Actually, Ballmer and Chambers Haven’t Been Running Microsoft and Cisco Into the Ground

With Microsoft’s just announced $8.5 billion acquisition of Skype and recent troubles at long time tech darling Cisco, their respective CEOs are taking a lot of heat in the financial media lately. The assaults usually start by comparing stock price returns over the last decade or so, mainly because such data makes it easy to point the finger at the top brass. It is true that Microsoft stock is trading at the same price as it did way back in 1998 (don’t forget this excludes dividends, many reporters do) but that fact alone is not reason to conclude that the CEO has failed their shareholders.

The fact of the matter is that CEOs have control over certain things and no control over others. Their stock price’s starting valuation at a certain point in time is something they have no control over. Most of these 10-year stock price comparisons work to proof a point because the ten-year period just happens to begin near the peak of the internet and tech bubble of the late 1990’s, a time when most tech stocks fetched 50 or 100 times earnings. Not surprisingly, if you bought tech stocks at those valuations, you have a horrible investment on your hands, but that is true regardless of who was CEO.

So how can we fairly determine how well a CEO has done creating shareholder value? Earnings per share, plain and simple. Many CEO’s fail because they look at overall sales to determine how well they have done, but you can grow the size of your company without making shareholders a dime, so that is an irrelevent statistic for investors. Stock prices are based on two things; valuation multiples and earnings per share. Simply put, the market determines the former and the CEO plays a huge role in the latter.

So, how have Ballmer and Chambers done in the context of earnings per share growth over the last decade? Contrary to media reports, not that bad. I assembled the chart below which shows how fast earnings per share have grown at seven different large technology companies for the ten-year period from fiscal 2000 through fiscal 2010. The results may surprise you.

As you can see, Microsoft and Cisco have not been run into the ground by Ballmer and Chambers over the last decade. In fact, given that the long term average corporate earnings growth rate has been 6% annually, most of these tech companies have performed quite well.

Not surprisingly, Apple leads the way in terms of average annual earnings per share growth and Oracle, despite Larry Ellison’s huge pay packages over the years, has done very well too. Former internet stock analyst Henry Blodget over at Business Insider wrote this morning that John Chambers has failed as CEO at Cisco, largely basing his view on the stock’s performance, but the numbers don’t really support that. Again, a CEO really can’t influence P/E ratios that much. Opinions about a company’s future prospects are largely based on recent history, so if a CEO has done well in the past, the odds are good that their stock’s P/E will be above average, which ironically will hurt stock performance in the future.

While Microsoft is not near the top of the list above, Ballmer has kept pace with other rivals such as HP and IBM, so calling him a complete failure seems unfair. One could certainly argue that he could have done a lot better given the hand he was dealt, but the numbers still show he is about average in the tech world and above-average compared with all of corporate America.

The real surprise from this analysis is the clear loser of the group, Intel. The chip sector is definitely cyclical, more so than the hardware, software, and services industries which dominate this list, but Intel has unquestionably been the dud in the group, growing earnings at about half the historical rate of 6% for all U.S.corporations. If any management team should be criticized in large cap tech land, it should be the folks who have been running Intel.

All in all, a very interesting exercise.

Skype Deal Doesn’t Help Microsoft Jump Up on a Large Cap Tech Buy List

Large cap technology stocks are cheap, really cheap. Some of them haven’t traded at current valuations ever in their history as publicly traded companies (Cisco, for example). Microsoft (MSFT) is often included on such a list, and for good reason (the stock is dirt cheap), but the company rarely gives investors confidence that their strategy is right in the ever-changing tech world. Very smart investors like David Einhorn have added Mister Softee to their portfolios but the stock continues to be dead money in the mid to high 20’s. Today’s announced deal to buy Internet calling giant Skype for $8.5 billion does little to change the landscape for the stock.

Microsoft’s biggest problem is that it really doesn’t innovate very much anymore. Using the massive cash generation from Windows and Office, the company has merely copied their competitors in other areas. Their online services division continues to bleed red ink as Bing, Live, and other initiatives are simply me-too product offerings. The Zune music player was a complete bust and there is little reason to think the Windows Phone operating system will get any traction. The X-Box gaming system has been the company’s lone success outside of its core products, but with only a couple of competitors, that was an easier market to make progress in. And with the consoles facing new competition, that market is only going to get more difficult.

If anything, this Skype acquisition is interesting in that it signals a potential shift in strategy. Rather than continuously trying to build a Skype-like product that stands little chance of gaining traction against Skype and Google Voice, Microsoft has decided to just buy one of the giants in the space. Although the price tag seems excessive at $8.5 billion (and very few would argue that point), they likely had to overpay to wrestle it away from other bidders. In my opinion, it makes more sense for Steve Ballmer to overpay for Skype than plow hundreds of millions of dollars into a Microsoft clone that will be dead on arrival. In fact, Microsoft investors should hope that the company stops sinking billions into its unprofitable internet services division and uses that cash to buy other well established companies. There will still be a risk that Microsoft will tinker with Skype and any other future acquisitions, which would increase the odds that they lose their leadership position, but there is far more money to be made with Skype than with Bing, as one example.

As for the stock, this Skype deal does little to change my view that Microsoft is near the bottom of the list in terms of attractive large cap technology companies. I don’t dispute the stock is very cheap, but capital allocation has not been a strong suit of the company in recent years (and that is putting it mildly), and as a result, investors should have little confidence that Microsoft is on a path to building up more large, profitable business units. And with the continued assault from Google and others on their Windows and Office monopolies, that is what Microsoft must do if they want to see their stock price get out of the doldrums.

Reader Mailbag: Is Salesforce.com (CRM) a Good Short Candidate?

Tim writes:

“Hi Chad, you’ve probably looked at CRM as a “short,” any chance we’ll see a blog update with your thoughts on this one?”

Thanks for the question, Tim. I have several thoughts that pertain to Salesforce.com and other high-flying, excessively priced growth stocks in general.

Shorting these kinds of stocks is very dangerous. As a value investor, I certainly believe that excessive valuation is a huge red flag for any stock, but the key question is whether or not that sole factor alone is enough reason to bet on the price declining meaningfully, as opposed to simply avoiding it completely on either side. Unless there is a clearly identifiable deterioration in the company’s fundamentals, I tend to avoid shorting stocks merely because they are extremely overvalued.

The problem is that the market tends to give high growth companies elevated valuations as long as they keep delivering results. As a result, the short trade can go against you for a while, making it such that you must time the trade very well, and market timing is tricky. It is quite possible you will lose money for a while, and even if you are eventually right about a price decline, most of your gains by that point might only really recoup the losses you sustained initially. Without a negative catalyst (a breakdown in the operating business) it is very hard to time valuation-based short trades well enough to make good money consistently.

Now, in the case of Salesforce.com (CRM), the stock trades at about 90 times 2011 earnings estimates. Even for a company that is well positioned to grow for many years to come, one could easily argue that even at an elevated price of 40 or 50 times earnings, there is plenty of room for downside here. And I would not disagree with that. It really is just a matter of whether you want to explicitly bet on a huge decline, because you not only need to be right about the price, but you need such a decline to begin relatively soon after you short the stock, because momentum names like CRM can keep rising for longer than most people think.

Unless the market in general has another huge meltdown, these situations typically result in the stocks moving sideways for a long time, in order to grow into the hefty valuation Wall Street has assigned to them, assuming that their business fundamentals are not deteriorating. While I do not follow CRM as closely as many others do, I am unaware of any reason to think their business is set to take a dive. If that thesis is correct and the company continues to grow nicely, I would feel more confident betting on the stock moving sideways even as rapid growth in their software business continues.

To illustrate this idea, let’s consider past examples of stocks that were excessively priced, but still burned the shorts since the business fundamentals remained strong. Amazon.com (AMZN) is a prime example of a stock that many people have tried (unsuccessfully in most cases) to short in recent years. Amazon has continued to post phenomenal growth as it takes market share in most every category it expands into. In fact, just over the last few years many investors have argued it was a prime short candidate (and still do, at the current price of 52 times 2011 earnings estimates). As their business has continued to grow, Amazon shares have actually risen from around $70 two years ago to $165 per share today. Shorts over this period have gotten crushed.

If we go back in time, however, we can see that Amazon shares really have underperformed (relative to their underlying business fundamentals, anyway) for a long period of time. The stock peaked in December 1999 at $113 per share, when Amazon’s annual revenue was a mere $1.6 billion. Today, more than 11 years later, Amazon’s sales are on track for $45 billion annually, but the stock is only about 50% above 1999 levels. This is entirely due to the fact that the valuation in 1999 was so high that it already factored in years and years of stellar growth. Sales at Amazon have grown 28-fold (2,700%) since 1999, but the stock is up only 50% during that time. Believe it or not, that makes the investment a disappointment for those who had the foresight to predict Amazon’s explosive growth potential a decade ago. The valuation simply mattered more because it was already factoring in tremendous growth opportunities. Perhaps the same situation may be brewing with Salesforce.com.

As a result, I would personally prefer to avoid CRM rather than short it today. In more cases than not, shorting a stock based on valuation alone can get dicey pretty quickly, whereas finding a company with deteriorating fundamentals AND a high valuation has a much better risk-reward profile. Think Crocs, circa 2008, as one example.

Coinstar Shares Look Very Cheap After Guiding Down Earnings Expectations

Consumers should know Coinstar (CSTR)very well as the maker of coin counting machines found at grocery stores and more recently the owner of the Redbox DVD rental kiosks found in even more retail locations such as McDonald’s and Wal-Mart. I believe the stock, which has gotten hammered lately after an earnings miss for the fourth quarter, represents tremendous value. CSTR gives investors a rare combination of value and growth potential.

At around $39 per share (down from $67 late last year), Coinstar stock fetches only 6 times trailing cash flow. To put that in perspective, Microsoft sells for 7 times, Cisco for 8 times, and IBM for 9 times. Investors are clearly getting a valuation that is otherwise reserved for larger, slower growth businesses. This despite the fact that the company just reported that 2010 revenue soared 39% on the heels of a 50% jump in DVD rental sales (the more mature coin counting business grew by 7%). Despite giving more conservative guidance going forward after the company missed Wall Street’s fourth quarter expectations, Coinstar expects 2011 revenue to jump by about 24% with cash flow rising by 18%, as it continues to invest in growing the business. If management can deliver on these numbers this year (and after an earnings miss we should think they might give out forecasts they feel quite confident in reaching), the stock trades at only 5 times current year cash flow, unheard-of for a company growing like Coinstar.

Now, as with any investment, expectations and forecasts of future growth and valuation are not the only things to consider. Analysts would be quick to argue (and I would not disagree) that movie rentals are moving from disc-based to cloud-based, with the emergence of Netflix and other streaming platforms. Any market share gains that Coinstar’s Redbox kiosks might see with the pending bankruptcy of Blockbuster could very well be negated by more and more people signing up for Netflix streaming.

However, I still believe that the market for Redbox kiosks is bright, for two main reasons. First, with nearly 25,000 kiosks installed in grocery stores and retail outlets across the country, the convenience and cost ($1 a day) of Redbox rentals will make them attractive to both cost conscience movie watchers (if you only watch a couple movies per month you will likely opt for Redbox over an $8/month Netflix streaming plan) and those who enjoy the convenience of grabbing a movie on their way out of McDonald’s, Wal-Mart, or their local grocery store (just picture how easy children can convince mom and dad to get a movie for $1 before they leave the store).

The second reason I think it will be years before physical disc rentals will become completely obsolete is that there are still millions of Americans who are afraid of technology to a large degree (either due to things such as identity theft, or simply out of not being comfortable with operating high tech toys such as wi-fi enabled DVD players). To illustrate this point, let me share an encounter I had with a woman a couple of weekends ago.

After noticing that several Blockbuster locations were being liquidated near where we live, my fiancee and I decided to stop by and see if we could land any ridiculous deals (they were literally selling the store’s shelves as well as the DVDs sitting on them). Everything was for sale, and if you had a spare $350 sitting in your bank account you could buy the giant gum ball machine from your local Blockbuster store (we saw one being carried out by a man as we entered the store).

As I was perusing the aisles I helped explain the pricing structure to a woman in her 50’s or 60’s who was confused. We got to talking and she was mostly rambling about how disappointed she was that this store was closing because all of the other DVD rental places had also closed and now there was nowhere for her to go. I mentioned Netflix and she immediately dismissed it as a viable option “because you need a credit card for the box.” She was clearly confusing Netflix with Redbox, but the fact that she refused to use a credit card to rent a movie told me that Netflix would not be any better in her mind.

I bring this up because I think people like this woman are exactly the ones who will shun new technology like Netflix streaming. Eventually she will have to cave and start using Redbox for movie rentals most likely, and think about how many people like her there are out there. Not only that, but even if she felt comfortable using the Internet to order movies by mail (I don’t see her using Netflix mail order anytime soon, given that her explanation for why that wouldn’t work for her was that her printer has been broken for months and she can’t figure out how to fix it), I really don’t think she would proactively adopt such a technology when there are other “lower-tech” ways of getting a DVD such as Redbox (granted, a credit card will still likely be required).

In short, I think there will be room for both technologies for several years to come. While I subscribe to Netflix and have never actually used a Redbox kiosk, there are plenty of middle aged and older Americans who will. Not only that, but the Redbox kiosk in the grocery store I visit is often crowded with college kids as there are several universities in the area. Cost is probably the main factor there, as young kids can certainly operate Netflix streaming movies, but more likely lack the discretionary income to afford an expensive box with wi-fi and a monthly plan. So, there is definitely a market for Redbox with younger people too.

With Blockbuster in liquidation, Redbox should continue to grow, although Coinstar’s current stock price seems to not fully be factoring in such strong demand for their kiosks. I do not see any reason CSTR shares should not fetch 7-8 times cash flow, which makes a stock price of $60 quite a reasonable expectation.

Full Disclosure: Long CSTR at the time of writing but positions may change at any time

Kodak: Horrible Fundamentals But Too Cheap To Short

At first blush shares of Eastman Kodak (EK) appear to be an attractive candidate to short. Digital cameras have essentially eliminated the company’s largest and most profitable revenue generator (traditional film) and sales have been declining for years. Kodak’s answer to a disappearing business has been to focus on digital hardware such as their own camera line as well as a foray into the world of ink jet printers and cartridges. The glaring problem with this strategy is that they are shifting from a very high margin, uncompetitive area (film) to a very low margin, highly competitive one (consumer electronics). The results thus far have been predictably poor. Over the last five years EK stock has plunged from $30 to under $4 as sales have declined and profits have all but disappeared during what they dubbed a “digital transition.”

Since I really do not envision the fundamentals for Kodak improving, it is a prime choice to look into as a potential short candidate. After such a dramatic fall, however, coupled with 24% of the outstanding float already sold short, there does not appear to be much room to the downside, in the near term anyway. This is mainly because Kodak has managed to successfully clean up its balance sheet in recent years (an imperative when a business is in decline) to the point where they now have net cash (cash on hand less gross debt) of about $150 million. And while revenue is certainly declining, they still bring in about $7 billion a year in sales. Such figures make the current stock price ($3.75) and equity valuation ($1 billion) look reasonable enough that shorting now is not all that exciting to me.

Considering Kodak’s current equity value of $1 billion and revenue run rate of about $7 billion annually, the company only needs to earn a net profit equal to 1.4% of sales to earn $100 million annually, which would give the stock a P/E ratio of 10. Therefore, in order for a short position to work well at current prices, the P/E would have to drop far below 10, sales would need to fall off a cliff, or they would have to start to bleed cash. While the business fundamentals are poor, none of these scenarios seem like a high probability event in the near term. More likely, Kodak will continue to slowly lose revenue, run the business at break-even or slightly above, and the stock will trade at a discount based on their weakened market position. While these facts would not make Kodak stock a good investment at current prices, there does not seem to be a huge amount of downside either, barring some unforeseen event.

Full Disclosure: No position in Kodak at the time of writing, but positions may change at any time

Apple Stock Can Easily Reach $450

I often get a little bit of flak from a handful of fellow value investors when I write about owning tech companies such as Apple (AAPL) or Research in Motion (RIMM). How can you call yourself a value investor and own growth stocks like these, they ask? For me it all comes down to valuation, not growth rates. If RIMM trades at 9 times earnings, why would I not want to own it as a value manager? It trades at a huge discount to the market and its peer group. Isn’t that what value investing is all about, finding stocks trading at a discount? If two stocks I am looking at both trade at 9 times earnings, but one is growing at 5% a year and the other is growing at 25% a year, I am going to favor the one growing at 25% a year (all else equal) because it has even more upside. That should not mean that I am abandoning my core investment strategy. When the stock reaches a market multiple and no longer trades at a discount, I will sell and move on.

Which brings me to Apple. How can I justify continuing to own Apple after the enormous move the stock has made over the last decade? Because for some strange reason it still trades at a discount. The company just reported quarterly earnings of $6.43 per share, more than $1 above estimates, giving them an annual earnings run rate of nearly $26 per share. Even after a solid after-hours rally the stock sits at $344 which is really more like $280 after you net out the $64 of cash and no debt on their balance sheet. Apple stock, therefore, trades at an astounding 11 times its annual earnings run-rate,  a 20% discount to the S&P 500 index, which is why my clients still own it.

When will I sell? Well, if we assign a 15 P/E to nearly $26 of earnings and add back $64 per share of net cash, we get about $450 per share. At that price the stock would no longer trade at a discount to either the market or its peer group, so I will move on. Even at $450 growth investors will likely still argue that Apple is “cheap” based on their growth rate (they often are willing to pay up to a P/E of twice a company’s growth rate), but that is a growth investor’s mentality. And although it is hard for some to belief, it is not the one I use when allocating clients’ investment capital.

Full Disclosure: Long shares of Apple and Research in Motion at the time of writing, but positions may change at any time

Motorola Doubles Down on Cell Phones with Mobility Unit Spin-Off, But Should Investors Tread Carefully?

 

Motorola’s long-planned corporate break-up became official last week as the stock split into two distinct business units; Motorola Mobility Holdings (MMI) and Motorola Solutions (MSI). The former will encompass Motorola’s consumer unit (cell phones and cable set-top boxes) whereas the latter will serve the enterprise sector.

Analysts have been praising Motorola Mobility as a way for investors to play the rise of Android smartphones and Motorola’s success with the Droid product line. In fact, just this morning Bank of America Merrill Lynch initiated coverage of MMI with a buy rating and $38 price target (the shares currently trade around $32).

Making a bet on a cell phone pure play, without a stronghold on a certain niche of the market a la Apple or RIM, seems risky to me. After all, this industry is extremely competitive and aside from Apple and RIM, companies make very little money selling cell phone hardware. Palm was forced to sell itself to HP and after their success with the RAZR phone many years ago, Motorola struggled mightily before their Droid came along. Other giants in the space like Samsung and LG have diversified electronics product offerings so they do not need to rely on cell phones for strong profits. And new competitors enter the market all the time. We just learned that LCD TV maker Vizio is planning to launch Android phones and tablets and HP is set to launch a line of phones this year based on the Palm webOS operating system they acquired.

Perhaps the biggest reason to be cautious about Motorola Mobility is the fact that Apple is set to give Verizon the iPhone shortly. The Droid has done pretty well on Verizon in large part due to the fact that Verizon is the largest U.S. phone carrier but has not had access to the iPhone before. Loyal Verizon users have been using Blackberry and Droid phones but that could change dramatically when Apple’s products are made available to them.

All in all, it seems that everyone is jumping on the Android bandwagon. This is definitely good for consumers but I have to question how all of these players are going to make good money by selling what is essentially the exact same commoditized product. Is a Motorola smartphone or tablet computer running Android really going to be able to differentiate itself from an Android-based product from Samsung, LG, Dell, or anyone else? Seems unlikely, and without doing so these hardware companies are going to be at each others’ throats, which reduces pricing power and mostly importantly, profit margins. Computers makers like Packard Bell and AST have long been extinct because they could not outsell their competitors with largely identical products (Windows-based computers). Why would the tablet PC market or the phone market be any different?

Digging into Motorola Mobility’s numbers hardly paints an overly bullish picture either. While it is true that the company has stemmed losses in its cell phone division, which was losing hundreds of millions of dollars just a few short quarters ago, the business is still not making money (operating margins were 0% last quarter). With a strong launch of the Droid and reduced competition within Verizon’s customer base, Motorola still isn’t making a dime selling smartphones today. It is hard for me to see how that situation improves materially after the iPhone launches on networks outside of AT&T, but Motorola’s long-term goal is an operating margin of 8-12%. Seems overly optimistic to me.

The overseas markets could potentially be a strong area of focus for Droid, but Motorola Mobility gets 68% of their revenue from North America, so they are not big players in Europe or Asia. MMI is also more than just cell phones, with one-third of their revenue coming from a leading market share position in the cable set-top box market, but that industry seems poised for competition too. Would it surprise anyone if Apple or Google eventually launched their own cable box to compete with digital cable? Growth potential in set-top boxes seems lackluster and Motorola’s leading market share could come under fire. In fact, I just read that companies are already working on ways to build cable box technology directly into television sets, thereby eliminating the need for cable subscribers to have a separate cable box at all.

All in all, color me pessimistic about the outlook for Motorola Mobility, the company’s new pure play cell phone company. At $32 per share, MMI shares trade at 18 28 (corrected 11:50am) times 2011 earnings estimates of $1.16 and given that the company lost money in 2010, I think those projections for future quarters may prove difficult to achieve. MMI does give investors a strong balance sheet ($3.5 billion in cash and no debt), but given high research and development costs, coupled with a cell phone business that is only breaking even right now, and it is entirely possible that their cash hoard may dwindle over time.

Full Disclosure: The portfolio that Peridot Capital manages on Wealthfront was short shares of MMI at the time of writing, but positions may change at any time

After Missing The Latest Quarter, Cisco Shares Are Dirt Cheap

There is no doubt that earnings season is my favorite time of year from an investing perspective. Every quarter Wall Street overreacts to dozens of seemingly disappointing profit reports and punishes stocks in the process. For a deep value, contrarian investor like myself, it’s Christmas, Hanukkah, and Kwanzaa all wrapped into one. One of this month’s best holiday doorbusters has to be networking giant Cisco Systems (CSCO), whose shares have fallen 20%, from $24 to $19, after the company guided down for the current quarter.

Now, I understand that investors hate quarterly misses, especially for larger companies like Cisco whose businesses typically have far more visibility than smaller upstarts. That said, Cisco’s current valuation (12x trailing earnings, 7x trailing cash flow, and 11x 2011 profit estimates) makes it seem like this company is barely growing at the rate of GDP. That does characterize some mature tech forms such as IBM (IBM), which only grows sales at 3%-4% and also fetches about 11 times earnings.

Despite recent softening in some of their businesses (especially sales to governments), Cisco is still growing sales and earnings at double digit rates and should continue to do so. This is a classic case of getting to buy a company that is growing faster than the S&P 500 at a discount to the market’s overall valuation. Not to mention that Cisco is a leading company in an excellent and highly profitable industry. I would be quite surprised if Cisco shares didn’t reclaim all of the recent losses sometime over the next 12-18 months.

Full Disclosure: Peridot Capital was long shares of both Cisco and IBM at the time of writing, though positions may change at any time.

RIMM: 76% Earnings Growth for Under 10x Trailing EPS

The market’s initial reaction to last night’s earnings report from Blackberry maker Research in Motion (RIMM) made sense to me. The stock popped about $4 after-hours to over $50 per share after the company blew past analyst estimates for their latest quarter. Earnings per share came in at $1.46 (est: $1.35), revenues were $4.62 billion (est: $4.47 billion), and subscribers grew 4.5 million to over 50 million.

This morning, however, those gains from last night have all but vanished (the stock is up less than $1 as I write this). I have been bullish on the stock at recent prices (in the mid 40’s) based on a ridiculously low valuation (10 times trailing earnings) for a company that is still growing like a weed, despite the introduction of the iPhone and an ever-growing selection of phones running Google’s Android operating system. Given how fast the smartphone market is growing, coupled with nearly 40% market share for the Blackberry, it is my belief that RIM can still grow quite nicely, which if true, should eventually result in solid gains for the stock, due to its low P/E.

Last night RIM reported sales growth of 31%, earnings per share growth of 76%, subscriber growth of 56% and unit shipment growth of 45% versus the year-ago period. To me, these figures illustrate that my thesis (the company can still grow thanks to a strong position and a growing end market) remains intact. If users were really shifting in droves from RIM to the iPhone, the Droid, and HTC, etc and the company was in the process of fading like Palm did in recent years (as many are predicting), there is no way they could have posted these kinds of numbers. Not only that, RIM guided earnings per share for the current quarter to between $1.62 sand $1.70, well above analyst estimates of $1.39.

As a result, I continue to like RIM stock, believe the company can continue to grow earnings per share, and think the market is overreacting to the competitive threat. At $47 per share, RIM is trading at 9.4x trailing earnings. Since there is very little room for the stock’s P/E to contract further, I am not sure how the stock can stay this low for too much longer (barring a drop in earnings per share from here). Assuming $6 of earnings in the coming year, RIM stock could fetch $60 to $72 per share (P/E between 10x and 12x). That would represent a gain of anywhere from 28% to 53% from current levels. I even think that P/E range is on the low end of what makes sense for the company (why can’t RIM trade at a market multiple?). Perhaps Microsoft will even wake up one day and finally decide to pull the trigger, buy RIM, and expand its dominance in enterprise computing.

Full Disclosure: Long RIMM at the time of writing but positions may change at any time.

Cisco Dividend Initiation Very Overhyped

I was fairly surprised how much positive press Cisco Systems (CSCO) received this week after CEO John Chambers announced that the company would likely begin paying a dividend in fiscal 2011. Market commentators acted as if this was hugely important news, not only to Cisco shareholders but market players in general. Really?

Chambers said the dividend would likely fall in the range of 1-2% per year. Considering that most other large tech companies pay meager dividends already (Microsoft, Oracle, IBM, H-P, and Qualcomm all pay ~1-2%), coupled with the fact that the S&P 500 yields a little bit above 2%, I think this announcement is both unimpressive and unimportant. I doubt Cisco shareholders are jumping for joy at the prospect of a 1.5% annual dividend (perhaps 3-4% would be a different story, as it would represent a large portion of their expected long term return) and they shouldn’t be. And for the investment strategists who claim that income-oriented investors will now all of the sudden flock to Cisco shares, they are clearly overstating the situation. A dividend of 1.5% simply is not high enough to wet the appetites of income-seeking investors. In fact, a portfolio manager running a growth and income fund probably already averages a 2% yield or more in their portfolio (the average dividend for the market), so adding Cisco stock will actually lower their total portfolio’s yield.

Until tech companies start paying dividends that rival those in sectors notorious for fat dividends, such as consumer staples and utilities (3-5% per year), there will be little reason for income-seeking investors to all of the sudden embrace technology stocks. Intel (INTC), with its current 3.4% dividend yield, has crossed over into that territory, but others such as Cisco have a long way to go.

Full Disclosure: Long Intel and no position in Cisco at the time of writing but positions may change at any time