RIM Stock Trading Below Tangible Book Value Again

Last week RIM stock dipped below $13 per share, rising to end the week at $13.58. That's only a dime above the accounting value for the company after excluding goodwill and other intangible assets such as patents. But it's off to another weak start this week, trading below the $13.48 tangible book value (TBV).

The "book value" of a company is defined as the value of assets minus liabilities. For RIM, that value is about $19.45 per share. The company's stock price dropped below that level in November. Tangible book value also excludes other types of assets, which I'll explain below.

Oh, and just to be clear, book value or tangible book value doesn't necessarily help investors understand the true value of a company. So don't interpret my presentation of some financial metrics as a stock recommendation. Make your own investment decisions.

Let's dive a bit deeper.

With technology companies, often the firm's book value is not a floor for valuation. Some of the assets sitting on the balance sheet are of questionable value. Goodwill (from acquisitions), and other intangible assets (patents) are hard to value.

It's easy to inflate a balance sheet with goodwill by purchasing lots of companies, paying in stock, and paying way above fair value. Tons of telecom equipment makers did this in the 1990s. Their balance sheets were not a good reflection of true value.

Because of this, investors will often ignore these assets and calculate a "tangible book value" (TBV). This represents the value of "tangible" assets minus liabilities, rather than all assets. By ignoring hard-to-value assets, you can get closer to understanding the downside on a stock. Or so the theory goes.

Last week RIM dropped below its TBV of $13.48 per share. And that's not the first time this has happened. It happened before in December 2011, just after the company announced its highly disappointing Q3 results. At the same time as those results were released, RIM also disclosed that BlackBerry 10 devices would be delayed until late 2012.

Interestingly, after RIM stock dropped to a low of $12.45 following the Q3 results, it bounced back to above $17 late in January. At the time, there were ripe rumors circulating about the potential of a transaction between RIM and a buyer.

But then Thorsten Heins was promoted to the role of CEO. Mike and Jim stepped away from their executive roles. Thorsten made it crystal clear that RIM was not interested in being sold, broken apart, or otherwise messed with. This crushed Wall Street's justification for the rising stock price, sending it back to its record lows.

So here we are again. RIM is trading below TBV. Does this offer downside protection? Or is TBV just some meaningless number?

The way I look at it, TBV would be completely meaningless if a company was unprofitable, or was quickly moving towards negative earnings with very little hope of recovery.

In a case like that (which some believe to be true for RIM), the value of tangible assets minus liabilities would only matter if the company shut its doors and sold its assets. But most company executives are human beings who's behavior is largely driven by psychology. And it's rare for a failing company to admit that the best course of action is to shut its doors, sell off assets, and return cash to shareholders. So they fight a good fight, lose the fight, and lose value every quarter.

But RIM, in my own opinion, doesn't fit that bill. They are profitable and even most of the bears on Wall Street expect them to stay profitable. They're losing platform market share in the USA, but things seem to be flattening out there too.

I've been wrong on the stock for the last couple of years now. It hasn't been fun, and my pessimism hit a peak after last quarter's results when RIM announced that BlackBerry 10 devices would be delayed to late 2012.

But I couldn't bring myself to sell my stock because, to me, it just doesn't make sense for RIM to trade below tangible book value. CrackBerry nation is well aware of the challenges RIM faces. But will they continue to make money and own a not-insignificant chunk of the mobile phone market? I think so.

So there you have it, folks. That's my take on the stock as it stands right now. Throw in your comments and questions below. RIM will be releasing its Q4 results later this month, and I'll surely be back with an update.