RIMM Fiscal Q2 Preview: Q: What do you get when you try to pick bottoms? A: Stinky Fingers

by Dan September 27, 2012 1:43 pm • Commentary

Event:  RIMM reports their fiscal Q2 tonight after the close.  The options market is implying about an 11%* move following earnings vs the 4 and 8 qtr avg post result move of about 14% and 11.5% respectively.  (* with the stock at $7 the Sept28th weekly 7 straddle can be bought for about .82, meaning if you bought this you would need an .82 move higher or lower from the 7 strike to break-even, or about 11%).

Sentiment: Wall Street analysts couldn’t be more negative on the stock with ONLY 1 BUY, 28 HOLDS and 20 SELLS with an avg 12 month price target of about $7.30.  I can honestly say that in all of my years in the Business I have NEVER seen that, well maybe Enron the day before they filed!  Short interest is down a bit to about 20% in the last month.  

Price Action:  The stock has been cut in half this year, down about 52%, trading at levels not seen since late 2003.  The stock has basically been left for dead by shareholders, down 95% from the all time highs made in mid 2008.

Valuation:  There is not much to add here, but Sanford Bernstein kind of summed up the valuation argument in a note to clients dated Sept. 21, 2012:

RIM isn’t the good short it used to be anymore; valuation is too challenging. Today, RIM’s enterprise value is ~$1.4bn – that is ~$20 per user, knowing that each user brings in $60 per year in service fees. The enterprise value is only 4 months of the revenues RIM generates from its service fees today. The recent stock price is justified by the likely disastrous financial performance the company will deliver in the short run, but at any point in time, management could decide to change strategy or an industry player could decide to step in. Both scenarios remain unlikely but would justify a very strong upside on the recent stock price.

At 0.36 times FY 2013 Sales, only slightly higher than Nokia and Motorola’s trough valuation in 2009, which reflects RIM’s more resilient business model (limited cash burn despite the collapse of the handset business).

Volatility: Weekly vols are through the roof, well north of 250% as they are a one day option.  The term structure across the board is very jacked, 30 day at the money is about 95 vol and Jan13 is about 76 vs the 30 day realized vol of only 50 and the 90 day realized of about 63.  There is not a cheap option to be had, and if you are going to make a directional bet you sure as heck have to sell something against any premium that you buy.  Oct & Nov IV likely to get nailed after the print, while Jan should not come in as much as it will capture their Q3 results.

MY VIEW: This was a name that I had very right on a few occasions in 2010/2011 on the Bearish side and then very wrong trying to pick a bottom in late 2011 and earlier this year.  The stock’s descent has amazed most observers, and the lack of real bad ass activist investors shows the general indifference towards the company’s prospects in a smartphone war that just started but appears to already have strong favorites with little room for also-rans.

Since making new multi-year lows earlier in the week, the stock has run about 10% since the company suggested at a user conference that their subscriber base had increased in the qtr by 2 million users.   This rally and sentiment shift, at least just this week, obviously raises risk for the potential disappointment following tonight’s report.  For RIMM to work from here you would have to bet on something that has never happened before, the Resurrection of a once dominant cell phone company (see NOK, MOT & PALM).

RIMM has lost every battle on the mobile front as it relates to products, strategy, and practically anything else you can think of, that said it is all well known at this point, but has been this way for over a year, and the stock has been annihilated.  I have to assume there is support somewhere, the patents, user base and the some other assets must be worth at least their ~53% of their market cap that sits in cash, but the market is clearly discounting all of the above.

WHAT TO DO?  It is clearly hard to press the short for the next 20% in the stock, at some point shorts have to cover…….you have heard me ask the age old question; What do you get when you try to pick bottoms?? A= Stinky Fingers.  We will avoid this one.

We thought about playing for no move, in that case selling the Sept28th weekly Straddle at about .85 (stock ref 6.84) and buying the Sept 28th weekly 8 call for .07 makes sense…..but again, not that compelling to us.