BBRY Fiscal Q1 Earnings Preview

by Dan June 27, 2013 11:30 am • Commentary

Event:  BBRY will report their fiscal Q1 earnings tomorrow morning prior to the open.  The options market is implying about a 12% move post earnings (the June weekly at the money straddle is offered at about 1.70.  If you bought that you would need about a 12% move in either direction.)  The average move over the last 4 qtrs has been about 11.75, but 2 of the moves have been massive (~19% & ~23%) while the other 2 were very muted (~1% and ~5%).  Of the last 12 quarterly reports, the stock has only risen 3 times the day after, and only about 4% on avg.

Sentiment:  Despite a recent spat of analyst upgrades , Wall Street analysts  remains fairly negative on the stock with 9 Buys, 12 Holds and 22 Sells.  Short interest in the stock is approaching 52 week highs, with Bloomberg’s latest reading show ~40-% of the shares sold short.

Options Open Interest:  The split of total open interest is slightly favoring calls with 867k vs 748 puts, with the largest single open lines: 56k of the Dec 11 puts, 43k of the Jan14 10 Puts, 37k of the July 16 calls, 33k of the July 20 calls, 32k of the Jan14 20 calls, 31k of the Jan14 15 calls, 30k of the Jan 14 calls and 30k of the July 15 calls.

Earlier today a trader apparently rolled up call strikes, the Sept 17 / 18 call spread was bought for .27, selling 8300 of the 17s to close at .73 and buying 8300 for 1.00 to open.   

Volatility Snapshot:  30 day at the money implied volatility has moved higher as expected into tomorrow’s earnings (despite not reaching levels in the last 2 reports), but what is most interesting is the divergence(below)  btwn realized volatility (white line) and implied vol (blue line).  The stock has been moving around over the last month at the most muted pace in more than a year.

BBRY 30 day IV vs 30 day realized vol from Bloomberg


Price Action / Technicals:  BBRY has performed very well this year up ~25%, despite most of the gains coming in January, with the stock banging around btwn 13 and 16 since.  For all intents and purposes, the chart is fairly constructive, forming a fairly nice base with the $12/$13 range serving as decent near term support.

[caption id="attachment_27587" align="aligncenter" width="589"]BBRY 1 yr chart from Bloomberg BBRY 1 yr chart from Bloomberg[/caption]

On a longer term basis, there is just a ton of room overhead, and when you consider the stock has 40% short interest it is almost impossible to short in front of the routine take-over rumors, speculation of activists like Carl Icahn, cheap valuation and the potential for some day that they actually have a phone that people will want to buy.

[caption id="attachment_27589" align="aligncenter" width="589"]BBRY 2 year chart from Bloomberg BBRY 2 year chart from Bloomberg[/caption]


Fundamentals:  To rehash all the gory details of this years BB10 operating system launch and the subsequent phone offerings would be a tad boring, and to be honest the most interesting perspective that I have heard on BBRY this year was in Barron’s May 13th edition citing a Jeffries analyst:

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.

MY VIEW:  A few weeks ago on June 4th in the MorningWord (here) I laid out my view, here is an excerpt:

I have been fairly consistent that the company does not have a future as a stand alone but, with its very strong balance sheet (36% of the market cap in cash & no debt), 70 plus million users and stabilizing service revenues, the company could be a very attractive take-over candidate.  I have also been very consistent in suggesting that the sum of the parts is much less attractive in the mid to high teens, but should see significant valuation support in the $10-$12 range.

So I am torn between what I think the value of the different moving parts, the potential for the company to be finally taken out, the potential for a kick ass activist like Carl Icahn to take a large stake and effect change vs the very plain and simple knowledge that their current product portfolio is just not that compelling or competitive and that the bring your own device trend in the enterprise has the potential to very quickly erode their subscriber base.

We are looking at some potential trades, but unfortunately the best trades on the board look like the “lotto” ticket trades, playing for the age old take out.  We will be sure to post anything that peaks our interest.