How do you define “dead money?”
In terms of our two Contra portfolios, BlackBerry Ltd. (BB-TSX) could work. Purchased about seven years ago at prices of $10.46 and $8.66, it currently trades around $6.50, with nary a dividend return. We really don’t like them apples. But our feeling is the company might finally be getting closer to the big turnaround we’ve been hoping for.
The link between BlackBerry and smartphones is etched into people’s minds. Perhaps a change of name and logo – to something that does a better job of saying, “We are exclusively an enterprise software and Internet of Things company” – would update everyone’s firmware. It is obvious that this is a completely different enterprise than the one that had almost $20-billion in revenue 10 years ago. Today, there are hopes and prayers to climb back to $1-billion. Nor is this the same outfit that was regularly profitable. Now, a black bottom line comes and goes and the accounting, from our perspective, is difficult to decipher. When numbers roll off from the accountants' work simplicity is something we admire. That is not the case here.
Investors should note that no cash from operating activities was generated in the first six months of fiscal 2021, though the hope is that free cash flow will be positive by the end of the fiscal year, which ends Feb. 28, 2021. Naturally, this is exceedingly important, but we will not believe it before it is carved in black and white.
There have been some huge recent moves to potentially make this a reality. One is the recent transaction with Fairfax Financial Holdings Ltd. BlackBerry redeemed $605-million of 3.75-per-cent debentures and did a private placement of $365-million of convertible debentures at 1.75 per cent. The beauty of this deal is that debt is reduced by $240-million and interest charges will be trimmed.
Rumours did surface in June that Fairfax was looking to acquire the whole company and take it private. If real, that possibility has since fallen off the rails, although maybe not forever.
Previously, the huge deal that chief executive John Chen arranged with the takeover of Cylance Inc. also dramatically altered the nature of BlackBerry. His goal is to make this enterprise “the most trusted AI-cybersecurity company,” with growth of 30 per cent a year. That has not happened yet and ultimately may prove to be elusive.
Goodwill has been written down from $2.5-billion last year to $848-million. A further markdown is not out of the question. The only good thing about this is it is a non-cash charge.
One important factor for the future of this enterprise is that it remains well connected. This month a partnership was announced with the Canadian Manufacturers & Exporters and the Government of Ontario to promote locally made products. Indeed, Premier Doug Ford recently thanked “the wonderful team at BlackBerry for making important contributions to the development of the made-in-Ontario COVID Alert app and for continuing to support homegrown innovation … .” It would appear BlackBerry is at least in the right place.
In 2018, given all of the various difficulties that BlackBerry was facing and the prospect of a lengthy turnaround, Benj switched the stock from a buy to a hold in his President’s Portfolio. Ultimately, after weighting the positives and negatives, it is being reverted to a buy. In the Vice-President’s Portfolio, meanwhile, Ben has a buy limit of $8 or lower on the stock. The feeling at Contra is that the stock could do better than a triple.
Given that numerous analysts follow this stock and that it remains in the public mindset, if it does catch a positive wind it could move up swiftly. But beware, dead money does not necessary regain its life, even at Halloween.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.
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