BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) was in dire straits when new CEO John Chen came on board, but now, things might be looking up. RBC Capital Markets analysts have upgraded the company to Sector Perform and increased their price target from $6 to $10 per share because they say its balance sheet has gotten stronger. In spite of their upgrade, however, shares of BlackBerry fell as much as 4% in early trading at the NASDAQ this morning.

BlackBerry

BlackBerry buys some time

Analysts Mark Sue, Paul Treier and Ameet Prabhu note that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) still faces some big challenges as it tries to right the ship. However, they say the company has improved liquidity and addressed some urgent concerns with its balance sheet. As a result, they said the company may have bought some time to fix itself. They also believe that by firming up asset metrics and transferring liability to Foxconn, BlackBerry may have helped cushioned its stock.

The RBC Capital team said the big $1.6 billion write-down could help lift BlackBerry’s gross margins over the next few quarters. The company’s 34% gross margins include negative margins from its handset division. After the deal with Foxconn, they estimate that the company’s handset margins could actually increase to about 10%. From now on, BlackBerry is allowing other companies to take on the risks associated with inventory, production and planning, thus enabling it to improve its working capital needs. In addition, they said “blended mix” could give additional upside to the company’s margins.

Wall Street too bearish on BlackBerry

The analysts believe that Wall Street’s gross margin expectations may end up being too bearish, and in fact, they don’t think investors should expect the company’s cash burn to be as bad as bears expect. They note that BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB)’s books now have only $254 million in inventory on them, compared to the company’s peak of $1.37 billion. They note that BlackBerry will continue using cash in the near term, including about $439 million in the fourth fiscal quarter of 2014. However, they said that rate is declining.

In addition, they believe Foxconn will pay for some of the company’s inventory, and they expect BlackBerry’s purchase commitments to wind down even more from the period high of $6.1 billion in the fiscal fourth quarter of 2013 to $1.5 billion in the following quarter and then less than $400 million in three or four quarters. They also said BlackBerry could get another $500 million tax rebate next year.

BlackBerry management moving fast

The RBC team said Chen is moving fast, and they’re expecting some more changes to be announced over the next six month. They note that at one time, BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) had 17,000 employees, and now it’s down to 7,000. They also admit that moving into the MDM segment comes with risks and that average selling prices in that market are eroding. However, they expect the company to successfully bridge its products between BlackBerry 7 and BlackBerry 10 and continue focusing on high-end enterprise customers.