BlackBerry (BBRY) and Sandridge (SD) are probably two of the most undervalued companies out there right now. The negative publicity coupled with the short term mindset of the market place has attracted famous and talented investors such as Prem Watsa (CEO of Fairfax Financials, "The Warren Buffett of the North") and Sanjeev Parsad (Founder of Corner Market Capital) to invest in them.
To help investors better understand how these investors are thinking about their investments, I took the opportunity to ask them a few questions during the annual shareholder meeting at Fairfax Financials (FFH.TO) in Toronto.
Prem was nice enough to give me a few minutes in regard to his thoughts on BBRY and SD.
Me: With the departure of Mike Lazardis (Co-Founder of BBRY and former CEO), does your investment thesis still stand from when you first bought into the company?
Prem Watsa: I am really good friends with Mike, and he is a technical genius. He built a $20 billion (in revenue) at its high from nothing. He has now left the company in great hands and Thorsten [Heins, Current CEO of BBRY] has done an amazing job in turning around the company. We think that Mike left the company because he knew that he left it in good hands, and that the team Thorsten has hired will help the turnaround effort. Mike also told me that it felt like leaving his son and letting him get married. He will not sell his shares and continues to support the company.
Me: What's your time horizon on BBRY and when do you plan to sell?
Prem: The turnaround story won't happen overnight, and it's only just getting started. The z10 is attracting nearly 30-40% of other smartphone users, and I think that's unbelievable. Another thing I want you to think of is the kind of market the smartphone business its in. We have nearly 6 billion phones around the world, and only 1 billion of them are smartphones. People are estimating smartphone shipments of 1.6 billion in 2016. If BlackBerry is able to maintain a 5% market share, then you have to roughly sell 80 million smartphones. They shipped 6 million last quarter, 1 million new phones and they are already profitable. We think the fair value is around 40 something and the time horizon is long-term as always, but we feel very confident in the management team.
Me: How do you feel about competition going forward?
Prem: Competition is going to be fierce going forward, I mean you got companies like Apple (AAPL) and Google (GOOG) with the a\Android, but BlackBerry has the security like no other. You can't get the kind of security you want on an iPhone. But we think BlackBerry has its place in the market.
While my discussion with Prem was short and concise, simply from his tone of voice, I can feel the kind of confidence he has in Thorsten and his team. To add on a side note, Prem had a BBRY booth at the annual shareholder meeting, and nearly 50-60% of the smartphone users had a BlackBerry. You can truly feel the excitement being built around the new platform, but the typical response I got from current BB7 users was that they are waiting for the Q10.
I understand that the loyal customer base is still [made up of] keyboard fanatics, but to have this loyal base really brings value at a time when competition is so fierce. The mere fact that there is this huge installed base waiting for a product release could signal the beginning of this turnaround.
Aside from the questions and the research, I've never been more pleased to say that Thorsten and his team are doing the right things, while there are still execution blunders (marketing), the long-term prospects of the company continue to be bright. With a strong industry tailwind, if BlackBerry simply survives to fight another day, it will always have an opportunity to regain market share.
Me: With the recent TPG-Axon proxy fight, how do you feel about the current situation with SD?
Prem: It was unfortunate that TPG had their way in the proxy fight, but that's just the way it goes. We think that Tom ([with whom] we are really good friends with) is an amazing individual. The man grew up living and breathing oil and gas. He helped built two great empires all from nothing. We were really disappointed, because we knew that Tom could realize significant amounts of the assets. While we did disagree a little on the compensation, we think that Tom is great.
Me: So what do you think is going to happen to SD?
Prem: It's unfortunate, but we think that TPG is just going to flip it and sell it. I mean yeah, we are going to make money on this, but we think that if Tom stayed in and grew value into the business, we think it could be worth 20-something a share. And we like natural gas right now, because it's so cheap.
There were more discussed, but the main points always reverted back to Tom Ward being an excellent CEO. The team at Fairfax believes that TPG is just thinking about short-term value, while ignoring the true intrinsic value of the Mississippian Lime Play. Fairfax is also extremely bullish on natural gas and believes that a $6 natural gas price would propel SD to greater profitability.
Sanjeev Parsad of Corner Market Capital:
In addition, I was fortunate to ask Sanjeev Parsad about his investment in SD.
Me: With the recent Chesapeake (CHK) agreement to sell 50%, the per-acre calculation came out to be 2,400. Do you feel that this land sale impacted SD's intrinsic value?
Sanjeev: We don't think the price Chesapeake got for the land was a fair representation of its true values. The price they sold it at was a fire sale price, and we think with the recent divestiture of the Permian sale, which we think was significantly higher than what we expected; SD's balance sheet is solid enough to prevent itself from a fire sale.
Me: What's your take on TPG - Axon, are you supportive of what they are doing?
Sanjeev: We actually encourage and like what TPG is doing with the company. They are cleaning up shop already, and I think we will see a rescheduling of the capital expenditures. At SD, they always believed in work hard, play hard. They were the first ones to get into the Mississippian, but they also have to watch cost. I think what TPG is going to do is slow down the expansion, and focus on the drills with the highest productions while lowering capex. The fact that they lowered board compensation and sold off the airplanes tells me that they are quite serious about this restructure effort.
Me: How do you think SD is going to play out?
Sanjeev: We think the most likely scenario is that TPG is going to sell the company.
After talking to these two successful investors, we can reasonably assume that BBRY and SD aren't doomed. The stories about their demise are overly dramatic and rumors about BBRY's recent returns being higher than sales are overly exaggerated as well. While there were rumors that dedicated BlackBerry users returned the Z10 in anticipation for the Q10, they will still be customers of BlackBerry, and to have this loyal base gives BlackBerry a niche in a depressingly competitive market.
Investors should still conduct their own due diligence when it comes to investing, but I feel that with people as talented as Prem and Sanjeev on your side, the margin of safety is quite high, and investors will be more than compensated to take this risk.
My fair value estimate on BBRY is 20.19. You can read about it more here. Be mindful that this analysis only incorporates what's on the balance sheet and does not consider the potential for future earnings growth.
Devon Shire gives an extremely detailed analysis of SD here.
Additional disclosure: I am long SD through naked puts.