Are RIM shares now a buy?

Back in 2007, CBC.ca ran a story about Research in Motion becoming Canada's most valuable company, displacing Royal Bank as the TSX listing with the largest market capitalization (share price times number of shares).

On a split-adjusted basis, the stock eventually topped $150 a share on the TSX in June 2008. Its total market cap approached $80 billion.

But that was then.

Fast forward to Thursday, when RIM co-CEO Jim Balsillie announced that "fiscal 2012 has gotten off to a challenging start."

The maker of the BlackBerry went on to report grim financial results  that fell short of the market's already lowered expectations. The analysts' knives were unsheathed again. Further downgrades and lowered price targets were quick to follow.

By the time the dust settled on Friday, RIM's TSX-listed shares had plunged to a closing level of just $27.24 — down a whopping 20 per cent on the day. It's now trading at its lowest level in almost five years. That $80 billion market cap has dwindled to $14 billion.

For RIM shareholders, there's been a dearth of good news coming from the company lately. Delays in the introduction of new products, a continuing loss of North American market share in the hyper-competitive smartphone industry, yet another earnings warning, and criticism of its dual-CEO structure — all of these points figured prominently in many analysts' critical reviews Friday.

At least six analysts downgraded their stock recommendations and many others lowered price targets for RIMM to as little as $20 US (Research in Motion also trades in the U.S. under the trading symbol RIMM).

Having said all that, the fact remains that RIM is still making money. It posted a $695 million US profit in the most recent quarter. The company lowered its full-year profit estimate to a range of $5.25 US to $6 US a share. At Friday's closing share price, that represents a forward price-earnings ratio of somewhere around five — stunningly low in a field where double-digit P/E ratios are the norm.

So the questions inevitably emerge: Are its shares a buy? And has RIM now become a takeover candidate? 

Well, there's no question that the stock certainly looks cheap. But several analysts noted that a low P/E ratio does not necessarily mean investors should rush in. Just about everyone advises caution at the very least — with the likelihood that the worst is not over for RIM's stock price.

"While RIM could still recover from the tailspin that they have been experiencing, it looks to us like the plane may fall another few thousand feet before there is any chance of recovery," said JP Morgan analyst Rod Hall in a note Friday. He downgraded his stock recommendation to "neutral."

BMO Capital Markets analyst Tim Long, for one, is still positive about the company's prospects despite Thursday's bad news, but acknowledges that the shares aren't likely to gain ground any time soon.

"There is a lot of unique value within RIM," he wrote in a research note to clients. "We remain positive, but don't expect the stock to outperform for a few quarters."

Could RIM be an acquisition target?

And now for the question of a RIM takeover.

That's been speculated as a possibility for quite some time. With the shares now at their lowest level since the summer of 2006, one might expect that talk to accelerate. Potential suitors mentioned in the past have included the likes of Microsoft, Oracle, Cisco, IBM and Hewlett-Packard.

Shira Ovide, who blogs for the Wall Street Journal, said Friday Microsoft appears "on paper" to be the most likely takeover candidate as it's having difficulty getting market traction with Windows Phone 7, its entry in the smartphone universe. 

But Ovide notes that a takeover of RIM would still be a big financial undertaking for any company. Assuming a minimum 25 per cent takeover premium, a buyout of all outstanding RIM shares would cost upwards of $20 billion.  

And with the ability of RIM management to successfully deliver new product launches very much a matter of debate in the minds of many tech-watchers, few analysts see an imminent takeover attempt as likely.

Co-CEOs own 10% of company

Sameet Kanade, an analyst with Northern Securities, points out that the two co-CEOs own 10 per cent of the company and would likely expect far more than the current $27 share price should they want to sell. He thinks they wouldn't look at an offer of less than $65 a share.

Kanade, who's had a "sell" recommendation on RIM shares for more than a year, thinks all the potential bidders are unlikely to make an offer at any price. "I think all the players are pretty much aligned and RIM's on their own right now," he told CBC News. "Not a lot of bidders for RIM at this point in time unless you have some private-equity shops say 'OK, let's take a run at this and see what we can do."   

There's also the question of whether the federal government would even allow a foreign takeover of the best-known tech company in Canada.  Would it pass the nebulous "net benefit" test — the same test that BHP Billiton's attempted takeover of Potash Corp. last year failed?

Another blogger, investment consultant Sean Udall, writing in the financial website Minyanville.com, suggested that RIM could put itself up for sale.

"I actually think [RIM] should do this," he wrote. "This doesn't mean they would ever actually sell, but the whole prospect of [RIM] potentially being acquired would buy them some very much needed time."

Still, with a juicy $3 billion in cash in RIM's treasury, we may see takeover speculation pick up if RIM's share price continues to slide.

These days, the only question that ultimately matters is not as simple as it seems: What's RIM really worth?