In Debt

I was reading a MF article about how to pick stocks in these uncertain waters. In their example they compared KG with another pharma. They showed how they were both priced about the same, but that KG had a lot more debt. Their conclusion was that you should not buy KG as they prefer the stronger balance sheet as we head towards a potential recession.

If MF prints it, others must be doing it. I thought about some of my MFI stocks with debt along with a couple I don't own that off hand I know have debt.

IAR - has a ton of debt and has really gone down.
FTD - ditto
WNR - ditto
PNCL - quite a bit of debt
JTX,VPHM and DGX all have some debt, I don't think their stock declines are related to debt.

So in my mind, IAR, FTD and WNR are poster children for high debt. FTD and IAR (I believe) were both taken private, loaded with debt and then spun back public as private equity made their millions with the re-engineering. WNR bought GI and took on debt.

I have said before that I don't necessarily view debt as "bad". As long as it is manageable, it is cheaper to raise $ through debt than issuing more shares of stock and as long as the additional capital is used for projects to grow earnings then it can be beneficial. Of course finance 101 tells us that debtholders get paid before stock owners and that of course is the rub if things get dicey.

So how do people feel about the debt of IAR, FTD and WNR? If you think they can service the debt in a downturn, then their stock declines are a buying opportunity.

IAR - every quarter their debt costs them about 170m. Their operating income runs about 370m per quarter. They are a very steady company in their financials. It is certainly possible their revenues could drop materially, but I don't think it is likely.

FTD - their debt cost is about 6.5m per quarter. Their Operating earnings average around 20m. So again, they currently have a lot of "room" before they could not pay their debt. Of course they are in the flower business, which may be the most discretionary spending imaginable. If some one lost their job, I suspect they'd stop giving fancy bouquets of flowers. I'd be a little more nervous about FTD as they rely on consumer spending while IAR relies on business spending.

WNR - they just went into debt, it looks like run rate might be around $25m a quarter to service the debt. Last quarter their op income was $67m which was the lowest in a long time (prior 4 quarters, which exclude the GI income averaged about 125m per quarter). To me, of the three companies, they have the most room to service their debt unless refining margins drop significantly or Americans start driving less. I do view these as possibilities in the short term.

What does all this mean? I am not sure. I think people should think about debt a little bit more as times get tough. I don't think this means you can have a simple rule: such as don't buy companies with debt.

Oh, I did look up KG to see if the MF had a point. They don't in my opinion. KG's debt costs them about $2m per quarter. That is a drop in the bucket against their $170m of operating income. I don't think a stock holder is at risk of KG not being able to pay their debt.