17 True 'Bottom Rung' Companies

Recently, Moody’s released a list of what they call “Bottom Rung Companies” (click here for a link to a blog listing several of the companies, accompanied by an industry breakdown of where these firms are located) which is based on the company’s ability, or lack thereof, to pay back the debt it owes. The 283 companies on the list roughly represent the riskiest 15% of all firms that Moody’s tracks. Moody’s does not always designate the most appropriate ratings (Fannie Mae (FNM) and Freddie Mac (FRE) were rated AAA before defaulting), so we decided to take their list into our own hands and provide the true bottom rung companies.

With so much negative news going around and many companies declaring bankruptcy, it is no surprise that measures of a firm’s financial strength, such as the Altman Z-Score (likelihood of a company to go bankrupt in the next 2 years), have been re-gaining popularity in the current market environment. So to help with our analysis, we used the Z-Score metric to analyze the companies on Moody’s list, as well as The Applied Finance Group’s (AFG’s) screening variables to determine how attractive these firms are from a valuation standpoint, and how each company’s forecasted profitability for their fiscal 2009 year looks (Forecasted Economic Margin). As a result, ValueExpectations.com has put together a list of the 17 “riskiest” companies to avoid. Each of these companies have “at risk” level Z-Scores, unattractive valuations, and are forecasted to achieve negative profitability (EM) for their 2009 fiscal year, all of which indicate that they will be more likely to underperform.

Below the table (click to enlarge) is a short description of the Altman Z-score and a breakdown of what the scores mean, along with a brief description of what Economic Margin (EM) is and how it is calculated.

17 Companies At Risk of Bankruptcy

The Altman Z-score defined: A metric that gives insights into the likelihood of a firm going bankrupt in the next 2 years. The model was developed by Professor Edward I. Altman of NYU’s Stern School of Business and first published in The Journal of FINANCE in September 1968.

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt

• 1.8 - 2.99 – Gray Area

• <1.8 – Likely to go Bankrupt in the Next 2 Years

Economic Margin (EM) Defined: A measure of corporate performance that captures off balance sheet items, by looking at how much a company is earning above or below their cost of capital. EM is expressed in a % or margin. The Economic Margin Framework™ is more than just a performance metric as it encompasses a valuation system that explicitly addresses the four main drivers of enterprise value: profitability, competition, growth and cost of capital.

Economic Margin Calculation (click to enlarge):

Comments

[Karen Mulvany:]

Did you really intend to label Clearwire as a bankruptcy risk? The company has raised $3.2 billion in equity since their last 10-Q filing and only has $1.35 billion in long term debt. They have reported their December quarter to reflect the newly capitalized company but have not yet filed a 10-K. But, if you check their press release you will see that total cash & equivalents, net of debt, amounts to $1.75 billion.

Clearwire will certainly be unprofitable in 2009. That is by design, as they aggressively build out their broadband wireless network, which turns cash flow positive on a market-by-market basis over time. This is a well understood model executed in the past by cable TV and cellular companies decades ago, as well as by Clearwire itself in pre-WiMax markets to date.

Mar 18 09:36 AM

[zagrebzagreb:]

Level 3 is next to the bottom... even after Warren Buffett made a huge investment in them! Love it when two 'proven' predictive indicators but up against each other.

And call me crazy, but I don't see Ford going bankrupt, especially as they are refusing government money, have a huge line of credit open, etc, etc.

Mar 18 11:17 AM

[Larrysyr:]

Interesting analysis.

Aside from the previous comments, the only thing I would add is that the mention of Moodys makes me question the rest of the article.

Mar 18 12:38 PM

[William Cowie:]

It's close to 3:00 a.m. in the tropics and that made me burst out laughing!!


> Aside from the previous comments, the only thing I would add is that
> the mention of Moodys makes me question the rest of the article.

Mar 19 02:44 AM

[longram:]

Let the system weed out the weak. Moody's should be one of them.

Mar 19 12:10 PM

[raytayzmd:]

...isn't that the truth!...right now, I rank Moody's opinion on par with Walden Welch's astrologer forecasts and Sylvia Browne's psychic readings!!


On Mar 18 12:38 PM Larrysyr wrote:

> Interesting analysis.
>
> Aside from the previous comments, the only thing I would add is that
> the mention of Moodys makes me question the rest of the article.

Mar 19 12:42 PM

[Geddy:]

But the problem is higher than normal churn and a very disgruntled customer base. Yes, every carrier has disgruntled customers but I've never seen entire websites dedicated to them as you can find in numerous places regarding Clearwire. Yes, they have 3.2 billion or so now...but they haven't even begun to build out a nationwide network and I can tell you that amount of money is no where near enough. With the economy in turmoil I can't see them raising any capital in the amount needed. Knowing some employees personally within the company, the only way they're becoming cash flow positive is to make employee needs secondary (try comparing their pay scale as well as benefits with ANY other carrier to see major differences).


On Mar 18 09:36 AM Karen Mulvany wrote:

> Did you really intend to label Clearwire as a bankruptcy risk? The
> company has raised $3.2 billion in equity since their last 10-Q filing
> and only has $1.35 billion in long term debt. They have reported
> their December quarter to reflect the newly capitalized company but
> have not yet filed a 10-K. But, if you check their press release
> you will see that total cash &amp; equivalents, net of debt, amounts
> to $1.75 billion.
>
> Clearwire will certainly be unprofitable in 2009. That is by design,
> as they aggressively build out their broadband wireless network,
> which turns cash flow positive on a market-by-market basis over time.
> This is a well understood model executed in the past by cable TV
> and cellular companies decades ago, as well as by Clearwire itself
> in pre-WiMax markets to date.

Mar 29 01:08 PM