Tuesday, July 3, 2012

Research in Motion (RIMM) Down But Definitely Not Out (undervalued techstocks, competition, blackberry 10)

      Research In Motion sold 260,000 playbooks between March 3 and June 2 of 2012 which though down quarter to quarter, is still one of the best quarters for tablet sales since their launch one year ago (500,000 in 4q12, 150,000 in 3q12, 200,000 in 2q12 & don't forget that playbook now owns 15% of the Canadian tablet market up from 5% in early 2011); Also, keep in mind that the less popular 16 GB playbook is being discontinued. RIM has yet to unveil the rumoured 10 inch model meaning that the company literally had NOTHING NEW to offer last quarter but still did reasonably well on the sales front. Only recently has the company allowed blackberry messenger users to view facebook and twitter updates so the full impact of that on sales won't be realized until another quarter. Remeber also that earlier this year sales of BlackBerry phones rebounded strongly after one of the worst quarters in company history.
Signs pointing to a recovery in stock price: July 2, 2012 Hudson Square upgrades RIMM to buy from hold consequently establishing a price target of $10 or 33.9% higher than now (July 3 start of trading). Also note that Lazaridis, one of RIM's biggest shareholders with 30M shares or 5.6% of the company (last major purchase was for 3.1M shares back in February) has not been a seller, indicating his confidence in a recovery.  Oct 31 through Nov 4 share price up +14.5% to $8.71 giving it a market value of $4.56 billion (Nokia up +3.0% to $2.80).
September 2012 Update:  For the three months ended September 1, 2012 Research In Motion posted better than expected results.  Although the company's bottom line remains in the red at -$235 million or -$147 million adjusted (27c/share) the loss is 43% lower than the expected -47c/sh.  In the two quarters prior RIM lost $518m (-99c/sh) and -$125m (-24c/sh) respectively.  Despite not releasing any new products, RIM's quarterly revenue was up +2.10% from the previous quarter at US $2.873 billion.  Negatives : 2013 second quarter cash flow was only $432 million $278 million less than in the previous quarter.  Shipping volume for smartphones was 7.4 million down -5.1% from the previous quarter.  As of September 2012 BlackBerry subscriber base is 80 million (+2 million last three months).

Financials : The Good News
$2.2B in cash equivalents + short & long term investments = $100M more than it was at the end of the previous quarter. That means that in the short term, RIM does not have to part out portions of its business (like Nokia is doing with Microsoft) to survive (why I especially don't think the company will give up either of its two core units, hardware or services, afterall it didn't consider selling either six months ago when the stock was worth 60% more).
The adjusted earnings loss in this first quarter of 2013 is actually a first for RIM (-$192M or -37 cents a share). In the prior quarter adjusted net income was actually $418 million which isn't bad considering Nokia went through a number of quarterly losses before investors punished the stock.

Subscriber base up +1M to 78 million giving RIM's cash flow a stronger foundation.
The last two quarters provided a combined unadjusted net loss of $643M only about a third as much as Nokia ($2.01b) even though RIM launched NO new products but Nokia had its Lumia 900 (2 million units sold up from 1 million last year).
Research and Development spending was almost identical to the November quarter of 2011 ($368m) but down only slightly q2q from $386m (March 2012 quarter), not bad considering it had 33% less revenue to work with ($2.8b vs $4.2b). Services (bbm, etc) accounted for 36% of revenue up from 27% in the previous quarter.

Research In Motion is trimming its workforce by about 5000 but that includes job cuts through to the end of 2013 (the quarter BB10 is released) so the good news here is that this is rock bottom ! Job cuts will save the company one billion dollars a year.
BlackBerry Jam (began last month, May 2012) aims to improve blackberry app world by bringing together industry leading application developers in order to help them innovate and get their products to market faster (one of the attractions for app developers is the fact that the top 10% of vendors are making more money at BB app world than at Android or even Windows).

RIM vs Nokia
Including the half a billion dollar loss in this quarter, RIM profited +$556 million over the last 4 quarters, so operating losses are still relatively new (by contrast Nokia lost -2.437b in 52 wks ending March 2012).
RIM sold $1.6 billion worth of devices (7.8M/260th playbooks); Nokia sold $4.2 billion worth of devices (83M cellphones, 12M smartphones). Nokia avg selling price for devices: €51, RIM avg selling price: ~ $200.

RIM's enterprise server/security platform (playbook first to be approved by the US government) basically makes it a major player in the corporate market regardless of how well developed or freely accessible its app market is (BlackBerry used by 90% of fortune 500 companies, on June 26,2012 the UK government approved use of blackberry security software important since the blackberries now offer mobile voice solutions; this is just one of many such approvals the long term positive effects of which are enormous).
In the latest quarter RIM shipped 7.8 million smartphones which is only 3.1 million less than Nokia (by contrast at this point last year the difference was closer to 10 million). 7.8 million is low but not THAT bad considering sales weren't that much higher at 10.6 million in the quarter nine months ago (and recovered in the following quarter when sales improved to a near record high of 14 million). It made $1.652 billion from the sale of 7.8 million phones and 260,000 playbooks. Comparing that to the $3.066 billion it made in 2q12 from the sale of 10.6 million phones and 200,000 playbooks indicates that the average selling price of a BlackBerry went down since then. I'd put the average playbook price at about the same as the phone (remember, the company now sells playbooks at $199-$299 down from over $500 earlier last year). That comes out to around $206 per device or 29% lower than the average selling price of a blackberry 7 phone earlier in the year according to Abramsky. You have to think, how much profit can RIM make from the next generation phones ? especially considering the vast amounts of features they're going to have.

Refering to the BB10 phones CEO Thorsten Heins said that he's confident they'll provide "a ground-breaking next generation smartphone user experience". The delay in launch is due to the time consuming process of integrating key features which RIM has had success developing (main carriers of the BB are more than satisfied with the platform).

Financials : The Bad News

If you're an investor then be prepared for a wild ride over the entire fiscal 2013 period, and it's only the 2nd quarter ! Operating losses, though still new at RIM, won't end until after we witness the consumer markets response to BlackBerry 10 qnx phones. That's quite a risk to take considering you're going to have to support a company bleeding money for the next nine months and then you have to hope that BB10 (aka BBX) will be THE gamechanger (by that time a slew of new android phones will have already hit the market, each better than the last).
If it were me, I'd take the risk. You see, it was only last month that the US military committed to buying more blackberry devices, which instantly validates the company's security, platform and features. The military, among other DoD and enterprise customers, was particulary impressed with enhanced features on the newest model 7 phones (near field communication technology/voice activated search) and with mobile payments facing increasing scrutiny from government lawmakers, blackberry's devices are already government approved (security) and that could mean a lot in the future.

Monday, July 2, 2012

Sobeys (EMP.A) Did Well in 2012 Even Compared Loblaw Companies LTD (L), Metro Inc (MRU.A)

Empire Company Ltd (tsx:EMP.A) is the parent of Sobeys Stores Limited, the food retailing unit which contributes 99.0% of revenue to the Empire Group (up from 98.3% in 2011 due to the divestment of Wajax property business but that will change next year due to the inclusion of 236 more gas stations as part of operations). Empire Company is still looking like a solid investment (ebitda margin grew the most out of the three companies however it's still in 3rd place at 5.5%).

It upped its dividend payout to 24 cents a share from 22.5 cents which represents an impressive +6.7% jump (had been 20c for a number of quarters prior to that). That beats Loblaw companies LTD last quarterly dividend payout of 21 cents a share back on April 30, 2012 (no growth quarter on quarter) and 21.5c at Metro Inc (up 12.0% from 19.2c which is a nice return). Metro had no problem hiking dividends, with earnings per share up +12 cents (82-->94c) compared to +14 cents at Empire Company (121-->135c) and -13 cents cents at Loblaw Companies Ltd (58-->45c).

Same store sales: Metro 2Q12 (March 2012) +1.0%; Loblaw Companies (march 24, 2012) -0.7%, Empire Company (June 2012) +0.7%

Although sales were down slightly in the last quarter of 2012 (-1.8%), after accounting for the period length being 1 week shorter empire's total sales were actually up +3.0% or $474.9 million (fiscal 2012 only 52 weeks vs 53 weeks in fiscal 2011). Sales were also +3.0% higher for the year after accounting for 2011's extra week & the impact on sales resulting from acquisitions & divestments of convenience stores/gas stations (sales difference between 2011 and 2012 goes from $290m --> $474.9m). Empire Company's EBITDA (unadjusted) ended 2012 on a strong note, up +$14.4m over last year's quarter compared to only +$13.6m for the entire fiscal year (meaning it actually contracted over the previous three quarters). In 4q12 only $10m ($35.3m for the year) in profit came from investments and other operations up from $6.5m in 2011. In the thid quarter, Sobeys food business contributed $3.94 billion to revenue (out of Empire's $3.98b) while in the fourth quarter it was $4.02 billion (out of Empire's $4.07b) which is about 99.0%. In terms of profit, Sobeys was the source of only 89.54% of Emipre's over the last two quarters.
Ebitda margin for last quarter; Metro Inc still leads the industry at 6.9% (up from 6.7%), Loblaws is still in second place at 5.9% (down from 6.6%); Empire Company, though last went up more than the other two: 5.5% (up from 5.06%).

Business at Empire Theatres appears to be strong with revenue from Empire's non food business up +7.2% to $50.6m (from $47.2m); Most of the revenue in that category comes from cinema operations. For fiscal 2012, that revenue reached $204.5m up from $200.5m.
$10M in ebitda gains in fiscal 2012 are attributed to 'dilution gains' from a change in ownership level of Crombie Reit. Normally it's $74.8m (vs $69.4m) but that changes to $64.6m (vs $62.6m) after removing items not considered part of underlying business.
Funded debt fell -$21.6m to just over $1.1 billion (1.3xebitda). Funded debt/total capital fell -1.7 basis points to 25.0%.

Market Share
If we base the market share each has in Canada's food retailing industry on the food revenue of each company during the last two quarters, we can assume Sobeys is at 23% if we believe Galen Weston Sr (Loblaw Companies) when he puts his company's share at 40% (Sobeys sales last six months $7.9632 billion vs Loblaws $14.034 billion last two reported quarters ending March 24). It follows that Metro Inc has 15% of the market (all of its revenue comes from food).

More information about the grocery industry can be found at another website I launched recently at www.grocerynews.org