| The Difference Between Down and Outby: Hari | | | | for each situation. Please do not treat this as a |
| Wibowo | | | | buy or sell recommendation. This is merely my |
| As turnaround investors, I prefer to invest in | | | | observation as someone who had watched these |
| companies that are down but not out. This is | | | | companies for a while. |
| important because a lot of times, investors | | | | Pfizer Inc. (PFE) might be categorized as the |
| misunderstood the two. Often times, these two | | | | company that is down. Stock price slumped to 8 |
| types of companies are trading near or at their | | | | year low this week due to weak sales of its drug |
| 52 week low. But the similarity ends there. | | | | franchises and tepid guidance. Management has |
| Company that is Down. This is the company that | | | | refused to update guidance for 2006 and beyond |
| experiences problem and it seems like it can | | | | due to uncertainty. So, let's look at Pfizer's balance |
| weather the problem. It just needs time to right | | | | sheet, shall we? The latest information on Pfizer |
| the ship and get back on track. How can we be | | | | shows that the company has $ 15 Billion of cash |
| certain that the company can weather the | | | | and equivalent and $ 5.517 Billion in long term debt. |
| storm? The ultimate guideline is to look at the | | | | In other words, Pfizer has $9.5 Billion of positive |
| company's balance sheet and income statement. | | | | net cash. How about earnings? Is Pfizer expected |
| Does the company have a positive net cash? Is | | | | to post a loss? Nope, it is expected to post |
| the company expected to post a profit? If the | | | | earnings of $ 1.95 per share for year 2005 or $ |
| answer is yes to both questions, then the | | | | 14 Billion of net profit. Profit is plenty while balance |
| company in question is most likely is just down, | | | | sheet is solid. Pfizer clearly is a company that |
| but not out. | | | | simply has a small bump in the road. |
| Company that is Out. This is the company that | | | | How about AMR Corp (AMR)? This is an excellent |
| experiences problem but its future existence | | | | example of a company that is down. Looking at |
| might be in doubt. It might right the ship but by | | | | the balance sheet, AMR has a negative net cash |
| then it might be too late. As a result, shareholders | | | | of $ 9.5 Billion. What this means is that it has $ 9.5 |
| will be wiped out and lose 100% of their | | | | Billion more long term debt than it has cash. Is |
| investment. How can we be certain for the | | | | AMR profitable? Not a chance. It is expected to |
| company that is out? Again, we have to check | | | | post a loss of $ 4.36 per share for 2005 or $ 714 |
| the ultimate guideline, which is the balance sheet | | | | Million. It doesn't look pretty. High amount of debt |
| and income statement of the company. Does the | | | | and big loss is the recipe for a company that is |
| company have a negative net cash? Is the | | | | down. If AMR doesn't turn its ship anytime soon, |
| company expected to post a loss for the | | | | it might be forced to file bankruptcy. |
| foreseeable future? If the answer is yes to both | | | | To consistently make money, investors need to |
| questions, then the company in question has the | | | | be able to differentiate the company that is down |
| high probability of being out of business. | | | | and company that is out. Weed out the company |
| Using analogy without illustrations are confusing, in | | | | that is out and your investment return will be so |
| my opinion. Therefore, I will choose one company | | | | much better. |