Until Debt Do Us Part

Until Debt Do Us Part

As 10 year rates creep past 3% and mortgage rates start to approach 5%, the cost of debt becomes something to think more about.  I own several shipping stocks and these are often relatively high debt-type firms.  That can work at times of low rates, but if refinancing costs go up substantially, while income trickles up => a real squeeze on margins.

So there seems to be a rush to the altar.  Companies are (1) refinancing now, (2) paying down debt (which is generally good, but the reduced leverage could take some ROEs below acceptable levels) or (3) are swapping debt for equity.

You don't have to go far to read doom and gloom about debt.

• Global debt surges to record high | Fox Business
• Global debt is at historic high and governments should cut levels
• Report: National debt hitting historic highs - USA Today
• America's companies have binged on debt; a reckoning looms - On ...

Just google record high debt levels.  Wow, that is a downer.  Some serious doom and gloom there, 

My MFI Holdings

Let us look at my MFI stocks.  What is their current debt level?  Have they binged on debt?

• AGX - no debt at all, now or past 5 years.
• AMGN - $35b of debt, up from $32b 5 years ago.  Revenues have climbed from $19b to $22b in that time. Cash has climbed from $19b to $41b!  Whoa.  That is impressive.Debt likely not a problem.
• CAAP - $1.4b of debt with a $1.8b market cap and $220m of cash.  No history.  Seems a bit high to me.
• CASA - $300m of debt, with $200m of cash and $1.5b market cap.  Seems fine.
• CELG - wow, debt has gone from $4b to $16b in past 5 years. Does feel a bit like "binged".  But cash has gone from $6b to $12b in same time frame and revenues have doubled to $13b. Note the figures I gave were year end.  If you look at Q1, much worse. Debt has ballooned to $20b and cash dropped to $5b.  Surely due to Juno purchase.  These acquisitions are a big bet by these companies, taking on a lot of debt for hopeful future revenues.  Seems a bit worrisome in today's rising rate environment.
• CSCO - debt has doubled to $25b, but cash has increased from $50b to $70b.  Debt is not an issue here.
• DIN - debt has stayed flat at about $1.4b over past 5 years.  They basically pay everything out in dividends, as DIN has a slightly negative book value (yuck).  In past 5 years, sales have dropped 7%.  I can see why this stock fell out of favor... they have some work to do.  They have $1.3b that rolls over in 2021.  Right now I think it has a rate of 4.3%.  That seems pretty cheap.  It is costing them about $60m a year.  They make like $200m (before interest) a year.  So if their refinancing cost takes the $60m to $100m, their income after interest will drop from $140m to $100m a year.  This is the "Til Debt Do Us Part" issue.
• DISCA - they have gone from $6b in debt to a staggering $19b in past 5 years.  Not a cash heavy company, under $1b in cash.  I am sure much of this debt was to finance purchase of SNI, which cost $12b.  Like CELG buying JUNO, I can see why these firms are trying to grow - but this can be a very risky strategy if rates increase.  Most of debt ($11b) is due 5 years +.  But the interest cost is high, a run rate of $700m+ a year.
• EGOV - much simpler.  No debt.
• EVC - debt has been steady, around $300m.  they have $260m of cash.  Their margins are challenged though.
• FTSI - little early to do much on forensic side.  They just went public, do not have q1 financials yet.  $290m of debt at year end with $260m of cash.  Thise have both likely changed.
• GHC - pretty dull company, but no debt issues.
• GILD - debt has exploded from $5.5b to $33b in 5 years. But cash has also risen from $2b to $27b.  Debt is costing them $1.2b a year against $8.5b of income.  No real issues here with cash hoard.  Recall they recently bought KITE for $11b.
• GME - no issues here, about 800m in debt, but also 800m in cash.  1/2 rolls over in 2019 and other 1/2 in 2021.  Doesn't seem like a big issue.
• HPQ - Cash is a bit over 6m, while debt is a bit over $7b. Doesn't seem like an issue.
• HRB - they have definitely levered up, debt up from $900m to $1.4b, while cash has dropped from $1.8b to $1.1b.  Not a big deal at this time, but bears watching.
• ICHR - smaller company, 180m of debt against $60m of cash.  Must be very cheap debt, I only see $3m of interest.  Well, digging in, the rate is 5% (most due in 2020), so the $3m of interest must be some sort of net number as 5% of 180m = $9m.  Either way, not much of an issue here.
• KLAC - debt has gone from $700m to $2.5b.  But they have $2.9b of cash (impressive).
• MD - I know they are a serial acquirer, so a little worried about what I'll find.  Hmm, I can see why Chanos is short.  A mere $70m in cash and $1.8b in debt, up from just 27m in 2013.  $1.2b is due/rolled over in 2021-22.  Given their balance sheet - which is negative tangible equity... $4.9b of "goodwill", I can't believe they could borrow money in 2021/22 at under 10%.  So that is $180m+ a year in interest when they roll over debt.  Operating income annually is in $600m range.  Right to be a little worried here.
• MSGN - a lot of debt (1.2b) with just $140m of cash.  I do have a few companies that could be stressed.  Looks like most the debt is due June 2021, but the debt seems to have a floating feature - so MSGN will seemingly be having higher carrying costs incrementally between now and then.  It is a bit complex, but I think this is another "sell" when I hit anniversary.  The balance sheet is terrible.  They actually have a negative net worth of -690m... and that is with $400m of goodwill.  Where does all their retained earnings go?  I guess looking quarter by quarter the negative equities are moving towards 0.
• OMC - little more debt than I'd like... but doesn't look terrible (going to start going faster).
• RGR - no debt.
• RHI -  no debt (hooray)
• SIMO - no/little debt.
• SYNT - relatively small debt
• TGNA - yikes, $3b of debt, although down from $4b a few years ago.  Interest costs are high, against $540m of operating income last year, $210m of interest expense.  Hmm, this does seem to be a problem.
• THO - great shape.
• TUP - about $700m in debt, very stable.  Doesn't seem a huge deal now, but sales have fallen 10%+ in past 5 years... so could get stressed down road if profits continue to drop.
• VIAB - I know before i look this will not be good.  There is a theme with these content/broadcast firms, DISCA, MSGN and TGNA being relatively high debt. Yup, 11b of debt with $400m in cash.  They made $2.8b in op income last year and then had $600m in interest expense (ouch).  he majority of the debt is due in 2023 and future (good), although a chunk of it seems to have floating rate features down the road.  So the issue here is operating income has declined 25% in past 5 years. But debt and carry costs have risen.  That trend could cause problems down the road.
• WDC - they have really ratcheted up debt in past two years from $2b to $12b.  I assume that was associated with SNDK purchase.  They do have $6b of cash.  Virtually all of debt is 2023 to 2026.  So with cash flow & cash in fist, non issue right now.

Ok.  So making a list of firms a bit worrisome; CAAP, CELG, DIN, DISCA, MD, MSGN, TGNA and VIAB.  Definitely more than I expected and some are worse than I expected.  I will not sell anything before it's time, but will start thinking more about debt in MFI Select going forward.