Ever since October 2006, I have published my list of Worst Run Companies. The list is reevaluated every year, burying those that have disappeared, excusing those that have improved and selecting new members for inclusion. Due to the unfortunate effects of Super Storm Sandy, I have delayed publishing this year's list up until today. Here is an update of the existing list and my additions for 2012. In the past, companies on this list have made excellent short sale candidates. Some have gone on to bankruptcy while others have redeemed themselves.
The following characteristics, one or more which are apparent for each of the worst managed companies, are as follows:
1. Poor Financial Condition: Heavy debt loads, large amounts of goodwill, as well as, poor cash flow are common among poorly run companies. As a result, their balance sheets are in lousy shape. The inability to shore up balance sheets could spell further danger in the future.
2. Second Banana Syndrome: Some of the companies on my list are not what you would refer to as "best of breed." Most of them are in an industry or sector that has at least one or more dominant competitors. Why be a bridesmaid when you can be the bride?
3. Ineffective Management: Successful companies will have management teams that not only innovate, but are also capable to perform during times of stress. Innovation does not mean simply introducing a single "cool" product. By extension, a great product does not make a great company. Just remember Sharper Image and its Ionic Breeze air purifier? For a more recent example, take a look at Pandora (P), the internet radio service. Why do I need Pandora if I have an pm3 player? Effective innovation and management are about being able to transform a company into a provider of a well-balanced and diversified line of products.
4. Disastrous Strategic Acquisitions: Many companies try to grow by developing a successful acquisition strategy; however, most cause more harm than good by doing so. Do you remember the ill fated acquisition of the old America Online by Time Warner (TWX)? How about Hewlett-Packard (HPQ) purchase of Palm, Autonomy, etc?
5. Failure to Deliver Value to Shareholders: The bottom line remains the same, good management teams deliver dividends and share price appreciation to shareholders. Bad management delivers coals in stockings.
First, let's review the roster of my list of worst-run companies from years past and see how they've fared so far in 2012 through the end of November:
Class of 2006:
Alcoa (AA) - Alcoa's only claim to fame now is that the company is first to report earnings in the earnings cycle. The stock's price has lost a modest 2.8% for the year through the end of November. I say modest because investors have been accustomed to larger declines. Still the story remains the same for Alcoa which is stuck in an operational Wonderland full of ever present risk, whether that is: commodity prices; energy prices; industrial demand; or, the ever mischievous maneuvering from the Cheshire Cat of China.
Alcatel-Lucent (ALU) - 2011 was a year in which Alcatel-Lucent returned to profitability. That was short-lived as the networking and telecommunications company is expected to lose money in 2012. Since the end of 2011, shares of Alcatel-Lucent have declined by 29.5%. Management should take shareholders out of their misery and sell the company for its scrap value.
Cablevision (CVC) - In the cable and entertainment business, content is king. Cablevision has managed to spin-off its content companies AMC Networks (AMCX) and The Madison Square Garden Company (MSG). This has left Cablevision shareholders to operate as a second banana cable company. Actually, according to JD Powers and Business week, in the East, where Cablevision operates, the company received an average overall satisfaction rating ranking well below its competition. Despite a projected 36% decline in earnings per share for 2012, the stock price of Cablevision has only declined 2.7% this year through the end of November. It is a classic value trap with a 4.3% dividend. Despite that above market dividend, the company does not have enough operational promise and the level of debt is too high for this company to be removed from the worst-run list.
Janus Capital (JNS): Despite a rise in the S&P 500 (SPX) for the first eleven months of 2012 by 12.61%, earnings for this investment management company are expected to decline approximately 38% for 2012. Luckily, the stock price has risen by nearly 30% over the same period of time. The rush to fixed income investments likely helped to soften the blow in 2012 and provided support towards the company's stock price. I am not sure that fixed income inflows will last so long. Janus' luck may be running out.
Sharper Image went bankrupt
Pier One (PIR) was removed from the list in 2010 as management has turned the company around.
Class of 2007:
Palm: is now part of Hewlett-Packard . Hewlett-Packard was later named a worst-run company (read on below)
Circuit City: bankrupt
Charter Communications: Filed for Bankruptcy in March 2009. The company emerged from Bankruptcy in November 2009 and is now operating as a public company. Since it is not the old Charter Communications it is longer on this list
Six Flags (SIX): Filed for Bankruptcy in June 2009. Emerged from Bankruptcy in April 2010. Now back in operation as a public company and since it is not the old Six Flags is longer on this list
Washington Mutual: Declared insolvent and seized by the FDIC. Washington Mutual is now a part of JPMorgan (JPM), which is one of the world's premier financial institutions under the stewardship of Jamie Dimon, despite what happened with the London Whale this year.
Class of 2008:
Macy's (M): was removed from the list in 2010. I have been so impressed with management's turnaround that I even own the stock now.
General Motors (GM): Filed for Bankruptcy in June 2009 and a new entity was formed with the backing of the US Treasury. Now back in operation as a public company as a result of its IPO in November of 2010. Since it is not the old General Motors, it is longer on this list.
Time Warner : Last year I upgraded Time Warner's status from a Worst Managed company to a work-in-progress and removed the company from this list. The company is continuing its turnaround.
Class of 2009:
Advanced Micro Devices (AMD): Advanced Micro Devices continues to fail to deliver the goods to shareholders. I don't think that management has figured out what to do in the age of mobile technology. AMD is clearly a second banana to Intel (INTC) and remains lost in the wilderness of the semiconductor sector. More headcount and guidance reductions are in the cards. The stock has declined a miserable 59.3% through the end of November of this year. Earnings are expected to decline from 50 cents per share in 2011 to a loss of 20 cents this year. Did management get the email or memo that the personal computer business is shrinking? Have they heard about the mobile telecommunications boom? I think they are still partying like it is 1999. I am not saying that AMD will go bankrupt; however, the company is on a treadmill to nowhere.
Sirius XM Radio (SIRI): I removed Sirius XM from my worst managed list in 2011.
Jamba Juice (JMBA): Jamba Juice's management team is trying very hard to turn the corner. Last year's loss of 16 cents per share is expected to improve to a more modest loss of 2 cents per share of 2 cents in 2012, while sales are only expected to increase 2% for the year. Long suffering shareholders have seen the stock rise 60% through the end of November to $2.10. Let's put that in perspective. The stock is off 28.6% from its 52-week high. Since early 2008 the stock has poked its head above $3 for a very brief period of time in the second quarter of 2010. Otherwise it has traded pretty much between $1 and $2. The company has more progress to make before I remove Jamba Juice from my list.
Class of 2010:
Yahoo (YHOO): Carol Bartz was supposed to be the savior of Yahoo . She was ousted in favor of Scott Thompson who ran into a mess over his bio. Thompson was replaced by Ross Levinsohn on an interim basis until the hiring of Marissa Mayer this past July. The company has had 5 CEOs in as many years. Will Mayer deliver the goods? Shareholders and management hope so. The stock has moved higher by about 17% so far this year, mostly on the feel good hiring of Mayer. I don't see hope as a business strategy for Yahoo's future. Mayer and the board have their work cut out for them. Fool me once share on me. Fool us four times - who knows? Is the fifth time a charm? A longer duration for Yahoo is prescribed on my list, but I am willing to put in on watch for an upgrade. We shall see what happens.
Boeing (BA): The company's 787-8 entered service last year. The 787-9 will not be delivered until 2014; however, we are seeing orders being cut back or cancelled. The American Airlines bankruptcy does not help Boeing's cause. Neither does the merger between United and Continental into a single United Continental Holdings (UAL). The budgetary constraints / fiscal cliff in Washington will also put pressure on the company's operations in the future. Earnings are expected to slip by 6% in 2012. I do not believe that 2013 earnings estimates can be trusted at this juncture. The stock has declined about 1.3% for 2012 year-to-date. For now, Boeing remains grounded on my list.
Class of 2011:
MF Global Holdings (MF): Little did we know that on the day I published my list last year (I prepare it well in advance of publication) that behind the scenes MF Global was improperly transferring client funds into company accounts to cover trading losses. Within a month the company was gone. The only question is whether indictments will be forthcoming. As always, with a bankruptcy this company is excused from the list as a matter of extinction.
Hewlett Packard : I used the word dysfunctional to describe Hewlett-Packard last year. It remains so. There is no comprehensive answer from Meg Whitman or the company's management as to how to combat the decline in desktop printing or personal computer usage. The company bungled the smart phone and tablet revolution. Selling ink is not going to bring this company back. Now to top it all off now this serial acquirer, with a lousy track record of acquisitions, is writing off nearly $9 billion of its $11.3 billion purchase price of Autonomy. Earnings per share are expected to decline 18% in fiscal 2013 after declining 17% in fiscal 2012. The company's shares have plunged 50% in this year through the end of November. Hewlett Packard's stock is a value trap poster child.
Sprint Nextel (S): Corporate actions both rumored and real have driven shares of Sprint-Nextel higher this year. Apparently, SoftBank thinks enough about Sprint Nextel that the Japanese telecom company invested $20.1 billion to acquire 70% of Sprint Nextel. In the deal, the company will also acquire a majority share in Clearwire (CLWR). Based on this series of corporate actions, I am removing Sprint Nextel from my list.
Class of 2012:
I hereby confer upon the following companies the distinction of being the newest inductees to my Worst-Run Companies list:
Research in Motion (RIMM): I gave this company some rope when considering it for inclusion in 2011. It took that rope and hung itself. There was a time not so long ago that the maker of Blackberry devices was at the very top of the Smartphone revolution; however, Research in Motion lost its way. It was too focused on the enterprise user at a time when companies were cutting expenses and consumers were being offered more cutting edge Smartphones with larger screens, more functionality, greater appeal and superior operating systems from companies such as Apple (AAPL) and Google (GOOG). The stock nearly halved from $14.50 at the end of 2011 to $7.50 at the end of September 2012, but has recently jumped to $11.60 by the end of November on the hype those new product introductions could jump start the company. I doubt it. Earnings have disappeared for the company and losses are likely for this year, next and conceivably further out. Perhaps, what can save Research in Motion is a sale of the company. Until then, management remains deer caught in the headlights of its competition.
Radio Shack (RSH): I remember long ago and far away when this was Tandy. Tandy was the first stock I ever bought with some of my Bar Mitzvah money. It was a great consumer electronics company that spun off many other companies. That was then and this is now. Radio Shack is now known as a place to buy replacement parts and batteries. The consumer electronics sector graveyard is littered with the carcasses of failed companies. Best Buy's (BBY) problems are well known. To exist on selling commoditized products as in cell phones, batteries and audio/visual wiring is not a business model worthy of future growth. To top it off, many times when I go to a Radio Shack they don't have what I am looking. Instead, the friendly salesperson offers to get it from the warehouse in a few days. Thanks, but no thanks. If I want to wait, I can get it over the internet. I do have a suggestion to Radio Shack company management. Sell yourself to EBay (EBAY), close the bricks and motor locations and go web only giving Amazon (AMZN) some serious competition.
YRC Worldwide (YRCW): This was another company I gave consideration to in the past. I think that the time is now to put it on my list. YRC Worldwide currently has a market capitalization of just around $100 million, give or take a few million, using diluted share count as of the end of September. At that point in time the company held $189 million in cash and equivalents versus $1.37 billion of debt. One could argue that the company has valuable equipment supporting that amount of debt. Of course the same argument might have been put forth for Hostess. The company lost $619 million in 2009; $326 million in 2010; and, $409 million in 2011. In the three quarters of 2012 the company generated losses of $95 million. It will take seemingly forever for YRC Worldwide to dig itself out of debt, even if it may show some improvement. I am not sure that the company can survive the next recession, whenever that might occur.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL, EBAY, GOOG, M stock and long AAPL and GOOG calls - although positions can change at any time. Benjamin Hansell assisted in the preparation of this article.
Business Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.