Analysts and corporate executives tend to have positive outlooks and assume firms will be in business forever. Despite this bias, many companies perform poorly and some even go bankrupt. Bankruptcy can render a company’s stocks and bonds worthless or impair their value. Bankruptcy is often a possibility for many companies facing radical changes in their industries, but does occur to financially weak firms in thriving industries as well.
Here are five companies that are enduring financial stress or are in dramatically shifting industries:
Now that Borders—rest in peace—went bankrupt, many investors wonder whether other physical bookstores will buckle under pressure from ebooks and discount stores. Barnes & Noble, Inc. (BKS) has a forward P/E ratio of 40.30 and destroyed shareholder value with a -8.58% return on equity in 2010. With a current ratio of 1.01, liquidity is precarious. It’s clear that the firm faces financial headwinds, and will have to reinvent itself to be competitive with cheaper books and ebooks offered elsewhere. The firm’s online portal shows promise, but is nothing compared to Amazon.com Inc. (AMZN). Bankruptcy prediction using the Altman Z-score method is indeterminate, with a Z-score of 2.27 falling in a grey zone between dangerous companies and those that are predicted to be safe from bankruptcy in the coming year.
In contrast, other mall retailers like Gap Inc. (GPS) compete with online and discount retailers too, but have faired much better. The Gap is profitable, and boasts a P/E ratio of 9.52 (ttm) and a future P/E ratio that is expected to be 11.42. The firm is liquid, with a current ratio of 2.33. It is clearly solvent, with a D/E ratio of 0.334. The Gap’s revenues have been surprisingly stable since the economic downturn: its sales have been over $14 billion every year starting 2002. Moreover, it has generated positive earnings every year starting 2002. Its lowest earnings were 93 cents per share in 2006.
Financial troubles can erupt in stable industries with thriving competitors. The drugstore Rite Aid Corp. (RAD) has suffered losses every year since 2006. These terrible results have created a negative equity value in the firm, which means that the accounting value of the Rite Aid’s liabilities is greater than the accounting value of its assets. In contrast, CVS Caremark Corp (CVS) revenues have increased steadily from $43.4 billion in 2006 to $98.7 billion in 2009, and was roughly flat at $96.4 billion for 2010. CVS has enjoyed positive earnings consistently in this timeframe.
Though Rite Aid has underperformed CVS, it is not a credit risk. It has an Altman Z-score of 2.34, which is between safe and dangerous categorizations.
Gannett Co., Inc. (GCI) has a better Altman Z-score of 3.13 which places it among firms which are likely safe from bankruptcy in the next year though it is not out of the woods. Gannett is a diversified media company whose holdings include the newspaper USA Today, Careerbuilder.com, television stations, and news data services. Its subsidiaries are vulnerable to competition from online media and are also dependent on cyclical advertisers (auto dealers, realtors, etc.) for advertising revenue. Its revenues peaked in 2006 at $8.0 million and have declined steadily to $5.4 million in 2010. Free cash flow to the firm followed suit, falling from $1.3 million in 2006 to $0.7 million in 2010. Gannett suffered a phenomenal -132.0% return on equity in 2008. Stiff competition from Washington Post (WPO) and New York Times (NYT), as well as Monster WorldWide (MWW) on the careers front, will keep any possibility of durable competitive advantage development by GCI at bay.
Like Gannett, News Corp. (NWS) is a diversified media conglomerate with cable news channels and newspapers which are vulnerable to online competition. However, the firm is much more stable financially. News Corp. has been profitable in recent years, and has seen revenue growth. These results are heartening in view of industry consolidation and restructuring.