High Debt, High Risk: 3 Stocks Vulnerable to Refinancing Woes
Recent information reported by Bloomberg about 2024 refinancing issues suggests many large debt-heavy stocks to avoid in the coming year. THis leads to us coming up with our list of stocks vulnerable to refinancing.
According to Calcbench, a financial data platform, non-financial S&P 500 companies have $107.7 billion in debt due in 2024. This debt carries an average interest rate of 2.8%.
Calcbench estimates that if these companies refinanced at 5.44%, the current rate of a one-year Treasury bill, the additional interest expense would be $3.09 billion.
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“Depending on the nature of the company and the strength of its balance sheet, this is significant,” Bloomberg reported the comments of Pranav Ghai. Ghai is the founder and chief executive of Calcbench.
Calcbench concluded that out of the 56 companies in the index with 2024 debt maturities, 19 of them didn’t have enough cash at the end of the second quarter to eliminate the debt coming due.
So, 19 possible names to choose from are refinancing risk stocks in 2024. Here are the three I would avoid.
Western Digital (WDC)
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Western Digital (NASDAQ:WDC) stock is up more than 48% year-to-date. Investors aren’t too worried about its debt issues coming due next year.
However, as Calcbench pointed out in its November report, the manufacturer of digital storage solutions has $3.27 billion in debt due in 2024. It also has only $2.02 billion in cash to pay for it, a $1.24 million deficit.
The company is on track for a second year of lower revenue year-over-year. This is likely leading to a second year of operating losses. Its trailing 12-month operating losses, as of September 30, were $1.81 billion on $11.33 billion in sales.
So, why are its shares up so much in 2023?
Western Digital agreed to split its company into two businesses in October after intense activist pressure from Elliott Management. Western Digital had conducted a strategic review throughout the past year. The company concluded that splitting its hard drive business from its flash memory unit made the most sense for shareholders. Elliott had pushed for the split.
I must admit, as I go through Western Digital’s Q1 2024 10-Q, I’m having difficulty understanding how Calcbench came up with its $3.27 billion figure for debt due. The only thing I can come up with is that on page 48, it says Western Digital has $3.83 billion in material cash requirements in 2024.
I’ll assume the analysts at Calcbench know more than I do about financial statements, and there’s a logical explanation.
Either way, Western Digital’s negative cash flow says stay away.
Kinder Morgan (KMI)
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I’ve never liked Kinder Morgan (NYSE:KMI). In 2018, I wrote about seven S&P 500 companies whose debt scares me.
Wisely, Kinder Morgan sold the Trans Mountain Pipeline to the Canadian government for 4.5 billion Canadian dollars ($3.28 billion) and used the proceeds to pay down some of its debt. In 2018, it repaid $14.6 billion of its debt, up from $11.1 billion a year earlier. However, it finished the year with $37.3 billion, down just $519 million from 2017.
Flash forward to 2023.
It currently has $1.9 billion in debt coming due in 2024, according to Calcbench, with only $497 million in cash, for a deficit of $1.40 billion. According to Kinder Morgan’s Q3 2023 10-Q, notes are due in February, May, and September 2024, with rates between 4.15% and 4.30%.
Thanks to higher oil prices in the last couple of years, its total debt is down to $31.0 billion. In 2023, through the first nine months, it paid down $680 million of its debt. The company’s most recent debt issue was in January, selling $1.5 billion of 5.2% senior notes maturing on June 1, 2033.
In Q3 2023, its net interest expense was $457 million, 15% higher than in the same quarter a year ago. Investors can expect the interest expense to keep moving higher in 2024.
Walgreens Boots Alliance (WBA)
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Long-time Walgreens Boots Alliance (NASDAQ:WBA) shareholders can’t be happy with their investment. Down nearly 43% in 2023, it’s lost 74% of its value over the past five years.
The drug store chain brought in former Starbucks (NASDAQ:SBUX) executive Roz Brewer in March 2021 to transition the company to more of a healthcare provider than a retail business. Acquisitions were made to enable this transformation, but the business wasn’t getting any stronger, reporting earnings lower than analyst expectations, forcing it to lower its guidance for the year and into 2024.
Calcbench points out that Walgreens had $2.15 billion in debt due in 2024, with only $871 million in cash, resulting in a $1.28 billion deficit. That’s the fourth-highest of the top 10 on its list.
Calcbench used Q3 2023 numbers. Page 94 of the 10-K from August 31 suggests the company’s deficit at the end of the fiscal year fell to $722 billion, based on $1.45 billion debt due in 2024 and $728 million in cash.
With a 141% decline in its earnings before interest, taxes, depreciation and amortization (EBITDA) in fiscal 2023 to -$2.58 billion, and total debt of $36.4 billion, the $558 million reduction in its deficit between the third and fourth quarters should not be a reason to keep your stock.
WBA is not the drug store chain to own at the moment. All of this easily made WBA earns its spot on our list of stocks vulnerable to refinancing.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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