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Blackberry Valuation Study: What is $BBRY worth?

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Update (25-Sept-2013): Fairfax came in with a sweetheart $9 bid for BBRY not 4 trading hours after they announced horrible results and material staff reduction as part of broad restructuring.  As suggested below, BBRY is worth $7-9. Thanks to Prem Watsa et al for validating the following fundamental analysis.

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Having lived in Southern Ontario my entire life, and worked briefly near Waterloo-area Blackberry (formerly RIM) headquarters I am very frequently asked my opinion on the stock price.  Mostly I tell people to ignore it, and sell if they own, but more on that later.

Throughout the agonizing drop from pinnacle of the mobile phone pantheon BBRY has always been top of mind.  The goal of this post is to KISS and answer the question in the title: what is the stock worth?

During early 2010 the nascent post-GFC recovery pushed shares of BBRY upwards from ~$40 bottom to reach $60-80.  After this run I started advocating employees of RIM, and other holders of the shares, divest themselves in favour of the iPhone-producing Apple $AAPL (for the risk takers) or cash (for those less apt to stay in the market).  Since then, as we all know, RIM dumped their founders Jim & Jim, overhauled their branding, and oh yea, watched their stock price drop ceaselessly from $80 to $10.

What is the true value of BBRY shares?

To find the rock-bottom valuation we’ll use tangible book value (TBV).  This strips out many assumptions that go into valuing a business as a going concern by assuming the worst: BBRY will immediately enter bankruptcy, never sell another device, or collect another nickel from subscribers (which is not going to happen anytime soon).

Using this hypothetical scenario gives us the most basic and reliable valuation.  By adding together the Co’s real assets and subtracting their long-term debt we find BBRY tangible book value (TBV) is roughly $7.

To find this value we add two their 2 core assets: cash + real estate ($5.86 + $1.31 = $7.17) and then subtract LT debt ($0) to arrive at TBV of $7.17.  This is the theoretical minimum price at which shares should trade around.

As a value investor, it would thus be prudent to buy BBRY if and only if it trades below $6, which will likely to occur IMO sometime in tax-loss season (Nov/Dec 2013).

What about Book Value?

Plain old book value (BV) incorporates some assumptions into our valuation, specifically intangible assets and cash flows.  The resultant mixture of data muddies the waters as the value of these elements is less clear and reliable.  Adding in these murky elements has ramification on the range of potential valuations and should evoke more scrupulous analysis of the figures below.

Why Bother?

Some investors would stop here and proclaim that value is only found below $6 per share and that anything higher is rip off since BBRY is a complete disaster and they have no chance to survive since their sales are about to vapourize.  Maybe so.  However valuing BBRY as going concern is only fair given they have millions of customers which generate +$3 Billion in sales every 3 months!  It’s not the struggling coffee shop in Miramichi, New Brunswick but a massive global enterprise.

Taking a fair outlook on their future business prospects by assuming a significant, but not catastrophic, decline in operational cash flow will boost the value per share.  Additionally,  we must add the other intangible assets like patents & intellectual property to round out our KISS study.

Starting with the latter, intellectual property & patents where some analysts have suggested BBRY owns $4.00 per share worth of assets.  Adding $4 to TBV makes a potential stock price of $10-$11 seem reasonable.  However, over the course of the past 6 weeks shares have traded for ~$9 (ignoring the huge leg up over last few days).  This is our first of 2 example of the market doubting BBRY through ‘discounting’.  By discounting their intangible assets (and cash flow, as well see below), the market doesn’t view the patents value as $4, but more like $9-$7 (Stock Price -TBV) = $2.

You might ask, “Why is the market doubting the patent values and not the cash or RE value?” and the answer is simple: assets which are easy to value (cash & RE) are discounted LESS than that which is complex or valued less reliably (patents etc).  We can be fairly confident that TBV is more static and reliable than BV for this reason.

Furthermore, the market is fully discounting cash flow that BBRY generates. Analysts from CIBC modelling their cash flows over the next 5 years and suggest — even with considerable drop off in sales and subscribers — BBRY generates $2 bil/year, which adds $10 of value to each share.  The market, however, is calling BS and is valuing BBRY operations at $0.  Using these optimistic assumptions, some firms have $20 price targets.

This is a mighty kick in the groin to a former titan of the mobile industry, but investors might view this as a sign that market is wrong and has undervalued BBRY since you can buy the assets of the business and get the cash flow for free.

Note the previous recommendation of staying away until BBRY sells for around $6 still hold to ensure margin of safety and reasonable rate of return to compensate for risk.  Will it ever regain former glory?  No, at least this author is highly doubtful.  Will it reach $6 per share or less?  Yes, I believe it will before Xmas this year, but what the hell do I know?

So, what do you think $BBRY is worth?

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Two Ways to View Canadian Housing: Bubble & Bubbler

Canadas’ smartest number-crunchers have long known that residential housing prices are inflated.  From June 2011:

“Canada is losing its penchant for wealth accumulation…In late 2006 Canada’s debt-to-income ratio and debt-to-assets ratios stood at 121.3% and 16.2% respectively. These ratios have gradually risen to 153% and 20%.  In more absolute terms, total household debt has risen from $1 trillion in 2006 to $1.51 trillion by 2011.” (3,5)

The Anecdote Cuts Deep

Garth Turner (1) laments the greater fool who waits in a frigid parking lot overnight to sign purchase agreements for maddeningly overpriced, unformed slabs of land and arranged bricks for over $700,000CAD (roughly 10-15x after-tax household income for this area.(2))

“…on lots as skinny as 32ft, in a distant suburb of Toronto.  The event  was remarkable for the thronging, the pushing, the instant buying and the palpable desperation. “It was like everybody was crazy anxious when they got in,” one player told me. “Little women were bodychecking me to get a red dot stuck on a map square. Unbelievable.””

Ravenous buyers are readily exchanging real dollars (mostly borrowed against future earnings) for homes that are merely blueprints.  The attitude of the mob has shifted into a dubious phase in Canada: euphoria.  At their own peril potential home owners are signing away years of their life on a whim, lifted by a cresting wave of loose credit in Canada.

Mr. Turner evokes an apt analogy to Canadian horror stories Nortel & Bre-X:

“The crowd comes to a collective decision, and then free will is lost. Almost always, the crowd gets it wrong.”

Of course the prose of journalists may be persuasive, so we look to data courtesy of a Bank of Canada 2012 Special Report (3) and others.

The Pictures are Loud

Levels of household debt in Canada have trended upwards for 30 years.  Most troubling is the vulnerability of First Time buyers who are loaded up with debt.  The mean real debt load of a typical household led by people aged 31-35 is $120,000 up from $75,000 in 1999 (60% increase).  The characteristics of their borrowing is frightening: slim equity margins (5-10% down payments) and tight servicing/coverage ratios (40% pre-tax income allocated to paying housing costs).  Nothing sums up this jargon quiet like:

Plight of the First Time Buyer in Canada

Numerically most of the credit bubble in Canada is due to mortgages used for residential housing, but a large component is ‘cash-flow lending’ where lifestyle is being supported with easy access to cheap credit.  In Canada this credit is most commonly is delivered with potentially toxic consequences via access to Home Equity Lines of Credit (HELOC).  These ‘gateway loans’ are like marijuana: smart and safe when used responsibly, but ruinous if abused by the wrong individuals.

While borrowers claim to be modernizing their homes through renovations, the data untangles the yarn they have spun to lenders.  The BoC estimates about ~4.25% of total consumption is attributable to home equity extraction.  HELOCs are being used for many purposes (shown above), with the smallest quotient being dedicated to renovations and non-financial investment.  Clearly the borrowers are calling an audible at the line of scrimmage: instead of converting home equity into productive assets, consumption and debt consolidation takes the lions share of the past 10-years worth of home equity extraction in Canada.

A Pound of Flesh

What lurks around the corner during any subtle correction in the Canadian economy is pain and financial stress for many households that are over-leveraged, cash-poor and “house-rich”.  Living off home equity is yesteryears’ dream and todays’ nightmare.

Based on 2009+2010 averages, consumption accounts for about 58% of overall Canadian GDP(4).  BoC then calculates that a housing shock could reduce aggregate consumption between 1.3–3.1%, which loosely translates into a GDP drop of 1% for every 10% drop in housing prices.

My advice is to stay nimble and unencumbered by debt for anyone with budget concerns.  There is a small subset of Canadians who can justify purchasing a home in this environment:

  • cash flow strong (1 standard deviation above median household income)
  • expanding their family
  • plan on staying in the same domicile for at least 10 years.

To those unqualified to join this exclusive group, check out the price for rentals.  Sooner than one might think newly-built condo units will be had for a song in a neighbourhood near you.

Follow me on Twitter: @Royal_Arse

References: 

1.  Garth Turner – “Crazy Anxious” http://www.greaterfool.ca/2012/02/22/crazy-anxious/

2.  Statistics Canada – “Average income after tax by economic family types (2005 to 2009)”   http://www40.statcan.gc.ca/l01/cst01/famil21a-eng.htm

3.  Bank of Canada 2012 Special Issue: “Household Finances and Financial Stability” –  www.bankofcanada.ca/2012/02/publications/periodicals/boc-review-winter-2011-2012/

4.  Trading Economics – “Household final consumption expenditure; etc. (% of GDP) in Canada” http://www.tradingeconomics.com/canada/household-final-consumption-expenditure-etc-percent-of-gdp-wb-data.html

5.  CGA (Certified General Accountants) – “A Driving Force No More: Have Canadian Consumers Reached Their Limits?” http://www.cga-canada.org/en-ca/ResearchAndAdvocacy/AreasofInterest/DebtandConsumption/Pages/ca_debt_default.aspx

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