Too much debt puts stocks under stress.
Falling interest rates can be good news for companies that rely heavily on debt, making it cheaper for these companies to borrow additional funds. However, if declining rates are an indication of economic weakness, they can signal a much larger problem for companies burdened with debt. Companies struggling to generate cash flow can have difficulty making debt payments, and a tightening of the credit market can cut off access to additional funding. This phenomenon can quickly put a company and its shareholders in financial stress. Here's how investors should approach nine stocks with troubling debt loads, according to CFRA.
General Electric Co. (ticker: GE)
The downfall of General Electric has been difficult to watch. Despite the company's insistence that its turnaround efforts are gaining traction, GE is far from firm financial footing. GE has roughly $109.8 billion in total debt and a troubling long-term debt-equity ratio of 2.6. Analyst Jim Corridore says there is potential for long-term investors to benefit from the company's streamlining and debt-reduction efforts, but investors should be aware that the company isn't out of the woods just yet. CFRA has a "buy" rating and $12 price target for GE stock.
United Parcel Service (UPS)
E-commerce has been a major growth driver for UPS. Corridore is calling for 4% revenue growth in 2019 and 5% growth in 2020. He says higher volumes and improved infrastructure should help boost margins despite potential labor cost pressures. But UPS's investments in its operations haven't come cheap, and the company is now carrying $25.9 billion in total debt and a long-term debt-to-equity ratio of 5.9. Corridore says there is opportunity for investors who can stomach that massive debt. CFRA has a "strong buy" rating and $145 target for UPS stock.
Charter Communications (CHTR)
A wave of telecommunications merger deals has created some bloated balance sheets. AT&T (T) has the highest long-term debt load of all at $191.1 billion after its buyout of Time Warner. Charter has less than half the debt of AT&T at $74.6 billion. However, its long-term debt-equity ratio of 2 is twice as high. Analyst Tuna Amobi says debt taken on to pay for acquisitions of Time Warner Cable and Bright House Networks will ultimately pay off for investors. CFRA has a "buy" rating and $450 target for CHTR stock.
Verizon Communications (VZ)
Verizon has $134.7 billion in total debt and a long-term debt-equity ratio of 1.9. Verizon paid $4.4 billion for AOL in 2015 and $4.8 billion for Yahoo in 2016 before ultimately writing off $4.6 billion from the two deals. Verizon has also been investing in its 5G network. Analyst Keith Snyder says Verizon is facing an uphill battle in coming quarters thanks to its struggling Media Group division, where he says the company has been investing too little in upgrades. CFRA has a "sell" rating and $48 target for VZ stock.
Comcast Corp. (CMCSA)
Comcast is another telecom company that has piled on more than $112 billion in total debt and has a bloated long-term debt-equity ratio of 1.4. Comcast's big recent splurge was its $39 billion buyout of Sky after a bidding war with Fox Corp. (FOX). Amobi says the risk should pay off in the long run for patient investors. He says Sky should provide much-needed business diversification and a major international revenue source ahead of the anticipated early 2020 launch of Comcast's new streaming service. CFRA has a "strong buy" rating and $150 price target for CMCSA stock.
Oracle Corp. (ORCL)
Plenty of tech companies have high debt burdens, but Oracle has a whopping $56.4 billion in total debt and a long-term debt-equity ratio of 2.4. Analyst John Freeman says Oracle's mix shift from legacy on-premises solutions to cloud-based services will not generate positive revenue growth until fiscal 2023. However, Oracle's balance sheet has transitioned from net cash of $6.5 billion in fiscal 2018 to a projected net debt of $18.6 billion in 2019. Freeman says that debt may limit additional buybacks and acquisitions. CFRA has a "hold" rating and $57 price target for ORCL stock.
IBM Corp. (IBM)
IBM is another tech giant taking on loads of debt to transition its business for the future. Unfortunately, IBM is still struggling with that transition after several years of disappointing results. IBM's total debt has ballooned to $78.3 billion, yet its share price is down 19.9% in the past five years. The company's long-term debt-equity ratio is now 2.4. Analyst David Holt is projecting another 3% revenue decline in 2019, but he says IBM is finally on a slow path to sustainable growth. CFRA has a "buy" rating and $167 price target for IBM stock.
Ford Motor Co. (F)
Debt has always been a big part of the auto industry, but Ford has taken it to the next level in recent years. Ford has $156 billion in debt and a long-term debt-equity ratio of 2.8. After years of underperformance, Ford has begun investing heavily in streamlining and transitioning its business by developing autonomous and electric vehicle technology. Analyst Garrett Nelson says these investments will hurt profitability in the near term, and management may begin to prioritize debt payment over buybacks starting this year. CFRA has a "hold" rating and $10 price target for F stock.
After repeatedly claiming it would not need to raise additional cash, Tesla once again took on more debt in 2019. Tesla says it will be self-sustaining starting in the second half of this year, but investors have been burned by trusting the company's financial targets. Tesla now has total debt of $14.3 billion and a long-term debt-equity ratio of 2.1 yet has yet to prove it can be consistently profitable. Nelson says investors should avoid Tesla at least until sales and margins stabilize. CFRA has a "strong sell" rating and $135 price target for TSLA stock.
Companies that carry enormous debt:
-- General Electric Co. (GE)
-- United Parcel Service (UPS)
-- Charter Communications (CHTR)
-- Verizon Communications (VZ)
-- Comcast Corp. (CMCSA)
-- Oracle Corp. (ORCL)
-- IBM Corp. (IBM)
-- Ford Motor Co. (F)
-- Tesla (TSLA)
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