Companies that are in a shaky financial position may sometimes attract investors in a bull market. Traders seeking a short-term profit can often use an oversold condition to capture a quick gain. But in a bear market, these companies frequently are left on the sidelines.
But a declining stock price by itself should not be enough to scare investors off. What investors really need to pay attention to is the company’s ability to finance existing debt or take on additional debt. Companies with low credit ratings face the problem of having too much debt on their books and an inability to finance it at more favorable rates.
That’s one reason we’ve put together this presentation that highlights 6 companies that may not survive the coronavirus. These companies have low stock prices. In fact, many of them are, or will be, in danger of being delisted if they cannot bring their stock above the $1 threshold. And on top of that, these companies each carry credit ratings of CCC+ or lower and are at risk of seeing those ratings even go lower.
Each of the companies presented here are considered to be among the weakest, if not the weakest, in their sector. If you have any of these falling knives in your portfolio now is the time to cut your losses and walk away.
Quick Links
- J.C. Penney
- Frontier Communications
- Chaparral Energy
- Exela Technologies
- Titan International
- Pyxus International
#1 - J.C. Penney (NYSE:JCP)
Sector: Consumer Discretionary
Few names bring memories of retail’s glory days as J.C. Penney (NYSE:JCP). But those days seem like ancient history. The company was already struggling mightily prior to the outbreak of the coronavirus. It was lagging behind in the e-commerce world, and store sales were shrinking. Now J.C. Penney is furloughing most of its part-time workforce, instituting a hiring freeze, and shutting the doors for its brick-and-mortar stores.
None of these moves are unique to Penney’s. And to be fair, the retailer has no choice but to put the safety of its employees first. But this could be the final blow to JCP stock, which is down over 70% in 2020 and is well below the $1 mark. This means if the company cannot reverse its fortunes, it most assuredly will be de-listed.
How likely is a turnaround? Unfortunately, it’s not very likely. The immediate problem is that J.C. Penney’s is woefully short on cash. As of their last earnings report, the company has just $386 million in cash and short-term investments compared with $3.7 billion in total debt. Plus, the company has limited options to get additional financing for the debt that will come due.
About J C Penney
J. C. Penney Company, Inc, through its subsidiary J. C. Penney Corporation, Inc, sells merchandise through department stores. The company primarily sells family apparel and footwear, accessories, fine and fashion jewelry, beauty products, and home furnishings; and provides services, including styling salon, optical, portrait photography, and custom decorating services.
Read More - Current Price
- $0.00
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#2 - Frontier Communications (NASDAQ:FTR)
Sector: Communication Services
Frontier Communications (NASDAQ:FTR) stock is down more than 50% in 2020. FTR stock got a modest bump when Frontier announced a restructuring plan. As part of the restructuring, Frontier will file for a Chapter 11 bankruptcy by April 14. According to the restructuring plan, the company anticipates receiving a confirmation of the Chapter 11 Plan within 120 days after filing.
There is no question that Frontier is taking a proper step to lower its existing debt. However, as analysts digest the plan, they are becoming skeptical of the company’s ability to execute the plan in a post-Coronavirus environment.
Frontier’s decline began in 2016. That’s when the company purchased Verizon’s (NYSE:VZ) wire line business in three states. Frontier’s revenue has dropped for the last 14 consecutive quarters. In 13 of those quarters, the company also posted negative earnings per share (EPS). This might be understandable if Frontier was a startup company. It’s not. And the company is showing an eroding customer base.
Only four analysts are currently covering FTR stock. They give the stock a 12-month price target of $1.39. However, with two of them issuing sell ratings (which rarely happens) and two offering a hold rating (which can be interpreted as a sell signal) it’s hard to take much stock in that price target.
Prior to announcing its restructuring plan, Frontier announced plans to sell operations and assets in Washington, Oregon, Idaho, and Montana.
About Frontier Communications
Frontier Communications Corporation provides communications services to consumer, commercial, and wholesale customers in the United States. It offers broadband, video, voice, and other services and products through a combination of fiber and copper-based networks to consumer customers. The company also provides Ethernet and traditional circuit-based services; software defined wide area network, managed Wi-Fi and cloud IT solutions, voice and Unified Communications as a Service (UCaaS), and Voice over Internet Protocol (VoIP) services, as well as hardware and network solutions and services to small and medium business, and large enterprises.
Read More - Current Price
- $0.06
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#3 - Chaparral Energy (NYSE:CHAP)
Sector: Energy
Chaparral Energy (NYSE:CHAP) stock is down 80% in 2020. Most of the blame for the country’s current predicament can be placed squarely on oil prices at near record lows. However, the company’s debt problems are not unique to this time and place. During the last oil shock, the company entered and successfully exited a Chapter 11 bankruptcy.
In late March, the company announced it has hired financial advisors to help it improve its balance sheet. The company has $421 million in outstanding debt. It has 8.75% bonds due in July 2023 that are currently trading at 25 cents on the dollar. The company says no restructuring move is imminent.
In its most recent earnings report in March, CHAP beat analysts’ expectations for both revenue and earnings. But that most certainly did not factor in the current state of the oil market. Despite the earnings beat, Roth Capital downgraded the stock from Buy to Neutral.
The bottom line for Chaparral is that it needs to see oil prices recover to stave off what appears to be an inevitable move into another bankruptcy. However, despite the United States government direct intervention with Saudi Arabia, the price of oil is still reaching for a bottom.
About Chaparral Energy
Chaparral Energy, Inc engages in the acquisition, exploration, development, production, and operation of onshore oil and natural gas properties primarily in Oklahoma, the United States. The company sells crude oil, natural gas, and natural gas liquids primarily to refineries and gas processing plant.
Read More - Current Price
- $0.04
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#4 - Exela Technologies (NASDAQ:XELA)
Sector: Information Technology
What do you get when you combine a falling stock price with a potential lawsuit alleging securities fraud? That would be Exela Technologies (NASDAQ:XELA). In March, the company announced it was postponing its earnings release because of a delay in filing its 2019 annual report. The stock plunged about 8% on that news.
Then the company disclosed historical accounting errors and is restating its financial statements for 2017 and 2018 as well as any interim periods prior to September 30 of 2019. Not surprisingly the stock fell further.
The company has missed on analysts’ EPS expectations for the last seven quarters. The last time the company reported positive earnings per share was in August, 2016. As recently as August 2019 XELA was receiving buy ratings from analysts with a price target in the low single digits. However, the pending litigation will make it hard to see the company delivering anywhere close to that.
The combination of negative earnings and no apparent catalyst for revenue is limiting Exela’s long-term prospects. Bankruptcy and a delisted stock looks like a greater possibility than seeing the stock becoming anything more than just a potential short-term trade.
About Exela Technologies
Exela Technologies, Inc (Exela), formerly Quinpario Acquisition Corp. 2, is engaged in providing information and transaction processing solutions. The Company’s segments include Information and Transaction Processing Solutions (ITPS), Healthcare Solutions (HS) and Legal & Loss Prevention Services (LLPS).
Read More - Current Price
- $1.99
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#5 - Titan International (NYSE:TWI)
Sector: Industrials
The fundamental problem facing Titan International (NYSE:TWI) is that the company was already reporting declining profits and stagnant to falling revenues as the economy was still in a bull market. Today prospects look cloudy, at best, for the manufacturer of aftermarket products for farm equipment.
TWI stock is down by nearly 60% in 2020. The stock took a negative turn after posting a larger than expected loss of 40 cents per share (analysts had been forecasting a negative 9 cents per share). But what made this number worse was that it was also worse on a year-over-year basis. The stock posted a negative EPS of 21 cents per share in the prior-year period.
And to make matters worse, the company has failed to surpass analysts’ estimates for the last four quarters. The last analyst to offer an opinion on Titan was Sidoti in June of 2019. At that time, the company received a Buy rating with an $8 price target. Given the company’s declining profits, it seems unlikely they will be able to hit that target.
About Titan International
Titan International, Inc, together with its subsidiaries, manufactures and sells wheels, tires, and undercarriage systems and components for off-highway vehicles in the United States and internationally. The company operates in Agricultural, Earthmoving/Construction, and Consumer segments. It offers wheels, tires, and undercarriage systems and components for various agricultural equipment, including tractors, combines, skidders, plows, planters, and irrigation equipment.
Read More - Current Price
- $7.78
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#6 - Pyxus International (OTCMKTS:PYYX)
Sector: Consumer Staples
What’s in a name? If you’re Pyxus International (NYSE:PYX) not as much as you would hope. The company, formerly known as Alliance One International, has seen its stock price drop nearly 70% in 2020. The company is facing a massive cash crunch and an impending $1 billion in debt obligations.
Pyxus has approximately $900 million of bonds maturing in 2020 and it is unlikely the company will be able to refinance the debt since it is at deeply distressed price levels. The revenue picture is not much better. In its most recent quarter, Pyxus had revenue of just $363 million, a 31% decline from the previous quarter. The company has only $396 million of available credit on its balance sheet.
Pyxus is attempting to pivot away from its core business as a reseller of tobacco into the emerging cannabis sector. The problem is that demand in tobacco continues to decline. According to the Altria Group, U.S. tobacco volume is expected to continue to decline between 4% and 6% in 2020.
In an interview for the Wall Street Journal, Alan Brochstein, founder of 420Investor.com said, “They’re not successful at their core tobacco business so they try to pivot into the cannabis space. Pyxus seems to be going at it from a position of weakness.”
About Pyxus International
Pyxus International, Inc, an agricultural company, offers value-added products and services to businesses and customers. It also involved in the purchasing, processing, packing, storing, and shipping tobacco to manufacturers of cigarettes and other consumer tobacco products. The company offers its products in China, the United States, the United Arab Emirates, Indonesia, Russia, Northern Africa, and internationally.
Read More - Current Price
- $3.19
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
One of the greatest threats that these companies represent is the possibility that they could default on their debt. Twenty-one companies throughout the world have already defaulted on their debt. On a year-over-year basis that doesn’t look too threatening. It’s about the pace of defaults in the same period in 2019 (22) and 2018 (20).
However, that was in the midst of one of the longest bull markets in history. The coronoavirus pandemic is creating changes to the global economy that have only been war-gamed in economic theory classes. When combined with the price war going on in the oil market and all of these factors contributing to volatility in the market, it’s not hard to imagine an uptick in defaults for the rest of 2020.
And when you consider that the companies in this presentation are already among the least prepared for a global slowdown, let alone one caused by a viral pandemic, they will likely be among the first dominoes to fall.
It’s certainly possible that one or more of these companies may come out of this current market crash with a faint pulse. But each of these companies had serious issues regarding revenue and profit expectations before the economy went downhill. If that side of the equation doesn’t improve, there’s not much hope for long-term growth.
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