In the spring of 2008, Corporate America was caught off guard.
Many companies carried hefty debt loads, and once the financial
crisis hit that summer, a number of stocks plunged precipitously on
looming bankruptcy fears. The most vulnerable among them: companies
with more debt coming due in the following 12 months than cash on
In an economic slowdown, lenders become much more wary of letting a
company simply roll over its debt. That's why
of companies like
Domino's Pizza (NYSE:
Ford Motor (NYSE:
briefly saw their shares fall below $3.
Fast-forward to 2012, and now many companies have wizened up. Debt
burdens are now much more manageable, and most chief financial
officers (CFOs) make sure debt is tied up in long-term borrowings
rather than short-term credit lines. Still, not all have learned
the lesson. You can still come across companies that are unprepared
for the next economic scare. In the table below, you'll find nearly
a dozen companies that have more short-term debt than cash.
To be sure, these companies aren't at risk just yet. They may still
manage to convert short-term debt into
, or even be able to generate enough
to cover their obligations. But if the
sours and these companies wait too long to take action, then their
share prices could come under serious pressure. And you won't want
to own any of these stocks when that happens.
A debt-burdened player in a financially-strapped
is a perfect example of the kind of
you need to avoid. The entire industry has been dogged by too much
borrowing that fueled a building boom. As a result, many facilities
have failed to meet their occupancy targets. When these targets
weren't met, cash flow slumped and lenders grew concerned. This has
led some industry players such as
Sunrise Assisted Living (NYSE:
to suffer through painful equity
to shore up flagging balance sheets.
Might Emeritus be next? Its
stands at nearly 90% -- and more important, its cash on hand isn't
enough to meet the company's current portion of its $2.1 billion in
long-term debt. In the first quarter of 2012, Emeritus generated
$20 million in
, but had $39 million in quarterly interest expense. So as it
stands, Emeritus wouldn't be able to pay off that debt out of cash
In its favor, Emeritus owns many of its facilities, so it could
enter into sale/lease-back agreements to raise cash, though much of
the sale proceeds would have to go to lenders, which have asked
that the company's long-term debt be secured by its
assets. If senior citizens continue to experience financial
distress in this weak economy, then they may not be able to afford
the fairly priceyoption of assisted living. If this happens, then
Emeritus's cash flow would slump further. It would be wise for
management to address this balance sheet risk now and not wait for
a rainy day.
A deceptivedividend yield
Even companies with seemingly steady revenue and income streams
possess risk. In order to meet balance sheet obligations, they may
need to reduce their
sharply. For example, energy storage and transportation firm
NuStar Energy (NYSE:
carries more than $800 million in short-term debt against just $37
million in cash. As it stands, the company has been paying out more
in dividends than its cash flow can support. In fact, dividends per
share have exceeded
per share for each of the past three years, a period in which
NuStar has generated $1.05 billion in cumulative negative
free cash flow
. This stock's seemingly attractive 8.3%
looks too good to be true, so you should look for more solid
dividend support elsewhere.
Risks to Consider:
If you're thinking about shorting any of these stocks, then
just remember: a stronger economy would make it easier for these
companies to roll over debt as lenders loosen credit standards. So
if growth in the U.S. picks back up (or any of the problems in
Europe get resolved), then you may want to consider getting out of
a short position.
Action to Take -->
None of these companies faces imminent distress, but it pays to
watch upcoming economic reports and the second-quarter earnings
releases from all of the companies in the table above. If cash
dwindles further or the current portion of long-term debt rises
higher, then these shares could come under serious pressure in the
second half of 2012, and you won't want to get caught holding any
of these stocks.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F in one or more if its "real money" portfolios.
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