For the inventory the bigger takeaway is right sizing their product offering. They were sitting on a ton of old stuff which is a problem for a company like Qurate who has historically held higher inventory. They took margin hits to mark down what they had to clear space and they're now recovering from this situation. To me it is less about the levels of inventory and more about the ability to offer relevant products and ship them on time. They lost revenue and took margin hits and with the debt I see this as the reason Mr. Market has left them for dead.
I challenge, with improvements above and given their current capital structure, the risk of bankruptcy in the next three years is low.
That stated, no doubt there is risk here but I think in that case the better ROI is to just buy the common right now. Neither is really a winner in the event of bankruptcy given their bond situation and then your money is tied up waiting. And while QRTEP does pay the $2.00 dividend holders are still down 58% from the 52-week high.
If you are bullish on their turnaround and do see them as a value play then the common seems to be the better buy right now.
If I took $1,000.00 I only get 44 shares of QRTEP at a current price of $22.90/s, but with QRTEA I get 1,818 shares at a current price of $0.55/s.
Complete hypothetical, but let's say the positive impacts from Project Athens begin to be felt and the fear of bankruptcy subsides and investors return. If I held QRTEP to collect all dividend payments and the stock, again hypothetical here, returned to its 52-week high of $53.96 ($61.96 would be price with dividend payments included), this turns a $1,000 investment into $2,705.54 for a profit of $1,705.54.
If QRTEA returned to its 52-week high of $2.84/s, then this turns the $1,000.00 investment into $5,170.00 for a profit of $4,170.00.
Both have same assumed risk of bankruptcy but given how beaten down the common is the potential for return is greater even with the dividend that QRTEP is paying.
I at minimum view Qurate as a Buffett cigar butt here. If they can overcome debt challenges heading into 2027 then they're maybe more, but with the FCF and disruptions + improvements they're making they have a few more puffs left and I believe worth more than the $0.55/s Mr. Market has currently valued them at.
In another event I could also see a scenario where they reduce their leverage enough to make them attractive for some M&A deal. QVC and John Malone have a rich history of this.
-Sean |
