Rim:T- The time to love RIM has arrived Earnings are strong, valuation is cheap

The time to love RIM has arrived
Earnings are strong, valuation is cheap

RIM-TSX

The success of Apple Inc.’s iPhone has been great news for Research In Motion Ltd. – or at least for those investors sitting on the sidelines, wondering if they should invest in the BlackBerry maker.

In its pre-iPhone heyday, RIM was the name in the smart phone market, particularly among business folks. But the company’s success and innovation drove the stock price – and, more importantly, its valuation – to levels that can only be described as silly.

One of the most popular valuation measures is the price-to-earnings ratio, which simply compares a stock price to the company’s annual earnings on a per share basis. In the case of RIM, the stock commanded a P/E ratio of more than 50 just as recently as two years ago, when the shares hit a record high of $150.

Put another way, investors were willing to pay $50 for every dollar that RIM earned – an absurd price that echoed the craziest days of the dot-com bubble. Even if you loved the BlackBerry, it was hard to fall in love with the stock.

And now, for the first time in years, it just might be possible to love them both. RIM’s earnings have been hitting record highs for the past four consecutive quarters and its share within the smart phone market continues to climb.

Yet, the stock’s P/E ratio is bouncing between 15 and 17. That makes it look more like a staid utility than an exciting technology company whose earnings are growing at a double-digit clip.

By comparison, RIM’s competitors look pricey. Apple’s P/E is 22 and Nokia Corp.’s is 30.

A low valuation reflects concerns, of course, and RIM is not without them. RIM’s inroads into the retail market (the business market is its core strength) has been mixed because the BlackBerry isn’t associated with fun and hip.

As well, the competition remains fierce, particularly now that the iPhone brand is becoming synonymous with wireless communication. There are also concerns that Motorola Inc.’s deal to acquire Palm Inc. might revitalize what had been a dying competitor.

In RIM’s favour is a new operating system for the BlackBerry, due to be released later this year, which has already earned rave reviews from analysts. If reviews don’t impress you, the numbers might: Amid surging global demand for smart phones, RIM’s market share is climbing. According to International Data Corp., RIM broke into the top-five handset makers in the first quarter, for the first time.

“Some analysts believe that the era of the BlackBerry is nearly over,” said Douglas McIntyre, at 24/7 Wall Street. “On the contrary, it has features unmatched by its competition, and that will make it very hard to catch.”

The stock, once too hot to handle, is now nice and cool.