While doing research, I stumbled upon a stock with declining revenue, which is unusual during an economic expansion. Thus, I figured shares of this firm must be tanking. Nope. The share price increased substantially during the bull market that started in 2009. Simply put, there is a dislocation between the fundamentals and share price.
Consequently, I did some digging. There are some reasons for the share price to increase. One reason, the firm's EBITDA growth. Another reason, the substantial amount of leverage the firm is using. Remember, leverage increases returns to shareholders. Also remember, leverage increase returns to short sellers.
At this point, it would not be in good judgment to recommend buying shares of CenterPoint (NYSE:CNP), but this firm is an excellent short sale candidate. If CenterPoint can not renew outstanding debts, this firm could go into Chapter 7 or 11: they do not have enough cash to pay off their debt.
There is an increase in the share price of primary degree. Shares of the firm went from trading at around $8 to over $24. That said, there is a dislocation between the fundamentals of the business and the share price.
You would expect the enormous increase in the share price to coincide with an increase in revenue, but that is not the case. Since 2008, revenue has been trending lower. There is a revenue increase in the twelve trailing month's data, but that is not enough to justify the dislocation.
It is not just a revenue problem. Operating income is also trending lower. But, this time, the twelve trailing month's data is not showing an uptick. To be fair, the operating margin is not bad; it is at 13 percent for the twelve trailing months.
That said, the substantial increase in the share price is partly attributable to the substantial amount of debt relative to operating income. On the flip side, a substantial decline in the share price could also be due to the level of debt relative to operating income.
The increase in the share price is also partly attributable to the increase in EBITDA; the firm has a relatively high depreciation expense. If EBITDA is decent, what is going on with the cash balance?
The cash balance is increasing, but cash is a relatively low percentage of long-term debt. The long-term debt level is almost $9 billion and the cash balance is just over $200 million. Meaning, there is a risk of insolvency. Net working capital is negative.
Also, CenterPoint is leveraged about 5 to 1: the financial leverage ratio implies weak solvency. What are investors seeing? Investors are seeing a share price return boosted by debt, a debt fueled rally. There could be, and possibly will be, a debt fueled collapse to follow. While there could be more upside to the share price during this historic bull market, CenterPoint is a stock worth short selling heading into the end of a historic bull market.