Monthly Archives: April 2012

NFLX – Two Big Problems for the Bulls on NFLX!

The 1st quarter results are out and the market has reacted.  Analysts on both sides -buy side/sell side – seem to be screaming at each other over the results.  As we said in our last NFLX blog, “We are sure quarterly reporting of NFLX will be a nail-biter over the next year”.

Old NFLX chart from our January 30, 2012 blog:

NFLX with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

New NFLX chart for April 26, 2012 (with 1st quarter financials)

NFLX with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of NFLX subsequent to this post will be maintained on Facebook, here.

We made this prediction in our January 30, 2012 blog.

“The more interesting question is what happens when NFLX transits downward through EBV+7.  If and when this happens we think NFLX will find a more comfortable home at EBV+5.”

We have not changed our minds on this prediction; we think eventually NFLX will go to EBV+5 or $49.66.  Then assess at EBV+5, whether NFLX should go lower.

We cannot add much to the loud conversation, on both sides, about subscription adds and churns but we can look at our unique metrics and offer two troubling trends when we look at the balance sheet.

Theoretical Earnings (TE)

As we noted in our last blog when the company raised $400 million of additional capital, this raised TE from $1.43 based on NFLX’s September balance sheet to $2.06 at year-end.  With the 1st quarter report TE has risen again to $2.35, a 14 percent increase.

What does this mean?

NFLX will have to produce more in earnings in order to create valuation.  As we said in our last blog on NFLX, we like the use of an analogy of the marathon runner.  It’s easy to run a marathon at 143 pounds (based on TE of $1.43).  However at 206 pounds (TE of $2.06), the marathon runner is still the same person, can still run marathons, but the runner will have to work harder to run the same race.  More weight to move!  NFLX now weights 235 pounds (TE of $2.35).  NFLX needs at least $2.35 per share of earnings and above to generate a positive sloping model price.  (Currently, the mean estimate for NFLX is $2.82 for 2013.  Over the coming quarters it will be interesting to see this estimate and further changes to NFLX’s balance sheet.)

Longer Term we can look at the relationship between earnings pre share and theoretical earnings.

As you can see the spread between forecast earnings per share and theoretical earnings were widening positively.  The market, in particular, momentum stocks, trades on this relationship and will pay any valuation for this expanding differential.

The first step needed for NFLX to get its’ mojo back!

The first step needed would be for current, forecast earnings to surpass its’ theoretical earnings.  With theoretical earnings trending upward, the more earnings NFLX needs to at least reverse the slide in the stock.

Convexity

Convexity is friction.  Higher convexity means less friction.  When convexity moves lower in a meaningful way, valuation becomes harder to achieve because of, you guessed it, more friction.

Here is the history on calculated convexity for NFLX going back to 2004.  Convexity is now lower than any other time in NFLX’s recent history.

What does this mean?

NFLX will find it hard, if not impossible, to not only return to the valuation of 2010 -11, (EBV+10) but also the current valuation of EBV+6 is hard to justify with these changing fundamentals. (Higher theoretical earnings and lower convexity)

How do you find theoretical earnings and convexity on model price charts?

These calculations are included in model price.  So users don’t have to worry about individual variables in our model price calculation.  However, it’s fun for us to deconstruct what is going on “under the hood of the car”.

RIMM – Breaks Above EBV-2, Major Buy Signal!

We wrote this on April 10, 2012.

What Now?

Not much.  Certainly RIMM is in the doghouse with Wall Street and every other stakeholder it seems.  The best thing for the company is to get out of the financial headlines and let the new CEO go about building a management team and delivering great products in the future. 

We believe the stock will drift between EBV-3 ($12.07) and EBV-2 ($14.05).  We see no reason, with the present fact set, for RIMM to trade below EBV-3.  However, if a significant, and pronounced breakdown of EBV-3 sometime between now and the launch of BB10 we would use that level $12.07 as a sell signal.

On the positive side, if RIMM breaks above EBV-2 ($14.05), this would be a significant buy signal and evidence that RIMM maybe on the right track long-term.

On April 26, 2012, RIM transited above EBV-2 or $14.05.  Here is the chart.

RIMM with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of RIMM subsequent to this post will be maintained on Facebook, here.

For those wondering about EBV lines we just finished a major blog on what these are, here.

Will be interesting to see what happens.

EBV’s – Economic Book Values are the Foundations of Good Security Analysis.

In the last few blogs we touched at length on model price.  So let’s even it up with a discussion on EBV’s or Economic Book Values.

Most, if not all, financial quantitative models, that we have seen, are based on empirical relationships.  What do empirical relationships mean?  Referencing ‘empirical’ in our Merriam-Webster’s Dictionary says the following:

1.  Originating in or based on observation or experience.

2.  Relying on experience or observation alone often without due regard for system

and theory.

3.  Capable of being verified or disproved by observation or experiment.

Whether you are reading a financial newspaper or an analyst’s report empirical relationships are everywhere in finance.  Our least favorite is regression analysis.  The “Financial Graveyard” is filled with many a career using linear regression and least squares regression as the murder weapon.  Financial relationships are sought, using regression analysis, money positioned to take advantage of this found relationship.  Sometimes money is made and if predictable, big money moves in and poof.  The relationship and the money are gone with everyone saying, “That shouldn’t have happened”.  Or our favorite, “the move in the market that bankrupted us was 23 standard deviations away from normal!”

What makes EBVs – Economic Book Value’s so different?

EBV’s are built on structural equations.  These equations do not change over time or across companies.  These equations are part of a theory of how economic activity is related to the structure of an entity and how the economic process creates value.

Human beings cannot visualize trends in a column of numbers.  We transpose these numbers into a graphical interface that viewers can easily see financial trends that can make an investor profits.  We also make use of logarithmic price scale so viewers of our charts can observe compounding that takes place in any company that is growing.

We have designed our own charts to include logarithmic price scale and include a spectrum of lines call EBVs or Economic Book Values.

How are EBV lines useful to you as an investor? 

1.  As a user, let’s first consider the EBV lines themselves, without price bars and model price.

What are the EBV lines doing long term, short term?  The reason we provide two charts is to give viewers prospective on the growth of the EBV lines.  You can actually see the compounding of the numbers, assuming the positive slope of our multi-colored lines.  If our EBV lines are flat, or trending down, tells the viewer that no growth has occurred or write-offs have occurred on the balance sheet.

Some questions we ask ourselves?  Can we see the growth in the EBV lines and how steep are these lines?  Steeper lines mean more compound growth.  How consistent is this growth?  Is growth accelerating or decelerating?  We believe this is a faster and easier way of viewing what is happening with the financials of a company then looking at the actual numbers from the balance sheet.

2.   EBV lines and overlay either a weekly or monthly price series.

Equity prices not only conform to EBV “zones” but also use EBV lines as support and resistance.  Therefore we use weekly, and monthly price bars because they reveal more information of the interaction between price and the EBV lines themselves. 

A company’s trading history usually confines’ itself to one or more “zones”.  We call the space between each line a “zone” for practical reasons.  Looking at our long term chart viewers can readily see which zone may seem comfortable for their given security.  An observer will note that even with the growth in the EBV lines, prices will conform to a zone sometimes for decades.  How and why does this happen?  The easiest way of explaining this phenomenon is to point out the EBV “constants” that define our EBV lines come from observable forces in nature.  Do known and observable forces in nature show up in the stock market? Absolutely.  We are confident over time and use of model price charts you will be amazed, just as we are, how equity prices interact with our EBV lines.

When stock prices transition from one zone to another important information is being transmitted.  Yes, we do occasionally say, “the market is speaking to you”.  A “transit” signals a change of fundamentals is occurring, either positive (break up) or negative (break down).  This can occur long before any signs and/or public announcement from the company itself.  We admit transits can be tricky to trade, sometimes there are multiple break ups/downs of an EBV line before the market makes up its’ mind before the actual transit.  This can be frustrating for a short-term trader, however when a transit does occur longer term traders can assess a very good predictor of the company’s investment performance long term.

3.  Lastly, considering EBV lines, overlaying weekly/monthly price series with model price.

As we have said previously, our model price calculation is our calculation of ‘What the company is worth’.  This can be of some help in determining which EBV zone the equity price should be trading.  Observing the long-term chart can give you guidance on any discount/premium that may exist between our model price history and the zone the security feels comfortable.  Also, any significant changes to model price, say change in earnings, can give advance notice on suspected transits in EBV zones in the future.

Conclusion

EBV lines and zones can give users considerable information with a blink of an eye.  We are delivering two very important and new concepts to our users, model price and EBV lines, where one is just as important as the other.  From blog to blog, we may emphasize one over the other however both are equally significant.

Also, we think it’s vital to point out the nature of our EBV lines.  They come directly from the balance sheet of each company and are based on structural equations that are NOT trended or use regression analysis in any way.  Yes, the same regression analysis, which has failed so many in the financial world.

ATDB – Alimentation Couche-Tard having fun and making money with acquisition math.

Unfortunately circumstances are rare that an announced acquisition for the acquirer that shareholders are rewarded.  Usually the acquirer gets slaughtered while the shareholders of the acquired company celebrate with high fives.  So what makes Couche-Tard acquisition different?

First, let’s look at the chart

Alimentation Couche-Tard (ATDB) with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of ATDB subsequent to this post will be maintained on Facebook, here.

Our key take-a-ways without reiterating any of the details outlined in the newspapers are:

1.  Before the deal was announced the company had a 20.4% upside to model price.  The deal help close the value gap because of the underlying future growth of the business.

2.  The company will finance the acquisition with debt.  ATDB has a “Solvency Ratio” (see Key Concepts) of 1.33 before the deal was announced.  This acquisition with debt will move ATDB “up” the “Solvency Curve” making them more efficient in terms of solvency or the use of debt on their balance sheet.

3.  Though we haven’t seen any numbers yet, and probably won’t until the acquisition is closed.  We are willing to guess that what the company took on in terms of theoretical earnings (increase) they more than offset with additional earnings.  We will report back on this when the deal closes and the numbers are released.

Very well done!

BCE – An Investors Dilemma! What is BCE Worth?

Long suffering investors, whether Do-it-Yourself (DIY) types or professionals, have parked some of their portfolios (perhaps all) into BCE.

Why?

BCE yields 5.44%.  Simple.  Right.  Well NOT so simple.

So let’s have a conversation.

DIY Investor:  “I have been burned so many times in this market.  I just want to make a return.  I have heard the expression, ‘getting paid to wait’ and this makes sense to me.  Look BCE is yielding 5.44%, and I’m fine with this.”

ModelPriceGuy:  “I hear you on being burned and have empathy with your situation however the equity markets don’t work like this.  Equity markets are about valuation.  Maybe I should design a bumper sticker that says ‘Yield is NOT valuation’.”

DIY Investor:  “I don’t know what you are talking about. What is valuation?  BCE trades everyday on the stock exchange.  Buyers and sellers are coming together transacting business.  Isn’t this fair market value for BCE.”

ModelPriceGuy:  “Unfortunately no.  There is a missing ingredient, the most important ingredient.  You have to ask yourself; ‘What is BCE worth?’  The daily transactions that you may see on the stock exchange, reported in the newspaper or your iPhone is the cost to you if you purchase BCE.”

“In your everyday life, whether buying lemons, cars or services you have a sense of what something costs and the worth of this cost.  If these two, cost and worth, are close you do the transaction.  Obviously, you will be happy whether you’re the buyer or the seller.  You received or given up value approximate with worth.”

“In the stock market, there is a separation between cost and worth.  Why?  Millions of reasons.  Market participants have their own motivation.  Let’s just say one participant that we know about is buying BCE for the yield of 5.44%.”

DIY Investor:  “OK big shot what is BCE worth?”

ModelPriceGuy:  “We calculate that BCE is worth $31.31 on April 17, 2012.  If you were purchasing BCE today, you would be purchasing an equivalent product or a service at 27% premium to its’ worth.  (Assuming a purchase at the close on April 17, 2012 at $39.88.  Forgetting yield for a second, what product or service in your everyday life would you overpay almost 30% and be happy about?”

“We have created a database on Facebook with something like 2000 securities, like BCE, where you can go to find what stocks are worth.  We calculate every night what stocks are worth, along with histories, so you can quickly assess cost with worth.”

“Here is the chart of BCE.”

BCE with weekly price bars, and calculated model price. The dashed line is a history of the calculated model price.

For those interested, a daily updated chart of BCE subsequent to this post will be maintained on Facebook, here.

DIY Investor:   “I have never heard of such a thing.  Can this be true?  Are you saying the cost of any and all shares trading, whether BCE, General Electric and Microsoft is not fair market value (FMV)?”

ModelPriceGuy:  “Unfortunately it’s true.  The vast majority of market participants compare cost to cost.  There is a whole body of experts who call themselves Technical Analysts’ that do nothing else but analyze cost on cost and make predictions based on this analysis.”

DIY Investor:  “How can I trust your model price calculation is accurate?  Are you saying I’m going to lose 20% of my money in BCE?  Aren’t utility companies like BCE safe?”

ModelPriceGuy:  “First, model price to us is 10 years old.  We have seen public transactions take place over the years that confirm the calculations we have performed.  Since this blog started, three months ago, there have been three announced deals that have confirmed our model price calculations.  (here, here, and here).  As time goes by we are sure more confirming M&A transactions will be taking place around model price so your trust can build.”

“Second, your purchasing BCE at $39.88 that has a worth of $31.32 irrespective of the dividend yield.  When will the market reflect the worth of BCE?  We don’t know.  Timing is everything in this business.  Just that over the long haul the true worth of the company will be transmitted through the equity price, but we don’t know when this will happen.”

“Third, financial history is filled with market participants losing money on utilities.  Just because some market participants think utilities companies are safe investments doesn’t mean you cannot lose money in them.  Have a look at Transalta. Back in September, October, November participants were paying over $22 per share for a 5.25% yield.  Investors have lost 25% of their purchase price and the current calculated model price (worth) is still below the current trading price or cost.”

See chart below:

Transalta with weekly price bars and calculated model price. The dash line represents the history of our calculated model price.

For those interested, a daily updated chart of TA subsequent to this post will be maintained on Facebook, here.

DIY Investor:  “My head is starting to hurt.”

ModelPriceGuy:  “No problem.  Follow these steps:

Step 1: “As an investor you must get acquainted with cost and worth.  Think of buying a stock like buying a product or service.”

Step 2: “Calculate the worth of a company?  You can try this yourself or find a resource to an Investment Bank Analyst’s research report, which you can rely on.  Or check out apps.facebook.com/modelprice.  We believe you will find this service truly unique and will go a long way to helping you be successful in the equity markets.”

Step 3:  “Yield is NOT valuation.  By buying BCE today, you’re getting a yield of 5.44%.  However, you are purchasing an asset that is 27% overvalued and this can fluctuate on a daily basis.  When will the market recognize this overvaluation, we don’t know?  Could BCE become more overvalued?  Thereby making you money as well as yield, absolutely.”

DIY Investor:  “This is all I need to be successful in the equity markets?”

ModelPriceGuy:  “No, this is only one piece of the puzzle, however it’s a pretty big piece!”

DIY Investor:  “Thanks for the help, now I will look beyond yield for my next equity purchase.  However, I will certainly consider cost and worth in my investment decision-making.”

ModelPrice Guy – “You’re too technical for me!”

A glass of wine (OK, maybe multiple) was required to loosen the lips of a friend and a reader of this blog. “I have read your blog and it’s too technical for me.” Nothing like a bucket of water in the face to review everything we have been doing for the last few months.

Why?

She’s my perfect reader. Early sixties – do it yourself (DIY) investor and former financial industry veteran. If she doesn’t get “it” than nobody else will! So with these comments and a mild hangover I set about with new eyes not only looking critically at the blog but also reviewing my objectives for this blog in conjunction with Facebook.

Objectives of what I’m trying to do?

1. Demystify Finance. The way and what is taught in modern finance is not helping the public at large make sound financial investments. If the professionals want to use our concepts so be it.

2. Use social media platform (Facebook), so investors are helping other investors with their investments.

How are we demystifying finance?

We have developed Model Price. Simply put, model price, is our definition, of fair market value. We calculate model price everyday and display model price and its’ history on over 2000 securities in a database we created on Facebook.

Since the dawn of man, and our economic progress to date, relies heavily on trade and economic transactions. When we transact, we give value for value. We have a fair estimate of worth and we transact based on these inherent values. However, when it comes to the financial markets, particularly the equity markets, our common sense of inherent value eludes us.

So we developed a database where the public at large can see model price for Canadian and US securities. Simple. Simple line (purple dashed line) calculated on a nightly basis. This is free and available for public use.

So armed with this database, you the public, have the answer on what the company is worth? Simple. Would you pay a 25% premium for your new car? Would you over pay for lawn care? Would you not consider a purchase if something was “On Sale”? Equities go “On Sale” everyday. You liked Apple’s prospects; you could have purchased Apple at model price last December. Maybe you will again down the road, but at least you can enter a financial transaction that is priced like every other transaction in your economic world.

Use of Social Media

Social media is five years old. Even though social media is a child, its’ impact is shaking the world population and its’ institutions. Social media can also change the financial investing world as well.

This may take some time however, we see individuals helping individuals in terms of investing. We have set up a platform for this to happen on Facebook. We will provide the platform where individuals, if they so choose, can start their own advisory/blog, inside and outside the regulatory system, on an area that interests them. With over 2000 securities there is a multitude of investable strategies for individuals to follow. We are willing to help, teach, and educate all users to be better investors with more relevant financial concepts that we have developed and found.

Conclusion

So I believe through this blog, hopefully a reader can see why I was hurt by the “Your too technical” comment. There is no angle. There is enough money in social media for everybody by helping other people.

You will also see some changes in this blog – over the next few weeks. I will endeavor to rank each blog on four levels, using our four square logo. Each level will be more advanced, in terms of financial concepts (i.e., convexity), than the last. We will also create a “Getting Started” tab, with blogs that are basic to our work so new readers can start their process of learning, in a non-threatening way instead of jumping into the first blog of the site, whatever that maybe, which maybe too complex for the new reader to understand.

Many thanks to those of you for reading so far, and don’t be shy, wine or no wine, with your comments.

FSLR – First Solar Falling into the Blue!

We tweeted yesterday, a warning to investors of First Solar (FSLR) that FSLR had fallen below EBV-3.  This is significant because the market is communicating (Yes, the market is talking to you) there is something wrong with the balance sheet of FSLR or is it something more serious?

First, let’s look at the chart.

First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of FSLR subsequent to this post will be maintained on Facebook, here.

Here are 4 reasons why stocks may fall below EBV-3.  Which we call “falling into the blue”.

  1. If the company is an operating business with a big amount of goodwill on the balance sheet. (Goodwill (excess purchase price over FMV of physical assets) is recorded usually after one or more acquisitions performed by the company).  The market is telling the investor that the “good” goodwill on the company’s balance sheet has turned to “bad” goodwill.  Usually this “bad’ goodwill will be written off in a subsequent quarter or year-end.
  2. If the company in question is a financial, the recorded assets are NOT worth what is stated on the balance sheet.  Market value is worth less than book value.  If the financial is big, say a money center bank, write offs usually do not occur.
  3. If the company has little or no goodwill, the market is saying the company’s whole is worth less than the sum of its’ parts.  (This is rare).  Also the company’s business model might be in peril.  Don’t see this much in public companies unless it’s a “concept” company with only one line of business.
  4. The company maybe insolvent.  Model Price ™ has a solvency ratio calculation that we use (see “Key Concepts” tab above).  We identify 3 forms of insolvency.  If the security has any form of insolvency, this warning sign (trading below EBV-3) will likely mean the equity price will go to zero unless the company can recapitalize in a timely fashion.

So let’s look at this list, point by point, to see if any of these points is applicable to FSLR.

  1. Reviewing the financial statements, FSLR took a Goodwill impairment charge during 2011 of $393 million dollars.  The company stills has $65 million dollars in recorded Goodwill on the balance sheet.  Even if the company reduced this amount to zero, it wouldn’t be material to the company, and not a reason for the company to fall into the “blue”.
  2. FSLR is not a financial so point 2 does not apply.
  3. Reviewing the 10K we found these comments
    “The solar industry experienced a challenging environment in 2011. The year was categorized by intense pricing competition, bankruptcies of several solar companies, many solar companies with little or no operating income, and toward the end of the year, announcements of manufacturing shut-downs or slow-downs. At December 31, 2011, the global PV industry consisted of more than 150 manufacturers of solar modules and cells. In the aggregate, these manufactuers have installed production capacity that significantly exceeded global demand in 2011. As a result, industry average module pricing declined significantly as competitors reduced prices to sell-through inventories in Europe and elsewhere. We believe this structural imbalance between supply and demand (i.e., where production capacity significantly exceeds current global demand) may continue for the foreseeable future, and we expect it will continue to put pressure on pricing and our results of operations in 2012.”

    Bingo, we think we found the reason for FSLR “falling into the blue”.  The market has not only priced in this structural imbalance but also has determined this imbalance is getting worse.

  4. To complete our list above,  FSLR has a Solvency Ratio of 1.96.  This is healthy and in no danger of having solvency issues in the near future.  (See “Key Concepts” tab above)

So what are we saying?

We believe the market must be making a comment on the business itself.  The market is discounting “bad” news ahead for this company.  We will watch with interest what the future holds however the market is talking, are shareholders listening?   Also, once FSLR stock price falls below EBV-3, the company’s stock price will become more volatile.  WHY?  The company’s stock no longer has the structure of the EBV lines.  EBV-3 is our last line.

What would change our minds?

If and perhaps when FSLR transits above EBV-3.  A transit above EBV-3, you guessed it, would be “Coming out of the Blue”!

S&P 500 – Model Price Market Strategy Update.

Back on February 24th, we blogged about three scenarios for the S&P 500 Index and our most likely scenario.  Remember we aggregate all companies in the S&P 500 Index into one model price chart.  We can use this chart to analyze the US equity market as a whole.

At the time of our blog, February 24,2012 we produced this chart for your observation.

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

We also said this below, included in our most likely scenario:

… US macro economic numbers, including employment have left the market in a positive mood.  If this continues than the S&P should reach our target of 1447, or EBV+3, which would propel the S&P up another 7 percent from the February 23 close.  In our estimation the only additional gains investors can expect is the growth in the book values of the companies themselves or the growth in EBV+3 line (red line).   Also we think the S&P will stay in proximity to EBV+3 for the foreseeable future.

We said additionally,

When valuations increase, risk also increases.  If something were to go wrong, (i.e., policy mistake, Europe and seemingly twelve hundred other things) the market will correct from EBV+3, which will present investors opportunities to invest in their favorite names.  Yes, we would buy the dips!  Looking for the market to return back to EBV+3.

Let’s look at what has happened since we wrote our blog.

First, the chart

S&P 500 Index with weekly price bars, EBV Lines (colored lines)

The market continued to rise since our post to 1422.38 on an intraday basis.  Close to EBV+3 level of 1447 cited above.  We think it’s fair to say as the market increased, since our last post, more bullish comments were being published in the leading business newspapers.  Though we realized 1447 would be a brick wall for the US market, corrections can and will occur anytime, so coming within 25 S&P points of EBV+3 before this current correction, to us was a win.

So what happens now?

The length and the time of corrections are very hard to predict, even for us.  This correction is beginning when first quarter earnings season is about to begin.  Expect the US markets to be choppy based on which companies are reporting on any given day.  But as we said in our previous post,

“… the market will correct from EBV+3, which will present investors opportunities to invest in their favorite names.  Yes, we would buy the dips!  Looking for the market to return back to EBV+3.

Then we should add, the market would probably correct again!  Hopefully, you see the most likely scenario unfolding before your eyes.  As the S&P 500 advances to EBV+3, everyone gets bullish.  Then the market corrects for duration of time and magnitude, the bears win.  Then we rally back to (you guessed it), EBV+3.  Overall the US equity market will move higher, as book value increases. (EBV+3 will increase 18% over the next year.)  However “feel good” traders and market timers, people who only invest when the market “feels” good, will probably suffer losses over the next year.  In other words, fearless traders who buy the dips at the most pessimistic times will do OK.

RIMM – What now?

Just as a reminder, this is what the RIMM chart looked like on February 10, 2012.

RIMM with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

We updated Facebook chart on the night of the earnings release, however this is the most recent graph we have updated from Monday, April 9, 2012 computer run.

RIMM with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of RIMM subsequent to this post will be maintained on Facebook, here.

On our March 14, 2012 blog we wanted to see three things.

  • Obviously, the year-end balance sheet will be released, and we will update the model price chart to reflect this new information.

The year-end balance sheet had been released and above is the new chart as of Monday, April 9, 2012.  Even though RIMM made money in the 4th quarter they took two write-offs. They took a goodwill impairment charge of US$355 million (US$346 million after tax) and a further US$267 million (US$197 million after tax) inventory write-down relating to the BB 7 phone.  This had the effect of reducing the EBV of RIMM, thereby reducing EBV-3 from the last blog reproduced above.

With the above noted write-off, RIMM reduced their theoretical earnings from $1.08 to $0.91, a reduction of 15 percent, which is a positive.  (See Theoretical Earnings under Key Concepts tab, above)

  • Most analysts still have RIMM making money in the 4th quarter.  (Scotiabank for instance is looking for 85 cents for the quarter.)  Just as long RIMM is making money on an operations basis, until the release of QNX enabled smart phones, this we would view as positive.

RIMM reported an adjusted EPS of $0.80, which obviously disappointed analysts however they did make money.  Stocks trading at EBV-3; usually don’t make any money at all!

Even though the company has suspended guidance and the company’s sales of BB 7 are slowing faster then some analysts expected, RIMM should be profitable in the second and third quarter before the release of BB 10 in Q4.

  • Update on when the new QNX BB 10 smart phones will be released.  Current release date we believe is November 2012.  If this release date were pushed forward, this would be very positive for RIMM.  (Just as a delay, would be viewed negatively.)

Much of everyone’s relief the new QNX BB 10 looks like a go in October/November of 2012.  Unfortunately the time frame mentioned misses the back-to-school season however the long delayed product will finally be released.

What Now?

Not much.  Certainly RIMM is in the doghouse with Wall Street and every other stakeholder it seems.  The best thing for the company is to get out of the financial headlines and let the new CEO go about building a management team and develop processes and procedures to launch great products in the future.

We believe the stock will drift between EBV-3 ($12.07) and EBV-2 ($14.05).  We see no reason, with the present fact set, for RIMM to trade below EBV-3.  However, if a significant, and pronounced breakdown of EBV-3 sometime between now and the launch of BB10 we would use that level $12.07 as a sell signal.

On the positive side, if RIMM breaks above EBV-2 ($14.05), this would be a significant buy signal and evidence that RIMM maybe on the right track long-term.

AOL – Market is telling you something, do you Hear? (Update 1)

Since beginning our blog site, the least read blog we did was one on AOL.  What caught our eye was the triple “Break Out/Pull Back” over EBV-3.  Seeing a triple “Break Out/Pull Back” is exceedingly rare and sets up for a low risk trade for those interested.

AOL with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of AOL subsequent to this post will be maintained on Facebook, here.

As we noted in our blog piece on February 1st, the price of AOL was $17.43.  Last trade on April 9, 2012 was $26.40, for a nice 51 percent gain in two months ….not bad!

OK ModelPriceGuy, what would you do now?

We believe EBV for AOL should hold at $25.77.  Certainly AOL has the ability to go to EBV+2, EBV+3 and maybe EBV+5.  This, however, may take time and will be interesting to see.  You can also add AOL to the growing library of this blog of “Coming out of the Blue” situations that we have written about in past blogs.