Undervalued Zombie Companies: A zombie company is a business that’s just about able to service its debt and has little-to-no growth prospects. As such, these enterprises are often undervalued and offer a great deal of upside to potential investors.
However, zombie companies are also considered high-risk investments – they labor under unusually high overhead costs and can only borrow funds at exorbitant rates. In addition, they often have to rely on lenders bailing them out with last-ditch infusions of capital and cash, without which they would likely collapse.
Despite the inherent danger, these businesses can make interesting speculative bets for those willing to stomach the risk. Indeed, if they remain a going concern during the worst of times, they can also offer investors a chance to make a quick profit when market conditions improve.
With that in mind, here are three zombie companies worth taking a second look at.
There can’t be many industries more maligned than the property sector right now.
Indeed, real estate construction companies such as Hovnanian Enterprises are feeling the squeeze as home affordability deteriorates. A key driver of this deterioration is inflation, which has been climbing steadily for the past few years. The cost of living is also increasing, which, combined with rising interest rates, is making it more expensive for prospective homeowners to finance a new purchase.
Unfortunately, all these factors are contributing to a stagnant market. This is terrible news for owners trying to sell, but it’s also having an impact on developers too. As demand for new homes declines, builders are being forced to discount prices or offer incentives to lure buyers.
There are, however, signs that things may be about to improve. For instance, vacancy rates are low
, indicating that there could be a potential shortage of available homes in the not-too-distant future. This has come about due to steady demand from buyers, combined with a lack of adequate new home construction activity.
Naturally, this is good news for those who have been struggling to find affordable housing – as well as building companies like Hovnanian.
In fact, that turnaround can’t come quickly enough for HOV. The firm’s share price has collapsed more than 66% in 2022, with its trailing twelve-month (TTM) revenue growth standing at a pretty abysmal 7.46%.
But that’s not the whole story. Hovnanian reported that its pretax profit spiked 81%
during the last quarter, while sales of $767.6 million improved 11.1% year-on-year. The company’s adjusted homebuilding gross margin also rose 420 bps to 26.3%.
One consequence of the firm’s stock having fallen so much is the fact that it now trades at an astonishingly low TTM P/E multiple of 1.38x. Moreover, its return on common equity is massive at 203%, which suggests the business is well-run in spite of its status as a zombie company.
Furthermore, HOV’s contract backlog increased 2.4% to $1.79 billion this year, priming the venture for a very busy time ahead. Add in that Standard and Poor’s upgraded the firm’s credit rating, and once those properties do start getting sold, Hovnanian’s outlook will be significantly more positive.
With a current share price of just $1.21, the information and analytics company comScore, Inc. is unnervingly close to entering the dreaded “penny stock” territory.
However, SCOR offers a valuable service to its customers, who use the firm’s measurement tools to inform their business decisions in an increasingly complicated media environment. The company works with brands such as Warner Media, Discovery and Publicis to facilitate cross-platform delivery and ongoing currency trials.
Indeed, SCOR’s adjusted second-quarter EBITDA was up 147% at $6.5 million
, prompting the company to predict its full-year 2022 margin will increase from 7% to 9%. Revenue also improved by 4.3% at $91.4 million, although this missed analyst expectations by $2.73 million.
Not surprisingly, having lost nearly 70% of its market capitalization over the last year, comScore’s forward price-to-sales fraction is a refreshingly low 0.28x. If you weigh this in concert with its growing profitability numbers – as well as its 74% year-on-year operating cash flow growth – the company represents a 49.6% upside based on a discounted cash flow forecast.
Furthermore, SCOR’s products are readily scalable, and the firm believes its “large end-markets
” leave it with plenty of room in which to grow. Not only that, but comScore is currently measuring in 1 out of every 3 households in America – which gives it ample opportunity to roll out new products as and when they become available.
Another zombie company exposed to the vagaries of the U.S. property market is BlueLinx Holdings Inc. However, unlike Hovnanian , BXC’s share price hasn’t been in freefall of late.
In fact, the firm has seen its stock rise 42% in the last year, with several tailwinds helping it achieve some record profitability metrics. For example, at the end of the second quarter, BlueLinx’s $451 million of available liquidity was its highest ever, while its diluted EPS of $7.48 and $101 million of operating cash were the third largest in its history.
Interestingly, for a company specializing in the wholesale distribution of building and industrial goods, its specialty products segment accounted for over 85% of its total gross profit
However, this was no accident. BXC has been implementing a strategy to “accelerate growth” in its high-value specialty offerings, and that appears to be paying dividends. These products – which include insulation, molding and engineered wood – command higher margins than its structural products catalog, and could be one reason why the business has performed so well in the current unforgiving, high-inflation macroeconomic environment.
To continue in the rich vein it’s been mining recently, BlueLinx will need to see continued homebuilding for the foreseeable future. Luckily, analysis by FreddieMac seems to imply that there could be a 3.8 million unit housing supply deficit
going forward, which is good news for BXC.
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