Research in Motion Offers Long-Term Value, Despite Mixed Reaction to PlayBook

Last Updated Sep 30, 2010 6:29 PM EDT

The Research in Motion PlayBook, the tablet computer being touted as the company's answer to the Apple iPad, made a poor first impression on Wall Street. Research in Motion's stock (RIMM) fell 3 percent Tuesday, the day after the PlayBook was introduced.

It then made a big comeback, recouping all of the loss the next day and tacking on an additional 0.7 percent the day after that, so the PlayBook may yet be the catalyst that allows the stock to outperform Apple's (AAPL), a case I made on Monday. Either way, Research in Motion is a company with strong prospects for long-term earnings growth and its stock is cheap.

Wall Street has had trouble recognizing that potential, as a long run of sluggish performance makes clear, but some investment advisors are starting to find reasons to express support for the stock. Charles C. Carnevale, chief investment officer of EDMP Inc., a money management firm in Florida, argued in a recent commentary that investors who have been shunning Research in Motion are unproductively obsessing over the company's short-term difficulties:

"There is a lot of opinion throughout the marketplace regarding Research in Motion's vulnerability in the smartphone market to the likes of Apple and Google (GOOG), etc. However, we believe the continued strong operating performance that Research in Motion is generating indicates that most of these fears are overblown. We believe that the smartphone market is big enough for all of them to prosper and grow. In other words, Research in Motion should be capable of generating strong enough earnings growth to support an increasing stock price."

Research in Motion carries a valuation of 9.37 times earnings for the most recent four quarters and 7.84 times analysts' consensus estimate of earnings for the next four. That's far less than the broad stock market, which trades at about 13 times trailing earnings, or Apple, at more than 21. Research in Motion's valuation is also very low relative to the annual earnings growth of 17 percent that analysts anticipate the company achieving during the next five years.

Research in Motion earned $5.19 a share in the most recent four quarters. If the company attains the earnings growth expected of it and if the stock trades at a price-earnings multiple of 17 - equal to estimated earnings growth and thus a very reasonable valuation - the share price should hit $193 by 2015. Things can go wrong between now and then, of course, but there's a big gap between $193 and the current price south of $50 that should offer a substantial cushion for investors who want growth with safety. As Carnevale put it:

"We believe the market is currently grossly underpricing RIMM shares based on fear. . . . With no debt on the balance sheet and the continuing strong generation of both earnings and cash flows, pricing RIMM shares at a mere 9.3 times . . . earnings is ludicrous."