10 Companies That Need to Die or Disappear
Normally I'm busy picking companies that I think will outperform and writing a blog about them, but this time I thought it would be interesting to do something different. I'm perfectly aware that over the course of the past 16 months I've picked out quite a lot of shorts, but I usually do not devote entire blogs to those shorts, I just write concisely sarcastic pitches and let my minions do the work from there. This blog I've decided will be devoted to 10 companies that are either on their way out technologically, financially or simply don't deserve to survive the next few years.
The majority of companies on this list have been giving us warning signs for years that have manifested in rising debt levels, growing losses and shrinking market shares. Many of the companies here will appear to be no-brainers, but investors need to accept the fact that these are indeed dying brands and let them move toward bankruptcy/delisting.
RadioShack (NYSE: RSH)
Who even uses the RadioShack these days? Before I even get into the financials here, I have to note that I haven't thought "boy, I think I'll go to RadioShack to get (insert electronic device here)" in about fifteen years. RadioShack has been predominantly bullied out of large shopping malls and finds itself relegated to small standalone's and strip malls these days. Best Buy (NYSE: BBY) has absolutely dominated the electronic retail space, essentially pushing Circuit City out of the market (though CC's management was less than stellar) and making RadioShack an afterthought.
RadioShack has made its mark recently selling cell phones, tv's and other, older electronic gadgets which have considerably slimmer margins. As cell phone companies bite further into RadioShack's margins and Best Buy begins experimenting with standalone kiosks and smaller stores (they're looking to have over 100 US wide by this time in 2011) it could push RadioShack to the breaking point. RadioShack has been tinkering with the idea of either selling itself or breaking itself up. This seems like the only logical idea otherwise they'll continue to be bullied into oblivion. The problem is that despite 220M in net cash RSH's revenues have been stagnant for more than 3 years and look to stay that way through 2012 before they begin tapering off again. With that, no business in their right mind is going to overpay for RadioShack. They're profitable but it's pretty much a stagnant profit in a dying margin business. I do think RSH will be purchased but I wouldn't be paying any more than $12 a share for their business and you better believe it will be Best Buy which gobbles them up. The world will be a better place without the Shack and their low margin, unexciting, revenue-tapering business model.
Sirius Satellite Radio (NASD: SIRI)
What good could I possibly have to say about my least favorite company listed on the stock market. I am personally astounded and mortified at the same time that someone came to the rescue of Sirius Satellite last year and gave them a cash infusion to meet their debt obligations. Sirius has since responded by increasing their debt pile an additional 300 million dollar since Liberty Capital's cash infusion and amending their credit facilities to include potentially higher future interest rates and pushing their maturity dates out. All in all 3.6 billion dollars of debt is still coming due, some of it earlier than other chunks, and unless they get significantly profitable soon, Liberty Capital which is itself highly indebted, will not be able to save them.
Sirius Satellite promised that a cohesive company of XM and Sirius would be able to save millions of dollars a year through synergies. That promise seems to have come about three years too late as Sirius is mired in the overall economic slowdown. Car sales have generally rebounded but Sirius sales for lack of a better word are lagging. Average revenue per user has been lagging for the better part of a decade now and the churn rate (as would be expected with economic uncertainty) has been rising. They simply can't give the service away for free right now and keep those customers coming back for longer than a year. The problem here is that free radio still exists and for the majority of consumers free will continue to trump "for pay" on almost every occasion.
Fundamentally speaking Sirius has diluted their shareholders nearly to death over the last half decade. Frankly I'm shocked that they even have a positive book value with a net negative in the debt column of over 3 billion dollars. However, 27 times book and a very conservative 70 times 2011's profit projections leaves a lot to be desired. It's very likely that satellite alternatives (i.e. Google's streaming services) could eliminate what little profit Sirius expects to turn in 2010 and 2011. The technology was there but it took too long to execute and management was simply to arrogant to see its own flaws. I really don't see Sirius surviving until 2015 and I'm personally stunned to still see them around today.
Eastman Kodak (NYSE: EK)
Eastman Kodak is the dinosaur of the print and imaging business. What once was a dominant force in the 1970's, 80's and part of the 90's, Eastman has been a flailing mess for much of the past seven to ten years largely because of their unwillingness to adapt to changing consumer habits but also because of their poor mismanagement of their credit line.
I feel pretty confident in my assertion that Polaroid died largely because it failed to anticipate the coming digital era and Eastman survived only because of it's brand name and larger credit line otherwise it would have joined Polaroid in the unemployment line. Eastman Kodak has given in, per se, to the digital age of electronics but it's really too little too late. Revenues have been in a steady decline for four years and EK cannot escape quarter after quarter of losses stemming from retiring debt and moving maturity dates out to 2013-2017 at marginally higher interest rates than they were already paying. Default risks on EK debt may not seem high given that they are turning a gross profit on their merchandise, but factoring in "debt storm" they have created, I'm not whole-heartedly convinced they'll make it past 2013 without giving in to the bankruptcy card. I'm not saying a restructuring could even cure Eastman, the brand name might be damaged beyond all recognition if they went belly-up, but I can tell you the company isn't going to survive based on the business model in place currently.
Eastman Kodak is in serious danger of having a six year revenue decline and returning to a full-year loss in 2011. If you factor in Eastman's book value you'll see how dire things really are, and by that I mean the negative 21 cents that they are currently worth. Eastman is behind the times and they've dug themselves a grave of debt. It's time they step aside and lie in their hole.
The Bank of Granite (NASD: GRAN)
The Bank of Granite is a 104 year old walking corpse as far as I am concerned, but you could probably tell that from their stock price I bet. This bank is involved with mortgage origination and general banking and real estate services to consumers and small businesses with 22 (soon to be closing) offices.
It came as no surprise during their last quarterly report that the FDIC deemed that the Bank of Granite was grossly undercapitalized and that it needed to raise, at minimum, 45M dollars in order to meet the bare minimum tier capital ratios. What was more surprising to me and even more disturbing was just how poorly their loan portfolio was performing and that its quality was continuing to deteriorate even as the economy partially stabilized. Currently over 46M dollars of GRAN's loans are written off as non-performing and it's looking increasingly likely that an additional 155+ million dollars may soon join that pile.
The Bank of Granite considered putting itself up for sale as a possible way to raise the cash needed but as of now no banks have taken an interest in the failing North Carolina bank. Management here has done little to nothing to help their case as is indicated by the poor quality of their loan portfolio and their approximately 5% tier 1 ratio. Loan loss reserves are considerably higher than they were in 2009 and GRAN is scheduled to post a drastically higher net loss than last year. They are also in danger of continuing a streak of revenue declines which could extend to a fourth year. As I said in my pitch, GRAN is running on borrowed time and I find it highly unlikely that they will make it out of 2010 without being seized and having their assets sold by the FDIC. This is likely heading to nearly zero.
Sprint-Nextel (NYSE: S)
Sprint-Nextel would be a happy camper if they could possibly crawl out of the cellar. They have been eating Verizon (NYSE: VZ), AT&T (NYSE: T) and T-Mobile's (owned by Deutsche Telecom NYSE: DT) dust for years now and that trend is likely to continue this decade.
If you were curious what company could possibly hold the record for most consecutive yearly declines in revenue I think the answer in the investment encyclopedia might read "Sprint-Nextel." They have been burning through subscribers at an alarming pace since 2006 and simply cannot keep up with the new technologies that Verizon and AT&T can offer to customers. I can't remember the last time I ran the figures, but I believe Sprint's subscriber base is shrinking by 2% per year. Even scarier their average revenue per user, an even better indicator of a cell phone providers health has been shrinking. A victory for Sprint would be for that number to remain stagnant for a year or two, but alas, no dice!
I really don't think Sprint will ever turn a profit because they simply can't differentiate themselves or their network as better than Verizon or AT&T (notice I keep excluding T-Mobile?). They are burning through their 4 billion dollars in remaining cash at an alarming rate as they attempt to update their network with their 4G roll-out and to amend their massive credit line which currently shows over 21 billion (with a B) dollars of debt, with most of it coming due in the next 3-7 years. Sprint is in serious danger of extending their revenue decline streak to six or seven years, possibly longer if they don't find a way to differentiate themselves from the other networks and I'm just not confident their 4G network is good enough. I think the merger caused a serious over-leveraging and subscribers can't jump ship fast enough. Sprint can lower plan rates as much as they want to try to lure consumers back but all they'll wind up doing in the end is scrapping their already low margins and digging themselves a deeper hole. Eventually I expect the Sprint network to be broken up and sold off as they will not survive in the current state they are in.
Rite Aid (NYSE: RAD)
My goodness, clean up aisle six! I won't actually make a long-winded deal about Rite Aid because it has been speculated on for a long time that Rite Aid was a sitting duck and it looks like 2010 might finally be the year that they give in to their shrinking revenues and massive debt load.
Everything bad about Rite Aid stems largely from their poorly executed and over-leveraged purchase of Eckard, a drug store chain that underperformed for years prior to being purchased and has really kicked its underperformance into high gear since joining Rite Aid. The other part of this puzzle is that Walgreen's (NYSE: WAG), Wal*Mart (NYSE: WMT) and other larger department stores/chains have eaten into a healthy chunk of what I'd refer to as Rite Aid's client base. Seriously, have you even set foot into a Rite Aid recently on purpose? I think I perhaps was in one about three years ago to buy a bottle of aspirin (I had a headache and was in a completely different state so I wasn't familiar with the surrounding businesses), but really, who goes into a Rite Aid anymore?
Revenues have been stagnant for more than a decade now and with that comes a consistent stream of 225M to 350M dollars in losses each year. With less than 300M dollars in cash remaining in Rite Aid's coffers and over 6.25 billion dollars in debts maturing over the next decade I think I would be a betting man that Rite Aid will not survive without seeking the protection of chapter 11 bankruptcy. I would be more than willing to bet that Rite Aid will be forced to close or sell off more than 30% of it's nearly 4800 operating drug stores under a reorganization plan, and of course you know WalGreen's and Wal*Mart will be chomping at the bit to buy up those locations. If you think you have a turnaround shot in Rite Aid you're right.. you still have the chance to turn around, and walk away before they file for bankruptcy protection.
Tree.com (NASD: TREE)
Tree.com may not ring a bell to you, but a man dressed up in a ridiculous caterpillar outfit in television commercials prompting you to get a payday loan at a Lending Tree might. Tree.com is the brainchild behind the short-term loan lending offices, Lending Tree, as well as numerous online lending websites in the real estate and short-term markets.
If you ever wanted my opinion on the current state of credit quality in this country you're about it to get it! It's crap! Plain and simple the overall credit quality of debtors in this country has been pitiful since 2005 and equally bad have been the lending practices of those with the cash. Tree.com's real estate profile is littered with poor, underperforming loans as is evidenced by the large drop off in revenues from their most recent quarterly report. Listen all you want to evidence by the CEO that their lending business is doing well but I'm telling you it is on very shaky ground. It would not take much of a dip in the economy for their lending business to fall on hard times and if record low mortgage rates and a 13-year low in new home sales are any indication, things are about to get very difficult for Tree.com.
One of the very few things I will say that Tree.com has going for it is their 71M dollars in cash, but that could easily be eaten through in 2 years if real estate and the economy makes even the slightest move against the grain. TREE does have a relatively healthy credit facility open to it, but they've already used almost 50% of that lending capacity. I don't see them turning a profit at least until 2013, if ever! As long as revenues remain stagnant around 210M-230M, TREE will not turn a profit and I'm worried enough as is about their ability to pay back the 85M plus they've already borrowed. Do yourself a favor and cut the TREE down. I wouldn't be surprised to see this trading under $2 within three years.
Dollar Thrifty Automotive (NYSE: DTG)
Yes, I am fully aware that Avis Inc. (NYSE: CAR) has made a bid to acquire Dollar Thrifty and barring the inability of Avis to get the financing, the deal will go through, but Dollar Thrifty is such a poorly run company it needs to be included on this list.
Whoever decided it would be a good idea to purchase Dollar Thrifty certainly has to be a sadist for taking on their nearly 1.6 billion dollars in debt and their stagnant revenue growth rate. Sure when you factor in their cash they are only net negative by 1.25 billion in debt, but taking into account that their debt ALL matures by 2014 I'd say that as a standalone this company would be screwed. The financing for Avis isn't exactly a sure thing, but as of right now it looks like it will get approved (again, I wouldn't want to be the banker than approves the financing of this crackpot deal). Revenues have dipped almost religiously every quarter since 2007 and when Dollar Thrifty was profitable it was a marginal profit, thanks to that huge pile of debt they lug around.
All I have to say is either Avis will purchase Dollar Thrifty and find itself victim to their burdensome pile of debt and within a few years perhaps we can kill two birds with one stone, or Avis will be unable to muster up the financing to complete this deal and DTG will succumb to nearly 500M dollar payments over the next four years, or simply amend higher debt amounts out at higher interest rates set to mature in 2017-2019. Either way, Dollar Thrifty is an overleveraged pig that in no way deserves to be trading as a nearly 1.4 billion dollar company.
Tesla Motors (NASD: TSLA)
I like you am frankly tired of hearing about the demise of Tesla before they've even had a chance to prove themselves, but if you look at the numbers, they simply are Willy Wonka-ish and don't make a lick of sense!
Tesla Motors is a newly public company that is planning to offer fully electric vehicles to consumers at an absurdly large and downright ridiculous price tag. Currently Tesla is about six to seven years away from even being a viable enough entity to turn a profit. Eventually the local and federal governments will discontinue offering subsidies to Tesla and when exposed to the real world automotive elements it's my opinion that Tesla would crumble.
It's a fad, nothing more than that. Electric vehicles are an excellent concept, but are highly unreliable for the normal American currently and at 37 times book I really doubt any analyst is going to give Tesla resounding support. Like Sirius, consumers are simply unwilling to pony up big bucks for a car constantly in need of recharging. It takes decades to transform consumers mass transit habits and unfortunately Tesla only has about 3-4 years of cash with which to prove itself. I'm going to stick with my assertion that it will take until 2017-2018 before Tesla even has a shot at viability, but it will either have been broken up for its technology or reorganized under bankruptcy protection by then.
PIMCO California Municipal Income Fund (NYSE: PCQ)
I had to throw one oddball into this bunch of ten and I'm sorry PIMCO but you're the clear winner here with your non-diversified bond fund focusing on, of all places, California, perhaps the most defunct state in existence. Investors may recoil when they think of the calamities in Greece, but they have little on the budget shortfalls that continue to plague one of the largest economies in the world.
This call is actually not based on the mismanagement of this particular bond fund by PIMCO because I firmly believe them to be one of the best in the business, it's merely based on the tight constraints the fund has to purchase only bonds based in California a state that is quickly rising the ranks of the default risk list. Based on what I've read over the past few months, I find it increasingly likely that somewhere between 6 and 10 cities/counties in CA will declare bankruptcy within the next 18 months. California continues to simply push its debt obligations further into the future and to furlough workers pay and jobs in order to save money. The budget gap grows almost every year regardless of what steps governor Schwarzenegger takes. I am not calling for the outright bankruptcy of the State of California, but I think funds based solely on muni's in CA are doomed to fail over the next decade as that state slips into the sixth dimension of hell. In 2009 this fund lost over 53M dollars for shareholders and moving forward I think losses like this could become the norm as California's debt quality further comes into question. Do yourself a favor and avoid anything with the name "California" in it unless you are buying CDS protection on that state =)