Thursday, October 30, 2008

Bankruptcy

I saw today where VSE, a MFI stock from a year ago is looking at bankruptcy (VeraSun falls on report bankruptcy filing imminent). One of my holding, IAR, is priced like it is going bankrupt at 33 cents... looks like I'll have a total loss there! IAR did announce their earnings today (Idearc Announces Year to Date and Third Quarter 2008 Results).

They actually made 50 cents per share, sounds pretty good for a 33 cent stock! Even though they are making money, they clearly have issues as they still have a crushing debt load of $9b. I am not sure what the covenants are, but given the stock price and comments that they are looking at capitalization options (not exactly a prime time for that!)... I have to imagine the creditors may have options to either pull the plug or increase the rate. Also, they may have to go off the NYSE as their price is under $1.00. I am sure Mr Klein isn't thrilled about inheiriting all these problems. I now see why the CEO in Feb retired after about a week on the job, he apparantly had some insight into the unsavory future (wish I had had that, though kudos to SDA of MD, who said IAR was a stinker way back).

WON is at 31 cents, I think they were on the list as recently as 6 months ago. It is more than a bit disconcerting to find so many companies teetering on the edge that were on the list. These were certainly not "good companies at cheap prices!" That does beg the question, which has been asked by people, is does MFI really work? Or at best is it a screening process after which you need to have some special expertise to read the financials/do your homework to discern the sheep from the goats (NPLA, SCSS and TGIS are other examples)? I used to think perhaps it was best to simply avoid the micro caps, but it does go beyond that as IAR and WNR have melted down from billion dollar market caps. Certainly debt was something in hindsight to avoid, but who knew we were going to head into the worst credit crunch of my lifetime? At other times, debt can actually enhance returns.

Oh well, thoughts are welcomed as always.
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2 comments:

Homer315 said...

I've been too lazy to look at the details of Idearc's financing (whatever is available) even though I own it in three accounts. I bought it during my MFI basket purchases. I really don't understand why there's such a good chance it may go bankrupt. Or, more accurately, I do and I don't. If its creditors insist on closing it down, they'll probably get very little. Meanwhile, it is making a ton of cash, though not in comparison to its large debt load. I disagree with Steve that the business model is fatally flawed. I don't think yellow pages are going the way of the dodo bird in the next 5-10 years. I think there are too many people who use them still, and there was a report out recently that said that 31% of people use search engines like google or yahoo for local searches, and second behind that was yellow pages.

I will admit that I have little faith in IAR's management. I listened to this morning's earning conference call, and they simply had no good reason for borrowing 247 out of 250 million in their revolving credit line. They borrowed this money last week, even though they have 300 million in cash, and said they just want to preserve liquidity.

Bottom line is that, IMHO it makes little sense that this boring, relatively stable business, which also has its hands in other ad sources, like the internet, should go bankrupt despite the amount of cash it still generates.

11:02 PM
Homer315 said...

BTW, the report had old fashioned yellow pages as the second source for local info, at 30%, so it's not like its far behind search engines...

11:04 PM

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