An Asset-Based Valuation Of BlackBerry

Aug.15.14 | About: BlackBerry Ltd. (BBRY)

Summary

Asset-based valuation is a useful measure to look at distressed companies with the potential to be turned around, and can be used to compare intrinsic value vs. stock price.

If there was an immediate sale of BlackBerry assets, what would it be worth? Special focus on intangible asset valuation is presented.

The hypothesis presented and defended here is that BlackBerry is significantly undervalued at current levels based on a simple analysis of its balance sheet.

Assumptions/Definitions for Analysis:

For the purposes of this asset-based valuation, we assume that there is no value to the continued revenues from hardware or software -- i.e., the analysis assumes that they pay all their dues and evaluates what would be left in assets in dollar value (as if there was a fire sale today).

Conservative Valuation (NCAVPS) = (Current Assets - Total Liabilities)/total outstanding shares

Aggressive Valuation (Book Value) = (Total Assets - Total Liabilities)/total outstanding shares

Intangible assets in the case of BlackBerry (NASDAQ:BBRY) are assumed to be the brand name, value of patents, and value of software development that creates new streams of revenues such as BES 12, Nanthealth integration, etc. The Secusmart purchase will also have the potential to add to intangible assets, as there will be a difference between the price BBRY paid vs. the value of the actual assets that are received into the balance sheet.

Analysis:

The table below was created using financial statements from prior quarters, which are available here.

Aug. 31 2013

Nov. 30 2013

March 1 2014

May 1 2014

Cash and cash equivalents

1181

2274

1579

1710

Short-term investments

1163

788

950

975

Accounts receivable, net

1743

1242

972

745

Other receivables

223

151

152

225

Inventories

941

254

244

107

Income taxes receivable

462

299

373

75

Other current assets

696

623

505

395

Deferred income tax asset

128

31

73

48

Assets held for sale

122

192

99

76

Total Current Assets

6659

5854

4947

4356

Long-term investments

225

130

129

333

Restricted Cash

0

69

Property, plant and equipment, net

2119

1070

1037

626

Intangible assets, net

3505

1342

1439

1432

Total Assets

12508

8396

7552

6816

Total Liabilities

4084

4365

3927

3143

Shares Outstanding

526

526

526

526

Conservative (Current Assets - Total Liabilities)

2575.00

1489.00

1020.00

1213.00

NCAVPS

4.90

2.83

1.94

2.31

Aggressive (Total Assets - Total Liabilities)

8424.00

4031.00

3625.00

3673.00

Book value

16.02

7.66

6.89

6.98

Click to enlarge

Findings:

An aggressive approach to valuation puts BBRY book value today at $6.98, while a very conservative view yields $2.31. Between Dec. 5 and 11, 2013, an excellent buying opportunity was presented as the share price dipped below $6 (while the conservative value of BBRY was $4.95 and the aggressive value was $16.20). Note that I used this thesis as an entry point to get into BBRY.

A further review of the trend on the balance sheet reveals more details that are deemed positive. After falling for several quarters in a row, the level of cash seems to have stabilized. This is consistent with what the management team has shared on the last earnings call. The inventory levels are declining. Having higher levels of inventory in the assets is really an anchor for the stock because unsold inventory of hardware is considered as an asset, although it can be fairly argued that there is little value to old phones that did not catch the attention of the public in the first place. The initial fall in the inventory line item (in December 2013) had more to do with writedowns rather than an actual increase in sales. However, we've seen a continued fall in inventory levels in recent quarters, which could be signs that they are actually able to sell the devices.

The benefits due to income tax refunds are also factored in, which is good as it allows BBRY more capital to restructure. PPE has gone down and released cash into current assets, which is very good (reflective of the sales of real estate holdings in prior quarters leading to more liquidity). The value of intangibles has gone down significantly, which is good and bad. It is good if we assume that the patents are more fairly valued. It is bad because this indirectly reflects fewer investments in R&D. I expect this to remain the same or grow over time as they continue to make investments (not a bad thing), but am required to keep an eye on this value as a percentage of total assets. NCAVPS and book value are slowly ticking up, which is very positive.

Finally, before the release of December earnings, BBRY was in a bad place and the absolute worst was expected as an outcome. Hence, it would be fair to use the conservative value to compare the share price during that time period. However, since that quarter, BBRY has made several positive strides in the right direction and does not look like it is going out of business. Therefore, one can use the aggressive value as a bottom line price for the stock.

Analysis of Intangibles:

I analyzed the value of intangible assets separately as well (since these are mostly invisible assets in the balance sheet and it is difficult to accurately estimate true value). The three columns of data here represent the value using the latest balance sheet, but ascribing no value or 50% value to the intangibles.

Assets

100% ITA

0% ITA

50% ITA

Cash and cash equivalents

1710

1710

1710

Short-term investments

975

975

975

Accounts receivable, net

745

745

745

Other receivables

225

225

225

Inventories

107

107

107

Income taxes receivable

75

75

75

Other current assets

395

395

395

Deferred income tax asset

48

48

48

Assets held for sale

76

76

76

Total Current Assets

4356

4356

4356

Long-term investments

333

333

333

Restricted Cash

69

69

69

Property, plant and equipment, net

626

626

626

Intangible assets, net

1432

0

716

Total Assets

6816

5384

6100

Total Liabilities

3143

3143

3143

Shares Outstanding

526

526

526

Conservative (Current Assets - Total Liabilities)

1213.00

1213.00

1213.00

NCAVPS

2.31

2.31

2.31

Aggressive (Total Assets - Total Liabilities)

3673.00

2241.00

2957.00

Book Value

6.98

4.26

5.62

Click to enlarge

Findings:

Intangibles (as a percentage of total assets) have decreased from 28% to 21%. The bottom-line price of the stock today (with no consideration to earnings or earning potential) is $4.26 (if we assume $0 valuation for intangibles), with the high at $6.98 if you value the intangibles as presented. Intangibles are not solely made up of the patents, but also include some expenses incurred to build future releases. So unless you consider that all the investment into building software or new devices (which are potential future revenue streams) will be worth nothing, then you cannot realistically value the intangibles at no value.

If you take the current share price of BBRY (~$9.40) and remove the asset value (~$7), the value of the stock price reflects only ~$1.3B in additional value for revenue and growth. If you consider BBRY is worth 2x sales at this valuation, it seems that the market is assuming revenues are going to $500M or less per year going forward. This is where I believe the analysis clearly points to the fact that BBRY is undervalued compared to its intrinsic value at current levels.

What does BBRY have to do to reach a significantly higher share price?

  • Not burn any more assets. (John Chen has commented that they will not let the cash levels fall below $2.5B) and losses are reducing QOQ rapidly, which will reduce and eliminate cash burn quickly.
  • Turn cash flow positive (which starts adding to the asset base). BBRY has a stated goal to achieve this by the end of this FY.
  • Hold revenues steady around $1B a quarter and grow from there. This is not clear and therefore a huge risk at this point -- i.e., it is possible that their revenues may decline further, but they become profitable (through recently concluded cost cutting measures). However, it is important to note that profitable companies that are growing sell for 3-5x sales. So even if revenues dip to $500M per quarter, the company should be valued at about $6-10B once they turn positive and start growing.

Conclusion:

BBRY is currently not valued as if it is going out of business. However, the Street still has a very low valuation for BBRY. The current share price is indicative of the expectation of a continued dramatic fall in top-line revenues or some major negative event. I am a continued investor at these levels of the share price and expect this to go much higher based on further positive news from BBRY on several fronts in the upcoming quarters.

Disclosure: The author is long AAPL, BBRY. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am long BBRY since I took a position in late December 2013. I have added to my position over the past few months and I used this analysis as one aspect for my investment into BBRY. This is an investment thesis and is meant to invite dissenting opinions. Therefore it should not be used as a sole basis for investing into BBRY or any other stock.