OK, OK — we’ve had a few folks who seem to have noticed that I promised to follow up on my original Harry Dent piece, and then didn’t follow through.
That first piece came out last week, when I revealed the stock that Dent was claiming will go bankrupt as soon as August 1, when their next debt payment comes due and it’s revealed that they’re standing there naked behind the racks of cell phones, remote-control helicopters and obscure batteries. That was RadioShack (RSH), as you may well remember, and we had a good long chat about it (and some reminiscing from the hobbyists and closet electrical engineers out there).
But while that was the headliner, Dent also said that he thought there were two other stocks that were destined for the trash heap of history — and sooner rather than later, with bankruptcy announcements expected (by him, at least) sometime this year. So let’s ID those for you, shall we?
The basic idea, if you don’t feel like going back to read our original article, is that the big demographic wave (baby boomers retiring) is, along with other forces, pushing a “great shakeout” in the economy that will crush businesses and clear the way for the world’s next great innovations. That’s nothing new, of course, that’s one consequence of the march of capitalism and free markets and the “creative destruction” that feeds so many economic cycles, at least on the micro scale.
Here’s how Dent puts it in the teaser ad:
“The first announcement that I see coming will take place on Thursday, August 1. [that's the RadioShack one]
“And this will be just the beginning of a wave of corporate failures that will send the economy into a tailspin and the Dow plunging.
“Why am I so certain?
“Because the one thing – that’s about to devastate these companies – is the most powerful and destructive economic force known to man.
“It’s the same force that likely caused these well-known American companies to fall by the wayside:
- Borders Books
- Blockbuster Video
- Ritz Camera
- Linens ‘n Things
- KB Toys
- Circuit City
- Bear Stearns
- Lehman Brothers
- General Motors
- Hollywood Video
“I call it The Great Shakeout.
“It’s a survival-of-the-fittest crisis period.
“Its whole function is to:
“WAKE UP Society…
“WAKE UP Companies…
“And WAKE UP Governments…
“During a Shakeout, it’s not enough anymore for companies just to come up with a revolutionary new technology or product.
“They’ll have to know how to market and distribute it.
“They’ll have to know how to connect and collaborate with customers and partners.
“They’ll have to be quick to take advantage of disruptive new technologies, radical new business models, economical new supply chains, just-in-time fulfillment processes, and new leaner manufacturing methods.”
There’s certainly some logical sense to it, and we know that companies rise and fall with changing trends and demographics all the time — though it’s rarely so specifically predictable that you’d want to say “these three companies will go bankrupt this year” … unless, of course, you’re trying to get attention and sign up new subscribers for your newsletter.
So we’ve already established that RadioShack (RSH) is his “number 1,” what are the other two companies he thinks are going bankrupt?
“Bankruptcy #2: A Minnesota firm in the same industry with over 160,000 employees is also buried in debt. This company has over $1.7 billion in debt and no way to pay it back.
“Bankruptcy #3: A company in a similar business with over 15,000 employees and 500 million outstanding shares will crash and burn when its main product soon becomes obsolete.
“In a nutshell, I believe these three companies will announce they’re bankrupt in 2013.”
“Bankruptcy #2,” sez the Thinkolator, is almost certainly Best Buy (BBY), the “big box” electronics retailer whose sales have been swooning in recent years as the great switchover to flat screen HD televisions ran its course and digital media crushed their sales of DVDs and CDs and, particularly with the many years since the last gaming console advances, video games … and the stores have now effectively been turned into showrooms for Amazon.com. Which makes management angry.
Like RadioShack, they’ve also focused heavily on mobile — selling phones and gadgets and service plans for the major telecoms.
They’ve also branched out somewhat to try to increase cachet, including adding little junior “Apple stores” to some of their shops, and they also have exposure to home appliances, which you’d think would be a growth factor with housing recovering somewhat. But really, all I ever see in my rare trips to a Best Buy are bare-looking shelves and bored teenagers playing video games.
The stock has obviously been a wounded duck, particularly after substantial losses last year meant they booked their first unprofitable year in a decade, though analysts are clinging to some optimism and projecting a profit this year and a growing profit next year — including one (deluded, I’d say) analyst forecasting what would be an all-time best profit per share from BBY of $3.84 in 2014 if they’re right. The average analyst is expecting $2.17 in earnings per share this year and $2.35 next year, which means BBY is still trading at more than 10X next year’s earnings and about 15X their average earnings per share over the last decade — which is fine for a growing company, but really expensive for a company that is stagnating or shrinking, as I expect could easily be the case for BBY (revenue grew at better than 10% a year for many years, but that appears to have come to a grinding halt in 2010-2011, with no real sign of revenue growth in my view).
Still, what Best Buy looks like to me is a “too expensive” company, not a company that’s on the verge of bankruptcy just yet. It’s possible, I suppose, but it’s more likely to me that the stock would fall enough that it gets taken private (the founders have tried to take it private before, which may be why it’s as expensive as it is now). They don’t have all that much debt, and they have some cash on the books and have continued paying (and increasing) their dividend, so I think it’s a company with serious operational challenges and I think the investors driving up the price of BBY shares over the last six months are probably too optimistic, but they seem to be stabilizing the business somewhat despite likely falling revenues so my guess is that the most likely outcome is a very long, very slow demise for BBY as a public company — and they’re not that huge (market cap less than $10 billion), so the possibility remains that they could change and improve results fairly quickly if they come up with some kind of operational turnaround that will help the business grow again … or if the economy continues to perk up, some private equity company will want to take them private, load ‘em up with debt, and do something dramatic to turn things around.
And number two? Well, 15,000 employees and 500 million shares and a main product that will soon become obsolete doesn’t necessarily specifically narrow it down to one exact match, even for the Mighty, Mighty Thinkolator … but I’d say the best match for “Bankruptcy #3″ is the punching-bag-of-the-decade Blackberry (BBRY), formerly known as Research in Motion.
Blackberry did have 15,000 employees a year or so ago, though that number has shrunk considerably now — down to fewer than 13,000. And it was closer to 20,000 back in 2010, so the precipitous drop of “mind share” and market share for the formerly ubiquitous Blackberry smartphone over the past several years has been reflected, to some degree, in the size of the company that makes it.
And they do have roughly 500 million shares outstanding and a product that is, while new models are technologically now back to being probably close to on par with the market-dominating Apple and Android phones, or better if you want to argue the point, practically obsolete because they have almost no chance of taking back a substantial portion of the enterprise market after frittering away their near-monopoly position with stagnation and missteps in the late 2000s. At least, that’s what I think.
Does that mean they’re on the road to bankruptcy? Well, that seems unlikely.
They don’t have any debt — which means, to me, that they’re not going bankrupt anytime soon. The stock could certainly crater (it traded down to close to the value of their cash on the books last Fall), and it may be that their obligations (pensions, etc.) are greater than shows up on a quick scan of the balance sheet … but companies who have sizable cash positions ($5 a share for BBRY in cash) and no debt or troubling debt payments upcoming don’t go bankrupt — they don’t have any creditors that they need to get relief from so they can repair the business, which is the point of most bankruptcies.
Like Best Buy, Blackberry posted its first loss in a decade or more last year. Unlike Best Buy, which is seeing falling revenue after a couple years of stagnation, Blackberry’s revenue has already fallen off a cliff, dropping from almost $20 billion in 2011 to $11 billion in 2013. Most analysts already rate it a “hold” or a “sell”, so though there isn’t a massive short position in Blackberry (at least, not in the US shares), there is certainly a shortage of optimism about their prospects. Still, the analysts do see a profit for this year, with a forward PE estimate of about 20.
Blackberry’s hopes are riding on their new operating system and the new devices that run it, the Z10 touchscreen phone that they introduced earlier this year, and now the Q10 phone with the familiar full Qwerty keyboard that they’re hoping will be their entree back into the enterprise market. A lot of the chatter now about their prospects revolves around whether the closed, supposedly more secure Blackberry network might have more value in an era of mobile security fears, and whether there is still enough of an underlying demand for physical keyboard buttons to drive sales and enterprise adoption of the Q10 now that everyone’s had a couple years to get used to touch screens.
So, I dunno — like Best Buy, it’s really hard to picture Blackberry going bankrupt immediately — their balance sheet is very strong, and unless the sales collapse dramatically further this year and the Q10 shows absolutely no sales traction they should have lowered costs enough that they could fund their operating expenses with their cash for at least the rest of the year. I wouldn’t buy BBRY at this price, since you’re effectively betting on a new product in an extraordinarily competitive marketplace, but if the sales stabilize or only decline gradually they could certainly keep going for several years at this rate — and if the product turns out to be a big hit and generates surprisingly good sales, perhaps the $13 share price it trades at now would be justified.
So that’s my take — Dent’s demographic forecasting is telling us that spending will fall dramatically as the Baby Boomers have left their consuming years and my generation, Gen X, is the smallest generation and can’t take up the slack … and partly because of those shifting trends in spending, he’s apparently predicting imminent bankruptcy for Blackberry and Best Buy … I personally would predict slower demise, and neither is without hope or under creditor pressure as far as I can tell.
And of course, you’ll find plenty of material if you want to debate Dent’s big picture prognostications — he made a couple crash predictions of the last two years that haven’t gone too well (yet, at least), but he’s also been eating out for years on some big-picture calls that he got right in the 1990s and early 2000s … if you publish a book of forecasts every couple years and have strong opinions that do have a logical backing, well, you’ll probably hit some of those forecasts right. Think he’s better than most, or worse? Or think Blackberry or Best Buy is circling the drain at a predictable rate? Let us know with a comment below.