5 Stocks with Crushing Debt Loads

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The markets are pulling back, leaving investors to wonder whether this is a short-term dip or another massive sell-off.  With the VIX picking up and the markets slipping, investors may start pouring money into safer assets. 

Treasuries, fixed-income securities, cash, and other instruments may see assets rise if the markets fall.  With the S&P reaching a recent high less than 7% off its all-time high, and the NASDAQ seeing prices not seen since the dot-com bubble, I believe that we are due for a larger pullback. 

Playing the Short

Of particular worry are stocks with huge debt burdens.  Keeping up debt payments in a sour economy is a chore, especially if the debt is downgraded by rating agencies.  Also, debt-loaded companies can become a target for short sellers.

Whether you are a short seller or a long investor hoping to reduce risk, here are five companies to watch – because they have huge debt burdens.

Company

Cash on Hand

Total Debt

Debt/Equity

Operating Cash Flow

Chesapeake

 $             1.00

 $     14.60

           73.60

 $                          0.76

Hewlett-Packard

 $             9.50

 $     29.80

           93.00

 $                          2.85

Weatherford

 $             0.34

 $       7.90

           79.40

 $                          0.14

Ford

 $           23.80

 $     99.90

         584.90

 $                          3.90

Dow Chemical

 $             4.00

 $     20.70

           84.80

 $                          1.47

*Numbers in Billions

 

 

 

 

**All Data from Last Reported Quarter, compiled 10/24/12

 

 

 

 

Chesapeake (NYSE: CHK) has been weighed by excess debt as it invests money into oil drilling.  The second-largest natural gas driller in the U.S., Chesapeake has jumped from natural gas, whose prices have tanked, into fast-rising oil.  Chesapeake’s management hopes to raise $17 to $19 billion through asset sales in 2012 and 2013, an increase from its previous goal.  The asset sales are expected to cover a chunk of Chesapeake’s outstanding debt, as well as to cover the firm’s rising capital expenditures.

Like Chesapeake, Weatherford (NYSE: WFT) also operates in the oil and gas industry.  Weatherford services the upstream market, those involved in drilling and producing natural gas and oil.  Weatherford’s shares have taken a tumble as the number of rigs in the U.S. grows smaller.  Finally, because the oil and gas industry is capital-intensive, burdensome debt is typically present.

However, Weatherford’s massive debt load compared to its miniscule cash on hand is one reason that the company’s shares are trading at 70% of book value.

Facing tough market conditions, Ford (NYSE: F) holds a mountain of debt.  The debt load is one reason that Ford is trading at such a paltry earnings valuation – just 2.3 times earnings – despite paying a 2% dividend.  Ford’s new 2013 line of Fusion sedans are sleek and plush, and I will be looking to see their effect on Ford’s bottom line.

As an added risk, Ford faces potential losses to its deferred tax assets, or DTAs, if corporate tax rates decrease. I wrote about how Ford is impacted in my article, “These Stocks Could Face Unexpected ‘Losses’ in 2013.

Hewlett-Packard (NYSE: HPQ) has a similar story.  I wrote about this in my post “Competition Strangling H-P,” which dissected the company’s threats and explained their massive losses due to writing off old acquisitions.  H-P has taken a hit as it faces dated products from a lack of R&D; excessive costs; a large infrastructure from old acquisitions; and increasing competition from Asian companies who are able to provide services more cheaply.

The problem for CEO Meg Whitman is that orchestrating a success story takes cash – something the company does not have.  With huge debt and a large debt-equity ratio, H-P will likely see further downside in a market correction.

Another firm to consider is Dow Chemical (NYSE: DOW).  Dow is a strong firm with good products, a 4.4% dividend yield, and “blue-chip” status.  Also, the company had a very unique strategy, where it sponsored the Olympics to bring itself additional business.  I wrote about this creative strategy in “Why This Company Really Sponsored the Olympics.”

The issue with Dow is an 84.8 debt-equity ratio and debt that is almost five times cash on hand.  Dow will be alright in the long-run.  The question is whether or not investors will punish the stock in the short-term for carrying large debt.

Conclusion

With the S&P 500 ticking down to the 1350 area, I am concerned for a broad asset pullback and a move toward safer assets.  Often stocks with large debt loads can be among the first to go from a portfolio – and the five companies mentioned above have large debt loads.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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