Inside the Market’s roundup of some of today’s key analyst actions
After BlackBerry Ltd. (BB-T; BB-N) reported on Thursday its fiscal third quarter financial results, showing negligible revenue for handset sales as it transitions toward being a secure-enterprise data-transmission company, Canaccord Genuity trimmed its price target on stock but is growing more enthusiastic about new revenue streams.
Analyst T. Michael Walkley lowered his price target to US$9 from US$11 previously, largely in response to declining share prices in the sector. The median price target is US$11, according to Zack’s Investment Research.
However, he maintained his “hold” recommendation on the stock. The new target still implies considerable upside, with the shares trading at US$7.50 – and BlackBerry’s sales were considerably better than expectations.
Indeed, Mr. Walkley is growing more optimistic about BlackBerry’s sales in the fiscal year ahead, as it closes its deal for Cylance Inc., an artificial intelligence firm it announced it was buying in November for US$1.4-billion, and continues with its car-connecting QNX software.
Mr. Walkley said the Cylance deal is on track to close in the current quarter, and should drive revenue of US$200-million in fiscal 2020, rising to US$242-million in fiscal 2021.
“We believe the combination with Cylance has the potential to enhance BlackBerry’s Spark offering by integrating artificial intelligence and next-generation endpoint cybersecurity capabilities into its offering of a single unified endpoint security and management platform and enabling BlackBerry to offer a solution across both mobile and fixed endpoints. UEM and QNX are also expected to benefit via Cylance, incorporating predictive AI and machine learning technology into both offerings,” the analyst said.
As for estimates, Mr. Walkley raised some of his forecasts for next year: “Given management’s reiteration of guidance combined with our incorporation of Cylance estimates, we revise our total revenue estimates for F’19/ F’20 from $890M/$945M to $905M/$1,137M, and introduce F2021 estimates of $1,253M. Based on continued strength in all facets of the business, offset by initial margin dilution cadence from Cylance post-close, we have updated our F’19/F’20 non-GAAP EPS estimates from $0.14/$0.23 to $0.17/$0.21 and introduce our F’21 non-GAAP EPS estimate of $0.27.”
Todd Coupland, an analyst at CIBC World Markets, maintained an “outperformer” recommendation on BlackBerry, along with a $14 price target, in a note following the release of BlackBerry’s quarterly results on Thursday.
He pointed out that sales were strong in all of the company’s operating segments, and that the company reported its highest operating margin since 2011 (or fiscal 2012).
“Management's three growth vectors are: securing vehicles with QNX, securing devices for the Enterprise of Things, and managing and securing the end points with its new platform, Spark,” Mr. Coupland said in his note.
He provided another three point list – this one backing his bullish thesis on the stock. First, he expects double-digit revenue growth to persist into 2020, backed by improved visibility. Second, he believes that BlackBerry’s path to a profit of 50 cents per share is now more attainable, given that it requires revenue of about $1.2-billion (which is just 5 per cent above his fiscal 2020 estimate).
And third, he argues that BlackBerry’s valuation is attractive, with the shares trading below peers at just 2.1-times next year’s revenue.
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Tobacco giant Altria Group Inc. (MO-N) struck a massive US$12.8-billion deal this week for a 35-per-cent stake in Juul, the e-cigarette maker that has emerged as a key threat to the traditional cigarette market. At least one analyst is less than impressed with the move, which follows an earlier $2.4-billion deal for a 45 per cent stake in Cronos Group Inc., the Toronto-based cannabis grower.
Adam Spielman, an analyst at Citigroup Global Markets, lowered his recommendation on Altria to “sell” from “neutral” and reduced his target price on the stock – which has been falling sharply this month – to US$45 from US$67 previously. The median price target is US$65, according to Zack’s Investment Research.
“We suspect this [Juul deal] is destroying value but it is impossible to be sure because Altria has not revealed any financial details, despite the scale of the investment. Altria says it’s a tech-style multiple. Trouble is, investors own Altria [shares] for predictability and cash. If they want tech-style growth and risk, surely they’d want to pick their own stock?” Mr. Spielman said in a note.
He also argued that the deal will ultimately hurt Altria’s existing cigarette business: “It allows Juul to directly contact Altria’s current consumers, to try to persuade them to switch from Marlboro to Juul. Juul retains autonomy, so it won’t become a more friendly competitor.”
He even doubts Altria’s ability to maintain its current trajectory of profit growth of 7 to 9 per cent per year, given that its debt to EBITDA (earnings before interest, taxes, depreciation and amortization) jumps from 1.1 to about 2.3.
“It says it will maintain its 7-9 per cent long-term earnings per share growth algorithm. We’re not sure this is possible now,” Mr. Spielman said.
However, Bonnie Herzog, an analyst at Wells Fargo, is more upbeat about the deal for Juul, even as she expressed some concerns.
Ms. Herzog said: “On a very high level, we remain very bullish on the global nicotine volume/profit pool and continue to anticipate growth of this pool to accelerate as new users and dual usage of reduced risk products increases. As such, we believe the company that has (or has a stake in/access to) the leading reduced risk brands/technologies will ultimately benefit from this global trend by taking the most incremental share over the next decade plus.”
She maintained an “outperform” recommendation on the stock, along with a US$65 price target. However, she recognizes the risks as investors weigh the better scenario: Altria spending nearly US$13-billion of shareholder capital on a minority stake in a fast-growing segment; or walking away from the deal with the risk that the company won’t be able to offset declining traditional cigarette sales.
“We think Altria’s decision to acquire a stake in Juul, which we’re certain didn’t come lightly, was ultimately the right decision to create long-term value for shareholders since it more than offsets downside risk from sharper cigarette volume declines and provides Altria with greater upside potential as Juul’s business accelerates internationally,” Ms. Herzog said.