As the first of many gifts to my paying subscribers, here are the finalists of the initial research used to find my first set of shorts in the industrial sector (I am currently working on my 4th set). I have added a monthly subscription, and significantly reduced the professional subscription rate.

There is still much content on the blog that is free (actually, most of it), but the current company specific forensic opinions will be for those who actively support the site. I have a lot more coming since I am narrowing my search to find probably bankruptcy candidates in lieu merely overvalued companies and I will try to post an additional screen by tonight.

This list was congealed from 510 prospects, in automotive, aircraft, metal, and a whole host of other industries to create a list of 20 potential candidates. Of the total 20 companies we had selected, I shortlisted the following 4 companies:

· Navistar International Corporation - pdf Navistar
Consolidated report (326.7 kB 2008-08-21
17:28:53
)

1. The company has huge debt liabilities ($6.8 bn) and negative shareholders equity of $562 mn. Its debt liability currently stands at approx. 60% of its total assets.

2. Recently S&P gave Navistar’s debt a below investment grade BB- rating -- with a negative outlook. All the company's competitors, including Paccar Inc, Volvo AB and Scania AB, earn investment grade ratings from S&P

3. The company is also in financing activities (for financing sale of trucks) and has around 50% of assets in the form of finance receivables. The current provision stands at mere 1.7% of the total receivables. Given the current problems in the consumer credit environment, the company can have double whammy from slow-down in sales and higher credit losses. Higher crude oil prices have had a denting impact on its revenues in recent quarters.

4. The company witnessed a 13.4% decline in its 2007 revenue off continuing subdued demand for automotives, and its operating margin declined to 2.6% in 2007 compared to 5.0% in 2006 off rising input cost and inelastic product prices.

5. Its interest coverage ratio is less than one, indicating insufficient cash flows to service its interest payments

6. The Company recently got relisted on NYSE after 16 months. The Company’s valuation multiples seem higher compared to its peers despite the fact that its operating margins are much lower.

7. The Company’s stock has witnessed a decline of nearly 14% in last 5 trading days

Published in BoomBustBlog
Wednesday, 27 August 2008 01:00

A note on Thompkins PLC

This is a company that popped up on one of my European screens. I don't have a position in this company, but thought my readership may find it interesting. Each of my shorts are usually the result of a screen of about 250 to 600 companies in a particular sector, industry or segment.

Tomkins
Plc (TKS US
)

Comparative
Price Chart of S&P 500 Index Returns and Tomkins Stock price Returns:

image001.gif


Picture
false

Tomkins Plc, along with its subsidiaries, is
a global engineering and manufacturing company. It has two business groups:
Industrial & Automotive and Building Products. Under the Industrial &
Automotive business group, the company manufactures a range of systems and
components for cars, trucks and other industrial equipment. The Industrial
& Automotive segment operates through four business divisions: Power
Transmission, Fluid Power, Fluid Systems and Other Industrial & Automotives.
Building Products consist of two business divisions: Air Systems Components and
Other Building Products. Air Systems Components supplies the industrial and
residential heating, ventilation and air conditioning market. Other Building
Products manufactures a variety of products for the building and construction
industries.

Tomkins                             Plc

Industrial
& Automotive

Building
Products

Power
Transmission

Fluid
Power

Fluid
Systems

Other
Industrial & Automotive

Air
Systems Components

Other
Building Products

image002.gif

Published in BoomBustBlog
Tuesday, 26 August 2008 01:00

Unrealistic projections from management...

Regarding the financial projections for Navistar.

Although we do no rely entirely on company’s guidance while making
financial projections and instead take into account the overall macro
economic picture, global and industry trends and company’s competitive
position within the industry, we do give reasonable consideration to
management guidance as well. We do not altogether ignore the
management’s discussion and statements about future industry and
company scenario and critically examine management’s guidance in light
of current environment to see if the company could meet the guidance.

Based on our independent analysis of the auto
industry and Navistar, following is the variance between the financial
projections for Navistar and company’s guidance.

Published in BoomBustBlog

This is the full forensic analysis of the Encore Corporation, an industrial that specializes in copper wiring for residential and commercial builders (that's right, Uh Oh!). I will be changing the format of the posts, including only summaries in html and leaving the bulk of the report as a downloadable PDF file. From this point on, I will focus on only those manufacturers and industrials that I consider to be bankruptcy candidates, with a macro report to show the reasoning behind these actions coming up soon. Enjoy!

Encore

Fast declining spreads between average selling price of wire containing a pound of copper and average cost of a pound of copper on account of an intense competitive environment in the US building wire and cable market has adversely impacted the performance of Encore Wire Corporation (Encore) over the past two years. The problem has been compounded by a slow down in residential construction which witnessed a sharp decline in 2007 and 1H2008. Further, slowing commercial construction in the US off contraction in economic activities, as evidenced by a decline in the manufacturing and non-manufacturing sectors, and rising unemployment levels, has had a dampening impact on Encore's average selling price and margins. This resulted in Encore's 1H2008 net earnings and EPS declining 42.8% and 41.8%, respectively, to $14.9 mn and $0.64 compared with $26.1 mn and $1.10 in 1H2007.

With no near-term turn around expected in the current deteriorating conditions in the US construction sector, Encore should expect to witness continued compression in its gross margins, with almost flat revenues in 2008 and 2009. While the continuing slow down in the US commercial construction activities should continue to strain the Company's near-to-medium term revenue growth, the margins are likely to be compressed amid volatile copper prices and Encore's lower bargain power on the pricing front. As a result, we estimate Encore's gross margins to be 8.0% and 9.0% for the next two years, down 140 and 40 basis points from the 2007 levels, resulting in our EPS estimate of $0.87 and $1.14 for 2008 and 2009, respectively. We believe that the Company's near-to-medium term performance will be determined by its ability to withstand the current volatility in the copper prices, which after rising 34.8% in 2008 to its highest ever level of US$8,985 per tonne on July 3, 2008, have subsequently fallen 14.6% till August 20, 2008, and to maintain sustained and reasonable margin levels with moderate growth in its revenues. Based on the relative valuation approach, we have valued Encore at $14.7 per share, down 22.5% from its current price of $18.9 as of August 20, 2008.

I. KEY POINTS

Tough times expected for Encore in the wake of impending US commercial construction deceleration. Encore's revenues rely largely on demand from commercial construction in the US. Currently about 74% of the Company's total sale volumes are attributable to the commercial construction sector. In the past few quarters, the impact of slackening demand in the residential construction sector on Encore's revenues had been compensated through simultaneous demand expansion in the commercial construction sector.

See the PDF for pro formas, valuation and further opinion on this company's prospects -

Published in BoomBustBlog

This is the full forensic analysis of the Encore Corporation, an
industrial that specializes in copper wiring for residential and
commercial builders (that's right, Uh Oh!). I will be changing the
format of the posts, including only summaries in html and leaving the
bulk of the report as a downloadable PDF file. From this point on, I
will focus on only those manufacturers and industrials that I consider
to be bankruptcy candidates, with a macro report to show the reasoning
behind these actions coming up soon. Enjoy!

Encore

Fast
declining spreads between average selling price of wire containing a
pound of copper and average cost of a pound of copper on account of an
intense competitive environment in the US building wire and cable
market has adversely impacted the performance of Encore Wire
Corporation (Encore) over the past two years. The problem has been
compounded by a slow down in residential construction which witnessed a
sharp decline in 2007 and 1H2008. Further, slowing commercial
construction in the US off contraction in economic activities, as
evidenced by a decline in the manufacturing and non-manufacturing
sectors, and rising unemployment levels, has had a dampening impact on
Encore's average selling price and margins. This resulted in Encore's
1H2008 net earnings and EPS declining 42.8% and 41.8%, respectively, to
$14.9 mn and $0.64 compared with $26.1 mn and $1.10 in 1H2007.

With
no near-term turn around expected in the current deteriorating
conditions in the US construction sector, Encore should expect to
witness continued compression in its gross margins, with almost flat
revenues in 2008 and 2009. While the continuing slow down in the US
commercial construction activities should continue to strain the
Company's near-to-medium term revenue growth, the margins are likely to
be compressed amid volatile copper prices and Encore's lower bargain
power on the pricing front. As a result, we estimate Encore's gross
margins to be 8.0% and 9.0% for the next two years, down 140 and 40
basis points from the 2007 levels, resulting in our EPS estimate of
$0.87 and $1.14 for 2008 and 2009, respectively. We believe that the
Company's near-to-medium term performance will be determined by its
ability to withstand the current volatility in the copper prices, which
after rising 34.8% in 2008 to its highest ever level of US$8,985 per
tonne on July 3, 2008, have subsequently fallen 14.6% till August 20,
2008, and to maintain sustained and reasonable margin levels with
moderate growth in its revenues. Based on the relative valuation
approach, we have valued Encore at $14.7 per share, down 22.5% from its
current price of $18.9 as of August 20, 2008.

Published in BoomBustBlog

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This is the first foresnic analysis of the next step of my investment thesis. We have analyzed and tracked the real property bust, the real property financing bust, the real property financing insurance bust, and now we shall trace the effects of all of those busts on mainstream corporate America and Main Street, USA. The banks are no longer loaning to each other, and are not loaning in any significant volume to businesses. This is bad news for businesses that need money, particuarly capital intensive businesses, businesses in tough operating environments, mismanaged businesses, and most of all - businesses ensconced in all three of the aforementioned buckets. Basically, as Wall Street and commercial banks horde capital from capital needy corporate America and Joe (and Jody) citizen, insolvencies quickly follow. After all, investment and lending is the lifeblood of capitalism.

In order to keep the posts shorter, I will separate the overview of this portion of my thesis from the initial analysis, then post a more rigorous supporting document on the effects of the credit crunch, followed by a Doo Doo list of companies affected by such. Below is the first company that I have decided to release t o the public domain as part 3 of the investment thesis. It is Navistar and it currently sports NEGATIVE SHAREHOLDER EQUITY in a very negative operating environment in a very negative macro situation. This HTML blog post does not have the full pro formas, but registered users may access the content by downloading the full report here: pdf Navistar Consolidated report (326.7 kB 2008-08-21 17:28:53)

Reggie Middleton's Forensic Analysis of the Navistar Corporation

image001.pngSlowing
global economic pace, high gasoline prices and rising inflation have dented the
demand in the global automotive sector. The problem has been compounded by
tightening lending and leasing standards, dramatically reduced residual values and
rising fears of a US recession. This has resulted in
automobile sales in the US tumbling
to a 16-year low in July 2008 following nine months of consecutive decline. The
truck and SUVs segment sales have been impacted the most, as customers shift
towards smaller fuel-efficient vehicles. The trend is expected to continue
through 2009 amid worsening macro-economic environment and slowing business
activities, forcing contractors and builders to postpone their capex plans and
purchase of commercial trucks. However, we expect 2009 commercial truck sales
to pick up over the 2008 levels due to strategic purchases ahead of 2010
emission requirement revisions, with a resultant decline in sales in 2010 due
to the macro environment.

Published in BoomBustBlog
Page 6 of 6