Avoid These 3 Stocks Drowning In Debt
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Taking on debt to finance company operations is fine unless management allows that debt to grow unchecked. Although in different industries, each of the three companies analyzed below suffer from the same problem: too much debt.
Enter Nordic American Tankers (NYSE: NAT), sinking under the weight of an aging fleet, negative cash flow, and unsustainable dividend payments. Eleven out of Nordic American’s twenty tankers are just about ready for dry dock. RightShip, the industry leader who assesses a ship’s quality and task suitability, automatically gives any ship 18 years or older a one star rating which effectively renders the ship as unseaworthy. By 2015, four of Nordic American’s vessels will be downgraded to one star; by 2016, five more will be added and by 2017, two more will be downgraded to one star.
The companies’ dividend yield of 10.30% and $1.20 dividend payment is unsustainable when you look at the financials. Annual revenue fell from $126.416 million in 2010 to $94.787 million in 2011, and net loss came in at -$809 million in 2010 and -$72.298 million in 2011. Nordic American Tankers reports cash of $104.71 million but over twice that amount in debt at $205 million. The operating cash is a negative -$12.79 million, which should make shareholders nervous about how the company will continue paying out a 10.30% dividend yield.
Bunge (NYSE: BG) acts as a middleman by purchasing, packaging, storing and transporting food items from farms to grocery stores. With their costs passed on to consumers and ability to buy in quantity at favorable prices, the company should have healthy financials. Unfortunately, Bunge’s $536 million in cash is dwarfed by their $6.89 billion of debt, and operating cash is in the red at -$349 million.
Bunge’s revenue increased while net income declined. The company reported revenue of $58.743 billion in 2011, and $45.707 billion in 2010, and net income of $908 million and $2.287 billion, respectively. For the first half of 2012, revenue came in at $28.536 billion, and net income was only $366 million.
Bunge has a market cap of $9.40 billion and currently trades around $63.00-64.00. The company pays a dividend of $1.08 with a dividend yield of 1.70%. The significant debt and negative cash flow may have investors questioning company executives about these problems at the next shareholders meeting.
Facing rising fuel costs in the face of tough competition, Avis (NASDAQ: CAR) is trying to remain the leader of the rental car and truck industry. The company has a market cap of $1.75 billion, does not pay dividends, and currently trades around $16.00 a share.
What Avis does have is $11.32 billion of debt against $454 million in cash. The company reports positive operating cash of $1.60 billion, but carries a negative free cash flow of -$2.45 billion. The profit margin is also negative at -0.48%.
Although Avis increased their revenue, the company saw a decrease in net income. For 2011, revenue was reported at $5.9 billion compared to 5.185 billion in 2010; but net income fell from 2010’s $54 million to a net loss of -$29 million in 2011. For the first two quarters of 2012, Avis earned $3.489 in revenue and stated net income at $56 million. The company plans to continue implementing cost saving measures to start reducing their considerable debt.
No matter how attractive a company may seem, negative cash flow and large debt should wave an investment red flag of caution. Potential investors may want to pass on these three debt-ladened companies in favor of others with healthier financials.
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