I keep hearing about folks wanting to buy a particular name now because the price was X, and its fallen to Y, so it's a great buying opportunity. That may be true in some cases, but you've got to look at the entire picture, the industry, as well as that company's balance sheet, before making that call. Rather than just looking at the fall in stock price or market cap, it is important to review a company's enterprise value, and take it in context with the current uncertain economic situation.
Enterprise value (EV) is calculated by adding market cap to debt, and subtracting cash. It's a better representative of how the market values a company than market cap alone. With businesses shutting down temporarily (for how long we don't know), debt will be an issue for some of them, and may force some into bankruptcy, especially those that were already struggling. The longer they are not able to open, the greater the risk. In general terms, the more levered they are, the more the stock price will fall, all else being equal (again, in very general terms).
Restaurant name Bloomin' Brands (BLMN) is among the first I've seen that has taken big steps to stay liquid. On Friday, the company suspended it's 20 cent dividend, which is ironic, because it had just recently doubled the dividend. In addition, BLMN drew down most of its revolving credit facility, so it now has about $400 million in cash. The stock has been decimated, falling 79% since mid-February. That has dropped the market cap from about $2 billion to $420 million. It ended last quarter with $87 million in cash, and $1.05 billion in debt (excluding operating lease liabilities), which puts its EV at about $1.38 billion, down from about $3 billion last month (the increase in cash from the recent draw down of credit line are offsetting). In cases where there's significant leverage, it's the equity (market value) side of the equation that is going to take the hit, especially in this unprecedented situation.
That's also the issue for the cruise lines. Royal Caribbean (RCL) shares have fallen more than 80% since mid-January, cutting the market cap from about $27 billion to $5 billion. However, there is a substantial debt load, about $10.7 billion as of year-end. With $244 million in cash, that puts the current EV at about $15.4 billion, down from about $37.5 billion. Again, it's the equity that will suffer first and the most where's there's significant debt.
RCL is currently yielding 13.1%, and is under a current 30-day cruise suspension that is set to end in mid-April. If that is extended I'd expect that the stock will go lower and the dividend will be cut or suspended. I still believe in the intermediate-long term for the industry and company, but there are still too many unknowns at this point to be a buyer here. Remember the 2008/2009 period when RCL traded in the single digits; during that time of economic calamity, the cruise line never had to suspend operations.
If something looks cheap to you at this point, make sure you take a look at the debt and enterprise value. In addition, be wary of forward price earnings ratios, as you may not be able to trust the "E" in PE ratio with so much still in flux.
