Companies That Might Not Survive This Crisis

In " Balance Sheet 101: Who Might Survive This Crisis" (November 2008) I focused on companies with large net cash positions ("cash kings") and the concept of the "z-score," which is an indication of balance sheet strength and potential for bankruptcy.

At the end of " Balance Sheet 101: Who Might Survive This Crisis," I highlighted three companies that needed to get their fiscal house in order or could face possible bankruptcy. Since then, those three companies -- Macy's ( M), General Motors ( GM) and Time Warner ( TWX) -- have reported another quarter of financial results. All three companies have experienced further deterioration in business and have to resort to layoffs -- and in GM's case, a government bailout -- to try to steady their financial condition. As of the end of the last quarter of 2008, the z-scores for these three companies now stand at the following levels:

  • Macy's: 2.59 (moderate sequential improvement)
  • GM: -0.15 (moderate sequential decline)
  • Time Warner: -1.45 (large sequential decline)
  • (Source: All z-scores referred to in this article were obtained from Bloomberg.)

    All three companies are still on bankruptcy watch, but the improvement at Macy's could take that company off of the endangered list.

    In past editions of "Balance Sheets 101" I have placed several other companies on my endangered list that were highly probable candidates for bankruptcy, such as Six Flags ( SIX), Level 3 Communications ( LVLT), Sirius XM ( SIRI), Charter Communications ( CHTR), Alcatel-Lucent ( ALU), Sharper Image and Circuit City. Charter, Sharper Image and Circuit City have already filed for bankruptcy. Sirius XM is on the verge. (Update: " Sirius XM Soars on Liberty Media Rescue") The z-scores for the companies just mentioned that are still in business are all negative and might be very close to bankruptcy.

    The companies with strong balance sheets, such as Apple ( AAPLE), Google ( GOOG), McDonald's ( MCD) and Gilead Sciences ( GILD), all continue to get stronger. However, as the economy and banking systems continues to falter, many companies are finding it more difficult to repay or refinance debt, as their revenues, earnings and cash flow decline. And the weak members of the business herd are going to get a visit from the Bankruptcy Angel of Death.

    So, here are two companies that I'm adding to my endangered stock list.

    Advanced Micro Devices (AMD)

  • Market Cap: $1.4 Billion
  • Z-Score: 0.21 (as of September 2008)
  • How the mighty have fallen! AMD was once a genuine competitor in the global semiconductor business. Its market share (2.9%) and global ranking (no. 8) in the industry peaked in 2006, but was still dwarfed by Intel ( INTC) that has a vise grip over the industry, with market share in the 12-13% range (Market share and ranking data source: iSuppli Corp.). AMD's market cap also peaked in 2006 at around $24 billion. Revenues peaked in 2005 at about $5.85 billion.

    However, strategic mistakes have since plagued the company. AMD over expanded its production facilities, knows as "fabs" in the industry. In 2007, the company made mistakes with the design and production of its quad-core server and desktop chips. Earlier this month, AMD announced that it was going to delay a planned spin-off in the company's attempts to outsource its chip production.

    Now, AMD faces declining market share, an economic dilemma and cash-rich competitors, such as Intel and Texas Instruments ( TXN), which can weather the current storm.

    AMD's debt rating is CCC+, which is categorized as "junk." In 2005 and 2006 combined, the company generated nearly $2.8 billion in cash flow from operations. In 2007 and 2008, the company burned a lot of cash (while I don't have the exact amount, I estimate the total to be just over $1 billion). AMD's debt grew from $1.3 billion at the end of 2005 to $4.7 billion at the end of 2008.

    When you put this all together, AMD is in serious financial distress. If the company cannot sell or spin off assets and the chip business remains weak, AMD will have to put itself up for sale or face the possibility of bankruptcy.

    Jamba (JMBA)

  • Market Cap: $55 Million
  • Z-Score: -0.82 (as of October 2008)
  • Jamba (better known as Jamba Juice) manufactures and retails blended juices, beverages and snacks, with an emphasis on freshness and nutrition. Unfortunately, Jamba Juice has had a lousy track record since going public in June 2005, at $8.00 per share. As with many "fad" companies, Jamba Juice's success was short-lived.

    Jamba has posted losses in six of the last eight quarters. Sales peaked in the company's first quarter of 2008 and have steadily declined since then.


    Jamba's first problem is its lack of a full menu. Other than a few baked goods items, Jamba primarily serves juice and juice blends. That is not enough menu diversification to attract diners and generate growth.

    In its attempt to grow, Jamba has burned cash and has saddled itself with debt and lease obligations, which is the company's second problem. We should expect Jamba's cash burn and further balance sheet deterioration to continue.

    Finally, Jamba is about to feel pain from a new source: McDonald's ( MCD). On McDonald's last conference call the company emphasized that it will expand further into the beverage business -- specifically, smoothies, frappes and bottled drinks. This is one battle that McDonald's the Goliath will probably win.

    It's unlikely that Jamba will survive in its current form and I would avoid investing in this penny stock. So why even mention Jamba?

    When you think about it, Jamba itself is really irrelevant. But there are two important takeaways here. First, avoid fad stocks, as their success is usually brief. The second takeaway: At $1.99 per smoothie, McDonald's would have to sell about 175 million smoothies to equal all of Jamba's annual revenues. That might sound like a huge amount of smoothies, but for McDonald's, it's not. With 14,000 stores in the U.S., each McDonald's location would have to sell about 17 smoothies a day (on average) to eclipse Jamba's sales. That will be relatively easy for McDonald's to achieve and you can bet that McDonald's will have much higher profit margins on those smoothie sales, so the company may not even have to sell as much as I just calculated.

    Your Homework

    There are several ways you can identify companies that may not survive financial distress. Some of those key indicators are:

  • Low z-scores (I have created a helpful tool on my Web site,, which will enable you to calculate z-scores from any set of financial statements. Please note: Z-Scores are not applicable for financial services companies.)
  • Declining market share
  • Fad-type product lines that dominate sales
  • Cash burn and increasing debt load
  • This week, take a fresh look at your investments and identify any companies that fall under any of these categories and consider taking action now.

    That action may be:

  • Sell the investment outright
  • Trade your stock in for a dominant company in the same industry that will likely survive and emerge from the current crisis stronger. For example, sell AMD and buy Intel. Consider this: It would have been wise to sell Circuit City and, in its place, invest in Best Buy (BBY).
  • At the time of publication, Rothbort was long AAPL, GILD, GOOG and MCD, although positions can change at any time.

    Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.

    Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

    Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

    For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at Scott appreciates your feedback; click here to send him an email.

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