others welcome to comment:
let us assume
- 2009 and 2010 revenue will be 50% of 2007 revenue.
- gross margins remain the same level as 2007.
2007 revenue and cost of revenue were $10.6 B and $9.1 B
so 2009 revenue and cost of revenue will be $5.3 B and $4.5 B
assuming 2009 and 2010 expenses (R&D + SG&A + interest on debt) remain the same as 2007 or $1.2 B,
then net income for 2009 and 2010 will be approximately a loss of $0.4B / year
- 0.4 = $5.3 B - $4.5 B - 1.2 B
since cap-ex in 2009 is to remain well below depreciation, actual cash flow will be less
These assumptions says that HUN can lose about $400M per year in 2009 and 2010 which is the money from Settlement.
I would think HUN can downsize to achieve profitability sooner than 2010 in the meantime and also may benefit from better margins as the assumptions above suggest.
There's no way this company is going bk. Why would the owners of this company load up with so much stock. There not buying there to go under. There trying to get you and i to understand that they are worth more. People sell stock for all types of reasonson. But there is only one reason why you'd by at these levels and obviously these guys no its going up. Unless they are all just really really stupid.
Yes, you want multiple indicators in your favor when buying a stock. Large and cluster insider buying as is the case with HUN is an important and reassuring indicator.
However, that alone is not a reason alone to ignore other factors.
You state "2007 revenue and cost of revenue were $10.6 B and $9.1 B, so 2009 revenue and cost of revenue will be $5.3 B and $4.5 B"
The biggest flaw in your analysis is that you assume input costs are unchanged. Cost of revenue will not simply be cut in half because half as much is used in the production process. Cost of revenue will also be reduced by lower input costs.
By my estimate (based off 9-30-08 10-Q starting point), if sales drop 50% then the firm will be profitable on net income basis if input costs drop by more than 16.5%.
For this estimate I only adjust revenue and cost of revenue, everything else stays constant from the 9-30 numbers (except for some minor gains). This is conservative considering if needed they could take cost cutting measures (check the Huntsman website and you will see that there are still jobs posted). Also, I didn't even remove the 6.2 million “Loss on accounts receivable securitization program” or the 25.8 million in "Expenses associated with the Merger".
To see the simple pro forma statement go to my site at www.samtibbs.com and click on the investment tab. Please let me know if you find any errors and intelligent responses are welcome.
Why exactly are you dropping the revenues by 50%?
Because they sell 50% less amount of goods (do to the recession here) at the same price, or because they sell the same amount of goods at a 50% lower price, or a blend of the two.
As oil and other raws get cheaper, the price of their finished goods will have to drop as well to remain competitive. You're assuming their raw costs will drop X amount more than their finished goods, which maybe true, but how did you come up with 16.5% more. I think Zooms 50% off of each until HUN can prove otherwise is the safer worst case assumption. Their other costs should decrease a bit more, no merger costs, lower interest costs and some of the SGA cost has to be related to the total sales. So instead of a 400 mil loss it should be less, but perhaps not all that profitable.
HUN really needs to trim its SGA spending to be more competitive, plus of course their interest costs. They need to give the market some guidance as to what they will do with the windfall.
Nice work. I was taking a reasonably worst case scenario to find a lower bound. In my follow up message, I did describe the upsides including a lower cost of revenue than I had initially projected.
Your spread sheet is very good start. Cash flow analysis is more important than GAAP EPS, as HUN's viability over the next 2 years is based on cash flow.
I think the $25M you have for merger is perhaps too high.
Other than this i think it looks good and also leaves more upside (e.g. cost cutting)
I try to avoid looking at Book value or GAAP EPS. For example, book value now contains $3B for inventory and Receivable which probably have deteriorated considerably in value due to recession.
Typical 2009 quarterly
Revenue 1,400 50% Reduction
COGS 745 50% reduction in oil & NG cost
Gross Profit 655
Operating Expense 254 Assume same as 2007Q3
Operating Income 401
Interest Expense 70 Extremely Conservative
Income Tax 8
Depreciation & Amort 98
Other Expense 50
Net Income 175
Your analysis assumes they will not go bankrupt, even if they take no action to cut expenses or gain market share. I can accept that as a worst case scenario. I believe they will do better than that. However, if that is what happens, you are talking about total losses of $3.41 per share for the combined two years. Compare that to my estimate of the estimated book value at 12/31/08 (previous post of mine) of $9.91 you would have a book value of $6.50 per share on 12/31/2010, NOT counting any settlement from the banks. IMO
Yes, that is my conclusion too. I assumed a relatively bad scenario where revenue
- dropped by 50% to $5.4B
- cost of revenue also drop by 50%.
- all expenses (research, general and administration, interest on debt and depreciation) remained at 2007 level which was $1.2B
So with these assumptions, I concluded that cash burn rate should be approximately $400M per year.
There are factors that can improve the $400M loss per year. For example
- Oil prices in 2009 are likely going to be lower than 2007. Hence lower cost of revenue that I assumed
- Company could cut staff thus lowering the annual expenses
- In the past, HUN kept Cap-ex at the same level as depreciation. Since they now plan to keep Cap-ex well below depreciation, whatever the difference will be upside to cash flow.
So all in all, I see very small chance of HUN going bankrupt in the next 2 years. This will given HUN enough time to adjust for break even operations (or better) as we stay in deep recession.
In addition, we should hopefully see upside from settlement with banks. $1B is an upside of $4 a share :)
""You just scared the sh***T out of me and having second thoughts about HUN as an investment.""
If a message on a Yahoo message board scares the sh*t (spelled with only one asterisk btw) out of you, then I have to wonder why you bought 48,000 shares of HUN at an average of $3.05, as you claim. Another reason why I seriously doubt that you are long HUN is that virtually every message you post is negative on HUN. If I were to believe everything you posted on this board, I would be short HUN, not long.