Market unease was alleviated after the Nasdaq rallied back from its 2012 low on June 1 last week. Investors perceived greater stability in Europe after Spain received support for its banks. Greeks voted on June 10 in what will become a coalition government, ensuring that for now, Greece will continue on an austerity plan. The macroeconomic instability is having a disproportionate impact on companies trading at low share prices. Investors perceive companies with a low share price as being more vulnerable to a weaker economy. This perception is correct in cases where a company is experiencing weak or negative cash flow, and holds too much debt.
ATP Oil and Gas (ATPG) offers a good illustration on a company investors should avoid due to heavy debt. The company named Matt McCarroll as Chief Executive Officer, only to announce a week later that he was resigning. ATP shares were once forecast by its management to be worth over $90. It closed recently at $4.57. Its 11.875% bonds are eight levels below investment grade, as rated by Moody's. Investors pushed shares up after the company sued the government, seeking over $68 million in damages.
Companies actively managing their debt and improving cash flow are:
Sprint-Nextel (S) closed recently at $3.08. Since then, CEO and board member Dan Hess said at the annual meeting that Apple's iPhone won't be profitable for Sprint until 2015. In the first quarter, the company sold 1.5 million iPhones which helped revenue per user rise to 6.9%. Sprint is expanding the iPhone offering with its plans to offer the device on Virgin Mobile, its prepaid business, on June 22.
Sprint shares are more attractive because the company is managing its cost and debt obligations. Sprint is addressing costs by shutting down the Nextel network by June 2013. By eliminating the older network, Sprint will unify its 3G and 4G wireless technology. Sprint also reduced default risks from Clearwire (CLWR) by holding less than 50% voting shares in the company.
Clearwire, whose shares are now down 72.73% from a 52-week high, closed at $1.14. The company is struggling to hold a $1 billion market capitalization. Selling pressure may be due to a number of reasons, such as: LightSquared's bankruptcy filing and Verizon's 700 Mhz spectrum sale plans. Clearwire is planning to open its TD-LTE network by June 2013. A positive development for TD-LTE is Clearwire's partnership with Qualcomm (QCOM). Qualcomm will be adding TD-LTE support to its multi-mode LTE chipset.
Expect investors to remain skittish on Clearwire if markets continue to shun risk.
Telecom equipment maker Alcatel-Lucent (ALU) shares are close to half the levels below the $2.50 price reached in March of this year. The company's value continues to lack appeal due to its CDMA business. Over 1/3 of Alcatel's wireless revenue is from North America. Wideband-CDMA gained traction in both China and North America in the first quarter. Alcatel also added 20 LTE contracts.
Investors should account for debt refinancing taking place next year. In mid-2013, a $765 million convertible debenture is due. In the last quarter, Alcatel said it had EUR 5.2 billion ($6.59B) in cash and marketable securities.
Upside exists in Alcatel shares, driven by LTE growth and GSM orders. GSM demand is expected to rise in China this year. GSM orders that were postponed in China in Q1 will be accounted for in Q2.
Another company trading close to the $2-range is Nokia (NOK). Nokia plunged last week after announcing that it would cut 10,000 jobs, sell Vertu, reshuffle executive management, and generate a loss in the quarter. Chris Weber, SVP of Markets in the Americas, was moved to EVP of Sales and Marketing. Among the executive departures, the most notable was Nokia's chief marketing officer stepping down. The restructuring will cost Nokia EUR 650 million ($824M) for the three quarters of 2012, and EUR 600 million ($761M) in 2013.
It is critical for Nokia to sell more Windows Phone 7 Lumias in North America without sacrificing margins. Nokia has nearly EUR 5 billion ($6.34B), but spent EUR 2.1 billion ($2.66B) over the last five quarters.
Investors worried about Nokia's cash flow will be able to deduce its financial health in the quarters ahead by monitoring Lumia sales in the U.S. and world-wide.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.