAIRS ARE TAKEN.
ORIGINAL POST Sept 9th 2011: RIMM: Report FYQ2 Next Week, Unless they Say “Exploring Strategic Alternatives” the Stock is Going Lower
Next Thurs, Sept 15th after the close, RIMM will report their Fiscal Q2. The options market is implying about a 10.5% move vs the 4 qtr average move of about 10%….
I want to make a defined short play into the event….I’ll be back with more detail later today……
TRADE: RIMM $30.46 Buy Sept 29/ 24 Put Spread for 1.00
-Buy Sept 29 put for 1.25
-Sell Sept 24 Put at .25
Break-Even on Sept Expiration:
Profits: btwn 28.00 and 24 make up to 4.00, below 24 make full 4.00
Loses: btwn 28.00 and 29 lose up to 1.00, above 29 lose full 1.00
TRADE RATIONALE: Stock has rallied 33% off of the summer lows and I have to think any incrementally better news is in the stock. The company is going the way of Palm or NOK, it is unavoidable. Unless they say we are “exploring strategic options” as been urged by a few large shareholders no one will believe their guidance. Their products suck and their management and strategy are worse. Their patents maybe worth something but I don;t think we will see a MMI sort of deal if a buyer just wants the patents, why own the declining asset of the handset business.
Technicals: Chart has a ton on air above current levels and given the recent run a good bit of enthusiasm on a short term basis.
[caption id="attachment_4581" align="aligncenter" width="300" caption="1 Yr RIMM chart from Bloomberg"]
[/caption]
Generally I am not in the business of pressing shorts, but to me this is a terminal short and I want to make short term, catalyst based defined bets. I am risking what I am willing to lose and I like the 5 to 1 payout potential of the vertical spread….won’t take much on the downside to break-even given the stocks recent run.
RISKS TO THE TRADE: There has always been the takeover speculation since the stock broke last year, and in an irrational market like we are in today, companies fighting for relevance can and will do dumb acquisitions (see MSFT for Skype and GOOG for MMI). RIMM is very cheap on a valuation basis, but then again so was NOK and MOT the whole way down.
The Playbook tablet was likely a dud and if there is any good news on this front it probably has to do with some funky games the company plays by stuffing their selling channels rather than actually selling to end users…..
As for new products in the qtr they where obviously all evolutionary, not revolutionary. iPhone 5 push out could have helped them a bit at AT&T and VZ as the life-cycle of the iPhone4 was getting old….
I guess my final take is that any good news on the margins or revenue re-acceleration I just don’t buy and would be a very near term phenomenon. The company needs to spend a ton more on R&D to be at all relevant…..So unless they say they are dropping their OS for Android, or they are exploring strategic alternatives I think we could see a sell off back to mid 20s post any disappointing results or guidance.