What do you call a stock that's down 90%? A stock that was down 80% and then got cut in half.
- David Einhorn
At the start of the year I posted an analysis outlining my view that Swisher Hygiene's stock (SWSH) would likely decline by more than 50%. Two and a half months later, the stock is down roughly 30%. With an additional four quarters of financials and a December 31st pro forma cash number now in hand, I figured it would make sense to provide an update. I still strongly believe there are more share price declines to come.
Here is a Cliffs Notes version of the article, "Why I Believe Swisher Hygiene Will Decline Dramatically":
- Initially backed by Wayne Huizenga and Steven Berrard, Swisher Hygiene is a roll up strategy of mostly small "mom and pop" cleaning and hygiene operations. Despite growing sales by +3x, operational leverage has eluded management.
- Based on publicly available financials, Swisher Hygiene has never generated an operating profit.
- In 2011 Swisher acquired over 50 separate businesses with stock and cash obtained through a reverse merger. The accounting challenge of integrating these businesses proved too much for management. In March 2012 the company announced it would need to restate its 2011 financials.
- In November 2012 Swisher sold its waste collection business, Choice Environmental, for $123MM, roughly breaking even from where the constituent businesses were purchased in 2011. Swisher used some of the proceeds to pay off a $17.2MM balance from a Wells Fargo loan, which was in technical default. The sale of the business and retiring of low cost debt implied that the company was likely burning significant amounts of cash.
- After acquiring over 60 businesses, the wheels of the acquisition strategy appeared to be coming off. Given a nearly $300MM market capitalization, Swisher Hygiene's stock looked to be very overvalued.
Financials Release Timeline
Though the company has yet to report fourth quarter 2012 numbers, Swisher has provided the market a great deal of information over the past three months. I do not think any of it supports a positive view of the company's ability to generate a profit.
Here is a brief timeline of significant news releases:
- January 16th - Swisher gave a brief business update at the ICR XChange Conference. In their presentation, the CEO and CFO noted that run rate revenue was roughly $225MM and the December 31, 2012 cash balance was approximately $70MM, not including a $12.5MM holdback from the sale of Choice Environmental. Having paid down the Wells Fargo loan, remaining debt had been reduced to $13MM. As a result of the prolonged restatement period, the company acknowledged that two large customers totaling $20MM in annual sales had taken their business elsewhere. Though the business had clearly incurred significant losses since their last financial disclosure, the CEO mentioned that they expect to be cash flow positive by Q3 2013.
- February 20th - The company announced restated financials for the first three quarters of 2011, thereby ending the 11-month restatement process. Through the first nine months of the year, Swisher's cash from operations was a loss of nearly $19MM and capital expenditures totaled $12.2MM (not including acquisitions).
- February 26th - Swisher released financials for the full 2011 year. The company posted a loss from operations of $34MM, which was $19MM worse than the prior year. The company noted that the total cost of the restatement had exceeded $18MM through February 15th.
- March 11th, 15th and 18th - Quarterly financials were reported for the first three quarters of 2012. After adjusting for the costs of the restatement, Swisher posted an EBITDA of -$11.7MM, which rounds out to an EBITDA margin of -6.6%, 270 basis points worse that the full year 2011.
The following summarizes income statements for continuing operations reported over the last three months:
Quarter Ended_ ________
Cost of Sales
% Gross Margin
% EBITDA Margin
% Operating Margin
I mentioned previously that there was nothing encouraging in the financial releases. I think the above is fair evidence of this view. Year to date, gross margins declined 440 basis points. Operating margins worsened almost 150 basis points. The business was significantly unprofitable in each quarter, even after adjusting for the costly restatement. While management has stated that it expects an additional $10MM in cost savings in 2013, such improvements will make a slight dent in the loss making operation which is on pace to generate +$35MM in operating losses. Furthermore, creating operational leverage by way of growing the top line faster than expenses appears increasingly unlikely. The $225MM annual revenue run rate implies that organic revenue growth has stopped, even after adjusting for the $20MM in lost customer sales. With the acquisition train at a halt, it will be extremely challenging for Swisher to manage the business to profitability. Meanwhile, there is a liquidity clock ticking here.
Swisher has burnt an incredible amount of cash over the past year. Though Q4 2012 has yet to be reported, the cash drain looks like it may have actually accelerated through the end of the year. The following is a summary of the company's cash flow through Q3 of 2012.
Quarter Ended_ __________
Cash from Operations
Adjusted Cash Burn
Using the company's December 31st cash estimate and reported proceeds from the sale of Choice Environmental, we can back into the implied cash burn for Q4.
9/30/2012 Cash Balance
Plus: Choice Proceeds
Less: LT Debt Pay Down
Less: Shareholder Loan Repayment
Pro Forma Starting Cash
12/31/2012 Cash Balance
Plus: Choice Hold Back
Pro Forma Ending Cash
Implied Q4 2012 Cash Burn
In total, Swisher Hygiene appears to have run through $40MM in 2012 operating its remaining business, even after adjusting for the cost of the financial restatement. Putting this in context with management's forecast that the business will be cash flow positive by Q3 2012 when only $10MM in cost savings have been identified, it reminds me of the last time management made this claim - on the Q3 2011 earnings call.
Steven Berrard: That's where we've been eating up a lot of cash flow from operations. That in itself will wind its way through the cash flow statement and as we are increasing earnings, because of revenue growth and cost containment, we will be cash flow positive.
Thomas C. Byrne: You'll start to see that in Q4, that working capital come down and generate cash flow.
(two questions later)
Analyst: Okay all right. Well, so, I mean so just the final thing, so, when you talk about cash being cash flow positive next year, that is cash from ops less than the $35 million to $40 million of CapEx, correct?
Steven Berrard: That's correct.
But it wasn't correct. Since that call Swisher Hygiene has burnt over $43MM on the existing operations and another $18MM on a costly restatement of financials. You'll have to forgive me for being skeptical of the claim that we are about to turn the cash flow corner.
So what now? With $70MM in net cash (assuming the yet to be received holdback from the sale of Choice Environmental offsets remaining debt), that gives you around $0.40/share in cash. Since we know that the business is continuing to spend cash and will do so at least through Q2, net cash is probably going to be closer to $50MM by mid-summer (run rate cash burn is $10MM/quarter), or $0.29/share. Considering that I have no reason to believe the existing operation will ever be cash positive and I do not believe this is an acquirable business, I would be reluctant to value the business for much more than the value of cash on the books, which is 70% below the current share price.
However, since I am short this stock I'll take a more conservative approach. Though the business has never posted positive operating income, not even for a quarter, some of the businesses acquired were profitable at one time. Pro-Clean of Arizona, for instance, posted an EBITDA margin of 4.2% in 2010. Though I think there is very little chance Swisher approaches this level of profitability, valuing the business at 8x hypothetical EBITDA would imply a $75MM valuation. Adding $50MM in net cash would get you $0.72/share, 44% below the current price.
Additional disclosure: This article represents best efforts to convey a fact-based opinion. My conclusions may be incorrect. This is not a recommendation to buy or sell any securities. I am short SWSH and may change my position at any time without notice