by Charles Sizemore | January 27, 2014 6:00 am
Though it’s down big over the last two days, BlackBerry (BBRY) is actually one of the best-performing stocks of 2014, up nearly 30% since the beginning of the year.
When a stock gets as beaten down as BBRY stock has become in recent years, it doesn’t take too much to generate a rally. News that the U.S. Pentagon would have 80,000 BlackBerry devices on its network by the end of 2014 sent shares up more than 10% on the hopes that maybe — just maybe — BlackBerry’s devices had a future. Forget for a moment that Apple (AAPL) sold an estimated 50 million iPhones last quarter and Nokia (NOK) sold more than 8 million Lumia Windows Phones.
But as it turned out, the Pentagon wasn’t planning on buying 80,000 new BlackBerry handsets. Most of those devices were existing phones carried by Pentagon personnel. Oops.
So, what is going on with BlackBerry, and what should we expect from BBRY stock?
To start, I will tip my hat to interim CEO John Chen. Chen inherited the impossible task of saving a company that the previous CEOs almost seem to have gone out of their way to destroy through a combination of denial and arrogance, and he’s making a herculean effort.
Chen appears to have accepted that BlackBerry’s consumer handset business is dead, outsourcing it to Taiwan’s Foxconn, and is focusing his efforts instead on developing enterprise software and services.
Chen is also attempting to raise about $300 million in desperately-needed cash by selling off a large chunk of BlackBerry’s Canadian real estate. For BBRY stock bulls that have long viewed the company as an asset play, this is the first step to unlocking the company’s underlying value.
Between BlackBerry’s cash, the market value of its patents and real estate (both of which are likely worth more than their accounting values) and the value of its software and services businesses, the company’s net assets could be worth a lot more than the $7.78 in reported book value.
There are any number of legitimate reasons for a company to sell its real estate. A sale and leaseback arrangement with a REIT can be a cheap source of capital, and there are potential tax benefits as well. And in the age of shareholder activism, managers are expected to unlock hidden sources of value.
But in BlackBerry’s case, it reeks of desperation. Selling off assets to keep the lights on is not a viable long-term strategy for BBRY stock.
And while I support Chen in his move to transform BlackBerry into a software and services company, I think it’s far more likely that the company bleeds to death before it gets there. As BlackBerry users continue to replace their aging devices with iPhones, Androids and even Windows Phones, BBRY is hemorrhaging subscribers … which drastically cuts into subscriber fees.
So, where does that leave BBRY stock investors?
Let’s look at the numbers. BBRY has $3.1 billion in cash as of the most recent quarter. Let’s be generous and say that real estate sales could add an additional $400 million. That gives BlackBerry about $3.5 billion in cash.
Well, BBRY lost $5.4 billion over the past twelve months. Now, to be fair, BlackBerry has large depreciation expenses, write-downs, and other assorted non-cash expenses, and the company will need to make less in the way of capital expenditures now that Foxconn is taking over what is left of the handset business. So the company can probably limp along longer than these numbers suggest.
But given the long uphill slog the company faces, do you really feel comfortable investing real money in BBRY stock?
If you think BBRY has value as an asset liquidation pay, forget about BBRY stock and consider the company’s bonds instead. If the event of the company’s failure — which is something I expect — you will be first in line during the liquidation process.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Check out his new premium service, Macro Trend Investor, which includes a free copy of his e-book, The New Megatrend Investor: The Ultimate Buy-and-Hold Strategy That Will Make You Rich.
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