08-12-13 04:42 PM
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  1. FinalEpiphany's Avatar
    Guys, I've read a lot about Blackberry stock valuation on this forum recently and there are a number of misconceptions that I'd like to point out based on my analytical experience as a former Investment Banking M&A analyst. Before I launch into my discussion, I have to profess that I used to own Blackberry stock a few months ago, made some profits on the way up, and sold out last month to get into other sectors. I'm planning to get back into the stock in the near future after it had declined nearly 40% post-earnings.

    Below are just some professional thoughts that I'd like to share pertaining to blackberry and stock valuation in general and hope it clears up confusions for some people:

    Q1. Blackberry has 3.1B in cash and no debt, loads of patents, infrastructure, 70mm+ subscribers, hardware business + service business, BES, QNX, BBM, etc, how can it go bankrupt?!

    A1. Bankruptcy can occur in a number of ways. First, if a company cannot meet its debt obligations, i.e. interest, for a sustained period of time then it is by definition bankrupt. In Blackberry's case, this will not happen as it does not have any debt but does it mean there is no other way that it can go bankrupt? Well, it is true that the company has no debt and own all of the aforementioned assets but equity valuation has everything to do with free cash flows. Technically, it is possible for a stock to still go bankrupt without having debt if it continues to generate negative free cash flows which is a drain on existing cash reserves. Also, this implies that the valuation for assets is negative rather than positive. The proper formula to derive Enterprise Value of a firm (EV) is the discounted value of all future free cash flows to the firm which is expressed as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) - unlevered cash taxes (for simplicity sake, just call it taxes) - change in net working capital - capital expenditures.

    Following this EV calculation, you add cash and subtract debt (there are many other adjustments such as preferred shares, redundant assets and minority interest as well but I will ignore them for now for simplicity) to arrive at equity value or share price. Clearly, from the theoretical formula, you can see that if a company consistently generate negative free cash flows, the enterprise value, which technically is the value of all of the firm's operating assets, can in fact be negative and even if you add a positive cash balance and subtract no debt (which is the case in Blackberry), the equity value/share price can theoretically trade at or below cash value. This simply means that the assets are operating in such a manner that they actually drain and deplete existing cash reserves rather than generating any positive value. Of course, whether this is true for Blackberry is what the bulls vs. bears argument is all about.

    Q2. Blackberry trades at a steep discount to asset value. How can it not be cheap?

    A2: Well, technically, gross asset value isn't what you should be looking at. It is net asset value you should be concerned about, which is assets less debt. Net Asset Value (NAV) is what market capitalization actually represents, not gross asset value which is represented by Enterprise Value mentioned in Q1 above. In Blackerry's case, since there is no debt, gross asset value = net asset value.

    Having said that, this brings us to the concept of a stock trading at steep discount to net asset/book value. There is a common confusion among investing public and even finance academia about this, it is that if a stock is trading at a discount to book value, it is automatically considered cheap and it is a buy. This is not true as a company's book value on the balance sheet is simply an accounting figure (the initial owners' equity and an accumulation of subsequently accounting earnings and losses) based on historical costs which often do not accurately reflect a company's cash flow generating ability based on its assets at all. For instance, consider a firm that has sunk $100M into exploring/developing a potential gold deposit which eventually end up not having any gold and therefore produces no cash flows in the future. The book value of that those costs would accumulate on the balance sheet as $100M as exploration/mineral assets (at least temporarily before the massive writeoff happens) but really is worth $0 from a cash flow perspective which is ultimately what stock valuation is based on.

    So in short, yes, a stock can trade at a discount, sometimes a steep one, to book value which simply means the market has little to no confidence in that book value on the balance sheet actually being worth that much.

    Q3: What does the current market valuation of Blackberry stock imply, i.e. what assumptions are factored into the share price?

    A3: The current market valuation of ~4.6B assumes full value of the cash (~3.1B) and assigns an additional ~1.5B of value to all other assets of Blackberry which include its patents, infrastructure, service business, hardware business, BES, QNX, BBM, etc. Obviously, there is not a whole of value being ascribed to Blackberry's operating assets relative to cash. These assumptions are based on the company as a going concern, i.e. it will continue to operate its normal course of business, and not as a break-up entity in a sale situation, which can arguably be worth more if the assets can be sold in pieces for a total value greater than ~1.5B. It is really an investor's subjective call on what the valuation of these assets of Blackberry is worth that he/she makes a buy/hold/sell (short) decision.

    Q4: What are Blackberry's current problems that results in its current seemingly low valuation? What can be done to maximize shareholder valuation?
    A4: Blackberry's biggest asset for now is the $3.1B cash it has. Hardware business is losing money. Patents has value to bigger players but only in a sale situation. Service business is seen on a declining trend for now. Subscriber base is dropping as well. BES, QNX, BBM are great assets but so far Blackberry has failed to monetize them. It is great that the management is talking up great potential about mobile computing and the future of BES, QNX, BBM but stock valuation is based on cash flows so until they start to translate these visions into real cash flows to the company, the market won't care and continue to assign little to no value to these assets as they are doing right now.

    Q5: Should Blackberry borrow debt, i.e. lever up, to help performance?
    A5: Some have raised this but from a professional perspective, at this stage, the answer is a resounding NO. The concept of levering up or borrowing debt is typically done to juice up ROE through earning a higher rate of return on asset that exceeds the cost of borrowing. This works great when you have a stable cash flow generating asset operating in a relatively healthy market environment that does not have great volatility risk. However, given Blackberry's current unstable and declining cash flows in the highly competitive smartphone market, introducing leverage at this level will simply introduce greater financial risk to the company. Taking on debt might be a good option when the company turns itself around and stabilizes for a sustained period of time but it is definitely not now.

    Q6: What are catalysts for the Blackberry stock coming up?
    A6: There has been a lot of talks about Blackberry being potentially acquired by one of the bigger players and I would agree that it is the fastest way to realize some upside to the stock as I'm positive that the company's assets are still valuable to other players, at least in piece meal form. However, there is also the debate as to who will acquire them and will they hold on to buy for lower prices, will Canadian government allow foreign acquirers, etc. In spite of this, I still believe this is the main major catalyst for the stock right now although it will be terrible for long time shareholders who have bought in at higher prices including Prem Watsa and his Fairfax Financial Holding which own close to 10% of the stock at $17 average.

    Again, many here will express strong disagreement to a sale of the company and I understand this, I'm a Canadian myself and would hate to see another Canadian icon disappear, and there is a chance that Blackberry may turn around organically but that risk then lies with management to execute flawlessly going forward and fast because as it currently stands, their performance has been disappointing and market confidence is deteriorating even at this low level.

    This is a lengthy thread and only touches the basic valuation and understanding of Blackberry which I want to share for now. This is a fairly objective view of the stock as I currently do not own any position in Blackberry. In the end, after all that has been said and analyzed above, overvaluation and undervaluation is all relative and it's all about your perception of Blackberry's future potential to turn itself around to generate positive cash flows based on all the assets it has, which it isn't able to achieve right now. Ultimately, investing is never a certainty even after extensive analysis but really your judgment call on the probability of being right or wrong on your predictions on the future cash flow generating ability of the company. I for one believe that the current market valuation for Blackberry seems to factor in a rather overly pessimistic view of the outlook, although it is entirely possible that the market might be right, I like my probabilities here and may take up a sizeable position in the near future.

    Good luck!
    Last edited by FinalEpiphany; 07-28-13 at 08:45 AM.
    07-28-13 08:21 AM
  2. Nathan Bael's Avatar
    Appreciate the objective analysis.
    07-28-13 08:31 AM
  3. FFR's Avatar
    Nice analysis. I enjoyed reading it.
    Minor correction
    Market cap is at 4.58

    Stock is hovering around 8.88 a stones throw away from bbry 52 week low @ 6.22


    Sent from my iPhone using Tapatalk 2
    07-28-13 08:49 AM
  4. jojo beaconsfield's Avatar
    Very nice article,you should post it on Seeking Alpha,you could make a quick buck,and get tons of educated responses,not saying you won't here ,but,I think you should go for it.I own BB stock and am really concerned about their lack of getting innovative products out which they need to do,fast!!
    07-28-13 08:54 AM
  5. ray689's Avatar
    Great analysis in theory.
    Now for the real life analysis of how stock valuation works:
    The stock market is one big game for the wealthy and they manipulate as they choose.

    Posted via Z10
    07-28-13 09:01 AM
  6. FinalEpiphany's Avatar
    Great analysis in theory.
    Now for the real life analysis of how stock valuation works:
    The stock market is one big game for the wealthy and they manipulate as they choose.

    Posted via Z10
    I agree, fundamental and technical analysis, separately, cannot ensure success in the stock market which I believe is much more driven by herd mentality and irrational extremes both to downside and upside.

    That's how in a bull market, even a grandma can make money hand over fist, and in a bear market, a professional can still lose money.
    07-28-13 09:09 AM
  7. Poirots Progeny's Avatar
    Excellent post!

    Thank you.

    Posted via CB10 on my BlackBerry Q10
    07-28-13 09:16 AM
  8. serbanescu's Avatar
    I see the situation the same way. BlackBerry still has another couple of quarters to prove the market wrong, but not much more than that.

    I hope they will succeed and this beautiful OS will be enjoyed by many.

    --------------------

    Calorie Monitor Pro for Z10, Q10, Q5 and PlayBook
    07-28-13 10:06 AM
  9. notfanboy's Avatar
    I see the situation the same way. BlackBerry still has another couple of quarters to prove the market wrong, but not much more than that.
    Did you read about the guidance for the next couple of quarters? They don't expect results to be any better. Misek is projecting flat BB10 sales of 2.7 and 3 million for the next two quarters.

    I agree with the OP that being bought out is the most likely path to an upside.
    07-28-13 10:17 AM
  10. yyzberry's Avatar
    . I'm planning to get back into the stock in the near future after it had declined nearly 40% post-earnings.
    What price does that translate to? $6?
    07-28-13 10:20 AM
  11. notfanboy's Avatar
    What price does that translate to? $6?
    OP wrote "post earnings", so the price would be what it is now $8.88.

    Here's one incentive to get in at this price. If you do this, you can brag at parties that you're handily beating Prem Watsa with regards to BBRY, and that Prem even has the huge advantage of being on the company's board.
    07-28-13 10:28 AM
  12. FFR's Avatar
    Did you read about the guidance for the next couple of quarters? They don't expect results to be any better.
    Guidance = a rough end to a rough year.
    Lately blackberry hasn't even been hitting their projected numbers.

    Misek is projecting flat BB10 sales of 2.7 and 3 million for the next two quarters.
    It's depressing when you realize that those figures are on the optimistic side.


    I agree with the OP that being bought out is the most likely path to an upside.
    The problem remains, who & why.

    For some perspective, NEC is closing their mobile phone division after Lenovo declined to buy it. Closing because they couldn't sell it. The writing was on the wall for NEC.







    Sent from my iPhone using Tapatalk 2
    Last edited by FFR; 07-28-13 at 10:57 AM.
    07-28-13 10:32 AM
  13. bitek's Avatar
    I guess it is time to buy some stock !
    07-28-13 10:41 AM
  14. yyzberry's Avatar
    OP wrote "post earnings", so the price would be what it is now $8.88.

    Here's one incentive to get in at this price. If you do this, you can brag at parties that you're handily beating Prem Watsa with regards to BBRY, and that Prem even has the huge advantage of being on the company's board.
    Could be taken to mean 40% less $10= $6.

    OP please clarify.
    07-28-13 10:45 AM
  15. route664's Avatar
    uh oh.. looks like someone's going after chris umi's job. GAME ON! haha j/k
    07-28-13 11:16 AM
  16. Chicago777Guy's Avatar
    Good write up...if you want to keep it simple just read what Prem Watsa has to say, after all he is the only one with a track record!!!!

    Posted via CB10
    07-28-13 11:24 AM
  17. sexybabe88's Avatar
    Thank you for that. I can now direct people who make the 3b and no debt claim to your post. I maintain that blackberry is destroying shareholder value at this rate and at this point, even suspending operations and winding up overnight can at least preserve some of that.
    07-28-13 12:22 PM
  18. sexybabe88's Avatar
    Stock price aside, I'm confident that a wacc vs roe comparison will prove my point.
    07-28-13 12:25 PM
  19. heymaggie's Avatar
    Wait...you didn't mention resistance/support lines, stock-price manipulation from evil shorts, and what you hope the stock will do. What kind of analysis is this?

    PS - If you really want us to take you seriously, we need to know if you wear shirts with collars, if you support BBRY, and what you did this weekend.
    Last edited by heymaggie; 07-28-13 at 12:43 PM.
    gg22, notfanboy and bekkay like this.
    07-28-13 12:30 PM
  20. yyzberry's Avatar
    Good write up...if you want to keep it simple just read what Prem Watsa has to say, after all he is the only one with a track record!!!!

    Posted via CB10
    Watsa is a fool. Never trust anyone without skin in the game. He manages a fund. If he's right? Huge upside. If he's wrong? No repercussions and he doesn't have to pay back the years of bonus and enormous salary he's taken.

    The system is rigged against the individual. Understand the system and profit from it.
    ray689 likes this.
    07-28-13 12:42 PM
  21. Chicago777Guy's Avatar
    Watsa is a fool. Never trust anyone without skin in the game. He manages a fund. If he's right? Huge upside. If he's wrong? No repercussions and he doesn't have to pay back the years of bonus and enormous salary he's taken.

    The system is rigged against the individual. Understand the system and profit from it.
    He is fool and what are you???? Lol...
    The guy has a fantastic track record..No one comes close to his record.

    Posted via CB10
    07-28-13 12:45 PM
  22. FinalEpiphany's Avatar
    OP wrote "post earnings", so the price would be what it is now $8.88.

    Here's one incentive to get in at this price. If you do this, you can brag at parties that you're handily beating Prem Watsa with regards to BBRY, and that Prem even has the huge advantage of being on the company's board.
    Yes, I meant I'm planning to initiate a position at these levels, i.e. $9. This is where I bought in the last time around last November and it is where I'm comfortable at from a valuation perspective.
    07-28-13 03:38 PM
  23. FinalEpiphany's Avatar
    Wait...you didn't mention resistance/support lines, stock-price manipulation from evil shorts, and what you hope the stock will do. What kind of analysis is this?

    PS - If you really want us to take you seriously, we need to know if you wear shirts with collars, if you support BBRY, and what you did this weekend.
    Yeah, I have not posted my views on technical analysis for BB because for one I'm not a huge fan of technical analysis and never use it as a primary tool for analyzing investments. I use it to supplement fundamental analysis combined with many other factors.

    In addition, technical analysis is even less effective in the case of BB here because the stock is so much driven by negative market sentiment and I'm a believer that this stock is manipulated significantly due to the tremendous level of short position by hedge funds.

    I used to be a big fan of BB but am not as much of one now especially after the most recent earnings report, however, from an investment perspective, I will put my money where I see good probabilities of a stock going higher than lower based on fundamental, technical and other factors. I see more upside potential than downside currently and that is why I might getting some money back into it soon.
    07-28-13 03:46 PM
  24. anon1727506's Avatar
    He is fool and what are you???? Lol...
    The guy has a fantastic track record..No one comes close to his record.

    Posted via CB10
    He's no fool... but is he adding to his BBRY portfolio right now?





    Posted via CB10
    07-28-13 04:00 PM
  25. yyzberry's Avatar
    He's no fool... but is he adding to his BBRY portfolio right now?
    Who am I? Just an anonymous forum poster who's telling you I'm made a lot of money off Blackberry going up & now going down. And that's 1000x better than the blow hard fund manager who only gambles with the House's money.

    Finalepith, I respect your opinions but I see further collapse coming. The market is literally by passing Blackberry BB10 as though it doesn't exist. The company is in shambles. More blood will be drawn.
    07-28-13 04:49 PM
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