CNBC Stock Blog

4 Companies That Are Bleeding Cash

Stockpickr Staff

When it comes to corporate America, it's "survival of the fittest." Sure enough, a handful of companies get culled from the herd every year, finding their way into bankruptcy court after a brutal run of losses.

For investors looking for stocks to short , it always pays to focus on these companies. If their balance sheets keep getting weaker and weaker in the face of open-ended losses, investors tire of pouring fresh funds into them and eventually the well runs dry.

Here's a closer look at four companies that are expected to lose gobs of money in 2012. Though they may not be in deep distress in the next quarter or two, the long-term outlook will weaken further as cash balances drop.

1. Achillion Pharmaceuticals

It's easy to take aim at biotech stocks as they are so vulnerable when it comes to cash. Take Achillion Pharmaceuticals as an example. The company's ACH-1625 protease inhibitor drug holds great promise for the treatment of infectious diseases. The drug has a long way to go until it hits the market — perhaps in 2014 or perhaps never if FDA approval is not granted.

Meanwhile, the company likely finished the year with $70 million in cash and is burning around $15 million per quarter. That means the cash will run out in the summer of 2013, unless the company can find more access to cash. This an obvious risk with many biotechs, but you'd be surprised how many companies wait too long to replenish their balance sheets and see their stocks plunge to distressed levels.

Achillion is rated E+, or "sell," by TheStreet Ratings.

2. Sears Holdings

Though biotech is the most fertile area to find cash-strapped short candidates, you can find them in almost any industry. Take retailer Sears Holdings as an example. While other department store chains such as Macy's and J.C. Penney have made major investments to keep their stores fresh, Sears' management has been on the sidelines, giving the stores a fairly dowdy feel.

Consumers have noticed and are starting to shop elsewhere. Same-store sales fell 5 percent this past month, which is really bad when you consider that retailers count on the holiday season for so much of their profits. The long-term decline for this storied retailer can be seen in the numbers. Net income before taxes peaked at $2.5 billion back in fiscal (January) 2007 and fell more than 90 percent to $1186 million in fiscal 2011.

The current year should be even worse. Sears Holdings looks set to lose around $500 million this year, and Goldman Sachs suggests losses will stay that high in the fiscal year that begins in February as well fiscal 2014.

Can Sears afford to lose all that money? Well, heading into the fiscal fourth quarter (that began in November), Sears had around $600 million in gross cash. That number likely grew thanks to seasonal positive cash flow, so let's assume it will be $900 million at the end of the February quarter. Well, Sears' burn rate from there is unsustainable, and barring a big turnaround, the retailer would run out of money by the end of calendar 2013.

Want to know how a "death spiral" plays out? Sears will need to come up with around $2.2 billion to address debts coming due in the next 12 months. To come up with that money, management will seek to sell-off inventories, perhaps at heavily discounted prices. Forget about store upgrades or a replenishment of that sold off inventory. Sears' resonance with shoppers will grow even weaker in 2012, and analysts will eventually talk of an end game where the retailer sells off real estate to stay afloat.

TheStreet Ratings has Sears rated a D+, or "sell."

3. Rite Aid

Also on the retail front, Rite Aid plays a dangerous game. The drugstore chain has been lumbering under a massive debt load, preserving cash while rivals such as Walgreen and CVS Caremark invest in growth.

Rite Aid's prospects have actually improved a bit lately: Decent recent sales trends have pushed the stock up nearly 50 percent since October to a recent $1.30. Still, considerable stress remains on this business model. As of the end of November 2011, Rite Aid had $150 million in cash, and more than $6 billion in debt. The company pays out more than $500 million in interest to its bondholders every year. Trouble is, that's the size of the company's cash flow so profits don't go to the balance sheet, they go to the bondholders.

Rite Aid recently announced an impressive 3.6 percent jump in December same-store sales. Yet almost all of that gain was attributed to a spike in pharmacy sales as several new popular generic drugs hit the market (drug store chains have a higher percentage of exposure to generics while pharmacy benefit managers are more likely to sell branded drugs). Sales growth away from the pharmacists' counter was anemic.

Rite Aid is unlikely to wrestle with bankruptcy fears in the very near-term, but the retailer simply can't afford to move back to negative same-store sales trends. If that happens, the $6 billion debt load would start to be in sharp focus for short-sellers.

Rite Aid is rated D, or "sell," by TheStreet Ratings.

4. KiOR

Clean energy is another area that investors need to watch out for potential bankruptcies. Several publicly traded and private solar firms have gone belly up recently, led by the high-profile blow-up of government-backed Solyndra.

One clean energy stock that short sellers are ogling is KiOR , which aims to convert biomass into fuel oil. To make that happen, KiOR is pouring huge sums of money into its facilities to generate meaningful production.

The company's technology is said to be very promising, which is why shares rose from their mid-teens IPO last summer to above $20 by late September. Shares are now below $10 and could be headed even lower as investors start to realize that more money will be needed to see this company through to eventual profitability.

KiOR's first plant will likely come on line this summer, and a second plant is expected to be running by the end of 2013. Meanwhile, cash flies out the door. KioR likely lost around $50 million in 2011, and analysts think losses could reach $100 million in 2012 and 2013, thanks to heavy spending on new plants. The company currently has $150 million in cash and the well could run dry by the end of this year unless KiOr can raise a lot more money. It needs upwards of $100 million more just to get its two plants going and to reach profitability, and that assumes no glitches.

KiOR's survival will hinge on oil prices. Its technology is uncompetitive when oil trades below $76 a barrel. So the company needs to see the current lofty prices for oil (which were recently just above $100 a barrel) to stay in place for the company to attract fresh investors. If KiOR waits too long, and oil prices pull back, it may find it impossible to raise cash.

These companies aren't in deep distress now, but their balance sheets are weakening and more troubling times may lie right around the corner.

Additional News: Retailers May Direct Excess Cash to Investors

Additional Views: Retail Sales Outlook for 2012: Analyst


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