When business-news outlets make bankruptcy predictions, no sector gets more attention than the retail industry.
I’m not sure why that is. Companies from various industries and sectors file for Chapter 11 protection. The focus on bankrupt retailers just boils down to most of us understanding and frequenting stores.
I googled “potential bankruptcies,” and the first five results involved retailers. Naturally Bed Bath & Beyond (NASDAQ:BBBY) was featured prominently in all five stories.
But since BBBY is widely expected to declare bankruptcy, I won’t include it on my list of three potential bankruptcies that could shock the market in 2023.
Instead, I will search the S&P Composite 1500 for businesses whose Altman Z-Scores are near or below 0, the level at which investors should become worried about a company’s financial strength. The Altman Z-Score is designed to assess the financial strength of businesses and the likelihood of them going bankrupt over the next 24 months.
|WBD||Warner Bros. Discovery||$14.81|
Warner Bros. Discovery (WBD)
Warner Bros. Discovery (NASDAQ:WBD) CEO David Zaslav’s compensation is almost as astronomical as the debt load of his entertainment company. In 2022, Zaslav received $39.2 million of total compensation.
Warner Bros. Discovery had $49.9 billion of total debt at the end of December, equal to 1.4 times its market capitalization. Nonetheless, most analysts are bullish on WBD stock. On March 17, Wells Fargo and Wolfe Research upgraded the shares.
Wells Fargo analyst Stephen Cahall upgraded WBD to “overweight” from “equal weight,” and raised his target price on WBD stock to $20 from $7. Wolfe Research’s Peter Supino upgraded the shares to “outperform “from “peer perform” with a $20 price target.
“Why the upgrade now? ‘Almost a year post-merger, guidance and the stock are lower, while internal visibility is higher,’ Supino explained, echoing others’ recent commentary that the company had put the worst behind it and was turning a corner. ‘We expect execution, free cash flow generation and debt-to-equity value transfer to improve from here,’” The Hollywood Reporter noted.
Both analysts are convinced that the owner of media brands such as HBO, HGTV, Warner Bros., CNN, the Food Network, and many others will significantly reduce its debt over the next few years.
WBD had better cut its debt for two reasons: Its current Altman Z-Score is 0.35, making it a prime candidate to go bankrupt over the next 24 months. Secondly, it would be embarrassing for the board to pay Zaslav such an obscene amount of money only to have him run the company into the ground.
Compared to where Coty’s (NYSE:COTY) share price was a year ago, the struggling cosmetics company’s stock is doing much better, as it has gained 34% during that time.
In June 2022, I included Coty in a list of seven cheap stocks under $20 that could double soon. I argued that the firm’s hiring of former L’Oreal executive Sue Nabi to transform its business was a brilliant move. But, of course, it didn’t hurt that Coty generated free cash flow.
In mid-March, Coty reported that its like-for-like (LFL) sales for would be up 10% or more in its fiscal Q3 versus a year earlier and that its Q3 LTL sales three percentage points higher than in the previous quarter. Additionally, it expects its 2023 LFL sales growth to be at the high end of its previous guidance of 6%-8%. So the company’s business is getting stronger.
However, when I wrote about Coty last June, it had reported trailing 12-month free cash flow of $628 million. As of December, that metric had dropped to $447 million, causing its valuation to climb to 23 times its free cash flow.
Further, the firm’s Altman Z-Score is 0.61, putting it in the distress zone, according to Altman’s original system.
So bankruptcy is still a possibility for Coty.
Norwegian Cruise Line Holdings (NCLH)
I’m of two minds regarding Norwegian Cruise Line Holdings (NYSE:NCLH).
On the one hand, nobody handles debt better than the cruise lines.
But NCLH is the smallest of the three leading operators -(Carnival (NYSE:CCL) and Royal Caribbean Cruises (NYSE:RCL) are the others), likely making Norwegian’s chances of bankruptcy higher than the other two.
However, a good friend of mine just returned from a Norwegian cruise in the Southern Caribbean, and he and his girlfriend had a blast. Their cruise started in Puerto Rico, went down to Aruba, and back up through some of the smaller Caribbean islands. They stayed in Haven, the cruise line’s luxury accommodation separate from the rest of the ship. They had no complaints.
People love cruising. On a number of occasions since the pandemic began, I argued that many consumers would resume taking cruises again, and they generally have.
In February Norwegian reported that it total revenue per passenger cruise day increased by 24% in Q4, excluding currency, compared to Q4 of 2019.
The problem is that its total debt at the end of December was $13.6 billion, 2.4 times its market cap.
As a result, its Altman Z-Score is -0.56, the lowest of the three stocks featured in this article. So if 2023 doesn’t continue to deliver for NCLH,, bankruptcy is a very realistic outcome for it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.