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.
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