Let's set things straight right from the start. In no way do I have a crystal ball at my disposal that can perfectly predict the future. But from the way I see things, all the clues are pointing toward a slow death for these three companies. Whether it's due to a crushing debt load or fierce competition, I just don't think these three companies have the cash or the time to turn their businesses around. While I may be a bit early, I figure now is as good a time as any to bid them adieu.
Clearwire (NAS: CLWR)
Do you ever get the feeling that the Sprint Nextel (NYS: S) /Clearwire interaction is set up more like a father/daughter relationship? Every few months, the daughter (Clearwire) shows up and somehow convinces Dad (Sprint) to lend her more money. But as you know from personal experience or through your favorite sitcom, eventually Dad gets fed up with his offspring and kicks her out to fend for herself.
Just four months after solidifying an amended deal whereby Sprint will pay Clearwire a minimum of $1 billion combined in 2011 and 2012 to utilize Clearwire's network, Clearwire is once again strapped for cash. Toting around $4.4 billion in debt and with enough cash to last a year or so by most estimates, this up-and-comer may be unplugged before it ever turns a profit.
Within the past year, the company has also seen both Chairman Craig McGraw and CEO Bill Morrow resign. To add insult to injury, Sprint partnered with Clearwire's rival LightSquared on a national LTE network plan after its partnership with Clearwire. To allay its current cash crunch, Clearwire will either issue more debt, more shares, or hope that Sprint once again comes to its rescue. Sounds like investing suicide if you ask me.
Beazer Homes (NYS: BZH)
On a personal level, I really hope the homebuilding sector doesn't take another decade to recover. From a financial standpoint, Beazer Homes likely won't be here to witness a housing recovery if it doesn't happen within the next few years.
Beazer has far more leverage than most of its homebuilder peers. Currently, 24% of Beazer's revenue goes just into paying interest on the company's $1.49 billion in debt. To put this into perspective, both D. R. Horton (NYS: DHI) and Pulte (NYS: PHM) have more debt on their books, but their interest payments as a percentage of revenue are just 4% and 6% respectively.
On top of this, Beazer is paying an average of more than 9% interest on its debt, while most of its peers have locked in financing at less than 7%. Being thus far unable to refinance and with nearly all of its debt maturing between 2015 and 2019, it appears very unlikely that Beazer will be able to survive long enough to see the housing sector recover. With book value steadily eroding from $44.50 in September 2006 to just $3.25 as of June 30, shareholders are being shown the exits.
AMR (NYS: AMR)
It's almost getting hard to remember the last time American Airlines parent AMR was in good shape. Myriad economic downturns coupled with the terrorist attacks in 2001 have caused AMR to lose a significant amount of money in eight of the past 10 years. Even with sector consolidation, there are simply too many competitors and not enough passengers to make the airline business profitable for AMR.
One aspect working against AMR is rapidly rising fuel costs. AMR, like many airlines, has felt the pinch of rising oil prices and has simply been unable to pass along price increases quickly enough to its customers. It's no surprise then that AMR's operating margins are usually negative or in the very low single digits.
Then we have possibly the crème de la crème of bonehead maneuvers. Just last month, AMR placed the largest airplane order in history: a 460-plane order from both Boeing (NYS: BA) and Airbus. While AMR's management would have you believe that over the long term it will have no problem paying for such a large order, call me beyond skeptical. These new orders are fully financed through 2016, but beyond that point is when this $40 billion order gets cloudier. AMR shareholders already have more than $11 billion worth of debt on the balance sheet to worry about, so many weren't exactly thrilled to see this new order. It's looking doubtful that AMR will be able to move margins significantly enough in the right direction to make a dent in its massive debt load.
Often we're told to stick with the strongest names in a given sector. If that's the case, these three companies are resoundingly the weakest links in their respective sectors. All three are decisively losing money hand over fist with rapidly deteriorating balance sheets. While I don't have a doomsday date in mind, I highly doubt these three will be around by 2020.
Do you think these companies have what it takes to survive? Perhaps you have your own list of bankruptcy candidates. Share them with the community in the comments section below and consider adding Clearwire, Beazer Homes and AMR to your watchlist.
At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always on your side.
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