Molycorp too risky to recommend for an investment

Tuesday, September 30th, 2014

The stock market has been seesawing recently and investors seem to have become complacent. Remember: The stock market does go down and there is no reason for panic that there will be a big drop soon.

One reason for the wide movements is there is not a lot of investment information out there to help traders. Within the next few weeks, we will start to see earnings releases from companies for the third quarter of 2014.

I expect this information should propel the markets to new highs. As investors, my firm has never worried about the short-term movements of the stock market. I am more concerned with the fundamentals of a company and what it is doing to grow its sales and earnings long term.

With that said, investors should be looking out over the next 12 to 18 months at the value of the businesses they hold and are buying now. Anything less than that and you will be on the emotional roller coaster.

I recently received a request to look at a company called Molycorp Inc. (NYSE: MCP)

The company is in the business of industrial metals and minerals. The company has a market cap of $303 million and the stock currently trades about $1.25. Over the last year, the stock went as high as $7.59 and very close to a 52-week low of $1.14.

The company starts off with a price-to-earnings ratio that is not consistent compared with the industry average of 59.9. Price to sales favors the company at 0.67 compared with the industry average of 1.38.

Price to tangible book value looks very good at 0.53, which means investors are paying 53 cents on the dollar for the tangible assets of this company. Compare that with the industry average at a much higher 2.83. Looking at cash flow, the company had cash from activities at a loss of $118 million; as a valuation ratio, the industry was at a positive 22.2.

Sales for the company declined 18 percent year over year the last 12 months, which is not as good as a 3.3 percent decline of the industry average.

This industry appears to have had problems. About a year ago, I made what I thought was a wise investment on a company called Cliffs Natural Resources and after six months I sold it -- the company had about a 15 percent loss.

Since then, the stock has fallen an additional 30 percent-plus. Although I think this industry has some potential based on sales, it may be too early to tell.

Don’t be confused by the earnings-per-share growth year over year in the last 12 months of 47.5 percent when the industry declined by 142 percent. The gain earnings per share year over year excludes an impairment charge of $120 million. In my opinion, the company should still be penalized for having this impairment charge. If you include the impairment charge year over year, earnings per share fell by 10 percent.

The balance sheet is not that strong, which adds to the risk of creditors demanding payment of their loans before this industry turns around. The current ratio of 3.26 looks positive and slightly higher than the industry average of 2.97. However, Molycorp is carrying excessive debt and has a debt to equity of 117 percent -- more than twice the industry average of 52 percent.

The return on equity is minus 35 percent compared with the industry average at a positive 3.6 percent. This negative return on equity includes the hit taken by the impairment of assets. Net profit margin and a negative 83.9 percent for the company also reveal the hit of the impairment of assets; the industry does have a net profit margin of a positive 2.3 percent.

Looking at the efficiency of this company: Receivable turnover for the last 12 months is 10.4 times, which is better than the industry average at 7.3 times. Inventory turnover over the last 12 months is roughly the same above the company and the industry, coming in at 2.99 and 2.92 respectively.

Based on the earnings estimates of four analysts -- which is fewer than I like to see -- the company is expected to lose $1.06 per share for the year ending December 2014. While there’s improvement looking out to the year ending December 2015, the company is still expected to lose 56 cents per share. I would be very concerned about creditors knocking on the door demanding payment of their loans.

None of this means the company can’t turn things around; it just means the chances of that happening are too low for me to recommend this company as an investment.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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