SIRI

Rick Newman with U.S. News and World Reports put together an interesting piece about 15 companies that may not survive 2009 because these firms all carry large amounts of debt with very little cash on their books. These 15 firms all have been labeled with "very high" credit risks by Moody's.

By using The Applied Finance Group's (AFG’s) intrinsic value chart, one would have identified many of these companies as possessing great investment risks, long before they became red flags among the masses. Let's take a look at what AFG thinks of the 8 publicly traded firms by using AFG’s Intrinsic Value Chart and a brief explanation of the chart.

AFG’s Intrinsic Value Chart: identifies how far a stock’s trading range deviates from its intrinsic value (target price assuming immediate decay), which helps you recognize potentially mispriced stocks and pursue long and short opportunities.

• The Blue Bars represent the high and low trading range for a stock for 1 year.
• The red dotted line represents Applied Finance Group’s (AFG’s) historical Intrinsic Value through time.
• When the red line (Intrinsic Value) is above the blue bars (trading range) the company looks to be undervalued.
• When the red line (Intrinsic Value) is below the blue bars (trading range) the company looks to be overvalued.

AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected improvement of economic profitability), and Accuracy (how well AFG’s default valuation has tracked the company) information.

A quick takeaway from the charts is: From AFG’s perspective, TRMP, SIRI, SIX, and RAD shares are currently worth nothing. KKD’s intrinsic value is below its latest trading price. DTG, BBI, and LNY shares appear to be worth more than where they are traded at. AFG’s valuation framework estimates a company’s equity value by subtracting debt and other liabilities from the total enterprise value. The total enterprise value is estimated by discounting projected future cash flows, utilizing analysts conensus, Economic Margin methodology, and the Decay concept which addresses the perpetuity bias in the traditional DCF model. In the case of TRMP, SIRI, SIX, and RAD, those companies are so leveraged that the values of their future cash flows are not sufficient to pay off their debt obligations.

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On January 13th, 2009, we posted a list of companies that were, “In Shape and Looking Good.” The screen looked at the Altman Z-Score (a bankruptcy forecast model) and valuation. On January 14th, Nortel Networks (NT), filed for bankruptcy protection. As of January 13, 2009, Nortel had a Z-Score of -3.5. As we posted earlier this week, Dr. Altman’s heuristic is broken down into 3 zones:

The Altman Z-Score breaks down firms into 3 zones:

• >2.99 – Not Likely to go Bankrupt
• 1.8 - 2.99 – Gray Area
• <1.8 – Likely to go Bankrupt in the Next 2 Years

As you can see from the chart below, Nortel Networks (NT) has a Z-score of -3.5 putting it in the “Likely to go Bankrupt in the Next 2 Year” category. Looking at its peers, ALU looks in jeopardy, where CSCO and JNPR are safe in the “Not Likely to go Bankrupt in the Next 2 Years” zone.

Below is a List of Firms in the R1000, that have negative Z-scores like Nortel Networks (NT) as of January 13th, 2009. Besides Z-Score this table also provides implied sales growth expectations priced-ion to justify their current price. Those with an N/A for VE Sales Growth need to fix their business model before we begin to evaluate the embedded expectations in their stock's price.

*VE Sales Growth calculated for these firms on 1-13-09