Is the Worst Priced Into BlackBerry?

In the late 1960s, a junior professor at NYU, Edward Altman, published a formula that would change finance: the Altman Z-score. Altman researched nearly 70 bankrupt manufacturing companies' financial statements pre-bankruptcy to determine what these companies had in common. This research gave rise to an easy-to-use equation that could predict bankruptcy.

Altman's Z-score has since been modified to address sector specificity and accounting changes, but the original version is still utilized by investors, professors, and business students alike to predict a company's chance of default. Considering that a bankruptcy is tremendously destructive to value, it is imperative to factor this scenario into your forward-looking analysis.

With BlackBerry's (NASDAQ: BBRY  ) admission that it needs help by forming a strategic committee to "explore strategic alternatives to enhance value and increase scale in order to accelerate BlackBerry 10 deployment," it's a good time to visit its Z-score.

What's in a Z-score?
The Altman Z-score uses income statement and balance sheet line items in the following equation:

Source: Computerized Investing.

Below are the unweighted calculations of each category and the final weighted Z-score for the last 12 months, 2013, and 2012.

While no formula is perfect, Altman's original work predicted bankruptcy roughly 80%-90% of the time. You can see that BlackBerry has entered the "gray area." However, the trend should be a reason for concern. Falling sales and EBIT have led to a Z-score ~30% lower than 2012.

What's bruising BlackBerry?
Techies are a fickle bunch. What is cool and "in" one year, quickly fades with new entrants, updates, and iterations. BlackBerry never quite caught on to this fact. Anecdotally, it was more concerned with a full-sized keyboard than developing a robust suite of apps to bolster its ecosystem. Its myopic focus on hardware and handsets allowed competitors like Apple (NASDAQ: AAPL  ) and Google (NASDAQ: GOOGL  ) to create or partner with handset creators to produce stronger, more durable ecosystems. As a matter of fact, Apple recorded more revenue from its iTunes/software/services category (4.0 billion) than BlackBerry did in total (3.0 billion) last quarter. Google took a different approach in developing its ecosystem. It decided to partner with handset makers through its Android OS to bolster search in the mobile market -- and it worked. According to comScore, Google's percentage of search was 67% in July, and an eye-opening report from Business Insider Intelligence pegged Google's mobile search market share at 97% in May 2012. Both competitors have established strong moats that may be fatal to BlackBerry.

Where does BlackBerry go from here?
The outlook looks bleak for BlackBerry as it fights back from an awful year where revenues dropped 40% from the previous year. The long-awaited "BlackBerry Saviors," the Z10 and Q10, hit the market with a proverbial thud after delays and missteps. And while many think the company is trading at a "cheap" price-to-book and price-to-tangible book value, that is predicated on a corporate turnaround and return to profitability. Management's strategic committee is a signal that that will not happen soon. Going private, making an acquisition, and participating in a merger are always options. However, "event investing" is an inherently risky proposition. Investors should continue to monitor this company for signs of progress, but stay away from it in the interim.

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Read/Post Comments (8) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On August 21, 2013, at 8:38 PM, Oril wrote:

    What this moron omitted was that companies that have no debt cannot go bankrupt. Even if they wanted to.

    Blackberry not only has no debt on its books, it increased its cash position last quarter to 3.1 billion dollars. Not bad for a company that is supposed to be losing money. Management is doing something right.

  • Report this Comment On August 21, 2013, at 9:30 PM, HelpIsHere wrote:

    And to think their Q over Q is up in unit sales and revenues. Why do we keep getting this nonsense?

  • Report this Comment On August 22, 2013, at 4:33 AM, rapag wrote:

    pls. commentators, relax! It won't help the company to insult the author. Actually, the result stated isn't even that bad. Even BBRY longs will have to admit that things aren't going so well right now. But this will hopefully change. Not to forget, apart from the smart-phone-business, they have potentially very valuable assets, for example QNX and Certicom, in which big players could be very interested.

  • Report this Comment On August 22, 2013, at 11:59 AM, TMFJCar wrote:

    @Oril,

    As the author, I appreciate your feedback! You are right that there is no debt in the form of bonds on its books. However, an alarming trend is the growth in accounts payable (those people are creditors too). By the way, slowing down payments to vendors and suppliers is a quick way to report an increase in cash.

    Also, you are right about the cash (my numbers are roughly 2.8 billion and I never disputed this fact), but did you notice the receivables dropped by more than the growth in cash quarter over quarter. The formula uses current assets--this is probably a better take on liquidity than just cash. I can make my bank account look really nice if I don't pay any of my bills for six months--but how healthy would my finances really be?

    @HelpisHere

    Thank you as well for your feedback. I agree that revenue did go up Q over Q. However, this quarter included the US release of the Z10 and Q10. You should have expected the revenue to go up--probably more than the 15% it actually did.

    My point here is that BlackBerry cannot continue to function as is. They are in need of an intervention.

    As always, I appreciate all your comments and reading the post.

    Thanks!

    Jamal Carnette

    TMFJCar

  • Report this Comment On August 22, 2013, at 1:10 PM, Oril wrote:

    Actually the way things are shaping up, a company that is more likely to go bankrupt is Apple.

    Declining interest in their products, out of ideas and taking on debt while hiding cash from the taxman is a sure recipe for bankruptcy. iit may take awhile but its glory days are past for sure.

  • Report this Comment On August 22, 2013, at 1:42 PM, TMFJCar wrote:

    Oril,

    It will be interesting going forward. I'm long Apple, but I will admit they don't seem as "cool" as they once were. A big announcement is coming around the corner--and it has rebounded from multi-year lows. It will be interesting to watch!

  • Report this Comment On August 22, 2013, at 3:52 PM, Oril wrote:

    Rebounded from multi year lows. Really?

    Now I know you are full of it. Apple reached its all time high last September and immediately sold off on the day it released a phone that failed to impress.

    Now you are calling the 380 or so multi year lows.

    Apple rebounded for one reason only. Because they are bidding up the shareprice by buying back shares.

    The iPod, iPod touch and iPhone3 were revolutionary. Everything since has been met with a

    yawn. I suspect you more likely invested at the all time highs rather than the recent multi month lows.

    Anyway writing blackberry bashing articles for the fool won't help your cause any.

  • Report this Comment On August 22, 2013, at 4:16 PM, TMFJCar wrote:

    @Oril,

    Yes, I used the term multi-year lows. The last time Apple traded at a price less than 380-385 was in December 2011. So, I counted 2012 and 2013 as multi-year. I think we are really arguing semantics here, but that's just me.

    As far as my investment is concerned, I am an open book--my cost basis is 464.55/share.

    I have no animus toward BlackBerry. Actually, I'd like for them to succeed. Competition (usually) leads to lower prices and more innovation.

    Fool On,

    Jamal Carnette

    TMFJCar

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