BlackBerry Ltd. and Bombardier Inc. Are Bargains on a Sum-of-the-Parts Basis
Both firms have seen their business prospects—as well as their share prices—fall precipitously over the past few years. They are each attempting a turnaround, but the outcomes are very much in doubt.
There is some good news though: both companies have very strong product offerings. Bombardier’s CSeries is easily the best product line in its category, with better fuel efficiency and lower noise levels than comparable planes. Meanwhile, BlackBerry is the best at securing mobile devices, and also has a very strong operating system in the Internet of Things marketplace.
So, are all these factors being properly reflected in their share prices? Interestingly, there are similarities here as well. When looking at traditional financial metrics, both companies look very expensive. Bombardier is burning cash and has a heavy debt load, yet is still valued at over $4 billion by the market. Meanwhile, BlackBerry is valued at roughly US$4 billion, despite having falling revenues and practically no earnings.
Yet when looking at the sum of their parts, both companies are tremendously undervalued. We take a look at each below.
When looking at Bombardier’s share price, it’s clear that investors aren’t expecting much.
The company’s $4 billion valuation translates into roughly US$3.2 billion in American currency. After adding net debt and subtracting the value of Bombardier Transportation, investors are valuing Bombardier Aerospace at about US$2.5 billion.
This seems like an extremely low number. In fact, Bombardier has already spent more than that on the CSeries. And we all know Bombardier Aerospace is a world leader in the business jet market.
So, how can Bombardier eliminate the discount in its share price? It’s quite simple: the company can sell the CSeries jet program to Boeing or Airbus. This would undoubtedly have to be done at a loss; there’s no way Bombardier can recoup its entire US$5.4 billion expenditure. But it would inject some much-needed funds into the company, and allow for a refocusing back towards business jets.
This won’t be happening anytime soon, at least not before Bombardier starts delivering CSeries jets. But this is something to keep an eye on.
BlackBerry’s shares are also severely mispriced on a sum-of-the-parts basis. To start, the company is sitting on roughly US$1.4 billion in net cash. So, investors are only valuing BlackBerry’s businesses at US$2.7 billion. To put this in perspective, the company’s patents alone may be worth this much.
Unfortunately, BlackBerry is unable to realize full value from its many assets and capabilities, mainly due to a damaged brand. That leaves only one realistic option: the company should sell itself.
Once again, this is unlikely to happen anytime soon, so I wouldn’t recommend buying the stock today. But if the company struggles in its turnaround efforts, then there may be more pressure on CEO John Chen to act. We’ll just have to wait and see.
This stock has even more upside than Bombardier or BlackBerry
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Fool contributor Benjamin Sinclair has no position in any stocks mentioned.
Despite being in different industries, BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) and Bombardier Inc. (TSX:BBD.B) have a lot in common. Unfortunately, that?s not a compliment for either company.
Both firms have seen their business prospects?as well as their share prices?fall precipitously over the past few years. They are each attempting a turnaround, but the outcomes are very much in doubt.
There is some good news though: both companies have very strong product offerings. Bombardier?s CSeries is easily the best product line in its category, with better fuel efficiency and lower noise levels than comparable planes. Meanwhile, BlackBerry is the best at securing mobile devices, and…