Jumpstarting a Bankrupt Company: Proceed with Caution

Home Gamers know that while Cramer can get a little crazy on the show, he’s a sane investor at heart. He doesn’t normally recommend companies that are in bankruptcy or trade on the pink sheets and he rarely recommends a company that barely trades above $2 per share.

Well, today, he’s talking about a stock that falls into all three of those categories: Delphi (DPHIQ.PK). But be careful – Cramer isn’t recommending this stock; he merely finds it fascinating and wants to let you in on its story, because it has the potential for an enormous upside. That being said, he can’t advise anyone to take on the kind of risk Delphi represents. Tread carefully if the stock piques your interest, Cramer says, because this company brings new meaning to the word “speculation.”

Delphi is a big bankrupt auto parts maker. It entered into an agreement with Cerberus and Appaloosa, two hugely successful firms that specialize in companies that are on the brink. Delphi made a deal with the two firms called the Plan Framework Support Agreement, which is essentially the plan for how to get it out of bankruptcy. But that’s not what Cramer is interested in. Delphi is a $2 stock, and the Cerberus/Appaloosa plan values the common stock at $3.92. If the deal is legit and works out, Delphi’s value would practically double. There’s another proposal from Highland that values Delphi’s shares at $7.70 but Cramer doesn’t even want to go there. He’s being conservative and he wants to focus on the plan that values the company for less. There’s no point in getting overly enthused about a bankrupt company, he says.

Since Delphi isn’t trading near either of these projections, it’s clear that Wall Street thinks the company is bogus. Investors are probably betting that the United Auto Workers union will throw the plan back in Delphi’s face and ruin everything, Cramer says. He wouldn’t put that past the UAW, but he doesn’t think it will come to that in the end.

With their valuation of $3.92, Cerberus and Appaloosa obviously see incredible upside in Delphi. And since it’s a bankrupt company, the stock could always go to zero – but since it’s only at $2, the downside is pretty well defined, Cramer says.

To find a good multiple to apply here in the long term, Cramer looked at comparable companies and got a 6.7 multiple for Delphi. In addition, CRT Capital suggested that in 2009, Delphi could have over $2.4 billion in earnings before interest, taxes, depreciation and amortization. Using Cramer’s multiple, that values a reorganized Delphi at $64.72. That upside is mind-boggling, Cramer says.

With two deals on the table that value this bankrupt company at far more than it’s worth right now, the stock has a lot of appeal. But, again, Cramer is stopping short of recommending it. He can’t in good conscience recommend the stock of a bankrupt company that could go to zero, but he wants to at least shed some light on the incredible potential upside in Delphi if the Cerberus/Appaloosa plan works.

Bottom line: Cramer isn’t recommending Delphi as a buy, but you could take a look if you’re a daredevil looking for something incredibly speculative.

Questions? Comments? madmoney@cnbc.com