When Fear Reigns Supreme: Share Price Vs. Cash Per Share

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Includes: ABUS, ACTG, HOS, NIHD, X
by: Jenks Jumps

Summary

2016 has marked history with its start. Stock prices are fractured. The horizon is unknown and fear lurks.

Being greedy when others are fearful does not mean abandoning the investing tenet of assessing a company's strength, performance or outlook.

When a company's share price falls near or below the cash per share on the books, should fear reign supreme? Projections abound.

Projections about 2016 abound. No one really knows if recession or a bear market or just a return to "normal" volatility is around the corner. If there is one thing that is known as 2016 begins, it is that this year has marked its place in history. Across the board, stock prices have been fractured.

Investors casting for growth potential are finding their nets much emptier than in recent years. Value investors are finding typical ratio "standards" being reset. Even dividend growth investors are being warned about chasing yield.

Not all coverage is gloom and doom. Some analysts see buying opportunity. Their logic reasons much of the drop is overreaction spurred on by margin calls, fund rebalancing and fear. Of course, sensing fear, some are calling for consideration of one of Sir John Templeton's basic tenets - be greedy when others are fearful.

But, such advice should not be taken in isolation. Warren Buffett warns investors to be more confident in a company rather than in its stock price. Well-managed companies offering top-notch products or services should weather economic downturns. Assuming the premise is true, what should investors do when a company's share price falls well below its book value? Does that truly mean the company is not well-managed or that its products or services are not top-notch?

Cash Balances Greater Than Market Caps
There are well over a thousand companies trading at prices creating a price-to-book ratio less than 0.5. Nearly half of this subset is within 5% of each stock's respective 52-week low. Narrowing the results to those trading on a major exchange for at least $3.00 returns less than 100 companies. Perusing this list highlights five companies sharing a common trait - NII Holdings (NASDAQ:NIHD), U.S. Steel (NYSE:X), Hornbeck Offshore Services (NYSE:HOS), Arbutus Biopharma (NASDAQ:ABUS) and Acacia Research (NASDAQ:ACTG). Each of the five has cash per share on its books nearly equal or less than its recent share price. The details are listed in the following table.

Company and Ticker

Market Cap

Jan 13, 16

Total Cash (MRQ)

Jan 13, 16 Closing Price

Cash Per Share (MRQ)

Sector

NII Holdings

$371.85M

$448.08M

$3.69

$4.45

Telecommunications

U.S. Steel

$985.89M

$1.16B

$6.74

$7.97

Metals & Mining

Hornbeck Offshore

$270.66M

$302.62M

$7.55

$8.44

Oil & Gas Services

Arbutus Biopharma

$203M

$196.1M

$3.72

$3.59

Biotechnology

Acacia Research

$177.07M

$157.77M

$3.49

$3.11

Business Services

Click to enlarge

When the market values a company for less than its cash on the books, some argue it indicates a potential bankruptcy on the horizon. It implies the company's assets have little to no value. It would be expected the company is burning through its cash reserves. Perhaps the company is debt-laden and does not have enough cash to sustain a downturn or the company is operating in a negative cash-flow environment.

Of the five, two companies are decidedly cash-flow positive - U.S. Steel and Hornbeck Offshore. Both companies, by the numbers, would be considered debt-laden with debt-to-equity ratios over 40. Yet, the liquidity ratio of both U.S. Steel and Hornbeck Offshore is in the safe zone. The "current ratio" compares current assets to current liabilities measuring whether the assets will adequately satisfy the liabilities to be incurred in the next twelve months. Only NII Holdings is in the danger zone when viewing its debt-to-equity ratio in conjunction with the current ratio and negative cash flow.

Company and Ticker

Operating Cash Flow (TTM)

Total Cash

Long-Term Debt

Debt-to-Equity Ratio

Current Ratio

NII Holdings

-$152.19M

$448.08M

$670.28M

41.44

0.91

U.S. Steel

$553M

$1.16B

$3.49B

109.99

1.62

Hornbeck Offshore

$229.46M

$302.62M

$1.08B

74.78

5.08

Arbutus Biopharma

-$45.01M

$196.1M

-0-

N/A

14.46

Acacia Research

-$7.55M

$157.77M

-0-

N/A

7.01

Click to enlarge

NII Holdings
And, in fact, NII Holdings filed for bankruptcy protection under Chapter 11 in September 2014. In November 2014, the company agreed to a debt restructuring deal. NII Holdings provides mobile communication services under the Nextel brand. When the company filed for bankruptcy, it was providing services to Brazil, Argentina, and Mexico. In April 2015, NII Holdings completed a sale of its operations in Mexico to AT&T (NYSE:T). In June 2015, the company's Chapter 11 reorganization was approved. In July 2015, NII Holdings relisted on the NASDAQ. Management changes were implemented in August 2015. In September 2015, NII Holdings sold 49% of its operations in Argentina to Grupo Clarin along with a call option for the remaining 51%.

From the 2014 third quarter to the 2015 third quarter, the company almost doubled its 3G subscriber base in Brazil. Yet, because of a 56% decline in the Brazilian real in the same period, the average monthly service revenue per subscriber dropped from $30 to $18. Though the company's current ratio does not reflect it, NII Holdings believes operational changes implemented will allow it "to fund the business for the next two years using our current cash and investments and assuming we receive the funds currently held in escrow from the sales of our operations in Mexico and Peru". Though the company is not yet conducting conference calls or providing a business outlook, it expects to do so effective with the 2015 fourth quarter and year-end reporting which should occur in early March 2016.

U.S. Steel
U.S. Steel's current ratio barely tops 1. The 100+ year-old steel producer has been hurt by weak global demand, high quantities of less expensive Chinese imports, the impact of foreign currency conversion, low oil prices and low steel prices. Year-to-date in 2015, U.S. Steel has reported an earnings loss but has remained adjusted EBITDA-positive. More losses are expected in the fourth quarter and throughout 2016. The company is highly focused on its cash position and liquidity. An ongoing employee-driven effort to reduce operating costs, The Carnegie Way, continues. In the latest earnings call, the company shared:

We have a very exceptionally-strong liquidity position now and it's going to definitely cover us well into 2017, no matter what economic circumstance we face this year. And, we feel really good about our cash management and our cash position through 2016.

According to its latest balance sheet, U.S. Steel is an asset-rich company with $4.4 billion in plants and property and $2.4 billion in inventories. The company paid a quarterly $0.05 dividend per share throughout 2015. The company does not have an active share repurchase authorization.

Hornbeck Offshore
Also asset-rich and debt-laden is Hornbeck Offshore Services. In November 2011, the marine transportation and service provider embarked on its fifth program to build offshore supply vessels. In February 2013, the company expanded the program to include multi-purpose supply vessels. To date the company has incurred 92.4% of the $1.27 billion in aggregate cost of the build. With 94% of the program's build delivered and in the water, Hornbeck Offshore now boasts the youngest fleet in the Gulf of Mexico. Younger fleets are more technologically advanced and require lower maintenance expenditures. Further, the vessels are capable of servicing a rig from "cradle to grave" which is of great benefit to deepwater offshore drillers.

Declining oil prices and the subsequent decline in drilling have created strong headwinds for Hornbeck. In response, the company actively "stacked" older vessels meaning it took them out of service. Stacking vessels significantly reduces operating expenses and rebalances supply in line with industry demand. Although the number of stacked vessels may appear high, when viewed in deadweight tonnage, the percentage is significantly lower.

Hornbeck has also actively refinanced its debt to lower rates. Its debt maturities are now slated for 2019, 2020, and 2021. In February 2015, Hornbeck also amended its revolving credit facility. This included appraisals of its fleet which concluded fair market value was greater than the company's book value. Yet, with $302.6 million in cash and a market cap of $270.66 million, the total enterprise value of $1.05 billion hardly compares to the fleet's book value of $2.5 billion.

As of its 2015 third quarter results, Hornbeck reported it:

...expects to generate sufficient cash flow from operations to cover all of its growth capital expenditures for the remaining seven HOSMAX vessels under construction, commercial-related capital expenditures, and all of its annually recurring cash debt service, maintenance capital expenditures and cash income taxes through the completion of the newbuild program, as well as discretionary share repurchases from time to time, without ever having to use its currently undrawn revolving credit facility.

For clarification, the final three OSV vessels were expected to be delivered in the 2015 fourth quarter. For 2016, it is estimated one MPSV will be delivered each quarter. Thus, the newbuild program is expected to be complete at year-end 2016. In October 2014, Hornbeck's board of directors authorized a share repurchase program of up to $150 million. But, the company has been hesitant to use its cash hoard for that purpose. Hornbeck does not pay a dividend.

Unlike NII Holdings, U.S. Steel and Hornbeck Offshore, Arbutus Biopharma and Acacia Research have no debt.

Arbutus Biopharma
Arbutus Biopharma, based in Canada and previously known as Tekmira, is focused on R&D related to curing HBV (Hepatitis B Virus). The company's share price hit a 52-week high of $26.73 in late January 2015, when it announced merger plans with OnCore BioPharma. Shortly after an early-March approval of the merger, the first sell-off occurred as the result of the announcement that an additional 7.5 million common shares would be offered.

In June, the company announced enrollment was closed for its Phase II clinical trial of TKM-Ebola-Guinea. The trial had been conducted in response to the late 2014 outbreak of Ebola in West Africa. The trial "reached a predefined statistical endpoint". Reaching the endpoint meant further enrollment into the trial "was not likely to demonstrate an overall therapeutic benefit". In response, the share price declined further below the $15 mark.

In July 2015, Tekmira changed its name to Arbutus after successfully integrating its merger with OnCore. The company reaffirmed its commitment to curing HBV. Its strategy is to "first establish safety and activity of individual product candidates, followed by rapid progression to small cohort combination studies (with multiple products) to identify the most promising regimens".

As is typical of a biotechnology company, Arbutus is not profitable. Besides share offerings, as another path for funding, Arbutus enters into research funding and collaboration agreements. The first, in February 2014, is with the Baruch S. Blumberg Institute and Drexel University covering cccDNA inhibitors, capsid assembly inhibitors and HCC inhibitors. The second is a three-year, renewable agreement began in October 2014 with Blumberg and covers HBV and liver cancer. The third, started in November 2014 with Blumberg and Drexel, addresses epigenetic modifiers of cccDNA and stimulator of interferon genes (STING) agonists.

In the 2015 second and third quarters, Arbutus reported less loss per share than analysts expected despite accelerating its development plans. In October 2015, it reported preclinical studies showed its RNAi candidate (ARB-1467) reduced all viral antigen levels as well as cccDNA. The projected cash burn in 2015 was approximately $50 million.

Therefore, Arbutus believes its $196 million cash balance will fund the company's activity into late 2018. The table below details 2016 plans from a recent company update:

ARB-1467

comprises three RNAi triggers that target all four HBV transcripts

Final results of Phase I study expected 1H 16

ARB-1467

Phase II trial evaluating two doses and multi-dose commenced December 2015; single dose results expected Q3 16 and multi-dose results expected Q4 16

ARB-1598

TLR9 agonist

Initiate clinical evaluation

ARB-1740

employs the same LNP (lipid nanoparticle technology) formulation as ARB-1467 but more potent

File IND (or equivalent) in 2H 16

cccDNA Formation Inhibitor

Considered the cornerstone of HBV cure; selectively inhibiting cccDNA formation through a novel MOA that prevents removal of viral polymerase enzyme from rcDNA

File IND (or equivalent) in 2H 16

Core Protein/

Capsid Inhibitor

Indirectly prevent replenishment of cccDNA and prevent formation of new infectious particles

File IND (or equivalent) in 2H 16

Click to enlarge

Based on its strategy, combination studies will be initiated in 2017. Arbutus believes combining drugs will create synergies and increase cure rates. In the meantime, Arbutus does not yet have a marketable, FDA-approved product.

Acacia Research
Acacia Research is also debt-free with a comfortable stash of cash. The company is a non-practicing entity which means it partners with patent owners to protect their patents. In 2012, the company posted historical highs in revenue and earnings. But, Acacia recognized the 80/20 rule applied to its business. The majority of its revenue was being derived from a subset of its patent portfolios. The company shifted its approach and purposely set out to accumulate a baker's dozen of "marquee" portfolios.

The hunt for prime portfolios took longer than expected. Trial dates took longer to schedule than expected. Additionally, postponements and delays were common. In summary, Acacia's shift to marquee portfolios took a toll on the company and its shareholders. The company did maintain a $0.50 annual dividend rate. Throughout the latter part of the shift, Acacia's management all but refused to employ its share repurchase authorization despite adequate cash and a depressed share price. They did, though, all but promise special dividends when the home runs were finally tallied.

The first expected homer was not a hit but, instead, a called strike. In December 2015, Acacia lost a jury trial on a case it had painted as a lock. One business day later, its CEO resigned. Within days, news flowed that Acacia was settling cases out-of-court.

The company related in its third-quarter earnings call that it could have settled cases in the quarter but chose, rather, to hold out for more. This quest for "birds in the bush" may have been the reason for the CEO's demise. And, Acacia's quick settling of cases shortly afterward does seem to support this premise. However, Acacia must be careful to not be seen as always willing to settle for less. Such an approach will limit the value of the portfolios it so laboriously amassed. It's also a distinct possibility the rush to settle cases was done to specifically prop up the fourth quarter numbers.

Litigation is expensive. In 2015, litigation expenses tallied 32% of revenue. As well, the expense of Acacia's employee base tends to be above-average due to its litigation-based business. Year-over-year, Acacia did manage to decrease its G&A expenses. Even still, year-to-date in 2015, these expenses consumed another 34% of revenue.

Whether one wants to declare Acacia as mismanaged or not, the company did have $157 million in cash and thirteen marquee or patent-rich portfolios at third quarter reporting. On the books, the patent assets are valued at just under $250 million. Yet, with a market cap of only $177 million, it means the assets are being valued at less than 8% of their book value.

Summary
Though sharing a common trait, each of the five companies does have its own unique story. As well, fear does seem to cloud the horizon for each whether it be a country's economy, an industry's turn-around, a medical break-through or court decisions. Deciding to be greedy despite such fear should not neglect a determination of whether the company is well-run or whether it offers top-notch products or services.

Disclosure: I am/we are long ACTG,HOS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I belong to an investment club that owns shares in ACTG and HOS.