I think the biggest issue is that Management has lost credibility. I think everyone could tell by the tone of the questions during the Q&A session that analysts and investors felt misled. I have not seen any materials from ORCC's investor day, but I get the sense that Management was overly bullish judging by the questions on the earnings call. Analysts published and investors bought based on the expectations that Management set. I can see why people feel angry when Management drops expectations such a short time later. I am not sure many people believe that so much could have changed in one month. If not much has changed, the logical assumption is that management was too bullish.
The problem that ORCC has now is that it may not get credit even if it gives strong guidance in December. I would guess that most analysts and investors will be in a wait and see mode before the stock starts to move upward again.
My bigger issue remains fundamental valuation. I still struggle with seeing a path to enough cash flows that when discounted back to the present justify much value. Consistent with my statements about credibility, I think Management needs to stop playing games with its financials and start to "bake" everything into their results. Most companies need to exclude some items (e.g. stock option expense, amortization of intangibles, etc.) from their GAAP results to make the results meaningful to investors, but ORCC is pretty extreme. I am amazed that KPMG has allowed ORCC to continue to present results that do not reflect fully-taxed earnings, but I think this is the last year that will happen. This may seem minor, but will reduce earnings by a substantial amount. As a believer in cash flow as the underlying driver of all value, this will not impact cash flow until they utilize their NOLs, but must be factored into any analysis.
On a related note, does anyone else think that value has been destroyed by acquisitions? I know we have all heard the widely quoted studies about how 90% of all mergers destroy value of the acquiring companies and I will admit that I am biased to agree. I think ORCC is a good case study. I believe that ORCC paid way too much for Princeton and it is paying the price now. My belief is that Management was inexperienced with acquisitions and consequently got fooled into thinking it needed to pay the premium it did for Princeton to close the deal. I believe they paid close to 30% more than any other bidders that were still involved in the last rounds of the process. Matt Lawlor admitted to paying a "full price" at the time of acquisition. ORCC had to restructure its previously clean balance sheet to stretch for this deal. It added costly debt and preferred equity. I was amazed that the common stock did not take more of a hit during that time.
My belief is that due to the high price Management paid for Princeton, they have felt the need to show much better results than the underlying business can deliver. This has resulted in the obfuscation of its financials. I also believe that the subsequent smaller acquisitions are an effort to continue to muddy the financial waters so no one actually knows how the organic business is performing or how the Princeton acquisition is impacting the financials.
Only time will tell and I am not sure that I am a buyer or a seller at the current price, but I would not assume that the precipitous drop in price is automatically a buying opportunity. Investors should take this opportunity to really understand the fundamentals and cash flows of the business.