RIMM Goes “All In” With Share Repurchase Program

Last night, Research In Motion (RIMM) released an earnings report that exceeded analyst expectations, produced strong guidance, and was well-received by the market. I took particular interest in RIMM’s share repurchase activity.

RIMM used $775M to purchase 12.3M shares at an average price of $63 per share (full details noted in Seeking Alpha’s transcripts of the earnings conference call). This amount is almost 2/3 the entire $1.2B RIMM’s board authorized for the repurchase program. By going “all in” with the majority of its authorization, RIMM management has followed through with its statement about its confidence in the business.

My previous rough estimate of a purchase of 8.1M shares at $514M proved to be far too conservative. Based on RIMM’s 2005 repurchase program, I also estimated a cap on repurchases at around $824M for the entire year of the program: “31% less than today’s maximum allotment, but it is still noteworthy.” Now, RIMM is on pace to spend at least that much at the end of the next three quarters. While I noted RIMM’s success with its 2005 share repurchase program, there were two main things that I missed that may have important implications for trading going forward:

First, RIMM generated $884M in income from operations (in the conference call, RIMM management pegged this number at $1.1B – I am not yet clear on the discrepancy from the reported results). This was more than enough to pay for last quarter’s repurchase activity. Given RIMM’s strong operational performance and the massive amount already spent on repurchasing shares, I will not be surprised if RIMM expands its repurchase program if shares once again weaken significantly over the next three quarters. I must now transition from skepticism over the size of RIMM’s $1.2B program to openness to the possibilities for RIMM spending even more of its hard-earned cash on buying shares. (Kudos to folks who contributed earlier comments pointing out that RIMM’s operational results alone could foot the bill for buying back shares!)

Second, the average purchase price of $63 is much higher than I initially estimated. RIMM’s stock only experienced four trading days – November 10-13 – where the stock traded at or above $63 between the start of the repurchase program and the end of the quarter. This average price confirms that RIMM concentrated most of its buying on specific high-volume days (click here for a review of some of the intra-day trading activity), but the large number of shares purchased also implies that general market demand for RIMM shares was much weaker than I earlier estimated. Given the weak general demand, it makes sense that RIMM’s stock failed twice to break the resistance from the 200DMA (I noted the first failure here, also see chart below). These failures produced ideal opportunities for shorting. I will be watching RIMM’s trading behavior in the coming days for evidence that the earnings report stimulates stronger market demand for RIMM’s shares.

Third, and finally, I am quite surprised that analysts on the RIMM conference call did not ask about RIMM’s repurchase program, especially given the aggressiveness of the purchases. Such questions would have provided management another opportunity to declare their bullishness. I am left wondering whether analysts do not (yet) think the repurchase program will have much impact on trading in the stock or the business. Management stated that “…while the repurchase did not have an impact on EPS during the third quarter, there will be approximately a $0.03 per share positive impact on Q4 diluted EPS.”

At the time of writing, RIMM’s stock has finally cleared the 200DMA hurdle, but it is likely to get pinned around $70 given options expiration. As long as RIMM continues to trade at these levels (and above), RIMM’s short-term technicals switch from bearish to bullish. The next upward price target for RIMM is $82.50 which represents a fill of the September earnings gap down. If RIMM dips back below the 200DMA, the trading action will suggest that the RIMM skeptics continue to dominate trading. Even if this happens in the near-term, I maintain that trying to short RIMM for more than a short-term trade is very hazardous given the success of RIMM’s past repurchase efforts (again, click here for a review of the 2005 program).

*Chart created using TeleChart:

Be careful out there!

Full disclosure: no positions