satyr

Retail Firms at Risk for Bankruptcy

As has been noted in many other places and on various blogs, Audit Integrity's approach to analysis appears to lack... integrity. Nobody knows quite for sure how they arrived at their list, other than some reference to "fundamental analysis". Uh huh. What investors would do well to do is to take the time to look at individual financial statements for these companies and draw their own conclusions.

One company on the list that I follow closely is RAD. They have no major debt coming due this or next year, and have net positive cash flow. In fact, they have announced that they will begin reducing debt beginning February 2010. How that translates to BK is beyond comprehension. As Chris Rodriquez notes, they do have real estate on the market. But, when you have around 5,000 locations, it is not unusual to be shifting footprint, as well as closing under performing stores while newer, better located stores are opened. This is part of an ongoing and well-documented effort by RAD management.

Quickly, regarding LilBob's comments about RAD pricing - while I can believe that they are selling items for 10% or 20% more than other stores, you do have to remember to compare apples to apples. 7-11 gets a lot for a can of tuna when compared to Wal-mart. But, when you want to stop make a quick purchase, it is still worth it. Most of the front-end product in drugstores is more about impulse and convenience than trying to compete with large grocers and discounters. If you compare RAD prices to Walgreen or CVS, I think you will find them to be similar. But don't take my word for it. Independent research has proven this out. In an individual market this may or may not be true. However, none of us can visit 15,000 stores to determine the true mean, so we rely on independent samples to tell us the story.

As for the rest of the list, I have no specific opinion, other than to say that the outfit that produced it does not have a good track record.

20 Companies Most Likely to Go Bankrupt in Next Year

I am noting a few things about this list:

1) They only looked at companies with market caps > $1 billion. That leaves a good many off the list due to having severely impaired financial conditions and hence low market valuations. My strong suspicion is that a good many of these companies are in far greater trouble than those that this company chose to examine and list.

2) Some of these same companies were listed several months ago by Moody's as likely to go bankrupt in 2009. Many of those stocks proceeded to increase in price 5 to 10 fold. At the time, I analyzed a few of them and noted that there was virtually no chance of bankruptcy - due to the fact that they had net positive cash flow and no significant debt maturities during 2009. Fast forward 6 months, and it is Moody's whose lifespan ought to be questions.

3) Pardon me for asking, but who is Audit Integrity, where do they get their funding to operate, and who is auditing them?

25 Short Candidates

The only two I follow on the list are GE and RAD. The former does not seem like a particularly good short candidate, but given that it trades in a somewhat predictable range, I suppose one can go either long or short on it and have a shot at making a few bucks. RAD probably has a lot more upside than downside. And when it goes up, it can move quickly. I think the potential to have your head handed to you on a platter is pretty good if you short it.

Companies' Risk of Bankruptcy - Audit Integrity

Moody's has been a day late and a dollar short for longer than I can remember. This list would have been useful a year or two ago, before many of these companies showed real signs of distress. Now it serves no purpose other than for Moody's to cover their arses.

What is worse is that a number of these companies have already taken adequate measures to restructure debt and improve liquidity. I can point to at least a few that have no major debt maturies coming in the next 24 months. So, how on earth would they have a 90%, or even 10% chance of going bankrupt this year?

The proof of the pudding is in the eating. Come 2010, if 90% of these companies has not gone BK, what will Moody's say? What if it is under 50%?