12/26/2010

Hidden Value with Highly Leveraged Stocks

Paying down debt, especially in highly leveraged companies never gets the respect or more importantly the increase in the market value it deserves.


Many of these companies made mistakes with poorly financed overpriced acquisitions or just hit bad times with an overly leveraged balance sheet. The market is not quick to forgive or recognize management’s improvements with debt pay downs. Investors are mostly ignoring these dramatic improvements in equity valuation. Some sell off bad assets, refinance debt or allocate the cash flow to accelerate the pay down of debt.

Some obvious improvements are reduction of interest expense, reduced company risk with opportunity to refinance at lower rates, improved debt capacity or new opportunities to improve future capital allocations.
An unintended beneficial consequence in my opinion is a more responsible allocation of future capital as there is little room to waste money
 

Some companies that may fall into this potential value creating category are

FIGI.PK $1.30 Fortress International (long position)

At the end of 2007 long term debt per share was ~.68 ($7.9 million) reduced to ~.22 per share (2.9 million) for the most recent quarterly balance sheet. This ~67% reduction in long term debt was accomplished with sale of noncore assets, dramatic expense reduction, allocation of cash generation for debt reduction and significantly improved business operations partially due to new customers and improved economics from the 2007/08 recession. The per share long term debt improvement was significant  from .68 (2007) to .22 (current).

Year end 2007 price was $4.85

Additional data:

Market Capitalization: $18,690,000
Enterprise Value: $36.290,700

P/S is ~ .27 historically cheap

On  11/12/10 FIGI.PK posted an outstanding improvements:

Backlog of $35.1 million at September 30, 2010
Cash  increased to $11.2 million at September 30, 2010
Revenue of $21.0 million, an increase of 108% over the third quarter of 2009
Gross profit was $3.2 million, an increase of 53% over the third quarter of 2009


BLD $1.31 Baldwin Technologies (long position)

At the end of 2007 total debt per share was ~6.76 per share (102.64 million) reduced to ~4.86 per share (75.456 million) for the most recent quarterly balance sheet.

Year end 2007 price was $4.72

Additional data

Industry: Diversified Machinery

Market Capitalization: $20,400,000
Enterprise Value: $81,961,700

P/S is ~ .10 historically deep discount

Reported (11/11/10) results improved

New President and CEO appointed October 1, 2010
Q1 Sales up 6% over prior year

Q1 Orders up 18% over prior year

MNTG: $2.50 MTR Gaming Group

At the end of 2007 total debt per share was ~18.15 per share (499.17 million) reduced to ~15.18 per share (417.64 million) for the most recent quarterly balance sheet.

Year end 2007 price was $6.79

Additional data

Industry; Gaming Activities

Large extensive valuable real estate portfolio of land and buildings for gaming activities

Market Capitalization: $54,260,000
Enterprise Value: $430,260,000

P/S is ~ .10 historicall discount

PFIN: $3.30 P & F Industries(Long Position)

At the end of 2007 total debt per share was ~13.38 per share (48.28 million) reduced  to ~10.38 per share (37.38 million) for the most recent quarterly balance sheet.

Year end 2007 price was $5.93

Additional data


Industry; Small Tools & Accessories

Market Capitalization: $11,930,000
Enterprise Value: $11,930,0000

P/S is ~ .20 historical discount

Recent quarterly results (11/12/10) showed an outstanding profitable turn around
improved gross margins
Net income per share for the quarter was .23
As the economy improves the company should be positioned to exploit opportunities

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2 comments:

walterlu said...

I don't think lowering debt necessarily increases equity, since you will decrease liabilities, but you need to use assets in order to do so. It does lower leverage though.

ShadowStock said...

Yes I agree. Thanks for correcting my comment.

Assets = Equity - Liabilities

So as debt go down it will not automatically increases equity if assets are reduced for a greater amount.

But if debt is reduced interest expense will drop and refinancing at lower rates is also possible. Hopefully if the reduction is substantial the market value will slowly increase from the reduced risk.

Best
John