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RIM: A Low P/E Does Not a Cheap Stock Make


RIM is trading at three times earnings but it's still dramatically overvalued.

Cue up the B.S. takeover rumors for Research In Motion (RIMM), because one of 2011's biggest value traps just extended its losing streak when it unveiled another batch of lousy news this morning.

On the plus side, third-quarter (ended in November) Blackberry smartphone unit shipments are expected to come in at 14.1 million, in-line with guidance of 13.5-14.5 million.


1. RIM will be taking a $485 million pre-tax charge to write down the valuation of its PlayBook tablet inventory. If you haven't been paying attention, the PlayBook has been eaten alive by the firebreathing Apple (AAPL) iPad, and Google (GOOG) Android tablets like the Amazon (AMZN) Kindle Fire.

2. Third-quarter earnings guidance will come in at the low-end of its $1.20-1.40 guided range, which puts it roughly in-line with the $1.21 Wall Street analyst consensus.

3. The company said that it no longer expects to meet its full-year guidance of $5.25-6.00 per share, something that's largely been expected as consensus was set at $4.65 as of yesterday afternoon.

4. Fourth-quarter Blackberry shipments are expected to come in below third-quarter levels. Note that last year, RIM saw a 5% sequential increase in Blackberry shipments from Q3 to Q4.

5. That shipment guidance implies a year-over-year decline of at least 5% in a smartphone market that will in all likelihood grow over 40-50% in Q4.

Now it's obvious that Wall Street has more or less caught up with the current trouble at RIM, as evidenced by the fact that estimates have been much lower than the company's guidance -- something that hadn't been true during the recent drama with Netflix (NFLX) (See Netflix: Double-Costanza Time After the Most Predictable Collapse of 2011.)

So why pray tell is RIM, which was trading at three times trailing earnings and four times forward earnings coming into today, getting killed this morning?

Well, the first reason is pretty simple. Cheap does not equal good, and bottom fishers have been beaten to death by value traps like RIM and Netflix this year. The idea of being patient for the long-term is dead in this market, and for good reason.

A P/E ratio is pretty easy to understand. Take the stock price, divide it by earnings per share, and boom -- you have a P/E. If you're feeling extra clever, or extra desperate, you can subtract cash per share out of the stock price, which puts RIM's forward P/E closer to three.

Nonetheless, I would argue that RIM is dramatically overvalued at three times forward earnings, because three to four years out, I think RIM's earnings will be way, way lower than they are today. In fact, RIM could easily be bleeding money by then.

Let's remember that the smartphone market will eventually slow down in a big way, just as we're seeing today with the PC market. RIM hasn't been able to succeed in a market that grew by 42% in the third quarter. So how well could it possible do when smartphone growth looks something like 20%? Or 10%? Or even goes flat?

And it's obvious that the rushed-to-market PlayBook is a flop that can only sell when Best Buy (BBY) sticks it in the bargain bin, so it's not like RIM can make up the lost ground in tablets.

And what about the upcoming QNX phones that the company's so excited about? Who knows. Maybe they'll rock, but then again, the company hasn't had an ounce of success in backing down the iPhone and Android assault.

RIM is a textbook value trap, and I'm steering clear.

Twitter: @MichaelComeau

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