Newspaper article THE JOURNAL RECORD

Finding Bargains among Highly Indebted Firms

Newspaper article THE JOURNAL RECORD

Finding Bargains among Highly Indebted Firms

Article excerpt

As the fallout from the heady days of overleveraging continues, investors have abandoned the stocks of many companies with high levels of debt on their balance sheets.

Doubtless most of these are deservedly abandoned. But according to some Wall Street specialists, the selloff of these stocks has left some good buys among some leveraged companies that generate enough cash flow to manage their debt and still record strong profits.

``The prices of some quality, highly leveraged companies may not reflect the underlying value of the stock,'' Neil R. Feldman, an analyst at Gruntal & Co., said in a telephone interview. ``It appears that investors have tended to discount these companies, given their heavy debt load. As a result, many of these stocks are trading at undervalued levels.''

Finding bargains among the highly indebted is not a game for everyone.

Several analysts, including Feldman, are quick to warn that highly leveraged companies remain vulnerable to an economic downturn or rising interest rates - either of which could hurt their ability to pay off the debt or indeed to survive.

To evaluate companies with lots of debt, some analysts recommend that investors focus on cash flow because it can be indicative of the earning power of a company. Cash flow is generally defined as net income plus depreciation minus preferred dividends.

But looking at cash flow may not be enough. Some analysts say investors should also calculate the cash-flow-to-price ratio.

To do this, an investor needs to first obtain a cash flow per-share figure by dividing the dollar amount of cash flow by the company's total shares outstanding in the latest full fiscal year.

The cash-flow-to-price ratio is achieved by dividing the stock's price by the cash flow per share.

According to Wall Street analysts, stocks are now trading at about eight times cash flow and investors should seek companies trading at less than that.

Joseph Arsenio, an analyst with Hambrecht & Quist in San Francisco, points to IDB Communications Group, as an example of a company with a low cash-flow-to-price ratio. The company, an independent supplier of satellite transmission services for radio and television programming in Culver City, Calif. …

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