Zeroing in:
From: Les H 12/14/2008 9:39:23 AM
of 171181
Zero Price Targets Proliferating
businessweek.com
news.morningstar.com
CDL GGP TWMC NT GM SIRI DCGN FCE.A TRMP VCI
Predicting Which Stocks Are Going to Zero
Analysts aiming to steer investors clear of disaster are pointing fingers at those companies that seem to be headed for bankruptcy
By Aaron Pressman
It seems like only yesterday regulators were accusing stock analysts of being stingy with "sell" ratings because of conflicts of interest, such as a desire to win investment banking business. How quaint. With the S&P 500-stock index down 39% and many individual stocks down twice that, analysts have started assigning an even worse rating: "going to zero."
The trend may have started over the summer when some enterprising banking analysts predicted that shares of IndyMac Bank (IDMCQ) in Pasadena, Calif., would go to zero. Bravo to them, since the stock was recently about 4 cents a share.
Now "zero" ratings are proliferating. RBC Capital Markets (RY) analyst Mark Sue slapped a target price of zero on telecommunications-equipment maker Nortel Networks (NT); Deutsche Bank analyst Rod Lache says General Motors (GM) shareholders will have worthless stock certificates within 12 months; and Henry Blodgett thinks satellite radio provider Sirius XM (SIRI) is headed for bankruptcy. Analysts at Morningstar (MORN) say the shares of 32 of the 2,000 companies they cover are likely to become worthless.
Analyst estimates are notoriously unreliable, of course, so don't expect every stock with a target price of zero to go out of business. But many recent zero-rating recipients are indeed in dire straits.
Take Nortel. Defenders point out that it had $2.65 billion in cash as of Sept. 30 and sales of $11 billion over the prior year. A looming $1 billion bond issue doesn't mature until 2011. But RBC's Sue notes that Nortel is burning through cash—more than $600 million since the start of 2008—and needs $1 billion to $1.5 billion just to run its business next year. "Bankruptcy is a distinct possibility," he writes. While not commenting on the report, a Nortel spokesman says it "has put in place decisive actions to cut costs and preserve cash to strengthen our financial footing." GM says: "We've clearly outlined a plan to restructure our business. We think that will drive our stock price in the long term."
At Morningstar, the number of companies seen as likely to go out of business has doubled in the past few weeks, and the firm expects the number to rise. Its sector analysts calculate fair value for every stock they cover based on fundamentals, says analyst Matthew Coffina, author of Morningstar's "Most Overvalued Stocks" column. Setting a value of zero "says there's a considerably better than 50% chance a stock will be worthless," he adds.
Most of Morningstar's picks, such as Citadel Broadcasting (CDL), are in the media industry, where heavily indebted companies are seeing advertising revenues plunge. But regional airline Mesa Air Group (MESA) faces a lawsuit over its operations in Hawaii and could see lower payments from its carrier partners. Decode Genetics (DCGN), which uses genealogical records from Iceland to understand genetic diseases, hasn't had any drugs approved by the Food & Drug Administration and could run out of cash.
Coffina says Morningstar isn't advocating that investors sell those shares short, but it wants to warn shareholders who may be hoping for a recovery. "Even selling at 30 cents is a huge return if shares are going to zero," he says.
Pressman is a correspondent in BusinessWeek's Boston bureau.
Citadel Broadcasting Corporation (CDL
news.morningstar.com
Sponsored by:
CDL)
From the Analyst Report: "Citadel Broadcasting's poorly timed acquisition of ABC Radio Networks only magnified the company's exposure to a stagnant industry with meager growth prospects. Given its substantial debt burden and declining cash flows, we think Citadel's shares could be worthless."
General Growth Properties (GGP
Sponsored by:
GGP)
From the Analyst Report: "Punch-drunk on easy credit, retail real estate investment trust (REIT) General Growth Properties is now staggering under the weight of its massive debt load. Raising capital or finding buyers for its commercial real estate assets may be difficult in the current credit-constrained environment, so we think it's likely that General Growth's equity value will fall to $0."
Mesa Air Group (MESA
Sponsored by:
MESA)
From the Analyst Report: "The future for regional carrier Mesa Air Group looks bleak, as the ill effects of both contract restructuring and a potentially devastating lawsuit mount.... Mesa boasts a debt/capital ratio of 0.93. To make matters worse, the firm recently paid roughly $52 million in a legal settlement...leaving the firm what we believe to be an insufficient $46 million in unrestricted cash."
Trans World Entertainment (TWMC
Sponsored by:
TWMC)
From the Analyst Report: "In today's fiercely competitive retail environment, pure-play music and video retailers like Trans World Entertainment are facing an uphill battle, and we think the long-term outlook for this company is dismal.... The balance sheet is in decent shape,...[but] the company carries significant long-term lease obligations that aren't reflected on the balance sheet."
deCODE Genetics (DCGN
Sponsored by:
DCGN)
From the Analyst Report: "DeCODE Genetics engages in some provocative research projects.... However, the company has yet to gain approval from the Food and Drug Administration for any of its products, and it is currently facing a severe liquidity crisis. It appears more likely to us that deCODE might no longer be a viable entity."
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