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Thursday, 6 February 2014

The Hidden Value in Blackberry Stock

The Hidden Value of  Blackberry Stock

I read an interesting article today.  It was written by Achilles Investment Research, a boutique investment consultancy.  The article stated that BlackBerry was a cinch to reach $17 this year.  It was an interesting piece because it mirrored Citron investments recent report and it is showing that some deep thinkers are bucking Wall Street’s herd mentality thinking.  I don’t normally take much notice of analyst because the ones who publish articles are backing their (usually short) position and the ones who don’t are quietly making money and want to milk their position for all its worth before the aforementioned herd stampede and suck out their profit.
This report was interesting because, like Citron it was based on an analysis of what the stock is worth and more importantly why.
The report started off by saying that the adoption of a long-term investment philosophy serves investors the best.  This is a surprisingly moral view in a generally immoral business.

The report goes on to say what most analysts miss, BlackBerry is currently going through a major transformational change with its business model, It states that BlackBerry has fallen on widely publicised hard times: poor handset sales, falling market share, unsuccessful product launches and inventory write-offs combined with eye watering quarterly losses over the last years. The recent house-cleaning action resulting in a massive quarterly loss of $4.4 billion, however, the report states that now we will see a meaningful inflection point as the company pulls itself out of the self-dug ditch.

The positive clearly outweighs the bad
Achilles is a contrarian investor and what they say they like about BlackBerry is that is still largely misunderstood.  The market is constantly talking about BlackBerry's handset business which immediately gets allergic reactions from investors. While it is true that the hardware unit is a loss-maker it is not true that this fact should determine the perception of the company and in fact it clouds the true underlying value of the company. Investors still look at BlackBerry as a device maker, while the company is rapidly transforming its business to become an enterprise software company.
The second thing Achilles speaks about is the fact that BlackBerry's shares have lost 85% over the last five years. Achilles believes that this value destruction is unwarranted.  They conservatively estimate that BlackBerry holds about $3.0 billion in cash and short-term securities on its balance sheet at the end of the quarter. With 526 million shares outstanding, this translates into approximately $5.70 per share in cash- and short-term securities value. In other words: 63% of BlackBerry's current market capitalization consists of cash and short-term securities, while the company retains all the upside from its enterprise segment.
Third, while the Fairfax transaction fell through, Prem Watsa is still upbeat about BlackBerry: On January 16, 2014, it was announced that Fairfax Financial purchased an additional U.S. $250 million principal amount of 6% unsecured subordinated convertible debentures of BlackBerry. Purchasing a sizable chunk of unsecured debt signals that Fairfax Financial is optimistic about BlackBerry's future earnings potential.
Fourth, Under its current management BlackBerry proactively creates catalysts for itself: Both the partnership with Foxconn (OTC:FXCOF) to control production costs as well as its intention to engage in real estate sale-leaseback transaction shows that the company is driven to create value for shareholders and turn BlackBerry around.
Fifth, Lenovo (OTCPK:LNVGY), the Chinese technology company that was rumoured to be interested in purchasing BlackBerry (but also rumoured to be blocked because of its Chinese Government connection), now bought Motorola Mobility from Google for $2.9 billion. While Lenovo’s didn't buy BlackBerry, the transaction goes to show that loss-making device businesses indeed can be sold in the marketplace. A potential sale of BlackBerry's device unit would be a major catalyst for the stock, and the clearest signal to investors that the company is changing.
Sixth, BlackBerry's short interest has been collapsing over the last six months: To contrarians, this signals that a potential bottom has been found.


What happens when investors change their perception?
Investor perception can change quickly, Both Alcatel-Lucent (ALU) and Nokia (NOK) were struggling with their hardware businesses and both companies went through transformational change that included a new business direction. However, the change wasn't fully understood by the marketplace. In the case of Nokia, for instance, the sale of its device unit to Microsoft (MSFT) fundamentally changed how investors thought about the company. The sale of its device business was a major catalyst for the stock, and also allowed the company to move forward with its plan to change its business model to become a wireless infrastructure provider and focus on its location-based service segment.

Conclusion
The recent market sell-off has hit BlackBerry extraordinarily hard, which makes a contrarian investment so much more attractive. Since January 22, 2014, shares of the company have corrected a 16%. Despite the decline in share price and the surrounding negativity, Achilles state that BlackBerry could be a good deal for contrarian investors in 2014 with a potential target price of $17 based on a sum-of-parts analysis, and they are standing firmly by that assertion. In addition, Citron Research (a notorious and successful short seller) issued a minimum price target of $15 for shares of BlackBerry in its research report from January 17, 2014. 
BlackBerry, just like Nokia, is still misunderstood and it will take time to adjust the false perceptions of BlackBerry being a phone manufacturer. Selling the device unit could be a major catalyst for BlackBerry's share price.  Achilles states that they will use any short term drop in the share price to bolster their Blackberry position.