Fairfax Financial (OTCMKTS:FRFHF) is a Canadian financial and insurance conglomerate led by legendary investor Prem Watsa. Watsa has often been called the “Warren Buffett of Canada.” In 2012, the company, which traditionally focuses on value-investing in its insurance portfolio, accumulated a 10% stake in BlackBerry (NYSE:BB), then called Research in Motion. In 2013, Fairfax unsuccessfully attempted to acquire the entire company for $4.7 billion. The deal was abandoned and instead, the company invested $1 billion cash into the company in return for convertible debentures.
Since then, BlackBerry has struggled to become a growth company again, with the performance of BB stock remaining relatively chaotic. Its efforts at becoming relevant in endpoint security, automotive software and other Internet of Things (IoT) applications have been somewhat of a mixed bag.
In 2020, it was rumored that Fairfax would again try to acquire all of BlackBerry, but these rumors were quickly dismissed by the company. As it stands today, after a complicated convertible bond exchange in 2020, Fairfax owns 16.6% of BlackBerry on a fully diluted basis if the debentures owned by Fairfax are converted.
When BB stock was caught up in the Reddit-fueled “meme stock” short squeeze saga, its price hit a high of $25.10 in January 2021. That gave Fairfax an unrealized pre-tax gain of over $1 billion on its position. Always the long-term investor, Fairfax did not sell any shares according to information available at this time.
The Future of BB Stock
With most of the day trading nonsense out of the way, what does the future look like for BlackBerry? I like the fact that the company spends about 25% of revenues on R&D, although much of that pay off is likely quite a ways away in the future.
InvestorPlace.com writers have covered BB quite extensively, both on the bull side:
“BlackBerry isn’t your classic comeback story but the company definitely has a lot going for it. The transition from hardware to software is likely to pay off for the company in the coming years. While I can’t say for sure when these potential gains will come into fruition, I will say that BB stock is a steal at its current price.”
“On Dec. 1, 2020, BlackBerry announced a multi-year global deal with Amazon (NASDAQ:AMZN) to develop BlackBerry’s Intelligent Vehicle Data Platform. Since vehicles are getting an increasing volume of technology and complexity, the partnership should finally pivot BlackBerry towards growth. The platform will let automakers have a way of securely reading vehicle sensor data.”
“Nonetheless, these problems are largely behind BlackBerry, and the company has many strong, positive catalysts, including its partnerships, its current strong IT security products, its ability to sell software and services through connected vehicles, and its likely upcoming big payday from Facebook.”
And on the bear side:
“Personally, I believe BlackBerry has a lot to prove. With the company disappointing in revenue growth over the years combined with its frequent red ink on the net income line, I’m not really sure if analyzing the fundamentals makes sense for an investment like this.”
“Again, I readily give credit where credit is due and I think BlackBerry deserves some credit for even being in the realm of discussion at this point. However, it’s too inconsistent for me to consider it a worthwhile investment.”
My financial take on BB stock is a little more straightforward — BlackBerry has more cash than debt and they should be generating free cash flow going forward. The company likely can’t compete against much larger players like Microsoft (NASDAQ:MSFT), VMWare (NYSE:VMW) and Oracle (NYSE:ORCL). However, its products, services and patents are probably worth more than the enterprise value today of approximately $6 billion.
And who knows, maybe the third time’s the charm for an acquisition by Fairfax. If not them, BB would make a nice tuck-in acquisition for many companies out there that are missing Blackberry’s core competencies.
Fairfax Financials’ Future
And what about Fairfax itself as a holding. BlackBerry is, of course, a tiny story within Fairfax, which has $71 billion in total assets and over $12 billion in cash and investments (over $16 billion when you include short-term bonds). Substantially all of the company’s insurance operations were profitable in 2020 with a combined ratio well below 100, this despite incurring major novel coronavirus losses primarily related to business interruption insurance. Fairfax’s non-insurance companies incurred major losses for the year due to industry concentration in restaurants, retail and travel related operations.
Fairfax’s book value per share at year-end stood at $478.33, well above today’s market price. The dividend yield is 2.44%, which is roughly equal to the 30-year treasury bond at this time. That begs the question would you rather invest in a 30-year treasury bond, or get the same rate from a company that is selling below book value and run by one of the greatest insurance operators and value investors of all time?
Prem Watsa has a decade’s long track of patience and taking advantage of market downturns by scooping up bargains at panic selling prices. And who know, maybe one day he’ll get that $1 billion gain back from BlackBerry at some point.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.