As you know, last year I recommended Hewlett-Packard (HPQ) and Tim Hortons (THI). I decided to do an update on these stocks. I'd like to point out, that HPQ has beaten the market while THI has just kept pace. This may make people think that the picks were correct, but that is not what we should look for to see if they were correct. For that, we should go to the facts about the companies and how they are operating.
Let us begin with HPQ. Last year their profits were negative due to $20 billion in non-recurring expenses. If we ignore these expenses they made about $7 billion to $8 billion. $11 billion was for a write down of a terrible acquisition called Autonomy. A lot of people believed they were paying 1999 dot com boom valuations for it. It seems they were right as $11 billion is close to what they paid for it. So they essentially wrote down the entire investment. Then there were charges for layoffs and other restructurings. These seem to be non-recurring so we can reasonable expect HPQ to make $7-$8 billion per year in the long run. That puts the valuation of the company between $70 billion to $80 billion if we assume a P/E ratio of 10 which is typical. As the current valuation is approximately $50 billion you are looking at about a 50% upside and if they can grow earnings it can do better. I am a huge fan of Whitman as she built up the Ebay empire so I think for now HPQ should still be a buy, but of course it is not as undervalued as before. Another reason HPQ is good right now is that there really are not a lot of companies that are undervalued. So I would still recommend it.
Now we must discuss THI. Excellent company that I believe can grow to compete with Starbucks (SBUX). SBUX has profits of $1.3 billion so THI can become that big. As a result I see at least 5 years of growth left at 15-20 percent per year. The company is phenomenal but the profits have been stagnating this last year. The last 4 quarters combined have basically left profits around the same level as the profits of the previous year. Part of that may be the $25 million in non-recurring charges in the last 4 quarters. I would still say to be careful, but I believe THI has another 5 years to go and so would still classify this as a growth stock and give it a buy.
Note I didn't talk too much about stuff that was previously covered. If anything had changed in a major way I would have. These 2 stocks remain a buy for now. Which reminds me, never think that just because a stock has gone up means it cannot go higher, and never think if a stock has gone down it cannot go lower. Bankruptcies prove the latter, and stocks of companies like General Electric prove the former. So just evaluate the business at that time and even if it has gone up a lot, if the price relative to value is low, buy it.
Tuesday, August 20, 2013
Thursday, August 15, 2013
Blackberry Is a Sell
I know my previous article said to buy RIMM which changed its name to Blackberry. However, times change, and we must change our views accordingly. Also, I made some silly errors in my last post. So let us delve right into it.
Regarding the financial statements, Blackberry is as strong as ever. On the balance sheet the company has no debt and lots of cash. Income statement in the last few quarters has been all losses but modest losses. When a billion dollar enterprise losses 10s of millions of dollars, it's a bad quarter but we have to look at why as the losses are not significant. Even if the free cash flow was positive (I didn't even look for it) I would ignore it because of net income being negative.
So why am I telling you to sell Blackberry at about a 10% loss? The first thing I say is if a company cannot be expected to make huge profits (at least double your money) don't buy it, and if you own it sell it. Admit your mistakes quickly. That way you can buy something else that will double your money. And in the long run a 10% loss is nothing, but losses should teach us something no matter how small the loss was. So that is the first thing you gotta think about. I think Blackberry at the moment offers very little profit.
Now why do I think that? First I do not like their new phones. By the way, I'm a huge fan of Blackberry. I should probably be institutionalized for it. The phones are awful. You have the Blackberry Z10 which is a 4.2 inch phone with a 1.7 GHz dual core processor and 2GB of RAM. Not a bad phone by itself but the Nexus 4 which comes unlocked and at a price of $300 to $350 is a 4.7 inch phone with a 1.5 GHz quad core processor and 2 GB of RAM. Blackberry Z10 price is at least $500. You may say the phone companies give you discounts, but they don't just give it for the Z10, they also give it for the Nexus 4. So they cannot really compete with it. Apps may be another issue, but being able to port Android apps may help. However, not enough for me to say I would want that phone.
They also came out with the Blackberry Q5 and Q10 phones. These are the most promising. The reason I say that is that the keyboards make them unique as most phones are full touch screens. However, this means the phone is large but the screen is small to the tune of only 3.1 inches. The screens are touch but what can you really do with 3.1 inches? The Q10 is a dual core with 1.5 GHz and 2 GB of RAM whereas the Q5 is 1.2 GHz dual core with 2 GHz of RAM. Not bad. The idea was good but the pricing was awful. The Q5 is $350 in Canada whereas the Q10 goes from $600-$700. Considering the Q5 is supposed to compete with the cheaper phones, why is it priced higher than the technically superior Nexus 4? In my opinion the pricing is what's killing Blackberry right now. These are not superior phones. These are mid tier phones and in the case of the Q5 a low tier phone and prices should be ruthlessly slashed. Another warning I want to give investors is regarding pricing of products. Peter Lynch once noted that the closer a product is to a finished product the faster the price declines. So an out of style dress which once retailed for $300 may not sell for $3 now. Whereas the material to make it such as cotton probably has not fluctuated a lot in price. So typically it is safer to invest in products that are further away from the consumers. Ironic considering all the stocks I have recommended have been very close to the finished product.
So we do not know what the next product will be for Blackberry. Hoping it will good enough to save the company is just pure speculation. And Benjamin Graham always knew that investing is better than the speculation. I apologize for the loss and sincerely hope I do not make too many of these. Next topic is a bit cheerier, HPQ. Remember I recommended it a while back? It's an interesting company and one I intend to discuss. So sell Blackberry, I'm sorry and we'll discuss HPQ next.
Regarding the financial statements, Blackberry is as strong as ever. On the balance sheet the company has no debt and lots of cash. Income statement in the last few quarters has been all losses but modest losses. When a billion dollar enterprise losses 10s of millions of dollars, it's a bad quarter but we have to look at why as the losses are not significant. Even if the free cash flow was positive (I didn't even look for it) I would ignore it because of net income being negative.
So why am I telling you to sell Blackberry at about a 10% loss? The first thing I say is if a company cannot be expected to make huge profits (at least double your money) don't buy it, and if you own it sell it. Admit your mistakes quickly. That way you can buy something else that will double your money. And in the long run a 10% loss is nothing, but losses should teach us something no matter how small the loss was. So that is the first thing you gotta think about. I think Blackberry at the moment offers very little profit.
Now why do I think that? First I do not like their new phones. By the way, I'm a huge fan of Blackberry. I should probably be institutionalized for it. The phones are awful. You have the Blackberry Z10 which is a 4.2 inch phone with a 1.7 GHz dual core processor and 2GB of RAM. Not a bad phone by itself but the Nexus 4 which comes unlocked and at a price of $300 to $350 is a 4.7 inch phone with a 1.5 GHz quad core processor and 2 GB of RAM. Blackberry Z10 price is at least $500. You may say the phone companies give you discounts, but they don't just give it for the Z10, they also give it for the Nexus 4. So they cannot really compete with it. Apps may be another issue, but being able to port Android apps may help. However, not enough for me to say I would want that phone.
They also came out with the Blackberry Q5 and Q10 phones. These are the most promising. The reason I say that is that the keyboards make them unique as most phones are full touch screens. However, this means the phone is large but the screen is small to the tune of only 3.1 inches. The screens are touch but what can you really do with 3.1 inches? The Q10 is a dual core with 1.5 GHz and 2 GB of RAM whereas the Q5 is 1.2 GHz dual core with 2 GHz of RAM. Not bad. The idea was good but the pricing was awful. The Q5 is $350 in Canada whereas the Q10 goes from $600-$700. Considering the Q5 is supposed to compete with the cheaper phones, why is it priced higher than the technically superior Nexus 4? In my opinion the pricing is what's killing Blackberry right now. These are not superior phones. These are mid tier phones and in the case of the Q5 a low tier phone and prices should be ruthlessly slashed. Another warning I want to give investors is regarding pricing of products. Peter Lynch once noted that the closer a product is to a finished product the faster the price declines. So an out of style dress which once retailed for $300 may not sell for $3 now. Whereas the material to make it such as cotton probably has not fluctuated a lot in price. So typically it is safer to invest in products that are further away from the consumers. Ironic considering all the stocks I have recommended have been very close to the finished product.
So we do not know what the next product will be for Blackberry. Hoping it will good enough to save the company is just pure speculation. And Benjamin Graham always knew that investing is better than the speculation. I apologize for the loss and sincerely hope I do not make too many of these. Next topic is a bit cheerier, HPQ. Remember I recommended it a while back? It's an interesting company and one I intend to discuss. So sell Blackberry, I'm sorry and we'll discuss HPQ next.
Wednesday, January 2, 2013
Is RIMM undervalued?
You must be curious as to what the valuation on RIMM is. After all I talked about it in my last post but I did not give you a valuation. So let me try to give you a valuation on RIMM and you'll see how I did what I did.
Let us begin with the usual. The financial statements. The balance sheet is outstanding. Long term debt is practically non-existent. Cash is at $2 billion which covers 2/3 of total debt. There is no bad debt on the balance sheet at all. The majority of the debt is accounts payable. So this company's balance sheet is given an A+.
Now the income statement. Although the last 3 full years have been profitable, we know that there have been losses in the last several quarters due to pathetic (yes I said it) phones. It would have been better if they were cheaper, but RIMM wouldn't even give that. Now the profit margins in those three full years were 16.4% (2010), 17.1% (2011), and 6.3%. As there have been losses in the last few quarters we have to give them a D. I know the grade may be low but also remember if they can significantly improve this back to 16% profit margins it would still be a buy.
Now we come to the cash flow statement. Here we notice that all three years the free cash flow has been positive, but in 2010 and 2011 FCF was lower than net income while in 2012 it was higher than net income. Interesting to note. What people fail to realize is that with the exception of quarter 4 2012 RIMM has had a positive FCF in every quarter including the last 2. Which is good but of course the amount has been going down. As it was not negative in the last 3 quarters we can give this a D+. Bad financial statements but if it has a legitimate plan to turn it around, we can expect a profitable year.
So how will it be turned around? First we have to ignore the buyout rumours. Thorsten Heins said he is not selling. Instead he wants to stake the company's future on the Blackberry 10. I think it's a good idea and quite frankly Of course that depends on the specifications of the phone. Luckily they leaked out and we learned that they intend to release several Blackberry 10 very quickly one after the other. It's a good idea if the products are significantly better and fast. Let us see the specifications for the Blackberry 10 London first.
So what are the specs of the Blackberry London? And do I like it? That is what I'll try to answer here. The Blackberry London has a 4.2 inch screen. That's small compared to a lot of phones but still bigger than the Iphone 5. It has a dual core processor even though many phones nowadays have a quad core, however, if we compare it to the Iphone 5, Apple's latest flagship phone still has a dual core processor. It has an 8MP camera with a 2MP front facing camera. Now notice that this phone is not competitive with Samsung but is competitive with Iphone 5. Problem is, Iphone 5 came out months ago and this will come out in the next month and a half to 2 months. So the next Iphone should be better. That sounds like bad news, but luckily RIMM knows what they're doing this time and expects to release other phones within months. Now those should be able to compete with the next Iphone and maybe even the Samsung Galaxy S4. But don't take my word for it. Let's discuss them next.
So what is the best expected phone from the Blackberry 10 line? It is the Blackberry Aristo. Aristo is Greek for best. So when specifications of this phone leaked out, I realized it should be the best Blackberry 10 that comes out. When I looked at the specs I was actually impressed. The screen size is 4.65 inches. I hope they make that bigger as that is kind of small compared to Samsung S3 or especially the Note 2. However, it is huge compared to the Iphone 5 and will probably be huge compared to the next Iphone. As for the processor it is 1.5 GHz quad core. Not bad. Cameras are the same and to be fair, after 5MP I failed to see an improvement but they have an 8MP camera with a 2MP front facing camera. So these specs show that they can compete with Samsung Note 2, but by then the S4 will be out, so the only question is whether that is vastly improved from the Note 2. Hard to say but I would expect it to at least be better than the Aristo. As a result I see this as being better than the new Iphone and worse than Samsung. Also we haven't really talked about the lack of apps, but if Android can build up their app store as fast as they did, Blackberry should be able to follow suit.
In case you were wondering I gave their strategy an A because the specs are competitive. Now, what can we expect in terms of profits. If these phones cannot be as good as the next Iphone then I would expect low profits. Maybe $1 billion but that's a conservative estimate as these phones are better than everyone other than Samsung and Apple at that point. What I expect is for the next generation blackberries to be better than Iphones and weaker than Samsung's, so I expect it at $2 billion at that point. If that is the case valuation of RIMM is $40. At the current price I would recommend buying. If they can beat Samsung's specs, then the profits will be off the charts. So I would recommend a buy on RIMM with a price target at the moment of $40 but changing depending on sales when BB10 comes out.
Let us begin with the usual. The financial statements. The balance sheet is outstanding. Long term debt is practically non-existent. Cash is at $2 billion which covers 2/3 of total debt. There is no bad debt on the balance sheet at all. The majority of the debt is accounts payable. So this company's balance sheet is given an A+.
Now the income statement. Although the last 3 full years have been profitable, we know that there have been losses in the last several quarters due to pathetic (yes I said it) phones. It would have been better if they were cheaper, but RIMM wouldn't even give that. Now the profit margins in those three full years were 16.4% (2010), 17.1% (2011), and 6.3%. As there have been losses in the last few quarters we have to give them a D. I know the grade may be low but also remember if they can significantly improve this back to 16% profit margins it would still be a buy.
Now we come to the cash flow statement. Here we notice that all three years the free cash flow has been positive, but in 2010 and 2011 FCF was lower than net income while in 2012 it was higher than net income. Interesting to note. What people fail to realize is that with the exception of quarter 4 2012 RIMM has had a positive FCF in every quarter including the last 2. Which is good but of course the amount has been going down. As it was not negative in the last 3 quarters we can give this a D+. Bad financial statements but if it has a legitimate plan to turn it around, we can expect a profitable year.
So how will it be turned around? First we have to ignore the buyout rumours. Thorsten Heins said he is not selling. Instead he wants to stake the company's future on the Blackberry 10. I think it's a good idea and quite frankly Of course that depends on the specifications of the phone. Luckily they leaked out and we learned that they intend to release several Blackberry 10 very quickly one after the other. It's a good idea if the products are significantly better and fast. Let us see the specifications for the Blackberry 10 London first.
So what are the specs of the Blackberry London? And do I like it? That is what I'll try to answer here. The Blackberry London has a 4.2 inch screen. That's small compared to a lot of phones but still bigger than the Iphone 5. It has a dual core processor even though many phones nowadays have a quad core, however, if we compare it to the Iphone 5, Apple's latest flagship phone still has a dual core processor. It has an 8MP camera with a 2MP front facing camera. Now notice that this phone is not competitive with Samsung but is competitive with Iphone 5. Problem is, Iphone 5 came out months ago and this will come out in the next month and a half to 2 months. So the next Iphone should be better. That sounds like bad news, but luckily RIMM knows what they're doing this time and expects to release other phones within months. Now those should be able to compete with the next Iphone and maybe even the Samsung Galaxy S4. But don't take my word for it. Let's discuss them next.
So what is the best expected phone from the Blackberry 10 line? It is the Blackberry Aristo. Aristo is Greek for best. So when specifications of this phone leaked out, I realized it should be the best Blackberry 10 that comes out. When I looked at the specs I was actually impressed. The screen size is 4.65 inches. I hope they make that bigger as that is kind of small compared to Samsung S3 or especially the Note 2. However, it is huge compared to the Iphone 5 and will probably be huge compared to the next Iphone. As for the processor it is 1.5 GHz quad core. Not bad. Cameras are the same and to be fair, after 5MP I failed to see an improvement but they have an 8MP camera with a 2MP front facing camera. So these specs show that they can compete with Samsung Note 2, but by then the S4 will be out, so the only question is whether that is vastly improved from the Note 2. Hard to say but I would expect it to at least be better than the Aristo. As a result I see this as being better than the new Iphone and worse than Samsung. Also we haven't really talked about the lack of apps, but if Android can build up their app store as fast as they did, Blackberry should be able to follow suit.
In case you were wondering I gave their strategy an A because the specs are competitive. Now, what can we expect in terms of profits. If these phones cannot be as good as the next Iphone then I would expect low profits. Maybe $1 billion but that's a conservative estimate as these phones are better than everyone other than Samsung and Apple at that point. What I expect is for the next generation blackberries to be better than Iphones and weaker than Samsung's, so I expect it at $2 billion at that point. If that is the case valuation of RIMM is $40. At the current price I would recommend buying. If they can beat Samsung's specs, then the profits will be off the charts. So I would recommend a buy on RIMM with a price target at the moment of $40 but changing depending on sales when BB10 comes out.
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