It's been just shy of three and a half years since the Australian stock market fell to the depths, and for many it seemed like there was no light at the end of the tunnel. I'm talking about March 2009, the month the S&P / All Ordinaries index (Index: ^AXAO) (ASX: XAO) hit 3,111 and began a recovery from the Global Financial Crisis. Doomsayers had been saying it was going to get much worse than it already was, but the market proved them wrong, and the All Ords has risen over 24% since that time.
Yes, it has been a bumpy ride, and who knows if we are out of the woods or yet to revisit those levels again. Some stocks haven't survived while others have seen massive slides in their share prices, and may never recover.
Spread thin
Elders Limited (ASX: ELD) saw its share price fall more than 92% from over $4 to its current price of 22 cents on the back of heavy losses and write-downs in its forestry Managed Investment Scheme business, a similar business that shut down Timbercorp & Great Southern. Perhaps another issue is the company's spread across many different types of business like agricultural products and services, insurance, automotive components, real estate, banking and forestry. While the company and most of these businesses were targeted at rural customers, perhaps the company as a whole became unmanageable. Elders is now in the process of selling off much of its forestry assets, in an effort to turn the company around, and reduce its debts. It appears the company still has some way to go with debts of $436m, plus another $145m owing on hybrid securities, compared to its current market cap of $99m and shareholders equity of $500m (excluding the hybrid securities).
Tax payer funded life support
Government support may not save BlueScope Steel Limited (ASX: BSL), which has seen its share price fall 86% since March 2009. Currently trading at 28 cents, the share price is a far cry from its all-time high of over $12. A high Australian dollar, higher iron ore prices and increasingly cheap imports have wreaked havoc on its business. Being capital intensive hasn't helped. So far taxpayers have stumped up $100m to keep the company afloat, and more looks likely to flow into BlueScope's coffers as it struggles to survive and reinvent itself.
Dumped!
Surfwear maker Billabong International Limited's (ASX: BBG) shares have dropped 85%, much of the falls coming in the last two years, as the company paid too high a price for acquisitions in its goal to grow at any cost and expanded from manufacturing into retailing. Debt was also Billabong's downfall, like a lead weight around the company's neck, it was unable to manouver to survive a downturn in business. An expansion strategy that perhaps the company would have been better off not following now sees the stock trade just over $1, a long way from its 2007 high of over $18. The company is now selling off assets and closing hundreds of stores, and was forced to raise equity at heavily discounted prices to attract investors. There may be yet some life in Billabong, which owns a stable of strong brands, and the company's debt levels should fall to more reasonable proportions.
Woodchips for shares?
Gunns Limited's (ASX: GNS) share price is down 79%, but has been in a trading halt in March 2012, and there are doubts whether it will ever trade again. The forestry and timber company has also felt the effects of too much debt. (Now you know why I avoid companies with loads of debt). Like BlueScope, Gunns has also had to compete with cheap imports, which slashed the company's margins. Add in the high Australian dollar, plans to build an expensive pulp mill in Tasmania, opposed by many and the current business appears unsustainable.
The Foolish bottom line
I may keep harping on about debt – during the good times, debt can magnify company profits, but during downturns, it can bring many companies unstuck. The lessons from the above four appear, to me anyway, to be crystal clear.
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More reading
- Miners: Recovery ahead or further to fall?
- Can these fallen stars regain their former glory?
- Sure things: Death, rubber and pipelines
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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
