Merry Christmas!!
As my Christmas present to the thread, I'd like to present this challenge: "Is there opportunity and deep value in buying Armstrong World Industries (ACKHQ) at current prices before they come out of bankruptcy?"
This company has been in business making flooring and related products since 1891. They have a strong commitment to shareholder value as evidenced (at least to me) by the amount of the Free Cash Flow (Timba-style) that they gave back in the form of dividends.
Year Free Cash Flow/Share Dividend/share
1995 3.77 1.40
1996 2.18 1.56
1997 2.39 1.72
1998 2.27 1.88
1999 4.24 1.92
2000 -3.03 1.44
In 1998 the warning signs started appearing about liability for asbestos injury that may have occurred due to asbestos having been contained in some of the products they had manufactured some 20 years earlier and had not manufactured since. As the popularity of the asbestos litigation grew, so did the need for ever increasing liability reserves. They settled scores of thousands of cases without trial but scores of thousands kept being filed in class-action suits. In 2000, Armstrong filed for bankruptcy protection. Management had decided to let the bankruptcy court figure it all out so that they could get on with their normal business at some point.
They have recently filed a reorganization plan to come out of bankruptcy and this plan has the approval of 75% of the litigants.
The plan can be viewed here: armstrong.com
The press coverage of the plan has been less than complementary with this being typical of what I've seen:
forbes.com
I believe the press has misinterpreted the above referenced reorganization plan, and so has most of the market. Section 7.4 of the plan indicates, to me, that Armstrong is funding the plan with 60-70 Million shares out of 215 Million, which is about 1/3 of the company. Additionally, they are not giving 1 Billion dollars to the claimants, they are giving 600 million (300 unsecured, 300 asbestos trust)
Now I'm not exactly approaching this company from a purely numbers-crunching position (yet). I am approaching from a few conceptual viewpoints first. I number these viewpoints just for my own clarity, but do not represent this numbering as any indication of the priority of the issues. More than the following points is the belief I have that this management team is a great one and really committed to the shareholder.
First, Armstrong didn't file Chapter 11 because its business was bad or that its business was unprofitable.
Second, the market for its business (flooring) is booming, but even when it wasn't (look at the 1995, 1996, and 1997 cash flows) Armstrong was making decent money flowing to the bottom line.
Third, regardless of how much of the company they give away, the remainder will be worth something.
Fourth, not having the liability overhang, their profitability is likely to be strong.
Fifth, they haven't "burned" their suppliers, employees, lenders or clients in this reorg. They are honoring all long term debt, all executory contracts, all promises to employees.
Sixth, they have a world-wide footprint and great name recognition.
So.....what are they selling for per share? They closed yesterday at the expensive price of $.26/share!
Now, before anyone goes rushing out to buy, it would be very advisable to read and understand the reorganization plan. Again, it looks to me that Armstrong is giving away about 1/3 of the company's stock and about 600 million dollars to settle all present and future asbestos claims. Current shareholders, it looks like to me, will get warrants with which they will be able to buy shares in the re-formed company.
I am not buying the current shares so I can exercise the new warrants, I am buying the current shares because I believe the new warrants will trade on the markets as a security in their own right for about 7 years, and that they will have a value far in excess of the current stocks ridiculously low pricing. When I sell, it will be the warrants I sell, and I'll make a decision at that time whether or not I want to buy the stock of the new entity.
I think this company presents a challenge and an opportunity to the value investor. This value investor doesn't look at bankrupt companies usually. But then again, I haven't seen a world-class, non-tech, nicely profitable company with great management selling for pennies a share either.
Happy Holidays to all!
Looking forward to the feedback!
Timba |
