Thursday, 06 May 2010 13:16

A Rare Sighting? Highly Indebted Company With Low Margins & Poor Prospects Trading Considerably Higher Than Its Peers

Hat tip to BoomBustBlogger shaunsnoll for bringing this one to our attention. Unfortunately this one is for subscribers only, but can be accessed with a retail monthly plan. Here are the highlights of a company drowning in debt, barely able to be meet debt service, susceptible to a falling euro and facing gloomy prospects trading at multiples that are higher than all of its peers.

  • The company has a high debt-to-equity of over 107% and a net debt-to-equity of over 111% as of quarter ended March 31, 2010.
  • Interest coverage for 1Q2010 was low at jut over 1.ox, however higher than 1Q09. Annual interest coverage ratio has continuously declined from just under 2.8x in 2007 to about 2.6x in 2008 to less than 1.7x in 2009.
  • The business can be hurt by a Euro drop, which is currently occurring at a historically unprecedented pace, as the company is expanding its business outside US (primarily in Europe).
  • Approximately 15% of the debt is payable in 2010, which accounts for 76.0% of annualized operating cash flows for 2010.
  • The Company’s ROIC over the last few quarters has been continuously declining except its recent improvement in 1Q2010. The Company’s weighted average cost of capital has been far higher than the recent figures shown for ROIC. What we have here is a classic case of destruction of economic value!
  • Currently the share is trading at a very high P/E of over 35x. The share price has more than doubled over the last one year without any significant improvement in fundamentals

Subscribers may access the review here: File Icon 050510 Release Candidate

Last modified on Sunday, 09 May 2010 10:04


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  • Comment Link manutd Sunday, 09 May 2010 16:04 posted by manutd

    Reggie, Euro ministers meeting live at 2pm at link below

  • Comment Link rahul Friday, 07 May 2010 17:58 posted by rahul,29489,1986310,00.html

  • Comment Link rahul Friday, 07 May 2010 17:37 posted by rahul

    In defense of Goldman Sachs :-p

    Mainstreet to Wall Street: With a trader, the goal of every minute of every day is to make money. So if running the economy off the cliff makes you money, you will do it, and you will do it every day of every week.
    Wall Street to Main Street: It is easy to think that Wall Street has always been the place for the corrupt and the greedy and that this is nothing new. But that's not really accurate.

    We are Wall Street. It’s our job to make money. Whether it’s a commodity, stock, bond, or some hypothetical piece of fake paper, it doesn’t matter. We would trade baseball cards if it were profitable. … Go ahead and continue to take us down, but you’re only going to hurt yourselves. What’s going to happen when we can’t find jobs on the Street anymore? Guess what: We’re going to take yours. We aren’t dinosaurs. We are smarter and more vicious than that, and we are going to survive.

  • Comment Link shaunsnoll Thursday, 06 May 2010 16:16 posted by shaunsnoll

    thanks Reggie, one of my favorite blogs and I am happy to be a part of what you are building here.

  • Comment Link shaunsnoll Thursday, 06 May 2010 16:14 posted by shaunsnoll

    they could always issue more shares, that is a risk, but the stock would do badly and given that their returns on capital are less than their cost of capital, any capital they raise and deploy is likely going to have negative value creation. I really don't understand why their biggest competitor doesn't just drop prices by 15% for two years and force this company into bankruptcy??! anyone have a good reason why they shouldn't? no regulatory body oversees them!

    about the pair trade, given that their peer has a better dividend please note that the cost of carry is a positive one so you are paid to wait.

  • Comment Link manutd Thursday, 06 May 2010 15:29 posted by manutd


    Did you see that!

    I have follow you and seen people bitch about your work or the way you present it, who gives a %^&$#%..anyone following you did very well today and probably this is not over.

    Congrats to your research

  • Comment Link schan Thursday, 06 May 2010 14:31 posted by schan

    What is the likelihood of them issuing more shares to help them service their debt? A couple of REITs have been able to issue shares over the past year with no consequences even though they are diluting existing shareholders. I understand this is not sustainable, but it appears that some companies are getting away with it for longer than we think.

  • Comment Link Reggie Middleton Thursday, 06 May 2010 13:58 posted by Reggie Middleton

    On the @&P, we've went from over 1200 to almost 1140 in less than 3 days. The extent of the drop is much more dramatic than that of the rise, and the rise was literally historic. You can only bend the laws of simple math for but so long.

  • Comment Link Reggie Middleton Thursday, 06 May 2010 13:56 posted by Reggie Middleton

    Those low volume meltups are going to be difficult to achieve with Europes liquidity disappearing and rates skyrcoketing upwards. It could happen, but if it does it simply exacerbates the extent of the fall.

  • Comment Link Reggie Middleton Thursday, 06 May 2010 13:54 posted by Reggie Middleton

    good point. I's good to have you aboard here.

  • Comment Link shaunsnoll Thursday, 06 May 2010 13:47 posted by shaunsnoll

    edit* "lower cost peer trading at same valuation"

  • Comment Link shaunsnoll Thursday, 06 May 2010 13:47 posted by shaunsnoll

    its largest peer trades at a similar valuation despite much better balance sheet, cash flow, leverage and profit margins. seems strange to have their higher cost peer trading at same valuation. for those worried about market risk of another rally this one is easy to hedge by going long their largest competitor. I think market is over valued so I'm comfortable having naked short exposure but worth noting for those who are not.

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