The Razor’s Edge

2-Year Price History

Ockham’s Rating

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RIMM Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company’s stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, RIMM the high and low end of the Price to Sales per share ratios are 10.51x and 3.19x respectively.

Notice that RIMM’s current Price to Sales per share ratio is 2.06x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $59.00, RIMM is 70% below where we would expect to see it. This will beneficially factor into our final analysis of RIMM as it is not often that this stock sinks to these levels.

RIMM Cash Earnings

Looking at RIMM specifically in their Cash Earnings capabilities, Ockham views RIMM as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from RIMM. For example, RIMM’s Cash Earnings ratio per share has fluctuated between 15.74 and 46.09 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where RIMM is with respect to prior business periods.

So with RIMM’s current price (latest close of $59.00) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, RIMM is 68% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with RIMM.

RIMM Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company’s inherent expectations. As far as our investing methodology goes, it is not necessary to pay a dividend in order to get a favorable rating, so as for right now RIMM gets a neutral rating for the dividend portion of the model. The company is not currently paying a dividend nor have they in the fairly recent past.