If Hewlett-Packard Looks Bad, AutoZone Looks a Lot Worse
The big news story of the day was Hewlett-Packard (NYSE: HPQ) reporting that it had to write down a majority of intangible assets resulting from the purchase of Autonomy, a software provider. HP is currently trading with a tangible book value per share of -$6.69, meaning that, after taking out the intangible assets such as intellectual property and goodwill, the equity of the company is actually worthless.
This is not to say that the stock should be worth -$6.69 because intangible assets such as patents are important for technology companies. However, tangible book value per share is a good measure of liquidation value, or the amount that shareholders can reasonably expect to receive should the company go under. One company that looks terrible on this metric, one that analysts also seem to love, is AutoZone (NYSE: AZO). If HP looks bad, this stock is the worst rotten apple in the garbage pail.
AutoZone currently has a tangible book value per share of an astounding -$49.98. However, unlike HP, this is not due to intangible assets such as goodwill and intellectual property; rather, the company simply has negative equity. The company has a retained deficit, or negative retained earnings, of $1.033 billion and a total shareholders' deficit, or negative shareholders' equity, of $1.548 billion. And yet, the company still insists on buying back stock, a misuse of the little cash it has considering the dire financial straights it appears to be in.
More worrisome is the liquidity situation of the company. Currently, the company only has $103.093 million of cash on hand, a mere 1.6 percent of assets. Compare that to the current liabilities of the company which stand at $3.656 billion and the long-term debt of $3.718 billion. Even worse, the company has slightly less than $3 billion in current assets, with 88 percent of those current assets being in merchandise inventory. Basically, should the company ever need to sell current assets to raise cash, they would only be able to do so through selling out inventory, something that is not attractive for an investor.
Looking at the efficiency of the company, this increase in inventory can be shown in the increasing days of inventory on hand and days of sales outstanding. Consider: with the fiscal cliff looming and the economy growing at stall speed, is it really worth it to be holding 224.9 days of inventory? (Effectively an entire year's worth of inventory if measured in trading days.) Also, days of sales outstanding has grown from a mere 2.3 in 2003 to a whopping 6.4 as of August 2012.
With little amounts of cash, massive amounts of debt, and negative equity for its shareholders, it is somewhat astonishing that the company has yet to go bankrupt; not to mention that the company is barely generating enough cash to cover its operations, which explains the massive amount of debt on the balance sheet.
What is truly shocking with AutoZone though is how clueless the analysts seem to be. According to Bloomberg, the consensus analyst rating on the stock is a buy, with 63.6 percent of the 22 analysts having a buy rating and 36.4 percent of analysts having a hold; the stock has no sell ratings. Further, analysts have reiterated ratings as recently as November 6, so it is not as if the ratings are old and un-updated.
The seemingly massive debt load, the lack of cash and the inability to generate cash through operations, the massive amount of inventory, and the negative equity are all worrisome.
Further, analysts seem clueless as to exactly what the financial statements are saying. And to top it all off, insiders have been selling the stock, with the net insider position decreasing 20,083 shares over the last six months. And to top it all off, the largest holder of the company, Edward Lampert, owns some 22 percent of Sears Holdings (NASDAQ: SHLD) and has been a large shareholder since 2010; not the kind of investing track record one wants to replicate considering the current situation of that company.
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