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Are the black days over for the Canadian mobile maker ?

Jan 31, 2014 at 11:59PM

BlackBerry (NASDAQ:BBRY), the Ontario-based smartphone maker, revolutionized the market by introducing the concept of on-the-go-mail. In recent years, it has lost business to Apple's iPhone and Google's Android devices. As smartphone sales shriveled, BlackBerry reported a loss of $4.4 billion in the last quarter. The company tried to sell itself, but there were no takers.

Almost three months into his tenure, BlackBerry CEO John Chen is implementing a slew of measures to stop the fall in performance. The Wall Street pundits who made BlackBerry a ubiquitous product have left no stone unturned to punish the company's stock. The share price has fallen to $5.44 from its peak of $18.32. This marks a decline of almost 60% over the last year.

SOURCE: www.bloomberg.com

Since the announcement of its quarterly loss in November, there has been strong strategic intent to revitalize the company.

The Foxconn effect
In December 2013, BlackBerry entered into a deal with Foxconn, an Indonesian iPhone assembler. The deal with Foxconn will help BlackBerry on multiple footings:

  • It provides BlackBerry with the opportunity to enter Indonesia, the fourth most populated country in the world.
  • Foxconn is the world's largest electronic contracts manufacturer. This provides BlackBerry with the advantage of scale and supplier negotiation, which the company previously lacked.
  • BlackBerry will not have to make any upfront payments to Foxconn for components used in the devices. Moreover, any unsold inventory will be taken care of by Foxconn.
  • In conjunction with Foxconn, BlackBerry is to launch a low-cost 3G model based on the BlackBerry 10 software. The target market is Indonesia and it could be rolled out by April. BlackBerry is not currently present in this segment. The model will allow BlackBerry to tap the low per capita Indonesian market.

Divesting assets in Canada
The company has recently announced its plan to divest real estate holdings in Canada. This decision will strengthen the balance sheet of the organisation. BlackBerry is looking to divest assets strategically by using a sale-leaseback model. Leasing will bring down costs substantially. New to the mobile industry, the sale and leaseback model is used to great effect by airline companies.

John Chen, BlackBerry's new chief executive, in a statement said:

"This initiative will further enhance BlackBerry's financial flexibility and will provide additional resources to support our operations as our business continues to evolve."

This move is possible due to the strategic tie up with Foxconn, which allows the organization to be more flexible. BlackBerry now has to manage only the software part of the business.

Niche player
BlackBerry posted billions in losses as its latest devices sold poorly, but it continues to maintain a loyal niche of customers who prefer using a physical keyboard. Chen is motivated to focus on the key proposition of BlackBerry, keyboard-based devices. The growth for this market might be low, but it can still be a potential revenue driver. Moreover, the developing markets are yet to be tapped. In India, where it was introduced a few years ago, sales surged in the initial years.

Recently, a Citron Research note has issued a $15 target for BlackBerry based on strategic decisions by the Canadian smartphone maker. The comparison below will illustrate the performance of BlackBerry in greater detail.

Foolish insights
Over the last year, the stock has plunged almost 60%. On the other hand, the company's major competitors, Apple and Samsung, have provided a return of 7% and -12%, respectively. But, a comparison of the stock performance over the last month yields an entirely different picture.

SOURCE: www.bloomberg.com

It is unfair to evaluate the future potential for BlackBerry based on P/E ratio. The performance can be evaluated by comparing the company's EV/EBITDA ratio against its peers. Details of the other companies in the sector are given in the chart below:

BlackBerry's expected EV/EBITDA ratio is 23.68 for the next 12 months. This is significantly higher than the median of its peer group, 5.99. The ratio also shows that BlackBerry is expected to outperform Apple and Samsung.

Foolish bottom line
The table below shows the cost of goods sold as a percentage of total sales for that quarter. Rising expenses, without commensurate growth in prices, was a key factor for the loss. The outsourcing of production to Foxconn will bring expenses down sharply and increase the gross margin for BlackBerry. This will lead to stronger results in coming quarters.

 30-Nov-1228-Feb-1331-May-1331-Aug-1330-Nov-13
Sales (in billions) $2.69 $2.68 $3.14 $1.64 $1.24
COGS (in billions) $1.5 $1.39 $1.85 $1.82 $2.31
COGS (% of sales) 56% %52 59% 111% 186%

Growth prospects seem good, with focus back on the company's core competency of manufacturing physical keyboard-based devices.

The future potential of BlackBerry, in terms of higher margins when amalgamated with the sheer size of its balance sheet, makes it an attractive stock. The inability to find a buyer may turn out to be a blessing in disguise for the Canadian phone maker.

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Fool contributor Satyam Moda has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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