The market turmoil that has plagued the beginning of 2016 is wreaking havoc on the stock prices of public companies -- and if they can't get their balance sheets in check, troubled companies could be headed for a gloomy year.
These companies may initially look like bargains as they trade in the single digits. But investors who focus solely on low stock prices, without taking debt into account, do so at their own peril.
To help investors sort out which companies could be in real trouble, Real Money, TheStreet's sister site, has unveiled its "Stressed Out" index of 20 troubled stocks that you should be watching in 2016.
"Many of the smaller dollar amount stocks didn't get there because management wanted you to start buying them by the boatload," said TheStreet's Jim Cramer. "No CEO wants their stock to trade in the single digits. They trade there because the equity is compromised by the debt side of the equation."
The companies listed in the index carry unsustainable debt loads and have a history of burning cash and resources in the absence of steady cash flow. They range across sectors, including retail, oil and gas, basic materials and telecoms. The Real Money team will be providing deep-dive analysis of the debt and equity problems sending shares to record low levels and will continue to monitor the companies. Real Money will also add newcomers to the index as needed and remove existing targets as management prove successful in executing turnarounds.
Here are 20 distressed companies that investors should watch.
Office Depot (ODP) is one of the few consumer-facing companies that made Real Money's Stressed Out Index. The Boca Raton, Fla.-based office supplies chain has been in the headlines for much of the past year over its impending merger with its competitor Staples (SPLS) -- a merger that Federal Trade Commission officials are none too pleased with.
Office Depot is expediting its plans to close 400 stores by the end of 2016 and up to 1,000 stores if the deal is approved.
As well, Office Depot's debt load has swelled, doubling from $659 million in 2012 to $1.58 billion as of 2013, wrote TheStreet's Tony Owusu. The good news is that Office Depot has sufficient liquidity, between its $1.2 billion credit revolver and the $958 million in its cash reserves, Owusu wrote.
In late January, the two companies pushed back the merger's closing (originally targeted for Feb. 4, 2016), but they are still committed to getting a deal done.
"This merger creates an unparalleled opportunity to better serve our customers and to deliver shareholder value," Staples CEO Ron Sargent said in a statement. "We are committed to completing this transaction and look forward to a full and impartial judicial review."
The lending business is by its nature a risky one, and student loans are getting a particularly bad wrap, with nervous observers predicting student loans to be the next bubble to burst.
Navient (NAVI) made the Stressed Out Index due to its "looming unsecured debt maturities coupled with the perceived and real risks of the student loan market [that] could spell trouble" for the student loan manager, according to Real Money's Carleton English.
Despite the relatively bullish outlook on the company by sell-side analysts, Moody's has a Ba3 rating on Navient, placing the company relatively deep into "junk" territory, English wrote. "Among the risks Moody's sees that are unique to Navient: the company has $16 billion in unsecured debt and just over half of it is due to mature over the next four years," she said. "The credit rating agency believes that Navient will have to refinance a portion of that debt."
Moody's also is concerned with Navient's nearly $100 billion in Federal Family Education Loan Program ABS Trusts and has put these securitizations on review for downgrade. (FFELP was a government-sponsored student loan program that ended with the Health Care and Education Reconciliation Act of 2010.)
"The repayment rates on the FFELP term ABS trusts are slowing because a growing number of borrowers are opting for income-based repayment plans, and the number of loans in deferment and forbearance remains high," Brian Harris of Moody's said in August.
Advanced Micro Devices (AMD) has a big problem: The Sunnyvale, Calif.-based semiconductor company has posted losses for the past five quarters, and Wall Street isn't expecting anything different for the first quarter of 2016. With sales dropping by nearly 30% in 2015 and cash running off its books, Advanced Micro Devices is one of two tech companies to make the Stressed Out Index.
Advanced Micro Devices had only $785 million in cash, as reported in December, down 25% on the previous year, wrote Real Money's James Passeri.
Shares are down by roughly 25% since the end of December.
3D Systems (DDD) is another struggling tech company that is feeling the brunt of waning global demand for its 3-D printers. The Rock Hill, S.C.-based company has seen its stock plummet over the past year.
3D Systems is also burning through its cash, posting only $157 million in the third quarter of 2015, down 58% year over year.
"We're disappointed with our overall results and the lower revenue from our 3-D printing products and services, which we believe were negatively impacted by continued challenging market conditions that extended customers' capital investment cycles and reduced demand across all geographies," CEO Andrew Johnson said on 3D System's third-quarter earnings call.
Still, the company sees demand in the health care market.
Sprint's (S) market cap has been cratering, and the company can thank the high-yield debt that's weighing it down.
The Overland Park, Kan.-based telecom company has taken on a lot of sub-investment-grade debt to finance its operations, but given the market turmoil, the high-yield debt markets are under pressure. Sprint's debt is trading down in secondary markets, meaning that lenders are less confident of repayment.
"Sprint's $1.5 billion unsecured bonds, maturing 2020 with a 7% annual interest rate, were quoted at $0.69 on the dollar today, down from $0.93 on the dollar in November," Real Money's James Passeri wrote last week, citing pricing data compiled by Bloomberg. "The bonds are rated 'Caa1' and 'B+' by Moody's and S&P."
U.S. Steel (X) was more than 4 times levered at the end of September. The ratio comes from U.S. Steel's total debt of $3.5 billion as measured against the company's EBITDA of $841.5 million over the past four reported quarters.
As a result of its being so highly levered, both U.S. Steel's bondholders and equity holders are fleeing, Real Money's Passeri wrote.
U.S. Steel's $450 million of unsecured bonds were trading at about 75 cents on the dollar as of Jan. 21, down more than 15% from December, based on pricing data provided by Bloomberg. The Pittsburgh-based company is burning through its cash as a result of interest expenses, and while it is considering its options (including refinancing more secured debt), a spokesman said in November that it was "premature" to make those decisions, Passeri wrote.
Still, if the bonds continue to trade any lower, it won't be long before the company could be in real trouble.
AK Steel (AKS) is another steelmaker to watch, considering it has the second-worst leverage of the steel watch list group. AK Steel is levered more than 5 times when considering its total debt of $2.4 billion and EBITDA of $452 million over the past four reported quarters.
The West Chester, Ohio-based company's share price has plummeted nearly 70% since its 52-week high on May 14, 2015, of $5.93, and its market cap has also been slashed as "shareholders flee minuscule profits due to AKS's onerous cost burden," Passeri wrote.
AK Steel's $380 million of unsecured bonds were quoted at 83 cents on the dollar, down 23% over the past year, Passeri wrote on Friday, citing Bloomberg data.
This slide was updated on Feb. 11 to reflect figures from TimkenSteel's January earnings call and comments by CEO Tim Timken.
TimkenSteel (TMST) has the poorest leverage condition of the steel watch list group, as it is theoretically undefined given EBITDA of -$31 million over the past year, and roughly $200 million in total debt.
Shares have tumbled 76% over the past 12 months, but the Canton, Ohio-based company maintains that through debt pay-downs and an amended credit facility, it is in healthier shape for the year ahead.
"We amended our $300 million credit agreement in December and ended the year with available liquidity of $84 million," CEO Tim Timken said on the earnings call in late January. "We paid consecutive quarterly dividends of $0.14 per share through the third quarter. We reduced capital spending by 40% in 2015, and we will take down another 40% this year."
Avon shareholders have gotten spooked, exiting the stock. Its market cap is down by nearly three quarters over the past year, and bondholders are also turning in Avon notes at a rapid pace. "The tranche of Avon's senior unsecured notes that pay a hefty 6.5% annual interest rate have lost 22% of their value in secondary markets over the past 12 months," Passeri wrote on Jan. 26, citing Bloomberg pricing data.
Even the suspension of its dividend and a $435 million cash injection by Cerberus Capital Management may not be enough to help the company. Passeri noted that while the Cerberus' December investment (in the form of acquiring the company's North American business) will allow Avon to dodge its looming debt maturities, it will still have to deal with the remainder of its debt maturing in 2018 and 2019.
"The bottom line is that slashing Avon's dividend and inventories and paying down debt may be a start, but the company cannot just put cover-up on this kind of sustained cash burn. Its future will hinge on whether it can start turning a profit in 2016, and investors will get an early peek at its chances in its early February earnings report," Passeri wrote.
Chesapeake's debt load stands at nearly $11 billion, which the company has had trouble getting under control. The price of its bonds plunged in the fourth quarter, with many trading for less than 40 cents on the dollar, wrote Real Money's Carleton English on Jan. 26.
Chesapeake announced on Jan. 22 that it was suspending its preferred dividend, six months after it cut off its dividend on common shares, to help repay debt.
In December, Chesapeake issued an exchange offering with preference given to its notes coming due in 2017 and 2018 and the new notes maturing in 2022. It also has a $4 billion credit facility to draw from, but "taking on debt to cover debt is not a strategy that gives investors' confidence," especially as the company continues to post losses, English wrote.
Southwestern Energy (SWN) is having a rough 2016. In just the first few weeks of the year, the oil and gas company announced a new CEO and that it was laying off roughly half of its workforce in the first quarter in order to shore up cash.
The workforce reduction will save the company roughly $150 million to $175 million per year. Southwestern Energy already implemented layoffs in 2015.
While the company doesn't have any debt maturities coming until 2018, it is significantly levered at 6.3 times as measured by net debt to EBITDA (based on 2016 projections), English wrote, citing Morgan Stanley.
And as of press time, Southwestern Energy had "not yet finalized its capital budget for 2016 and its oil rigs are sitting idle," English wrote.
Ultra Petroleum (UPL) doesn't beat around the bush. The Texas-based company warned investors flat out in its third-quarter filing with the Securities and Exchange Commission that if crude oil and natural gas prices remain low (or fall even further), "the Company is likely to generate lower operating cash flows, which would make it more difficult for the Company to remain in compliance with all of its debt covenants."
Ultra Petroleum has $2.76 billion in debt, with $62 million due in March 2016 and only $25 million of cash on hand, as of the third quarter. "Its ability to cover this issue with cash from operations is questionable as the company already accessed its credit facility to finance capital operations," English wrote.
Shares of Encana (ECA) , the Canadian energy company, have sunk more than 70% over the past year due to falling oil prices. Meanwhile the company's leverage is at 5.1 times, compared with 3.8 times for its peers, English wrote, citing Morgan Stanley.
Even if Encana does shed assets, its position is unlikely to improve until energy prices rally for a sustained amount of time.
Dropping commodity prices as well as weaker global demand is wreaking havoc on Freeport-McMoRan (FCX) , the Phoenix-based mining company that also has oil and gas businesses, which has $20.4 billion in debt. Last year, Freeport-McMoRan announced a slew of cost-cutting measures to shore up its balance sheet, including suspending its dividend.
Freeport-McMoRan, which reported earnings on Jan. 26, did beat analyst expectations but still reported a fourth-quarter loss of $3.47 a share (it posted a loss of $11.31 a share for all of 2015). The company said that it is targeting to reduce its debt by $5 billion to $10 billion but that it would take time and multiple transactions, including the shaving of assets, English wrote. It also slashed its capex spending for 2016 to $3.4 billion from $6.35 billion in 2015.
"We are where we are. We can't wish the market away. We can't wish this debt away we've got to deal with it and that's the hard decisions we're making," CEO Richard Adkerson said on Tuesday's conference call.
Ain't that the truth.
And then there are the companies that are indirectly related by the price of oil, such as McDermott International (MDR) , a Texas-based company that designs and installs structures for offshore and deepwater oil and gas companies. The company is considered junk -- at least in regards to its corporate rating. Moody's downgraded the company to B1 from Ba3 on Jan. 21, citing the "risk of project cancellations due to the plunge in oil prices," English wrote.
"The nature of McDermott's business, which includes sizeable fixed priced offshore and subsea oil & gas projects, lends itself to volatility in orders, project timing, revenues and profitability and encompasses high execution risk," Moody's said.
Moody's isn't alone in its concern about McDermott. Earlier this month Morgan Stanley reiterated its underweight rating on the stock and said there is "higher company specific risk around winning new work and executing at profitable margins."
McDermott has a $500 million note coming due in 2021. It's priced at $65.50 as of Jan. 27, down sharply from the start of 2016, according to data provided by Thomson Reuters.
Tidewater (TDW) is another struggling oil-and-gas service provider. The New Orleans-based company provides offshore vessels to the energy industry. Its customers are directly influenced by the price of oil. And for the final nail in the coffin, Tidewater also does a lot of business in Brazil and Venezuela, two Latin American countries notoriously associated with corruption.
Tidewater reported $1.5 billion in debt as of December. Though the bulk of the notes aren't due until 2020, prolonged low oil prices could hamper its ability to repay.
And then there is Transocean (RIG) . The Switzerland-based company has seen shares collapse since its 52-week-high on May 14, 2015. It also confirmed plans to delist from the Swiss Exchange.
Moody's downgraded Transocean in October to Ba2 from Ba1 due to market conditions and is reviewing the stock for another potential downgrade, English wrote.
"Although the company has taken proactive measures to cut costs, defer large capital commitments and maintain strong liquidity, Transocean is entering a potentially prolonged period of declining cash flow generation and significant debt maturities," Peter Speer of Moody's wrote in October.
A Goldman Sachs analyst is also worried about Transocean's $1.6 billion in debt coming due in 2017 and reiterated his sell rating on the company.
Finally there is Texas-based Weatherford International (WFT) . Like Transocean, the company's corporate rating is under review by Moody's (which currently rates it at Ba1).
"While we believe that Weatherford will generate free cash flow and will focus on debt reduction through 2016, it will continue to be modest and not sufficient to offset overall moderate cash flow generation stemming from a prolonged oilfield service cyclical downturn," Gretchen French of Moody's wrote when issuing the October rating.
Not everyone is so down on Weatherford. RBC Capital Markets (a unit of Royal Bank of Canada) has an outperform rating on the stock, even if it did recently trim its price target by $2 to $9. Weatherford's $950 million in debt coming due in 2017 is "manageable," RBC Capital Markets says, but sustained low oil prices will test the firm's thesis.