BlackBerry Limited (NYSE:BB) shareholders have been on a wild ride over the past year. The company's shares suffered a brutal loss over the first 10 months of 2013, losing roughly two-thirds of their value heading into Thanksgiving -- but something changed after everyone tucked away the turkey and polished off the last pie. Since the holiday season began in earnest, BlackBerry shares have gained two-thirds despite little in the way of genuine good news. Since last week, the stock has been on a tear, almost entirely because of a fairly modest Department of Defense report that noted support for "80,000 BlackBerry phones."
Let's keep in mind that it was only one month ago that BlackBerry took a $1.6 billion pre-tax write-off for its third quarter on unsold BlackBerry 10 phones, and it was widely reported in October that the company could have a hoard of up to 10 million unsold BlackBerry 10s. What's 80,000 phones compared to that? About an eighth of a percent. That quarter, in which 250 million smartphones were sold around the world, BlackBerry sold 4.4 million -- half that of latecomer Microsoft.
The government's going to have to do a lot more to pull BlackBerry back up, since 80,000 new smartphone sales would only get the company about half a percent further back to its quarterly high-water mark of 14.9 million phone sales, set over two years ago and now rather out of reach:
According to the U.S. Office of Personnel Management, the federal government had a workforce of 4.4 million people in 2011. State-level government employed another 3.8 million people full-time, and local government employees numbered 10.8 million people -- with the vast majority employed in education. There's clearly no need for many government employees to be given work-issued smartphones. Let's assume that perhaps 10% to 20% of these employees work jobs where information security is important enough for the government to hand out secured smartphones, as the Department of Defense has. That gives BlackBerry anywhere from 1.9 million to 3.8 million new sales, which are likely to be spread out over multiple quarters as the slow gears of government procurement grind into action. It's a start, but it's simply not enough.
What's left for BlackBerry, then? Barring a miraculous reversal in consumer attitudes toward the company's phones, government business seems like a much better long-term option. There are plenty of angles to take in government communications contracting that might play to the company's strengths, should BlackBerry decide to develop new products beyond its existing smartphone lineup. Two of the largest government communications-equipment contractors, Harris (NYSE:HRS) and Motorola Solutions (NYSE:MSI) show the relative stability of this market, but they don't exactly offer any reason for BlackBerry shareholders to start cheering:
Harris presently trades at a P/E of 23.9, while Motorola boasts a more modest P/E of 16.4. To reach the midpoint of these two valuations -- a P/E of roughly 20.2 -- while sustaining its present market cap, BlackBerry would have to earn about $260 million in its upcoming fiscal year. That certainly seems reasonable, as it implies a much lower profit margin (3%) than either Harris' (6%) or Motorola's (13%). Of course, we have to stretch our assumptions pretty far to believe that a government that's been in belt-tightening mode for years would suddenly find the resources to sustain Harris, Motorola, and BlackBerry at their present (or higher) levels of revenue.
BlackBerry could find its way again, as a much smaller company than it once was, by catering to government needs with secure communications solutions. However, it seems ridiculous to expect the company to ever see substantial growth again if its primary customers are going to be government purchasing agents. In five years -- and this includes the immediate post-financial-crisis rebound period -- Harris' government-driven revenue has grown just 14%. That barely exceeds inflation growth of 10% during the same period. There might eventually reasons for speculators in BlackBerry's beaten-down stock to cheer, but government support isn't one of them.