Can these fallen stars resume their former glory?
By Mike King - July 16, 2012
The Global Financial Crisis that began in 2008 and extended into early 2009, or some would say, is still going now, claimed many companies ‘ scalps that had pushed too far too hard, including the likes of ABC Learning, Centro Property Group, Babcock & Brown, MFS Limited, Timbercorp, Great Southern Plantations and the list goes on.
Several stocks have survived, but are shadows of their former selves just 5 years ago, and have seen their share prices fall to all-time lows. Can these stocks resume their former glory? Let’s take a look at four that fit into this category.
As an investment bank, Macquarie Group Limited (ASX: MQG) is heavily dependent on the state of financial markets, mergers and capital raisings, securities and currency trading, corporate finance amongst many other activities. The company has transformed itself away from a packager and seller of infrastructure assets, into a ‘true’ investment bank, and hence is much more reliant on the health of financial markets.
Thanks to consistently weak markets, returns on equity and capital, profits and earnings have all fallen and the company has had to raise issue more shares. Prior to the GFC it was trading at over $76 (adjusted for rights issues) and is currently trading around $25.35.
When (or if?) markets resume normal service, Macquarie should recover, the issue for many investors though, is when? If Macquarie Group can turn itself around, in 5 or 10 years’ time, it’s likely to be a very profitable investment bank, with the share price likely to follow.
JB Hi-Fi Limited (ASX: JBH) is facing structural changes in many of its segments with online competitors able to sell products cheaper and many of its products are now sold digitally, including games, movies & music. It still sells consumer electronics and other accessories and has recently moved into musical instruments. In 2009, JBH traded as high as $21.31 (adjusted for new share issues), but the share price is currently languishing under $9. Falling profits and earnings are due to the structural changes outlined above, but also weak consumer sentiment in the retail sector. Its low cost of doing business has helped it survive this long, and many of its competitors have fallen by the way side (HMV, Virgin Music, Sanity, Strathfield Car Radio, Dick Smith, Clive Peeters etc) and it may well survive and even thrive in future, but the risks appear to be high.
The company started out selling high end hi-fi systems before branching out into car stereos and then into TVs, CDs, DVDs, computers and associated equipment. Can the company continue to adapt? Personally, I believe JB Hi-Fi can turn itself around and in 10 years time, is likely to be selling completely different products to its current offerings.
BluesScope Steel Limited (ASX: BSL). At the height of its glory, BlueScope traded at over $12 (adjusted for rights issues) in 2007. It’s now trading at just 29 cents, and has traded as low as 26 cents. The company has been receiving Federal government assistance to keep it afloat with $100m paid to the company in 2011 and BlueScope expects to receive another $80m in assistance at least.
For BlueScope, I suspect that the company may linger for a few more years, propped up by capital raisings or government intervention, unless it can revolutionise the way it does business. At the end of the day though, the company has poor economics, and it appears unlikely to turn around its fortunes.
Arrium (ex OneSteel)
Arrium Ltd (ASX: ARI), is slowly transforming itself into an iron-ore miner, but still retains its steel business. Risks are probably higher now, should China’s demand for iron-ore fall, so one wonders whether Arrium has jumped from the pan into the fire. In 2008, shares in OneSteel traded at over $7.00 (adjusted for share issues). Currently, shares are trading around 86 cents.
Arrium could end up a successful iron ore miner, fully transforming itself and likely ending its association with steel manufacturing, but I wouldn’t bet on it.
The Foolish bottom line
Turnarounds seldom work out well for shareholders. Whether these companies can reverse course remains to be seen. I’ll be watching two of them with interest.
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Motley Fool writer/analyst Mike King owns shares in JB Hi-Fi. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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The Global Financial Crisis that began in 2008 and extended into early 2009, or some would say, is still going now, claimed many companies ? scalps that had pushed too far too hard, including the likes of ABC Learning, Centro Property Group, Babcock & Brown, MFS Limited, Timbercorp, Great Southern Plantations and the list goes on.
Several stocks have survived, but are shadows of their former selves just 5 years ago, and have seen their share prices fall to all-time lows. Can these stocks resume their former glory? Let?s take a look at four that fit into this category.