Federal Mogul: A hidden gold mine?
So this post goes to my fellow WSO veteran analysts loll. I'm not going to get into the quantitative details behind this target, but if it peeks your interest you can look it up yourself. FDML is a mega giant with 6+ in billion revenues. Somewhat variable revenue, but overall not a significant variation. Carl Icahn owes 75 percent of the company of which he bought with junk bonds when the company filed for bankruptcy in 2001 from asbestos claims and later converted into class A CS during the 2008 IPO.
Company emerged from bankruptcy with fixed amount of debt associated with future claims. 98M shares outstanding with 2.7 billion in a 7% coupon non-callable LT Debt that are to mature in 2027, all of which are mainly associated with the fixed settlement amount with asbestos claims and some creditors prior to filing chapter 11. Ever since their inception they have been able to cover interest expense with other income. On average they spend 342 million on capex and other opex for various reasons, which erode the bottom line, but eventually they have to start realizing the positive NPV for the projects taken. Well, hopefully that is the case, in this day and age who knows what hidden agendas companies have under their belt loll.
Icahn split the company in three segments. Industrial, OEM Car parts and After Market parts. The company is heavily integrated with global giants and has a huge presence world wide. Everyone on the sell side is screaming sell.
OK! enough boring you guys. What is your take on the future of this "giant".
Honestly don't know much beyond the basics and just looked up the financials and stats. Couple of things stand out to me.
1) The Revolver and TL B come due this year and the year after (Term C in 2015).
Can FDML get financing from banks or other lenders? If not, it needs to raise more equity or it will go bankrupt. Even if they raise more equity, the dilution will be extreme.
2) The leverage is quite high at 6.3x Debt/EBITDA (5.2x Net) and given the company's deteriorating cash position (negative CFFO on an LTM basis), that isn't a good sign for supporting existing debt or future debt.
3) Margins have declined the past two fiscal years, another bad sign. Both Gross and EBITDA margin are down, part of the reason the company is struggling with its cash position.
That being said, from a valuation standpoint, it is quite attractive. If you believe Icahn can turn it around, then it could be a buy. Otherwise, I'd sell/short. Definitely not a hold IMO.
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