by Fernando Commodari, Ph.D.
Two days ago when the markets were down (NASDAQ), BBRY was bucking the trend and was up. Today it is closing on NASDAQ up at $14.91 and on the TSE up at $15.63. I believe that the next earnings report will be a pivotal turn-around moment for the stock and the shorts will begin to get squeezed. Today Zacks Equity Research reports that BBRY is likely to top its earnings when it reports first-quarter fiscal 2014 results before the opening bell on Jun 28, 2013. They state:”The combination of BBRY’s Zacks Rank #3 (Hold) and +100.00% ESP makes us confident of a positive earnings beat on Jun 28, 2013.”
The report can be found here:
On Seeking Alpha, Steve “Ziffster” discusses: “The Longs & Shorts On BlackBerry”. In an attempt to be analytical about trying to predict a turn around for BBRY he discusses key factors for a BBRY turn around:
“Turnarounds are a slow processes and success is difficult to predict. However, below are the indicators worth watching and how BlackBerry currently fairs.
- Profitability – Although one quarter is not enough to establish a trend, another positive quarter should demonstrate BlackBerry’s ability to earn a profit.
- Cash Flow and Reserves – This was never an issue for BlackBerry.
- Gross Sales – Unfortunately for BlackBerry, sales as currently reported are still declining quarter over quarter and this will continue if BB7 sales decrease faster than BB10 sales increase.
- Turnover – Financial statements have never shown problems with accounts payable or receivable turnover. Inventory turnover (once channel stuffing is calculated in), which was a problem, improved as of the last quarterly.
- Market Share – Hard numbers provided in previous financial statements confirmed that market share was still dropping and information reported since then has been mixed.
- Resource Optimization / Overhead – BlackBerry has taken significant steps to optimize efficiency. The last quarterly report suggested margins were now among the highest in the industry. Some analysts have questioned if these gains were real or if they were artificial due to one-time adjustments so this point is worth watching.
- Research & Development – BlackBerry is in the midst of its largest roll-out ever including transitioning to an entirely new platform (BB7 to BB10), multiple new devices, transitioning its services platform to multivendor and expanding QNX functionality to include paid services. So far all of these initiatives seem to be proceeding smoothly.
- Financial Stability – BlackBerry has never had problems repaying debt, paying employee benefits, performing plant maintenance, or replacing manufacturing machinery in a timely fashion.
- Corporate Moral – Staff is much more upbeat lately. Employees of all levels are encouraged to voice their ideas openly and a slew of new social activities are being offered to employees by the company. This time last year staff was depressed about the future of the company and felt left out.
- Clear Vision – Thorsten Heins has clearly articulated where he sees the company headed, and has done a good job selling his vision. However, what’s missing are the details of how the changes will contribute to the bottom line.”
“Overall signs are positive, but there are enough concerns to warrant caution until more information is available. Things to watch for in the June 28, quarterly report are:
- Has the decline in gross revenue stopped?
- Has the decline in market share stopped?
- Has cash flow remained positive?
- Have cash reserves been preserved?
- Have gross margins been maintained?
- Have clues been provided regarding how BlackBerry intends to monetize ‘Free’ multi-platform BBM?
Earnings per Share (EPS) is of course important, and may have a significant impact on the market short term, but from a long-term perspective the above points will provide better insight into the status of the turnaround.
Subscriber base has long been suggested as a good indicator of BlackBerry’s health. However, due to changes in BlackBerry’s service model, this is no longer the case. Value will be limited to primarily just indicating the number of subscribers still with BB7 devices.”
He then states:
“In a bid to resolve this conundrum, NYU Professor Edward Altman introduced the Z-score formula in the late 1960s. Rather than search for a single best ratio, Altman built a model that distills five key performance ratios into a single score. As it turns out, the Z-score gives investors a pretty good snapshot of corporate financial health. Here we look at how to calculate the Z-score and how investors can use it to help make buy and sell decisions.
Here is the formula (for manufacturing firms), which is built out of the five weighted financial ratios:
Z-Score = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E
A = Working Capital / Total Assets
B = Retained Earnings / Total Assets
C = Earnings Before Interest & Tax / Total Assets
D = Market Value of Equity / Total Liabilities
E = Sales / Total Assets”
BlackBerry’s current Z Score works out to around 2.5, which indicates a company could go either way. He concludes:
“Although midterm prospects are definitely looking up for BlackBerry, it is too early to call what will happen longer term as signs are mixed. If the next few quarters are positive, most of the naysayer’s should stop questioning if the turnaround can be sustained and share price should stabilize.
The gamble every investor makes standing on the sidelines until the future is known is that they miss out on the substantial gains possible with speculative stock. BlackBerry could end up being the most undervalued stock of the year… or then again might not.
Although I remain long, I appreciate why BlackBerry is so highly shorted.”
The Ziffster story is here:
Kofi Bofha, this morning presented a good case for not shorting BBRY, in reviewing where the stock has gone since its low of $6.22 on September 24, 2012.
The Boha article is here:
In another post, on June 23, 2013:
“Peter Misek, CFA, CPA at Jefferies thinks that in the near term, Research In Motion Ltd (BBRY) may deliver a surprise. Results from suppliers Jabil/Wistron and another round of UK store checks lend continued confidence in their far above Street estimates. Misek expects limited Aug Q guidance details but thinks sell-through will ultimately prove that BB10 is not just a one quarter channel fill phenomenon”
Todd McDonald, also weighed in this morning with his valuation and concluding analysis:
BlackBerry shares have formed a symmetrical triangle, trading around the 50-day SMA throughout the year. The consolidation pattern indicates that a breakout could happen either way, making the upcoming report crucial if it breaks. Should earnings surprise to the upside, look for initial resistance at the $15-level, followed by the descending trend line near $15.50. If earnings disappoint, potential support is near $13.50, followed by the 200-day SMA near $12.50.”
The McDonald article is here:
As mentioned above, I believe that the next earnings report will be a pivotal turn-around moment for the stock and the shorts will begin to get squeezed, based on an objective review of the available data. This will be especially the case if BBRY meets or exceeds anticipated earnings. The comments in the above referenced articles/posts, are also worth reviewing. Based on a review of the trends over the last year and the momentum going forward, I expect the stock to begin to move away, in an upward direction, from the $13-$14 mark it has been hovering at during this period of adjustment with the the Z10 and Q10 launch and re-invention. I expect, with a positive earnings call, that the stock will approach the $20 mark by the Fall, with the launch of multiple new OS 10 devices, including the A10 and Q5. This is what I see in MY crystal ball, but if the numbers aren’t there, things can move in the opposite direction, in the short term.
I am long on BBRY. Nothing written on this site should be viewed as an endorsement of any stock or any stock over another; we cannot predict the market!