Johnson Controls’ stock has lost 17% of its value year-to-date, currently trading at levels of around $34. While the stock fell close to 43% to about $23 as the markets collapsed in March, it has risen by 46% from these lows. Why? While the Covid-19 outbreak and associated lockdowns resulted in… The market dislocation wrought by the coronavirus pandemic has a new poster child in Hertz Global Holdings Inc., which has asked courts to sell stocks amid a… In the stock market’s worst wipeout since the height of the coronavirus panic in March, only one member of the S&P 500 Index managed to post a gain. Hertz shares went into overdrive Friday after the bankrupt car-rental company announced plans to sell up to $1 billion in stock. “I think you just kind of have to let it come down and see whether there’s anything left of the day traders after they have their margin calls,” said “Mad Money” host Jim Cramer. Hertz stock might be a fun gamble, but it’s no investment.
BRAZIL – 2020/05/10: In this photo illustration the Johnson Controls logo seen displayed on a … [+] smartphone. (Photo Illustration by Rafael Henrique/SOPA Images/LightRocket via Getty Images)
Johnson Controls’ stock (NYSE: JCI) has lost 17% of its value year-to-date, currently trading at levels of around $34. While the stock fell close to 43% to about $23 as the markets collapsed in March, it has risen by 46% from these lows.
Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. In addition to this, investors are now expecting a quicker economic rebound, which will bode well for Johnson Controls.
But is this all there is to the story?
Not quite. Despite the massive rally, Trefis estimates Johnson Controls Valuation at about $30 per share, roughly 12% below the current market price based on two key risks.
The first risk we see is to Johnson Controls’ near-to-medium term revenue growth. With the economy barely limping back to normalcy following Covid-19 related shutdowns, and unemployment at multi-decade highs in the U.S., the real estate sector is expected to take a hit. The project timelines and cash flows for real estate developers are affected due to the halt in certain construction activities. Moreover, several service oriented companies are now expecting to have a higher percentage of the workforce to work from home even after the Covid-19 crisis winds down. Such initiatives will likely take a toll on companies such as Johnson Controls, which provides building solutions.
Johnson Controls reported a 6% drop in revenues in Q2 fiscal 2020 (ending March), primarily led by lower sales in Asia Pacific, while the adjusted earnings grew 31% led by margin expansion. The company has withdrawn its full year guidance. Revenues are expected to take a sharp hit in Q3 fiscal 2020, due to lockdowns being imposed in various cities and muted construction activity.
We project that Johnson Controls’ revenue will stand at about $22.4 billion for fiscal 2020, marking a decline of about 7% year-over-year. This compares with the growth rate of a little over 2% in 2018 and 2019.
The second key risk stems from Johnson Controls’ high valuation multiple, compared to its own historical multiple over the recent years. The stock now trades at over 19x its projected 2020 earnings per share of about $1.90. In comparison, to earn close to $1.90 per year from a bank, you’d have to deposit about $190 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At Johnson Controls’ current share price of roughly $34, we are talking about a P/E multiple of just over 19x. And we think a figure closer to 16x will be appropriate.
That said, there is a long-term opportunity in the buildings solutions business, and Johnson Controls can capitalize on it.
Climate change consciousness is growing. There is considerable social and political pressure on fossil fuel producers to reduce emissions, and on consumers to reuse, reduce, recycle! This also means that investors are looking at greener industries much more favorably and Johnson Controls is one such stock investors could look at.
Johnson Controls is one of the top players in smart buildings solutions. A smart building is referred to as a building that uses automated processes to control the building’s operations including heating, ventilation, air conditioning, lighting, and security among other systems. This not only improves the overall performance, it significantly reduces energy use (up to 50% in some cases), minimizing the environmental impact of buildings.
Looking for more insights on industrial stocks in the current Covid-19 crisis? Look at Raytheon Stock’s Down 35%, But Sales up 25%, Why? and 30% Downside For 3M?
See all Trefis Price Estimates and Download Trefis Data here
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Author: Trefis Team
Hertz seeks bankruptcy court approval to offer $1 billion in stock —but experts expect equity to be wiped out
The market dislocation wrought by the coronavirus pandemic has a poster child in Hertz Global Holdings Inc.
Yet Hertz stock tops a popularity chart among Robinhood app users.
The selling of new shares would be “a head scratcher,” analysts at Credisights said in a note. The company got a delisting notice this week and an even more compelling negative is “being in chapter 11 with unsecured bonds at a very steep discount,” the analysts said.
“Unless a genie or a lamp showed up the collateral pool, we expect the eventual equity value will be zero,” the CreditSights analysts said.
Investors eyeing Hertz if the issuance is approved might be some of the same who have been buying “deep value ‘penny-like’ stocks” on Robinhood, said Nancy Tengler, chief investment officer at Laffer Tengler Investments.
“This is not investing. It is gambling,” she said.
“This is for the quick buck crowd, not long-term investors,” Tengler went on. It remains to be seen whether the court will approve the offering. “I know of no precedent,” she said.
Hertz stock has nearly tripled in June, and is poised to gain 12% this week, a Wednesday delisting notice from the New York Stock Exchange notwithstanding.
The shares hit an all-time closing low of 56 cents on May 26, a few days after the company’s May 22 bankruptcy filing and a far cry from their Aug. 2014 record closing high of at $110.61. The next day, they logged their largest one-day increase ever, jumping 136%.
Recent average volume has been more than 16 times the volumes before the filing. Notably, Carl Icahn took the first opportunity after the filing to sell all of his stake at a steep loss.
Hertz’s motion to the bankruptcy court characterized the potential equity sale as an opportunity for the debtors to raise capital on better terms. The company did not immediately reply to a request for comment.
Hertz is No. 1 at a popularity list at Robintrack, a site that tracks activity on the Robinhood app.
“From our vantage point, the 30-handle unsecured bond prices should create some reconsideration of equity upside for a company in chapter 11. We are old fashioned that way,” the CreditSights analysts said.
Hertz’s most widely traded October 2022 corporate bonds were changing hands at an average price of about 40.50 cents on the dollar Friday, a plunge from nearly 100 cents on the dollar at the start of March, according to bond trading and pricing platform MarketAxess. Bonds often are considered distressed once they trade below 70 cents on the dollar.
“We think this deal would be more robbing from the misinformed to give to the senior secured,” they said.
Author: Claudia Assis, Joy Wiltermuth
Only One Stock in the S&P 500 Finished Higher as Index Plunged
A shopper holding an umbrella walks towards a Kroger Co. grocery store in Louisville, Kentucky, on April 26.
Photographer: Stacie Scott/Bloomberg
Photographer: Stacie Scott/Bloomberg
In the stock market’s worst wipeout since the height of the coronavirus panic in March, only one member of the S&P 500 Index managed to post a gain.
Supermarket operator Kroger Co. finished in the green, eking out a 0.4% advance after BMO raised its price target for the stock. That’s in stark contrast to the benchmark equity gauge, which plummeted 5.9% as fears of a second wave of U.S. coronavirus infections gripped markets. More than 60 of the index’s members lost at least 10%.
Thursday’s selloff unwound risk-on sentiment that had been building for several weeks, with investors bidding up battered industries best poised to profit as states reopened. However, signs that virus cases are rising in some regions halted the rotation: airlines and cruise companies were among the hardest hit, with Norwegian Cruise Line Holdings Ltd. plummeting over 16% in the day’s worst performance. Meanwhile, in the technology-heavy Nasdaq 100, virtual meeting company Zoom Video Communications, Inc. was the only stock to gain.
“The entire thesis that the virus was over was pretty flawed,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “The catalyst is the second-wave narrative, but the precondition is stocks were fully valued at best and overvalued at worst.”
Taken against the S&P 500’s 45% advance since late March, Thursday’s slump is but a blip. And despite the selloff — which erased nearly $2 trillion of market value — the index’s forward valuation was still 13% higher than in February, when the virus crash began.
Hertz wants to cash in on surging shares amid bankruptcy
Car rental giant Hertz has filed for bankruptcy because it doesn’t have enough money to pay its debts — and its stock is soaring.
Welcome to the coronavirus stock market, where mom-and-pop day traders addicted to free trading apps are taking control.
The bankrupt car-rental company announced plans to sell up to $1 billion in stock amid a surge demand since it filed for bankruptcy in May. News of the potential stock offering sent the Florida-based firm’s stock price up as much as 65 percent to $3.40 in early trading.
The company requested court approval to sell more than 246 million shares as an alternative to typical bankruptcy financing, citing the tenfold increase in its shares in the two weeks after its May 22 bankruptcy filing. The surge — brought on by investors seeking to capitalize on the rock-bottom rate — presents a “unique opportunity” for the company to raise money during the bankruptcy process without the restrictions and costs of so-called debtor-in-possession financing, Hertz said in a Thursday court filing.
Hertz shares closed at about 56 cents on May 26, the first trading day after it declared bankruptcy, but surged to $5.53 by Monday’s closing bell. The price has since tumbled to close at $2.06 on Thursday.
The boom has coincided with the stock’s growing popularity among retail investors — more than 151,000 users on the Robinhood trading app held Hertz shares as of Friday, up from about 44,000 on May 26, according to data compiled by Robintrack.
While selling stock is a creative bankruptcy financing strategy, it may be “a bridge too far” for the bankruptcy court to approve, according to Bloomberg Intelligence analyst Philip Brendel. Hertz would have to sell the new shares for $4.05 apiece to raise $1 billion from the sale.
“Selling shares that could potentially be wiped out in Chapter 11 may leave Hertz exposed to securities lawsuits that would arise post-petition and could result in additional administrative claims,” Brendel said in a Friday note.
Hertz’s bid to sell shares came a day after it revealed the New York Stock Exchange moved to delist the company last month. Hertz has appealed the decision but there’s no guarantee it will stay on the exchange, it said in a Wednesday regulatory filing.
Hertz also acknowledged that “an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless” — a fact it said it would disclose to potential investors.
Author: By Noah Manskar
Cramer on stock market plunge: There’s been a ‘happiness trade’ out of sync with ‘everything’
CNBC’s Jim Cramer said Thursday that the stock market’s recent rip higher was not reflective of actual conditions in the U.S. during the coronavirus pandemic.
“There’s just been a happiness trade that has been out of sync with everything, whether it be hot spots in Arizona, or whether it be unemployment, or whether it be the higher price of food,” Cramer said on “Squawk on the Street.”
Cramer’s comments came as U.S. equity futures pointed to sharp declines at Thursday’s open. The Dow Jones Industrial Average traded more than 900 points lower shortly after the opening bell.
Stocks that had lately been surging on hopes of the U.S. economy reopening smoothly from the coronavirus, such as airlines and cruise lines, were down big.
But now a few states, such as Texas and Arizona, are seeing an increase in Covid-19 cases and hospitalizations that alarm some experts, setting off fresh concern on Wall Street about a second wave of the virus.
“I think there’s a lot of people who were in denial. People who say, ‘Listen, that’s what happens when you start testing more or the hospitalizations, they’re not really up.’ Well, that’s not true. The hospitalizations are up,” Cramer said.
He said he believes the situation in these states may not get as severe as it once was in New York state and New Jersey, but contended investors cannot ignore the developments. “I think we have to watch it,” Cramer said.
Earlier Thursday, the Labor Department reported there were 1.54 million initial jobless claims last week, a figure slightly better than what economists polled by Dow Jones had expected. It marks the 10th straight week of declining initial claims since mandated business closures due to the coronavirus pandemic wreaked havoc on the U.S. economy.
The S&P 500 is up more than 40% from its virus-driven lows in late March. More recently, the rally had been propelled by stocks that were particularly sensitive to the reopening of the economy. For example, American Airlines is up more than 65% in the last month.
Cramer argued that retail investors who were day trading have been a driving factor in pushing these types of stocks higher. A notable portion of these people are trading on margin, meaning they’ve borrowed money from a brokerage firm to make an investment, he said.
“If we continue to think that this market is being run by people who trade through Goldman Sachs, we’re fools,” the “Mad Money” host said.
For that reason, investors should not necessarily panic about Thursday’s market declines, Cramer said. “I think you just kind of have to let it come down and see whether there’s anything left of the day traders after they have their margin calls.”
Author: Kevin Stankiewicz
Bankrupt Hertz Seeks Permission To Raise $1 Billion In Preposterous New Stock Sale
Looking for the exit.
Hertz Global Holdings, in a filing Thursday, asked the court overseeing its Chapter 11 bankruptcy reorganization to authorize a stunning plan to raise $1 billion by selling 246.8 million new shares.
“It’s bananas,” says Matthew Cavenaugh, a bankruptcy attorney with Jackson Walker, who has no involvement in the case. “The whole concept of funding a Chapter 11 through an equity raise, in the first month, in this unprecedented environment, strikes me as ludicrous.”
This is because by almost any stretch of the imagination, shares in Hertz should already be considered worthless — with equity holders so far down the totem pole that they would be foolish to believe a Hertz reorg would leave them with any value whatsoever.
But don’t tell that to retail investors who have inexplicably piled into Hertz since its May 22 bankruptcy filing, driving up the share price from 56 cents to as high as $5.53 earlier this week. In after-hours trading last night the stock has shot up nearly 50% to $3.
It’s “a unique opportunity,” according to the Hertz court filing, “to raise capital on terms that are far superior to any typical debtor-in-possession financing.” Typically, when bankrupt companies need to raise cash to get them through a restructuring, the funds come with high borrowing costs. But issuing new stock, says Hertz in the filing, would not impose restrictive covenants, would not impair any of the creditors, and would carry no repayment obligations, “and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market.”
Hertz is essentially saying that if morons are offering free money, why not take it? Bondholders will still end up taking over anyway. “Caveat emptor,” says Jeff Anapolsky, managing director of Crossroads Strategic Advisors and co-author of The Art of Distressed M&A: Buying, Selling and Financing Troubled and Insolvent Companies. “While Hertz common stock may be an interesting gamble, it’s not a good investment.” With $2.7 billion of Hertz senior notes trading in the 30s, even raising $1 billion will not make the creditors whole, explains Anapolsky: “If the value of Hertz is less than the amount of the debt, then the creditors are likely to receive the new equity in the reorganized company, leaving the old equityholders with nothing.”
There’s very little precedent for this kind of move, says Anapolsky, and long-running debate as to whether exchanges and regulators should allow shares of insolvent companies to continue trading in bankruptcy. Is it too much mothering to prevent companies from baiting naive millenials — on new day-trading platforms like Robinhood — into handing over free money?
How can we be so sure that Hertz stock will end up worthless? Look at the capital structure. According to court filings the bankruptcy of Hertz Global Holdings involves $2.7 billion in debt (its $14.5 billion in vehicle-related debt is not subject of these proceedings). That $2.7 billion face value debt is currently trading at about 35 cents on the dollar — for an implied market value of about $950 million. Even if Hertz (via its investment bankers at Jefferies) could hypothetically sell $1 billion in new stock, that wouldn’t be enough to make its bonds whole, and the creditors would still end up taking over.
Even if the court allows Hertz to sell its 246.8 million in additional shares, there looks to be zero chance of raising anywhere close to the $1 billion headline number. At $3 per share, Hertz has a current implied market cap of just under $300 million. Because an additional equity offering would be overwhelmingly dilutive to existing holders, the only direction for the share price to go is down — at least in a rational market with rational participants.
But this is 2020, so who knows, maybe it will work.
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Author: Christopher Helman