MorningWord 5/13/13: $BBRY ‘s Shifting “Plans”

by Dan May 13, 2013 9:15 am • Commentary

As  a trader, one of the most frequent mistakes that I make on losing trades is not anticipating what the reason will be for a reversal in direction.  Let’s take BBRY for an example, I have not liked this company or their products for 10 years.  Obviously I have been wrong for a good portion of that time, and if I had stayed short during that period’s eye-popping gains, I would not be alive today to write this post.  Back in the middle part of last decade the story was about their first mover advantage and the secular trend  towards smartphones that led to a near monopoly of the space.  The last 5 years the story has been about declining market share and the lack of innovation.  Many market participants, including myself, have written them off for dead (most recent post below), which is evident by the short interest in the stock that sits a few percent from all time highs at ~37% of the BBRY float (per Bloomberg).

While I am not short the stock, I do have a negative bias on their current business and product portfolio and have a slightly short biased range bound calendar structure (below) on. But, this weekend in Barron’s I read something that could cause me to be a tad more open minded.  But first, let’s talk about the set up in the stock and why I am not short.  The company has an ~$8 billion market cap, which is about 40% less than their expected sales in their current fiscal year.  Despite the horrific earnings collapse of the last few years (from over $6 in fiscal 2011 to a loss last year), the company has about 33% of their market cap in cash, with no debt.  In a market where investors are looking to play some catch up, I am surprised that this high short interest name (that also has a heavy concentration of long holders, the 10 hold almost 38% of the float) has not joined the “short squeeze” party with its freaky friends TSLA, GMCR & FSLR, all of which share similar concentrations in holders and high short interest.

Back to the mention in Barron’s this weekend, one of the most interesting comments was the least sexy in a smartphone landscape dominated by retina displays, app stores with gazillions of titles and lightning fast data speeds.  As Barron’s referred to it, they are calling it BBRY’s “Plan B” their push to proliferate their BES “Blackberry Exchange Server” to manage other device platform’s email traffic and security.  Barron’s:

If even a fraction of enterprises take up BES and the NOC, bulls think it could boost the stock. Peter Misek, who follows BlackBerry for Jefferies & Co., and rates its shares Buy, doesn’t expect BlackBerry will win the smartphone wars. But with perhaps 500 million corporate users of email on mobile devices, worldwide, Misek reasons that if just 10% of them were to take up BlackBerry’s offer to use the NOC, and if each one paid $100 per year, the result would be a steady $5 billion in revenue for BlackBerry annually.

Put a 42% operating margin on that, and you could be looking at $2.50 per share in earnings, for a stock worth $30 at a P/E multiple of 12. With a steady $5 billion in security revenue, BlackBerry could be attractive to an acquirer, he thinks. For example, Misek speculates that Microsoft might want to boost its standing in mobile by buying the company.

So the net of it is,while others and I could continue to focus on what most agree on are their weak product portfolio and continued market share declines, if the company is to succeed in the ever increasing commoditized mobile world, it will likely be leveraging its existing strengths rather than trying to pull a PALM by attempting to unseat the champs.

For months now since BBRY established a new range above $10, my take has been that the sum of the parts look very interesting btwn $10-$12, but not so attractive in the high teens, yet the stock has been range bound, and now sits in the middle of the 2013 range.  If I were short this stock I would very much worry about some form of development that has nothing to do with a smartphone that is branded with the BBRY logo and be far more worried about the “bring your own device” trend that could once again make BBRY a household name.




Original Post May 6th, 2013:  New Trade $BBRY – Canadian Bacon

When I think about BBRY, the products, their competition, their management and their challenges to regain a path towards profitability and revenue growth I can’t help but think they will eventually go the way of PALM, MOT, or NOK.  While the old management, which consisted of the company’s founders presided over the rise and fall of a near monopoly, the new management appears to be equally challenged when it comes to anticipating the future of mobile computing when you read recent quotes like this from CEO Thorsten Heins in a Bloomberg interview on April 30th, 2013:

“In five years I don’t think there’ll be a reason to have a tablet anymore,”

Right, this guy is seeing something that AAPL and Samsung are not, both of which are risking cannibalizing a huge chunk of their existing PC and Mobile phones revenue mix to bet on the category.

The stock will obviously have its fits and starts – just ask the shorts who were playing for the equity to trade at cash last year (whoops).

While I do not think the stock is invest-able at current levels given all of the product and competitive uncertainties, I have been on the record and continue to believe that there is a price (probably closer to conservative sum of the parts valuations around $10) that the risk/reward of being long is skewed to the long side.

In preparation for a Bull / Bear Debate tonight on Fast Money on CNBC at 5pm, I thought I would jot down a few notes as I am facing the fearsome Guy Adami (friend of the site):  

1. BB10 phones Z10 and Q10 have met less than stellar customer reviews and higher than expected returns for the Z10.
2. Q10 demand (the qwerty keyboard phones) appear to be better than the touchscreen models which is a surprise, but doesn’t bode well for their ability to compete with new Samsung Galaxy or iOS
3. The real question for the stock is whether the dramatic earnings decline can be halted with increased margins from new phones??  
4. In my opinion stock has serious valuation support on a sum of the parts btwn $10 and $12, but high teens seems a bit stretched.  Main value is the company’s approx 75mil users of which at most 25% are enterprises users where the company charges service fees.  Bring your own device options at large businesses is seriously challenged.
5. Almost a third of the market cap in cash, so if company can stop burning cash and stem customer defections than than they maybe able to remain standalone , if they can continue to compete on the high end.
6.  I think very unlikely the company can succeed against iOS and Android as a standalone given margin pressure and secular changes in enterprise mobility.
On a technical basis, after its breakout from a 6 month base in late 2012, the stock has been stuck between 12 (green) and 18 (red) for most of 2013:
[caption id="attachment_25555" align="alignnone" width="632"]1 year BBRY daily chart, Courtesy of Bloomberg 1 year BBRY daily chart, Courtesy of Bloomberg[/caption]

The 50 day ma (pink) flat-lining around 14.50 is indicative of a range-bound name, and there are no major catalysts until the June 28th earnings report.  (AAPL has its WWDC on June 10th, announcing its new OS, but at this point the BBRY story is really dependent on what BBRY does, not the competition.)

This setup lends itself to a similar trade structure to last quarter, where we had success trading a calendar spread heading into the earnings event.  Our thought was that the options that captured the earnings event would remain well bid, while options that expired prior to the event would decay much quicker.  Given the stock’s rally to near 16, no clear catalyst prior to earnings, and a rangebound technical situation, we like a similar trade once again:

TRADE: Bought the BBRY ($15.72) June 22nd / July 14 Put Calendar for $.55

-Sold 1 June 22nd 14 put at $ .65

-Bought 1 July 14 put for $1.20

Break-Even on June Expiration:

-If the stock is above 14.00 the June puts will expire worthless and I will be long the July 14 puts for .55, which catch earnings and at that point I will look to spread.

Payout Diagram:

[caption id="attachment_25565" align="aligncenter" width="551"]Screen Shot 2013-05-06 at 12.45.01 PM from TradeMonster[/caption]

As you can see from the diagram, not much will happen with this position in the near term (thin line) but as we get closer to June expiration any downside movement is profitable as long as it doesn’t go too far through the 14 strike. The short june option will decay at a faster rate than the long july option on a percentage basis with that percentage increasing as expiration approaches.

Trade Rationale:  This trade structure will hold its value quite well as long as BBRY stays within the 12 to 18 range.  The ideal scenario is that the stock leaks down towards $14 over the next 6 weeks, and is around there prior to earnings.  In any case, the structure will gradually appreciate in my favor if the stock stays within a few bucks of the $14 level, and I can re-assess my options prior to earnings.