June 25th, 2012 update: With RIM’s first-quarter results on Thursday expected to again disappoint, Reuter’s Alastair Sharp wrote today about how RIM’s cash position, once thought to be a major advantage, has suddenly become a concern. When we published this article, RIM’s Altman-Z Score, its margin of safety against bankruptcy, was a robust 5.4. Today, that number is a lower, but still healthy 3.7…
Just when it seemed things couldn’t get any worse, a stark headline last week reminded us how much Research in Motion (TSX:RIM) has fallen from grace, at least in the mind of the market.
On November 3rd, shares of RIM fell below book value for the first time in nine years. Book value, of course, is what you get when you add up a company’s assets, such as cash, real estate and inventories, and subtract its liabilities. At the end of Q2, which ended ended Aug. 27, RIM had a book value of $18.92 a share. The stock closed at $18.85 last Thursday and has not recovered in the two sessions since.
So what’s next for the Waterloo stalwart? Those bullish on the company say the market is too focused on the negative, and ignores the fact that RIM is performing exceptionally well in places like India. Joining their ranks of late have been noted value investors such as Fairfax Financial’s Prem Watsa, Donald Yacktman and John Hussman, who recently sold his entire position in Apple.
For RIM bears, the most recent news suggests that the company is soon to be sold off for less than the sum of its parts, or go bankrupt. But a remarkably reliable formula developed in 1968 suggests the latter possibility is off the table.
The Altman Z-Score was pioneered by Edward Altman, now a Professor of Finance at New York University`s Stern School of Business. The formula is a linear combination of four or five common business ratios that are weighted by coefficients. The coefficients were estimated by identifying companies that had declared bankruptcy and then collecting a matched sample of firms which had survived.
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Since 1968 The Altman Z-Score has been found to be 72% accurate in predicting whether or not a bankruptcy would happen two years prior to the event, a number that rises to more than 80% one year prior. The formula sorts the results into three categories; a number 2.9 and above is considered the “Safe Zone”. 1.23 to 2.9 is is reserved for companies in a “Grey Zone”. A company scoring below 1.23 is considered to be in the “Distress” zone.
So where does Research in Motion score? Many on the ongoing RIM deathwatch might be surprised to learn that its Altman Z-Score is 5.4, nearly double the number required for the “Safe Zone”. RIM is naturally topped by Apple, whose score of 8.4 is nearly triple the Safe Zone requirement, but handily beats handset competitor Nokia, whose 2.4 score puts that company in the Grey Zone. A more general comparison shows us that Alcoa, one of the worst performing components of the DOW 30 this year, has a Z Score of 1.4, placing it in the Distress Zone.