RIM Rallies as Activist Investor and Upgrades Bring Life to Stock

Activist shareholder Jaguar Financial Corp. urged Research in Motion (NASDAQ:RIMM) earlier this week to consider a sale of the company or a sale of RIM’s patents in order to maximize shareholder value. ^[1] The stock jumped a little on this announcement despite a decline in broader markets. In the past month, the stock has rallied 35% showing some signs of life as investors see either a turnaround or a buyout in the offing. Since Google (NASDAQ:GOOG) acquired Motorola Mobility (NYSE:MMI) at a huge premium, many now believe that struggling players like RIM or Nokia (NYSE:NOK) might be good buy-out candidates — or at least targets for their product and patent portfolios. See our note After Google-Motorola Deal Are Nokia and RIM Next?.

While we don’t disagree that it could be a buyout candidate for the right player, we also believe that a turnaround in operations could be attractive value players who are bottom fishing.

Management Willingness to Sell an Obstacle

We believe that management’s willingness to consider a sale will be one of the most important factors if shareholders want the company or its patents to be acquired. However, a lack of a strategic fit for potential buyers and a comparatively weaker patent portfolio are some of the other hindrances that shareholders might face.

We discussed some of our concerns in an earlier note titled Why RIM Makes a Poor Acquisition Target.

Selling is Not the Only Way to Unlock Value

We believe that the company’s core fundamentals are still intact despite the success of many of its peers which have eclipsed RIM in the last couple of years. We are optimistic about the prospects of a 12-18 month turnaround that underlies our $43 price estimate for RIM stock, which is a 40% premium to current market price. The keys to this turnaround will be the migration to QNX operating system in 2012 and solid management of its product portfolio that could be triggers for a leg up for the stock in the coming months.

Although RIM’s stock has more than halved this year and declined from a peak of $70 earlier this year to around $30 as of yesterday, it has rallied in recent weeks as a number of brokerage firms have upgraded RIM with essentially the premise outlined above that RIM is oversold and that there is value and management can unlock it. (see Upgrade Gives RIM’s Stock Life, QNX Still the Key)

If investors show some more patience, they could get rewarded over time either by a turnaround in sales or by a potential bid for the company or its patents.

See our complete analysis for RIM stock here

1. RIM Urged by Investor Jaguar to Sell Itself or Spin Off Wireless Patents, Bloomberg, September 7th, 2011 [↩]