For the last little while, I was really
confused what to make of Blackberry's stock price. The stock has been
going up and down and seems to have no real direction. More
importantly, I wanted to know if the stock price was reflecting the
intrinsic valuation of the firm and if the stock was going to fall
off the edge with no future, or suddenly soar so high that I could
not enter the play.
I finally bit the bullet and decided to
do a Discounted Cash Flow Analysis based on the latest sales figures
projected into the future.
I found that at the surface the stock seems fully priced, perhaps even over-valued, but if one understands that the latest quarter only reported 35 calendar days of BB 10 sales instead of a typical 90 days, the stock seems to have some hope.
Some History
The first thing to recall is that the
firm Research In Motion (Blackberry) is trying to make a recovery
into the market through a revamped product. While having all the
elements of a competing platform, the adoption is slow and not very
consistent across markets. I am interpreting these slow adoption
rates to imply that there will be marginal increase in revenue
growth, and the topline numbers will grow steadily but will not upset Apple and Samsung's "apple cart" any time soon.
Looking at a last few years
In the following table, we look at the
sales figures in the past few years. These will help us in creating a
baseline for future projections.
Historic
Values
|
2010
|
2011
|
2012
|
|
|
|
|
Revenue
|
$19,907,000
|
$18,423,000
|
$11,073,000
|
Cost
of Goods Sold
|
$11,082,000
|
$11,848,000
|
$7,639,000
|
Operating
Expense
|
$4,189,000
|
$5,078,000
|
$4,669,000
|
Total
Other Income/ Expenses Net
|
$8,000
|
$21,000
|
$15,000
|
EBIT
|
$4,644,000
|
$1,518,000
|
-$1,220,000
|
Income
Tax Expense
|
$1,233,000
|
$347,000
|
-$592,000
|
Historic
Tax rate
|
26.55%
|
22.86%
|
NA
|
Depreciation
|
$927,000
|
$1,523,000
|
$1,918,000
|
From the above table, we can make the
following important deductions
Cost of Goods Sold is roughly
between 55 to 65% of the revenue.
Operating Expense is relatively
constant. This may not be a good thing as the high fixed costs are
making the EBIT negative in the latest financial year.
When making positive revenue
numbers, Income tax rate is between 22.5 to 26.5%
Depreciation hovers around $1M the
next year of a product launch and we can assume that it doubles
every 3 years as old platforms and technologies become obsolete and
have to be replaced.
Looking at last few quarters
Looking at the last few quarters also
shows some interesting trends. Here is the table.
In millions
|
|
|
|
|
|
|
Jun
2, 2012
|
Sep
1, 2012
|
Dec
1, 2012
|
Mar
2, 2013
|
Jun
1, 2013
|
North
America
|
$794
|
$868
|
$647
|
$587
|
$800
|
Europe,
Middle East & Africa
|
$1,028
|
$1,087
|
$1,160
|
$1,227
|
$1,100
|
Latin
America
|
$580
|
$520
|
$535
|
$479
|
$575
|
Asia
Pacific
|
$405
|
$386
|
$385
|
$385
|
$400
|
Total
Quarterly Revenue
|
$2,807.00
|
$2,861.00
|
$2,727.00
|
$2,678.00
|
$2,875.00
|
In the above table, I have added the
next quarter (June 2013) as an estimate. I will use this quarter to project the
numbers for the remaining year. As you can see, I am assuming North
America numbers will pick up, Europe Middle East & Africa will
cool down and the remaining will grow slightly. This is looking not
just at the immediate quarter but also the previous quarters. The most important thing to state is that March 2nd 2013 earnings report was for the period that included a product launch on January last week.
Looking Ahead
Now the task of looking ahead. To make
projections, I had to make some assumptions. These assumptions are as
follows:
Terminal Value of the stock is
reached in Year 5
Revenue increases 10% Year over
Year till Year 5
Cost of Revenue is 62% of the
Revenue
Operating expense reduces by 5%
Year over Year till Year 3 when it becomes 20% more
Annual Depreciation is $1M except
Year 3 when it is $2M
Tax rate is 25% each year
Most importantly, the annual
revenue is 6 times the latest quarterly revenue. More about this
later.
Beta is 1.59
Debt Financing Rate is 4.8%
Equity Financing Rate is 6.3%
Terminal Value estimates
Growth becomes 2% after Year 5
Alternatively, stock price
stabilizes at 9.5 P/E based on Year 5 revenue.
Actual Terminal value was mid
point between these 2 estimates
|
|
Year
1
|
Year
2
|
Year
3
|
Year
4
|
Year
5
|
|
FY
2012-2013
|
FY
2013-2014
|
FY
2014-2015
|
FY
2015-2016
|
FY
2016-2017
|
FY
2017-2018
|
Quarterly
Factor
|
|
4
|
|
|
|
|
Annual
Revenue
|
$11,073,000
|
$10,712,000.00
|
$11,783,200.00
|
$12,961,520.00
|
$14,257,672.00
|
$15,683,439.20
|
Cost
of Revenue
|
$7,639,000
|
$6,628,244
|
$7,291,068
|
$8,020,175
|
$8,822,192
|
$9,704,412
|
Operating
Expense
|
$4,669,000
|
$4,435,550.00
|
$4,213,772.50
|
$5,056,527.00
|
$4,803,700.65
|
$4,563,515.62
|
Total
Other Income/ Expenses Net
|
$15,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
Total
costs
|
$12,308,000
|
$11,063,794
|
$11,504,841
|
$13,076,702
|
$13,625,893
|
$14,267,927
|
Net
Income
|
-$646,000
|
-$351,793.79
|
$278,359.33
|
-$115,181.99
|
$631,778.86
|
$1,415,511.85
|
Depreciation
|
$1,918,000
|
$1,000,000
|
$1,000,000
|
$2,000,000.00
|
$1,000,000.00
|
$1,000,000.00
|
EBIT
|
-$1,220,000
|
-$331,794
|
$298,359
|
-$95,182
|
$651,779
|
$1,435,512
|
EBITDA
|
$698,000
|
$668,206
|
$1,298,359
|
$1,904,818
|
$1,651,779
|
$2,435,512
|
Tax
rate
|
0.00%
|
25.00%
|
25.00%
|
25.00%
|
25.00%
|
25.00%
|
EBITDA
X (1 – Tax rate)
|
$698,000
|
$501,155
|
$973,769
|
$1,428,614
|
$1,238,834
|
$1,826,634
|
Capital
Expenditure
|
$413,000
|
$500,000
|
$500,000
|
$1,000,000
|
$500,000
|
$500,000
|
Delta
Net Working Capital
|
$0
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
$100,000
|
Free
Cash Flow
|
$2,203,000
|
$901,155
|
$1,373,769
|
$2,328,614
|
$1,638,834
|
$2,226,634
|
Beta
|
1.59
|
|
|
|
|
|
Debt
Financing Rate
|
4.80%
|
|
|
|
|
|
Equity
Financing Rate
|
6.30%
|
|
|
|
|
|
Discount
Rate
|
14.82%
|
|
|
|
|
|
Assumed
Discount Rate
|
15.00%
|
|
|
|
|
|
Number
of outstanding shares
|
524,159,844
|
|
|
|
|
|
EPS
|
$4.20
|
|
|
|
|
|
NPV@15%
of FCF's Year 1 to Year 5
|
6,609,148
|
|
|
|
|
|
Terminal
Value Estimates
|
|
|
|
|
|
|
Perpetual
Growth at 2%
|
$17,127,952.97
|
|
|
|
|
|
Assumed
PE of 9.5
|
$13,637,362.56
|
|
|
|
|
|
Assumed
Terminal Value
|
$15,382,652
|
|
|
|
|
|
PV
of Terminal Value
|
$7,645,181
|
|
|
|
|
|
Current
Value Per Share
|
$14.59
|
|
|
|
|
|
Projected
Value Per Share
|
$12.61
|
|
|
|
|
|
This predicts that the current
intrinsic value of the share is $14.59 and long term projected value
is $12.61.
The mystery of the latest quarter
However, the big revelation is that the
latest quarter numbers actually were based on only 35 days of
results for the BB10 launch. If we assume, that the actual revenue will be more than 4
times the numbers reported for the latest quarter, the stock price
looks quite undervalued. Here is the results of assuming different
factor rates.
Assuming
annual revenue factor from latest quarter
|
4X
|
6X
|
8X
|
10X
|
12X
|
15X
|
Stock
price
|
$13
|
$23
|
$33
|
$43
|
$53
|
$73
|
My personal take is that over the next few quarters the annual numbers will be 5 to 6 times the numbers reported for the latest quarter. The next quarter will reveal the actual
trend.
