Faces of Death: Part One

The bankruptcy of American Airlines this week and never-ending talk of punk profitability for retailers this holiday season has got me to thinking about potential corporate death stories. I always find it amazing that investors gravitate to a $5 stock instead of a $100 stock because of how “cheap” the price is; no work is done on the valuation and business' fundamentals. More shares of garbage as opposed to more shares of quality makes no sense, yet time and time again lessons go unlearned (look at the chart on America Airlines today and relative to last week). So welcome to episode one of “Faces of Death”, where I will seek to shed light on looming stock disaster stories. The mission is simple…to avoid the next AMR, CC, BCS, LEH, BB, BGS, or other stinkers from yesteryear. First company in the firing squad line is furniture manufacturer Furniture Brands. The fundamentals of the company say it all: •39% of its total assets tied up in inventory that customers generally do not want. Heck, if I am going to plunk down cash on a big ticket item like furniture I am off to Ikea on the low-end or Ethan Allen on the high-end…not the furniture section at Macy's, where Furniture Brands calls home to some of its lines. •This company still has to PAY on leases for stores it has closed. No good. •Book value is useless indicator of this company's worth. The company's property, plant and equipment values have plummeted further from start of the year due to lower future sales assumptions and a higher discount rate. The company's trade name values also are losing value. •Availability under its new asset-backed loan facility is dwindling. No good considering it's burning through what little cash is left on the balance sheet. •Sales strength in the premium brands in the portfolio are not enough to offset the margin erosion occurring in the middle market centric brands.