Firms Coming Up Short in Analysis
By ANTHONY PALAZZO and CONOR DOUGHERTY
Enron Corp. has stolen the headlines with its spectacular demise, but lesser-known companies have seen their share of troubles. Los Angeles County Chapter 11 bankruptcy filings surged 615 percent in October from September, mirroring a nationwide post-Sept. 11 trend.
It's only going to get worse.
"We've gotten more calls in the past three months for pre-insolvency advice than I have had in the past year," said Barry S. Glaser, a bankruptcy partner at Luce Forward Hamilton & Scripps in Los Angeles. A number of those calls have been from public companies, he said. "I think we're going to be approaching the top of the bell curve in the next year."
Already this year, several local public companies have filed for Chapter 11 protection, including online retailer eToys Inc. and film distributor Kushner-Locke Co. One of the region's largest utilities, Edison International, narrowly survived a brush with bankruptcy thanks to a deal, brokered by state officials, that allowed it to pay off about $3.3 billion in debt.
A Business Journal analysis of 200 of the county's publicly held companies finds many showing signs of strain. Nearly half in the LABJ 200 Index were found wanting in one or more categories set up to gauge companies' vulnerability.
The Business Journal looked at five criteria: net loss in the preceding 12 months, projected loss for 2002, debt-to-equity of greater than 200 percent, analysts' consensus investment rating of hold or lower, and a stock price under $1.
While the tally isn't meant to predict business failures, it does provide a general gauge on which L.A. companies are likely to face serious challenges in the near term.
"A lot of these companies are not mature and came to the public marketplace in the last three years. There's frequently tough going whether you're in a recession or not," said turnaround consultant Bruce Ballenger, managing director of Ballenger Strike & Associates. The results, he said, are evidence of the entrepreneurial, risk-taking spirit that exists in Southern California.
A number of companies making the list are local stalwarts that haven't given any hint of serious trouble. These include Dole Food Co., Univision Communications Inc., Smart & Final Inc., Gemstar-TV Guide International Inc. and Hughes Electronics Corp. (now in the process of being acquired). Several of these came to the list by virtue of high debt levels typical in the media business or "hold" ratings on Wall Street. (Financial services companies, which also carry high debt levels, were excluded, unless another factor brought them onto the list.)
"A lot of companies have not run through their reserves, and will really have to face the music in 2002. I think the recession will have been over and the piper won't have been paid," Ballenger said.
Of the 200 companies, 88 44 percent of the total fell afoul of one or more of the criteria, and 35 were found wanting in two or more categories. Most damning, 58 area companies, or 29 percent, had net losses over the past 12 months.
That's slightly higher than the national average of 27 percent for all publicly held companies, said Thomson Financial/First Call research analyst Ken Perkins.
Only seven of the companies that have lost money in the past four quarters are projected to lose money next year, according to First Call data. However, many current projections are out of date, Perkins said. Wall Street analysts are just now sharpening their pencils for 2002, and overall expectations are almost always revised downward, he said.
That's not good news for at least one local company on the list. Aircraft repair firm Hawker Pacific Aerospace of Sun Valley faces a liquidity test next year, as it got caught with too much debt when the economy went into its downturn.
The post-Sept. 11 fall-off in air travel forced many of Hawker's customers to ground airplanes the company was scheduled to service. Sitting with nearly $100 million in current liabilities and long-term debt, Hawker has lost money all year, and has already drawn down a credit line with its majority owner, Lufthansa Technik AG, to pay its bills. Cash liquidity will be "tight but manageable" over the next several months, the company said in a recent 10Q filing.
Out of favor
Only three local companies were found to have even a single sell rating: Scpie Holdings Inc., Korn/Ferry International and National Golf Properties Inc. (Based on analysts' consensus, Korn/Ferry didn't make the list.) But be wary of those low numbers: Wall Street is reluctant to cast negative aspersions on public companies, because brokerages depend on these same companies for underwriting business. Instead of placing "sell" ratings on an undesirable stock, an analyst is more likely to place a "hold" rating, or not rate it at all.
Korn/Ferry's looming cash crunch and National Golf's problems collecting rent were covered in Business Journal articles last week. Scpie Holdings is a Los Angeles medical-malpractice insurer that's had to pay high levels of claims outside of California and is attempting to institute premium increases. The analyst who rates it "unattractive," Michael Smith of Bear Stearns, declined to comment.
One company rated a "strong buy" by Bear Stearns analyst Jeff Vilensky is Los Angeles-based ArtistDirect Inc. this despite the ignominious distinction of having lost $16.47 per share in the past 12 months, more than any other company on the LABJ 200. Vilensky, believed to be the only analyst to follow ArtistDirect, declined to comment, saying he hasn't followed the company closely for some time.
ArtistDirect is symbolic of many local companies making the list. Starting out as an Internet play, the company shifted to a different business plan once the dot-com boom went bust and its Nasdaq listing was threatened.
Since a 1-for-10 reverse split in July, ArtistDirect's stock has risen to near $10, from about $5.25. The company has repositioned itself to emphasize a record-label subsidiary and hired record mogul Ted Field as chief executive. Industry insiders say that confidence in Field and a recent distribution agreement with BMG, the music division of Bertelsmann AG, have led to renewed excitement about ArtistDirect's prospects.
Other former dot-comers haven't been so lucky. Many are saddled with stock prices measured in pennies and no viable business model.
Of the 22 companies on the list whose stock prices are at $1 or below, nine were in the Internet sector, dwarfing any other industry. Names include Styleclick Inc., Youbet.com Inc. and US Search.com. They could be joined by Homestore.com Inc. of Westlake Village, an online real estate listings site. The company didn't make the list even though its stock is down about 85 percent for the year-to-date. Analysts say the company faces its own cash crunch next year, and its chief financial officer, Joseph Shew, resigned Dec. 6. The stock, which traded as high as $37.25 this year, is now at $2.33.
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