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Holly LaFon
Holly LaFon
Articles (9485)  | Author's Website |

3 Companies With Sinking Revenue and Rising Debt

A famous short-seller's formula finds stocks whose poor situations appear temporary

April 16, 2018 | About:

In his book, “Dead Companies Walking: How a Hedge Fund Manager Finds Opportunity in Unexpected Places,” noted short-seller Scott Fearon describes a number of characteristics he looks for in short candidates, but the most important is concurrent declining revenue and mounting debt.

Using this metric as part of his method, Fearon, the founder and president of Crown Capital Management, successfully bet on the demise of Blockbuster, rollerblades, beepers, home cholesterol tests, a high-flying building materials company and much more. In addition to red flags on paper, a key component of Fearon’s strategy is to meet with management teams in person. He also has a keen eye for identifying moribund trends, dying industries and competitive weakness. Other supporting warning signs are described in his book.

Since starting his fund in 1990 with money from family and friends, Fearon’s short selling helped grow it to $100 million by 2015 and boasted an 11.4% annual compound growth rate.

Using the All-in-One Screener, stocks with falling revenue and rising debt levels can be identified. Setting the maximum three-year revenue growth rate to 0% and minimum three-year long-term debt change to 50% yields these top five companies: Helmerich & Payne Inc. (NYSE:HP), Johnson Controls International PLC (NYSE:JCI) and Exxon Mobil Corp. (NYSE:XOM).

Helmerich & Payne Inc. (NYSE:HP)

Helmerich & Payne is contract drilling company primarily in the U.S., with some business overseas.

Three-year revenue growth rate: -21%

Three-year long-term debt change: 1,132.9%


Helmerich & Payne has suffered from broad negative trends depressing the price of oil. This has brought down the price-earnings ratio of the exploration and production sector in which it operates to the third lowest in the market, second only to coal and airlines, at 13.32. Companies from the sector trade at only 1.33 times book value and 2.95 times sales. Helmerich & Payne has a higher price-earnings ratio of 19.6 and lower price-book of 1.71.

With $6 million in net interest expense and $2 million in operating losses in the fourth quarter of 2017, Helmerich & Payne has trouble servicing its debt. Its interest expenses on its debt have surpassed operating income since 2016. Operating income improved in the fourth quarter, however. Each of its three segments – U.S. Land, Offshore Operations and International Land Operations – posted higher operating income compared to the same quarter the previous year.

The company is betting on the possibility of higher oil prices to drive greater use of its rigs. It is also depending on its size – it owns about half of the 200 to 250 upgradeable rigs on the market – to capitalize on an increase in demand for high capacity, super-spec rigs.

Despite falling revenue, mounting debt, and two years of net losses and negative operating margins, Helmerich & Payne has an Altman Z-score of 4.04, indicating it is in a safe zone and not in danger of failure.

The company’s stock has also risen to a one-year high at $72.19 per share Monday as revenue has begun to turn around. Revenue per share rose to $5.17 in the fourth quarter, up from $3.40 a year prior, with four consecutive quarters of increases.

Johnson Controls International PLC (NYSE:JCI)

Johnson Controls International makes heating, ventilation and air conditioning systems; building products and technology; information-based retail solutions and energy storage. It merged with Tyco in September 2016, which explains most of its debt load increase.

The company’s share price declined 17.06% over the past year, something Bill Nygren (Trades, Portfolio) of Oakmark Fund, one of its investors, discussed in a fourth-quarter shareholder letter.

“Johnson Controls shares have underperformed since the $18B Tyco merger, which also brought a new CEO, George Oliver, whom we know and respect from his days at Tyco,” Nygren said. “We believe JCI had been undermanaged prior to the merger, and Oliver has the opportunity to improve operations in addition to achieving the merger synergies. Roughly three-quarters of revenues and two-thirds of earnings come from the legacy Tyco fire and security business and JCI’s legacy HVAC and building automation businesses. JCI is also the largest producer of lead-acid automotive batteries with nearly 40% market share. While this business is lower growth, the fundamentals tend to be fairly stable as aftermarket accounts for 75% of sales.”

Three-year revenue decline rate: -18%

Three-year long-term debt change: 72.33%


Though revenue has a decline rate for the period, revenue has been increasing for the past three years. It reached $30.17 billion in 2017, soaring from $20.84 billion in 2016 with the addition of Tyco. Debt mounted in 2016 to $11.05 billion in 2016 on the merger, up from $5.75 billion in 2015. It stood at $10.9 billion at the end of 2017. The company also had cash of $552 million at the same time.

Operating income of $752 is comfortable to cover interest expense of $114 million. It has a poor cash to debt ratio compared to its industry. At 0.04, it is lower than 95% of the companies in the global engineering and construction industry. It also contributes to a moderate financial strength rating of 5 out of 10.

On Oct. 4, the company sold its Scott Safety business to 3M for $1.9 billion, which it used to pay down merger-related debt.

With efforts to increase its sales capacity and gross margins as orders increase in the first fiscal quarter of 2018, Johnson Controls confirmed adjusted earnings per share guidance of $2.75 to $2.85 per share for fiscal 2018.

Johnson Controls has a price-earnings ratio of 21.55 and price-book ratio of 1.58.

Exxo Mobil Corp. (NYSE:XOM)

The multinational oil and gas giant ExxonMobil has a $332.7 billion market cap.

Three-year revenue growth rate: -15%

Three-year long-term debt change: 104.64%


Exxon ended 2017 with $23.08 billion in long-term debt and $3.18 billion in cash. Its debt escalated in 2014 to $11.3 billion from $6.5 billion the previous year as oil prices began to implode. The debt situation played into its cash-debt ratio of 0.08, which is lower than 84% of the companies in the global oil and gas integrated industry. GuruFocus rates it a moderate financial strength ranking of 6 out of 10.

Exxon will also be more than able to service its debt due to interest expense of $186 million and operating income of $2.0 billion.

Revenue increase in 2017 compared to 2016 but has fluctuated over the past three years. It reached $55.72 per share in 2017, $48.03 in 2016 and $57.16 in 2015. Another negative sign is Exxon’s five consecutive years of operating margin declines leading to 2016’s 10-year nadir of 0.47%. They recovered in 2017 to 5.09%, the highest since 2017.

Exxon trades cheaply by its primary ratios. It has a price-earnings ratio near a two-year low at 16.81, price-book ratio near a 10-year low at 1.76 and price-sales ratio near a two-year low of 1.31.

Though walking the rocky road due to oil and gas prices, Exxon has ample strength. Its Altman Z-score of 3.7 falls in the safe zone, though its scores for the past three years are the lowest in a decade.

See the screener used to find these companies here.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

Visit Holly LaFon's Website

Rating: 5.0/5 (2 votes)



Alberto Abaterusso
Alberto Abaterusso - 11 months ago    Report SPAM

Making profit short selling stocks with declining revenues and climbing debt. Excellent piece, thank you.

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