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Last week, Jarden Corp. (NYSE:JAH) issued a press release indicating that its Q4 08 sales would be roughly $1.3B compared to analyst estimates of $1.5B. While sales for Q4 08 will be well below Street estimates, the Company did not reveal any margin information and also indicated that JAH 2009 revenues would be $5B or 8% below Street estimates of $5.4B.

JAH also expects 2009 cash flow less capital expenditures will be $250MM. Moody's Investors Services quickly followed up by issuing a negative outlook on the Company. While it has taken far longer than anticipated, it appears that the Street may slowly be coming around to understanding the risks facing JAH.

The risk with JAH is its debt and how dependent the Company is on Q4. In 2006 and 2007, JAH's operating cash flow through the first 9 months of those years was just $28MM and $23MM, respectively. Despite the paltry cash flow production, JAH cash outflows from investing were $256MM and $941MM, respectively for those same time periods. In 2008, the Company's operating cash flow through nine months has been just $55MM while its investing cash outflows is $118MM.
The shortfall has always been made addressed by the Company issuing debt and /or drawing on its credit lines. JAH's Q4 accounted for 88% and 92% of the Company's operating cash flow in 2006 and 2007, respectively, where total operating cash flow for 2006 and 2007 was $236MM and $305MM, respectively.

JAH expects Q4 08 revenues of $1.3B. In Q4 07, JAH generated revenues of $1.5B with gross margins of 27.3%, resulting in EPS of $0.89. With an 11.4% drop in projected Q4 sales, JAH's gross margins will likely be pressured. With a 27% gross margin, and SG&A of $262MM, JAH's EPS could be roughly $0.33, resulting in 2008 GAAP EPS of just $1.79.

More importantly, it's difficult to believe that management will be able to pay down much debt after Q4 as it had previously anticipated before the Q4 warning. This will matter in 2009 since JAH generally finances its working capital needs with debt until its usually large Q4, so it's possible that JAH's debt balance increases beyond the $2.6B it currently maintains.

Another area one could question is management's belief that JAH can generate $250MM in operating cash flow less capital expenditures in 2009. JAH's maintenance capital expenditures are roughly $100MM. This means that operating cash flow for 2009 is expected to be $350MM on revenues of just $5B. In a worse macro environment with lower sales, it's hard to believe that operating cash flow would exceed its record operating cash flow of $305MM in 2007.

Secondly, nearly 50% of JAH's operating cash flow has been driven by inventory turnover. If sales don't materialize in Q4, JAH will be stuck with a lot of excess coffee makers, camping products, and playing cards. With a possible inventory "hangover" facing JAH at the end of Q4 08, JAH's operating cash flow could be constrained throughout 2009 since inventory turnover will be sluggish unless JAH slashes prices aggressively, pressuring gross margins.

A JAH investor might not think this is so bad but the problem is JAH's credit profile, which Moody's appears to be catching on to. At $5B in 2009 sales, JAH's EBITDA could come in around $475MM. The Company's maintenance capex will be around $100MM resulting in $375MM in EBITDA less CapEx. However, JAH's interest expense could run about $170MM in 2009 while it's taxes could be $55-75MM. This ratio of JAH's EBITDA less CapEx divided by JAH's fixed charges is under 2.0x.

While the Company's equity prices have been somewhat slower to react, some portion of JAH's debt, such as its $650MM senior notes, have been pricing in significant distress. Fixed income markets are usually sharper than equity markets but it doesn't take much to realize the serious risks facing JAH based on its debt profile.

DISCLOSURE: SHORT JAH

Source: Q4 Warning and Moody's Support My Jarden Short Thesis