Alan Brochstein

Goodwill Hunting: Beware Potential Asset Impairment Charges

Yes, RRD definitely fits the profile. It's intangibles exceed its equity. The reason it didn't make this list is that they haven't reported 2008 Q4 and my screener works on "next year" rather than a "calendar year" and is looking at 2008 vs 2007 at this point still. One of the parameters was for a decline of 15% or more in EPS in 2009, and this one definitely meets that criteria but was excluded.

As I tried to convey, this list is only a small (very small) subset of a larger group of companies with challenging balance sheets.

Goodwill Hunting: Beware Potential Asset Impairment Charges

Excellent point. I probably mistitled this article, as I was really just addressing a single type of asset impairment, but I have previously discussed the many that all companies will face to some degree: Inventory write-downs, AR write-downs, PP&E write-downs, hits to pension assets, deferred tax credits that become worthless, and investment losses. It's a reason that "tangible book value" isn't the be-all end-all but rather just a key metric. As companies begin losing money on their operations (or making a lot less than their cost of capital), many of the productive assets by their very nature become worth less. Thankfully, I suppose, most companies don't have to "mark-to-market" their long-term assets! They do, however, have to adjust for many of the items I highlighted. This is a vicious economic downturn - start thinking about things in a different light than to which you are accustomed and I believe that you will see some of the same continued downside to stocks that I envision (not you, Constructe, but anyone reading this comment). Thanks for your input!


On Feb 11 08:43 PM constructe wrote:

> Good work. Thanks for the data.
>
> I think many companies should realize real estate asset impairment,
> but non-core property companies just aren't doing it. It is funny
> that they are so quick to realize property gains when they need to
> beat earnings and the real estate market is up but never to the opposite.
> Accounting allows a lot of wiggle room in reporting real earnings.
>
>
> Buyer beware. Passive property acquisition and investment was a big
> part of many non-property businesses. And I'm not just talking E-Trade.

Goodwill Hunting: Beware Potential Asset Impairment Charges

No problem - glad that worked!


On Feb 11 03:37 PM PROXIMO wrote:

> Alan-- I just downloaded the PDF and printed it along with your article.
> They came out perfect. Thanks.

Goodwill Hunting: Beware Potential Asset Impairment Charges

After the close today, Masco (MAS), which made the screen and is actually a company I have followed for quite some time, cut their dividend over 2/3 citing challenging economy and a debt maturity in early 2010.

Goodwill Hunting: Beware Potential Asset Impairment Charges

Proximo, did you try clicking on it again? It magnifies the image. You can also go to my blog and try it there (ab.typepad.com). I have just updated my blog with a link to the table so that you can download the PDF.


On Feb 11 09:49 AM PROXIMO wrote:

> I'd really like to see the information on the list. Unfortunately,
> my computer must be a real P.O.S. because the list is too fuzzy for
> me to make out. Thanks for the article anyway.

Goodwill Hunting: Beware Potential Asset Impairment Charges

Thanks for your question. I did some work on the overall energy sector in December or January and found it to actually have in aggregate superior balance sheet metrics to other sectors (just behind IT and Health). Anytime one makes a screen, he or she risks omitting certain variables. Two big ones that should be examined more closely are WFT and RIG, which certainly fit the bill as you described but didn't make the list due to thresholds. XTO is a serial acquirer, yet their balance sheet has very little in terms of intangibles. Of course, there could be asset impairments there as well, but I don't believe the tests are as rigid as for goodwill.


On Feb 11 08:43 AM Jim Hawthorne wrote:

> Thanks for your work, Alan! Much appreciated and worth further examination.
>
>
> But I was surprised not to see more oil&gas stocks listed, as
> many of these companies took on considerable debt loads through new
> lease acquisitions, renewals, new drilling and existing well renovations
> and revivals when oil passes the $90/Bbl mark and showed no end in
> sight!
>
> Care to comment?

Be Careful, Consumer Retail's Full of Land Mines

BBBY looks great to me. Their largest rival is bankrupt and closing stores. The company isn't the growth vehicle it used to be, but given its small average ticket price and the fact that sheets and towels do wear out and bridal registrants still get married, I think BBBY, which trades at 13X forward earnings and has no debt and $300mm in cash is one to own. It is the only non-dividend paying stock in my "Conservative Growth/Balanced" model portfolio.