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payments to handle their debt, and right now they are at risk of not having enough cash to meet potential obligations. Typically, a company can simply roll over that debt and push out the time frame when debts come due. But a weak economy would make this task much harder as lenders grow skittish. That's why it's so important to pay attention to balance sheets. Lots of debt is only a problem if the debts are soon coming due. For example, mattress maker Sealy Corp. (NYSE: ZZ) has a very weak balance sheet, with almost $800 million in debt and less than $100 million in cash. But management wisely rolled over its debt while it could, and now the company faces no major repayments until 2014. But if a company's "current portion of long-term debt" -- that is, debts due within the next 12 months - exceeds cash on hand, you need to listen to how management plans to address the problem because these companies could be at risk of failing. I went in search of companies that may have just such a problem (less cash than near-term loan obligations). I also added Canadian media firm Thomson Reuters (NYSE: TRI) to the mix because its weak balance sheet is just above that threshold. The table below highlights a group of companies that are at risk of having to declare bankruptcy in 2012 if their lenders are in no mood to extend them more loans. Take a look...
Current portion of longterm debt ($M) $1,083.0 $125.4 $79.8 $77.0 $0.4 $2.3 $14.2 $67.8 $57.0 $49.8 $338.0 $3.0
Company (Ticker)
Recent Price
Cash ($M)
Thompson Reuters (TRI) Crown Media Holdings (CRWN) CAI International Inc. (CAP) Cost Plus (CPWM) Ram Energy (RAM) Limoneira Co. (LMNR) Metalico Inc. (MEA) Great Wolf Resorts (WOLF) American Apparel (APP) John B. Sanfilippo (JBSS) Dex One (DEXO) Inventure Foods Inc. (SNAK)
$21,640 $414 $296 $223 $218 $179 $156 $87 $80 $78 $74 $67
$26.07 $1.14 $15.30 $9.92 $2.75 $16.10 $3.31 $2.76 $0.77 $7.34 $1.48 $3.62
41% 306% 272% 135% 1,212% 167% 67% 331% 264% 49% 42,517% 79%
5.6 2.1 5.1 Neg. 7.9 NM 2.4 1.1 Neg. 4.2 NM Neg.
$589.0 $21.0 $13.1 $2.9 $0.0 $0.1 $5.9 $38.4 $8.0 $1.7 $195.4 $1.4
Neg. = The company is generating negative operating cash flow. NM = The company has no current interest payments.
This is just a short list. These stocks had red flags on the balance sheet as of September 30. The current earnings season may bring more troubled companies into this group. And if the economy slips into recession, as some -- but not all -- economists anticipate, then the list will only grow in the coming months. Some companies may be hard-pressed to avoid a date with a bankruptcy judge. Take American Apparel (AMEX: APP) as an example. The company is saddled with more than $100 million in debt, much of which is slated for repayment in the next few quarters, but it has less than $10 million in cash on hand. American Apparel generates roughly $70 million in gross profits every quarter, but has $80 million in quarterly overhead. As the losses pile up, American Apparel's balance sheet could weaken further. American Apparel has already raised $22 million in fresh cash this year, but that might not be enough to keep the wolves at bay. Billionaire investor Ron Burkle is one of several investors said to be looking at acquiring some of the company's debt -- not equity. That's often a precursor to eventual hostile moves to take control of the company by calling in debts, wiping out existing shareholders in the process. Short sellers may also be anticipating an eventual bankruptcy filing, because they hold more than 5 million shares in short accounts. Even seemingly healthy companies can get tripped up by a lousy economy. Right now, Thomson Reuters carries a hefty, but manageable, $7.8 billion in debt. This shouldn't be a problem, as noted by EBIT coverage of about 5.6 (which means Thomson Reuters' quarterly cash flow is 5.6 times higher than its interest payments). But what if the economy stumbles and demand for the company's professional-grade subscription services starts to slump? EBIT coverage would quickly shrink, forcing the company to meet with lenders to make sure Thomson Reuters doesn't run out of cash.
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forcing the company to meet with lenders to make sure Thomson Reuters doesn't run out of cash. This scenario is quite unlikely in the next quarter or two, but bears close scrutiny in a worsening economic environment. Risks to Consider: Some of these stocks already trade at levels that suggest imminent financial distress. If they're able to shore up their weak balance sheets, then short sellers may boost the stocks by short covering. And as I mentioned earlier, "current portion of long-term debt" is a good metric to consider, but it isn't perfect. It's important to realize that this metric only points to increased risk of financial trouble, and it does not imply that failure is imminent or inevitable. Action to Take: If you own any of the 12 "at risk" stocks we've identified above, then consider selling them now, because all of them could tumble in a hurry. Instead, we'd suggest looking at the rare 1% of companies in our coverage universe that fall on the entirely OPPOSITE end of the spectrum -financially-stable companies that enjoy some of the best business models on earth. We call them "Forever" stocks. These stocks benefit from sustainable competitive advantages, pristine balance sheets and ample cash flows, and we think you can buy them today and hold for the rest of your life." In fact, when we started to research "Forever" investments, we discovered something very unusual - many of the world's richest, most successful investors, politicians and businessmen are loading up on "Forever" stocks. For example, one of our favorite "Forever" stocks has jumped 585% since it went public just a few years ago, and legendary investors like Warren Buffett are loading up on the stock. In fact, Buffett has bought more than 9.3 million shares of this "Forever" stock in recent months. For more on these stocks -- including several names and ticker symbols -- we've put together a special presentation called "The 10 Best Stocks to Hold Forever." Just click on the video below to watch it right now. -- David Sterman
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