It’s that time of year again: time to close the fiscal and mental books on one year, and make predictions about what the coming year holds.
The reality is, the coming year is likely to see some stocks fall, a few losses logged, and maybe even a bankruptcy or two.
With that as the backdrop, here’s a closer look at seven companies that won’t likely last through the end of this year … at least not as we know these names today.
Sears Holdings Corp (SHLD)
While a true bankruptcy isn’t realistically in the cards for most of these troubled companies, it is a distinct possibility for Sears Holdings (SHLD), which managed to lose $454 million last quarter despite sales of $5.75 billion.
Sadly, that was a fairly typical quarter. In fact, the iconic retailer hasn’t turned a quarterly profit in years.
It hasn’t been a problem, as CEO Eddie Lampert has been selling assets to raise cash as the organization was bleeding it via its normal retail operations. Sears Hometown (SHOS), Sears Canada (SRSC), Lands’ End (LE) and a bunch of real estate are just some of the properties Sears has shed over the past few years to put some much-needed money back in its coffers.
Problem is, as of the last tally, Sears only had $294 million in the bank and a $963 million credit line it can tap into. That’s about three quarters’ worth of losses at its current rate. It’s unlikely SHLD will be able to secure any new loans (at palatable terms, anyway) until it can prove viability as a retailer again — something Lampert has had more than ample time to prove. Simultaneously, the company is running out of marketable pieces of itself to sell.
Eddie Lampert can do a lot of creative things, but he can’t defy mathematics.
Sprint Corp (S)
Sprint (S) isn’t likely to face bankruptcy in 2016, as it has plenty of cash in the bank … $2 billion to be exact. The wireless service provider has been booking losses on a pretty regular basis, though, despite a concerted effort to win new business by extending generous customer incentives while at the same time cutting out any expenses it can.
Those efforts just aren’t proving worth it. For example, Sprint recently scored fourth among the four major cell service providers in terms of customer satisfaction. Sooner or later — probably sooner — its financial backers are apt to run out of patience and/or money.
Although that’s the majority opinion (as suggested by the fact that S shares are down 60% since the middle of 2014), it’s a premise likely to ruffle the feathers of a quite vocal minority that does believe Sprint has a viable future.
That being said, while Sprint’s most immediate issues aren’t necessarily cash-based, the company could be feeling a big cash pinch sooner than most recognize. Sprint has $3.6 billion worth of bonds maturing in 2016, versus only $1.2 billion worth of debt that matured in 2015. It has to come up with that cash, or be forced to refinance.
It’s unlikely lenders are going to be lining up to extend favorable credit terms to a company that’s clearly still getting no traction.
Harmony Gold Mining (HMY)
The average cost of mining one ounce of gold this year is $950, which means that despite how much gold has fallen since late 2011, most miners still can operate profitably. (Gold ended last week at a price of $1076 per ounce.)
That average all-in cost of $950, though, sports a wide standard deviation, and several gold miners are spending as much if not more than the current price of gold to dig the stuff up.
One of the more prolific gold miners paying a dear price to mine gold is South African miner Harmony Gold Mining (HMY), which spends $1,117 per ounce to mine gold. Its mines are difficult and expensive to operate because gold in South Africa, while plentiful, is deep underground.
Technically speaking, Harmony could remain in business indefinitely with gold at its current price … but just barely. And, it’s also worth noting that’s an unforgiving all-in cost/price dynamic, leaving no room for error or the inevitable added costs that pop up. For perspective, Harmony Gold Mining hasn’t turned a quarterly profit in over a year, even though gold prices didn’t touch the company’s all-in costs until last quarter. If gold doesn’t recover anytime soon, those losses very well could widen.
And there’s the rub. Weak gold prices are largely spurred by a strong U.S. dollar, but the dollar isn’t positioned to pull back anytime soon … especially now that U.S. interest rates are poised to move higher.
Peabody Energy (BTU)
Whereas gold is still a viable material for some miners even if it isn’t for Harmony Gold Mining, coal remains at such depressed prices one has to wonder if coal miners will ever see the light of day again. And, believe it or not, one of the biggest may be the most vulnerable to bankruptcy … Peabody Energy (BTU).
The coal miner wouldn’t be alone if it did file for bankruptcy or was forced to restructure its debt … or itself. Peers and rivals Alpha Natural Resources (ANRZQ) and Patriot Coal (PCXCQ) both filed for bankruptcy earlier this year, and with coal prices stuck at multiyear lows, the industry as a whole is hanging by a thread.
But how close is Peabody to falling off the liquidity cliff? Almost as an omen, Peabody spokesman Vic Svec made a point of saying in October, “We have two financial priorities. One of those is maximizing our liquidity, the other one is reducing leverage.”
Those are the right priorities. The company hasn’t turned an annual profit since 2011 (when the price of coal was still relatively healthy), and Peabody’s cash balance has dwindled from $799 million then to $334 million now. That’s actually up a little from 2014’s last cash level, but only because the company has been selling mines.
When a company starts selling off revenue-bearing pieces of itself, it can quickly turn into a death spiral.
It’s tough to believe that any $1.87 billion company with $2.393 billion in the bank is dancing with bankruptcy, and to be fair, SunEdison (SUNE) will likely figure out a way to evade bankruptcy simply by reorganizing itself before it gets to that point.
Make no mistake, though — one way or another, something drastic will be changing (for the worse) simply because the mathematics and subsequent yieldcos don’t add up to long-term viability. While the solar power company’s cash balance may be getting bigger with its revenue, so too is its loss.
That’s not going to be a popular premise with a small but vocal crowd of SUNE supporters who will be quick to point out that the solar power plant developer just secured a $650 million line of credit, mostly to facilitate the purchase of Vivint Solar (VSLR). With Vivint also being an unprofitable company, though, it’s not a deal that actually makes SunEdison any more viable. It’s just a deal that saddles SUNE with more debt it really can’t afford.
And that’s the really scary part about the dynamics of solar power and the business model SUNE employees — it requires a debilitating amount of debt. The company’s debt-to-equity ratio now stands at a whopping 2.6.
That’s palatable for some companies, and especially for master limited partnerships, which are designed to rely on debt. The debt requires reliable (even if thin) profits, however, which SUNE isn’t. In fact, its recent retraction in its forecast installations for the current and next quarters is yet another clue that solar power is struggling to survive as an industry as subsidies fade.
Petroleo Brasileiro SA Petrobras (ADR) (PBR)
Last but not least, no list of names approaching bankruptcy would be complete right now without at least one oil company on it.
Petroleo Brasileiro SA Petrobras (PBR) — better just known as Petrobras — is the one that made this list, though it’s just one of several that could have been added.
For perspective, as of the latest look, more than three-fourths of the oil exploration and production companies that Standard & Poor’s tracks has a credit rating of BB+ or worse. That’s “junk” status, and given the number of names with that rating, it’s an indictment of the entire industry’s ability to just service its debt … let alone pay its freshest bills. In fact, S&P says Petrobras’ creditworthiness is slightly lower than the first tier of “junk” status, categorizing it as BB.
Making matters even worse for Petrobras is the fact that its home country of Brazil is in a fiscal nightmare of its own. Aside from rampant government corruption stirring up a lack of faith in the country’s future, Brazil’s credit rating itself had been downgraded, exacerbating the fiscal headwind every multinational company in the country is facing now by pulling the last leg out from underneath its currency.
Already in liquidity dire straits, Petrobras’ near-term plans to circumvent a cash crunch in the near-term may do more harm than good. It might not matter in 2016, but a day of reckoning is coming.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.