Sizing Up Earnings in a Battleground Stock

 | Mar 27, 2013 | 5:30 PM EDT  | Comments
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BlackBerry (BBRY) is scheduled to report fiscal fourth-quarter earnings Thursday morning before the open (instead of after close because of the Good Friday holiday).

This is a battleground stock. Several bullish analysts have $20 price targets on it, and they think it will surprise positively this year because they predict a large chunk of its existing subscriber base will purchase the new phones.

The vast majority of the 58 analysts covering the stock, however, are very bearish on BlackBerry. They claim that, if BlackBerry is going to be successful this year, there's a 20% to 30% probability of it at best. They believe Apple (AAPL) and Samsung have far too much of a head start for BlackBerry to catch up.

Most investors seem to side with this negative view. Currently, the short interest in the stock is about one-third of its float. That's huge. A Wall Street Journal blog post earlier today pointed out that borrow on BlackBerry is very limited at the moment.

This bearish view is that reality -- i.e., that this company has no hope -- will start to hit Thursday in the earnings report, and that it will be proven out as the year progresses.

I think the quarter to be announced Thursday won't be that great, but that people will focus in on some key metrics and signs of momentum. The consensus view from Wall Street is that BlackBerry should lose about $0.30 in the quarter and reach revenue of just under $3 billion

This quarter the company is reporting only had a few weeks of availability for their Z10 phone in Canada and the U.K. If it sells more than a million Z10s, it will be a big deal. But, even if it sells 500,000 Z10s in the quarter, many might take this positively.

I continue to be a believer that this stock could work really well this year if the company gets only one in four of its current subscribers to buy the new phones. That's 20 million out of 79 million -- not that ambitious, in my view. BlackBerry doesn't have to have Apple-type lineups, for sure. But, as long as the product is bought by the chief information officers of big enterprises and government, that doesn't really matter.

BlackBerry doesn't even have to be the No. 3 player in smartphones for this stock to work. All it needs to do is get a lot of existing subs to re-up on BlackBerry with the new phones.

The big metrics to watch in the report will be:

Units: Did the company sell 1 million Z10 phones in the quarter?

Cash balance: Most expect it to drop on higher market costs. But if it's only down to, say, $2.7 billion from the prior $2.9 billion, investors will become more confident that they've got plenty of firing power in reserve.

Services revenue: After last quarter, investors are worried this is going to go from $1 billion a quarter in high margin revenue to zero. If it's only a small drop, people will be excited.

The other big surprise on the call could be: Does BlackBerry reinstate forward guidance? If so, and if it's healthy -- suggesting they have confidence in the U.S. market -- that could really scare folks who are short the stock.

I have owned stock and options in BlackBerry since November, and we are lightening a lot of our stock going into the report. That's because, as we saw in December, these reports can really hit the shares with surprises. However, I do own September and January calls in the name, and I do think the stock can move toward $30 by the end of the year.

Lots of moving parts will be in this report, but the big thing I'll watch for is: Does the company bring back forward guidance?

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