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The aim of this article is to value BlackBerry (BBRY) with the main assumption that BlackBerry 10 will be a success in the coming months. How much is it really worth? That's the question. In this article, I'm going to compute the fair value of the company thanks to the FCFF (free-cash-flow-to-the-firm) valuation model, and I will explain why I'm bullish on the company.

First of all, a lot of people are skeptical about the future success of the company, and it's easy to find negative opinions about it. In last Q4 earnings, information about Z10 sales can be interpreted either way because there are both positive and negative points regarding the Z10 sales. In fact, the company has shipped one million of its new Z10 smartphone according to the last Q4 earnings report. For BlackBerry, it is good news but if you compare with Apple (AAPL) or Samsung (OTC:SSNLF), it is not that good. According to this article, Samsung sold 18 million Galaxy SIII when Apple sold 16.2 million iPhone 4S.

Nevertheless, I don't agree with those who believe BlackBerry is a "has been" company because the new BlackBerry 10 operating system is really innovative with news functions such as BlackBerry Balance and BlackBerry Hub. Moreover, the gross margin profit has increased by 10% to 40% according to last Q4 earnings results, which proves that the company can sell its new devices to the customers, at the price it desires.

The company will also launch the Q10 (second device after the Z10, with a physical keyboard). The Q10 is unique in the market thanks to its physical keyboard. In fact, each new smartphone has touchscreen keyboards except this one. According to this article, physical keyboards are better than touchscreen ones. Personally, I use a BlackBerry Bold 9900 (with physical keyboard) and I cannot imagine changing for a touchscreen, because the physical one is much more practical and comfortable to write with.

The company has another competitive advantage; the security of its devices with its BlackBerry Protect application. In fact, BlackBerry is famous all over the world thanks to its high security level. Nevertheless, the Canadian government has issued a warning about the BlackBerry PIN-to-PIN communication one month ago.

Personally, I think BlackBerry 10 is going to be a success and the company will improve its market share against operating systems such as Android from Google (GOOG) or iOS from Apple. According to this article, there are 10 reasons why BlackBerry 10 is more innovative than iOS 6. In my opinion, the new OS is more innovative than iOS for one simple reason: the user interface. In fact, Apple iOS has the same user interface that it had in the beginning: you touch small icons to open apps and when you want to close them, you touch the "Home button". This user interface isn't as quick and convenient as the new BlackBerry Flow. Nevertheless, Apple is famous for its innovative features such as Siri, which, for the moment, gives the iPhone a strong competitive advantage.

Now, let's talk about the valuation of the company. First of all, I have calculated the WACC (Weighted Average Cost of Capital). Based on 2012 annual report and cost of capital estimations from NYU Stern, the WACC is at 8.33%. Then, I used the cash flow from operations (CFO) and the capital expenditures to calculate the FCFF. Capital expenditures include acquisition of property, plant & equipment, acquisition of intangible assets and business acquisition. Finally, I have discounted the FCFF by the WACC to obtain the present value of FCFF for the coming years.

Notes:

  • My analysis is based on the success of the new BlackBerry 10 operating system.
  • I have estimated a cash flow from operations of $ 3454.5 million in 2013 (increased by 50% thanks to the new BB10 from 2012) and afterwards, I have assumed a continuous increase of 5% for the next three years.
  • Acquisition of property, plant & equipment: I have assumed a continuous increase of 10% for the next fourth years based on 2012 data, even if the acquisition of PP&E has been decreasing for the last three years.
  • Acquisition of IA: I have also assumed a continuous increase of 20% for the next fourth years based on 2012 data.
  • Business acquisition: I have assumed a stable spending of $ 200 million for the next four years, because the company will have to buy startups to stay innovative in the future.
  • Infinite (∞): I assume a constant growth rate of 2% as the US GDP.
  • Based on 2012 data, the WACC is at 8.33%.


(Click to enlarge)

When I apply the FCFF valuation model to BlackBerry, I get a fair value per share of $ 33.51, which represents a potential increasing of 123% based on a price per share of $ 15.03.

Conclusion

According to the FCFF valuation model, the company is undervalued by 123%, which represents a good opportunity to invest in right now in order to take advantage of this market mispricing. Moreover, the company still has a treasury of $ 2654 million (composed by cash and equivalents of $ 1549 million, and short-term investments of $ 1105 million), which represents a Price-to-cash ratio around 4. My personal advice is to buy the stock at this price because the risk/reward is really attractive, even if the share price has improved by more than 100% from the bottom. Z10 sales from the last Q4 earnings results are hopeful with a higher gross margin profit increasing by 10% and the Q10 is going to be launched in the upcoming weeks. This is why I'm bullish on BlackBerry.

Risk involved: If the BB10 is not a success, the company will face difficult times in the mid-term. The stock is highly volatile and bad news can impact negatively its share price on a daily basis. Moreover, BlackBerry competes in a strong competitive market, where Apple is going to release its new iPhone 5S in the coming months. The launch of the new iPhone can impact significantly the future sales of BB10 devices.

Source: BlackBerry Is Highly Undervalued According To The FCFF Valuation Model