Piecing Together Analyst Reactions Before BlackBerry's Q1 2014 Earnings Results

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U.S stocks have tilted lower lately on fears of a slowing Chinese economy and the U.S Federal Reserve's plan to unwind U.S stimulus. BlackBerry (NASDAQ: BBRY) was one of the few gainers in the technology sector on Monday, climbing 2.8% to $14.75 per share. The company is set to report earnings results for the first quarter of fiscal 2014 before the opening bell on June 28.

BlackBerry's stock price reached an intraday high of $18.32 on January 24 over optimism ahead of its BlackBerry Z10 and Q10 smartphone unveiling. Since then, prices have dropped, rallied and consolidated after various stock ratings, store checks and upcoming quarterly estimates from industry analysts.

For BlackBerry’s fiscal third quarter, analyst forecasts for earnings per share range from $(0.11) to $0.50, with a consensus estimate of $0.06. Analyst forecasts for sales range from $2.7 billion to $4.3 billion, with a consensus estimate of $3.4 billion.

Bullish Analysts

Société Générale (SocGen) analyst Andy Perkins upgraded BlackBerry from a Sell rating to a Buy, revealing that channel checks show heightened sell-through demand for BB10 units. SocGen estimates sales of 5 million BlackBerry (BB10) handsets, above Wall Street’s consensus of 3 to 4 million units for the quarter.

“We are forecasting Z10 sales to be in excess of 4 million handsets with Q10 sales just under 1 million units," Perkins said. SocGen boosted its price target on BlackBerry to $17 from $13.

Peter Misek of Jefferies & Company reiterated a Buy rating on BlackBerry shares, and a $22 price target. BlackBerry Z10 sales have slowed down, but Misek states the robust demand for the BlackBerry Q10 will offset the slowdown. He expects BlackBerry to announce stronger-than-expected BB10 shipment numbers and beat Wall Street’s consensus estimates.

Misek stated that one of BlackBerry’s main BB10 manufacturers, Jabil Circuit Inc. (NYSE: JBL), reported impressive “high velocity” revenues that may foreshadow a strong May quarter for BB10 handsets. Jabil Circuit’s fiscal 2013 third quarter revenues increased 5.1% to $4.5 billion. Jabil’s High Velocity revenue segment, which primarily represents sales to BlackBerry and accounts for 29% of Jabil’s revenues, ballooned to $1.3 billion, up 23% from a year ago.

Despite strong sales, Jabil’s profits dropped 51% as a result of high restructuring costs. Net income came in at $50.1 million or $0.24 per share, down from $101.3 million or $0.48 per share a year ago. For its fiscal fourth quarter, the company forecasts High Velocity revenues to increase 15% year-over-year.

Bearish Analysts

Bernstein Research analyst Pierre Ferragu downgraded BlackBerry shares from Market Perform to Underperform and slashed his 12-month price target of $15 to $10. The New York research firm carried out channel checks with operators and distributors across Europe to evaluate BB10 support. Channel checks revealed a lack of BB10 excitement from consumers and among corporate customers. However, BlackBerry CEO Thorsten Heins stated that 55% of users who bought the Z10 switched from other devices such as Apple's iPhone and Samsung's family of Galaxy S smartphones.

"Our latest channel checks suggest that consumer take up is slow and we believe adoption of BB10 in the enterprise may be slow and only partial," Ferragu said. "Blackberry 10 is being tested at only 60% of Fortune 500, which implies the share of defectors could be very large."

Management Outlook

Thorsten Heins expects to break even, but his company may show a profit. In the company’s fourth quarter conference call, Heins warned about the company bolstering its marketing expenses by 50% to market the new BB10 devices, dampening operating income.

Heins expects “single digit percentage decline” in service revenues. Service revenues came in at $964 million last quarter, down 2%. BlackBerry CFO Brian Biduka expects the company to post solid gross margins this May quarter. Gross margins will be driven by stronger hardware margins and cost improvements, which will offset the gradual decline in BlackBerry’s service revenues.

BlackBerry has focused on developing integrated service offerings such as BlackBerry Messenger (BBM) to battle declining service revenues. BBM, a messaging application, will be available as a free download on Apple iOS and Android-based devices this summer. The company will monetize BBM through BBM Money and BBM Channels. Some analysts remain skeptical. If BlackBerry allows iPhone and Android users access to BBM, it may decrease the need to own a BlackBerry phone. However, allowing BBM services on various phones will increase exposure and maximize revenues.

Short Interest

NASDAQ data shows 182.6-million shares of BlackBerry are sold short as of June 14 against 494 million shares in the public float—an increase from 171.3 million shares as of May 31. The average number of days to cover increased from 9.3 to 9.4 days. 

<img alt="" src="http://g.fool.com/editorial/images/53382/chart-1_large.jpeg" />

Source: Short Analytics (click image for bigger picture)

If BlackBerry beats estimates with impressive earnings, the stock price may soar to new month highs. Short sellers will be cornered and forced to liquidate their positions. If it's known short sellers are covering their short positions, especially from institutions or hedge funds, the stock may propel higher, break out above overhead resistance levels with high volume and reach its 52-week high of $18.32 a share. If estimates come in below expectations, the company's stock price will fill with uncertainty and risk and shares may drop to new month lows. BlackBerry shares may reach the $13.30 support level and trend lower to $12.85 with added short-selling pressure.

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