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Another Orchestrated Bear Attack On BBRY. Carry On

|Includes: BlackBerry Ltd. (BB)

Another Orchestrated Bear Attack On BBRY. Carry On

Earlier this week, on Tuesday the 18th, Mark Sue of RBC Capital Markets came out with a bullish note on BlackBerry (BBRY) and a target price of $18. The stock quickly rallied to $15 per share.

The very next day, on Wednesday the 19th, Bernstein downgraded BBRY to "Underperform" and sent the stock right back down to $14 a share. Another vocal analyst, James Faucette of Pacific Crest Securities, chimed in "reiterating" his negative outlook on the stock. Mr. Faucette is as dependable as a Swiss timepiece; without fail he is always there to "reiterate" his sell rating whenever BBRY is rallying, as every BBRY follower knows well.

Interestingly enough, the Bernstein analyst, Pierre Ferragu, was bullish with an "Outperform" rating as recently as May 14th. Perhaps that is why the market met his change of heart by such gravitas.

Lets explore the arguments by both Messrs. Sue and Ferragu so as to put everything into context.

Firm, Research Analyst

Bernstein, Pierre Ferragu

RBC Capital Markets, Mark Sue

Date, Nature of Note





Key Points

· Mr. Ferragu cites Google Trends data, and asserts that slowing web searches for BB10 devices is indicative of lower consumer interest and slowing sales

· He writes "BB10 is being tested at only 60% of Fortune 500 companies", an indication that enterprise sales may be lighter than expected

· "Our price target, at 20x 2014 EPS, corresponds to a valuation floor supported by the services business, IP assets and the company's net cash"

· Mr. Sue cites faster than expected channel fills of Z10 and Q10 inventory

· Mid tier growth and demand is strong in Emerging Markets, and the BBRY is positioned well

· "Near term profitability is attainable" with 40% gross margins on BB10 devices

· RBC applies an EV/S multiple of 0.5x to their blended CY13/CY14 sales estimate of $13.5 billion to calculate a price target of $18

The ever-vocal bear, Mr. Faucette of Pacific Crest, hurriedly released his comments on the coat tails of the Bernstein downgrade.

Our checks on U.S. Q10 demand show lower shipment and sell-through volumes than posted by the Z10. This reinforces our view that BB10 production of 1.5 million to 2 million per month remains well above global sell-through demand, which we estimate at well below 500,000 per month.

BlackBerry's management has declined with unfailing consistency to disclose actual BB10 activation figures even when addressing direct questions from investors and press. When the company reports its FQ1 (NYSE:MAY) results before the market opens next Friday, June 28, we believe it is incumbent on BlackBerry's management to give a complete and accurate accounting of its progress to establish BB10 as a new mobile platform and ecosystem. We think such transparency would show the highest level of good faith toward BBRY shareholders, many of whom we believe have staked very large portions of their personal holdings on BlackBerry's ultimate success.

The notion of BBRY building more products that what is actually selling (sell-through) is an argument Mr. Faucette routinely makes every week or two, particularly in order to exacerbate a sell off induced by comments made by a well respected brokerage house or analyst. There are no ideas in his analysis.

Back to Mr. Ferragu's analysis. His target price, is the same as his valuation floor ($10 per share). That means he is attributing zero value to the future growth of this business. To me that just does not make sense. Even if you feel the company is bleeding, the FV of the business is still more than nothing.

Years of experience in the hedge fund industry have given me interesting insights on how the sausage that is sell side research is made. Sell side research is named aptly; it is indeed "for sale."

My guess is that a large Bernstein client threatened to pull their business if they didn't shift their view on the stock. The head of research had no choice but to oblige. A thorough analysis of the Bernstein note reveals only speculative insights, and a target price that is not in line with the fundamental financial analysis.

Mr. Faucette of Pacific Crest Securities, along with Detwiler Fenton, Wedge Partners, and ITG makes a living as a PR firm for large hedge funds who pay them to publicize "research" that is beneficial to their benefactors.

Disclosure: I am long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.