Are These Screaming Bargains or Beware?

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One number many investors focus on is the Book Value of a stock.  Book value represents the equity a company has.  Equity is what shareholders own.  In theory, book value is what investors would receive if a company goes out of business.  It's theoretical because assets are rarely worth exactly what they're held on the books for, but the book value is a close estimate of what investors would receive.

When you can buy a stock that is selling below book value, you buy $1 for less than $1.  If a stock's book value is $10 and it's selling for $7, the argument is that you've gotten a 30% discount on the true value or Book value.  Many investors scour the market for stocks selling at huge discounts to their book value, hoping that, at the very least, the stock will someday get to book value or if it goes out of business, they will get book value for their investment. 

Here are some stocks selling well below book value, and why.  Remember Book value is a point in time, and companies can be very dynamic. 

Eagle Bulk Shipping, Inc.   Symbol: EGLE  Price to Book: .11
Possible reason for "cheapness":  For the Third Quarter: 
- Net reported loss of $5.9 million or $0.09 per share (based on a weighted average of 62,652,724 diluted shares outstanding for the quarter), compared to net income of $8.2 million, or $0.13 per share, for the comparable quarter in 2010.
- Net revenues of $80.3 million, an increase of 10% compared to $72.8 million for the comparable quarter in 2010. Gross time charter and freight revenues increased 10% to $84.0 million, compared to only time charter revenues of $76.4 million for the comparable quarter in 2010.
- EBITDA, as adjusted for exceptional items under the terms of the Company's credit agreement, was $25,931,089 for the third quarter of 2011, compared with $41,129,782 for the third quarter of 2010.

Central European Distribution Corp. (CEDC) Price to Book: .35
Possible reason for "cheapness": Class action lawsuit filed November 15.
The Complaint charges CEDC and certain of its officers and directors with violations of the Securities Exchange Act of 1934.  CEDC is one of the largest producers of vodka in the world and is Central and Eastern Europe 's largest integrated spirit beverage business.  The Company exports its products to markets that include the United States , England , France and Japan .  CEDC also is an importer of alcoholic beverages in Poland , Russia and Hungary , and an importer of premium spirits and wine in Russia.

The Complaint alleges that, throughout the Class Period, defendants failed to disclose material adverse facts about the Company's financial well-being, business operations, and prospects.  Specifically, defendants failed to disclose or indicate the following: (1) that the Company was experiencing significant declines in its vodka portfolio; (2) that the Company was losing market share in Poland as discounters were taking market share from the Company; (3) that the Company's Zubrowka Biala product launch was having a materially adverse effect on CEDC's gross margins and had impacted the channel mix in the market; (4) that as a result, CEDC was required to take an impairment charge primarily related to two of its Polish brands, and that this impairment charge was not recorded on a timely basis; (5) that the Company's financial statements were not prepared in accordance with Generally Accepted Accounting Principles ("GAAP"); (6) that the Company lacked adequate internal and financial controls; (7) that, as a result of the foregoing, the Company's financial statements were materially false and misleading at all relevant times; and (8) that the defendants' financial guidance and positive statements about the Company's future prospects were lacking in any reasonable basis when made.

On November 9, Deutsche Bank downgraded the stock from buy to hold, lowering its price target form $15 to $3.10.

Dynegy, Inc. (DYN) Price to Book: .13
Possible reasons for "cheapness": Dynegy subsidiary, Dynegy Holdings,  filed for bankruptcy in early November in order to break expensive leases on two power plants so it wouldn't drag parent company, Dynegy, Inc. and its shareholders through bankruptcy. 

For the third quarter, Dynegy reported a net loss of $75 million, or 61 cents per share, in the third quarter. That compares with a loss of $24 million, or 20 cents per share, for the same period in 2010. Revenue slipped 33.4 percent to $516 million in the quarter.

Hutchinson Technology Inc. (HTCH)  Price to Book: .18
Possible reasons for "cheapness": Severe flooding in Thailand required the company to suspend assembly operations at its Thailand facility in early October. 

Fourth quarter results (fiscal year ends September): Reported a net loss of $7.2 million, or $0.31 per share, on net sales of $74.4 million for its fiscal fourth quarter ended September 25, 2011. The results for the quarter included:
 
- A gain on debt extinguishment of $2.9 million related to the previously announced exchange offer that was completed in July 2011 for $46.0 million of its 3.25% Convertible Subordinated Notes;
- Non-cash interest expense of $1.7 million resulting from the accounting for convertible debt instruments; and
- Consolidation expenses of $0.4 million and accelerated depreciation of $0.2 million related to the company's previously announced manufacturing consolidation and restructuring plan.   Excluding these items, the company's net loss for its fiscal 2011 fourth quarter totaled $7.9 million, or $0.34 per share.

- In the preceding quarter, the company reported a net loss of $10.9 million, or $0.47 per share, on net sales of $72.2 million. Results for the quarter included accelerated depreciation of $2.4 million, non-cash interest expense of $1.7 million, a $0.6 million reduction of previously estimated severance costs and $0.3 million of consolidation expenses. Excluding these items, the company's net loss in its fiscal 2011 third quarter totaled $7.2 million, or $0.31 per share.

These stocks sell between $1.11 and $3.23 a share.  Investors expect the worst.  These are mostly small-cap stocks except for Dynegy.  They have multiple problems (more than the above capsules describe).  But they do have low book values. 

If one number was all it took to invest successfully, then these would be high on anybody's wish list.  But it takes more than numbers.  It takes an understanding of where the company is going and how well management is managing.  Investing takes more than one number.  Even more than all the numbers.

- Ted Allrich
November 22, 2011



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , US Markets

Referenced Stocks: CEDC , DYN , EGLE , HTCH

Ted Allrich

Ted Allrich

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