5 Public Companies I Wish Were Private

How fitting that I'm finishing this commentary Sunday night. Fright night. Otherwise known as Halloween. I'll be honest: This is my least favorite holiday by a pretty wide margin. Why? I don't really like to be scared, especially when it comes to my portfolio.

That's why, when I screen for potential investments, I try to find firms that have a propensity to increase their net worth, also known as shareholder's equity. Fellow Fool Rex Moore has previously written in depth on the importance of return on equity as a measure of management effectiveness. And Bill Mann's parsing of its elements is as good an instruction as you'll find anywhere on what makes good firms great.

Equally, firms that bleed equity are shareholder-value-destroying monsters. Call them the worm-ridden corpses of the market. Scary? Sure, if you own them. And chances are you do. A search of the stock screener at Fidelity brings up more than 800 stocks with a -25% or worse return on equity over the trailing 12 months.

With so many possible candidates it's impossible to know for sure which companies are the most frightening -- the Michael Myers, Jason Voorhees, and Freddy Krueger of the corporate world. Nevertheless, I sought them out, focusing my research mostly on large, well-known firms that have seen far better days.

Last time I introduced you to five private companies I hope will eventually grace us with their presence in the public markets. This time I'm profiling five firms whose record for destroying shareholder value is almost unprecedented. Five firms that, dare I say it, might be better off private.

Trump Casinos & Hotel Resorts: Deficits don't matter
Watch enough political commercials, you're bound to hear this phrase at some point: "deficits don't matter." If you want to argue the national policy merits of that claim, go to the Political Asylum discussion board. But as a matter of corporate policy, no firm has proved to have a bigger, nor more lethal, appetite for debt than Trump Casinos & Hotel Resorts (OTC BB: DJTC).

To some, it's going to seem like I'm piling on The Donald, since I selected Trump Resorts as a ghoulish trick for this year's Fool Halloween special. I guess you'll just have to trust me when I say I'm not. Indeed, Trump only recently posited that his gaming business could be taken private when a deal with Credit Suisse (NYSE: CSR  ) subsidiary DLJ Merchant Banking to bail out the firm went awry.

The Donald's gaming business should go private because it has spent years destroying shareholder value. Besides, Trump didn't use the public markets to make himself a billionaire. The Trump Organization, which I wish was public, is a growing $8 billion real estate empire. Trump Casinos, on the other hand, reported last week in its third-quarter results that its year-to-date sales were 2% lower than the same period a year ago. Its net loss for the quarter also more than doubled from last year.

It's a common refrain, actually. Trump Casinos has never once earned a full-year profit since coming public. Yep, that's right, not once. Not surprisingly, Trump Casinos' stock has underperformed the S&P 500 for four of the past five years, and shareholder's equity has declined 82% in three years.

Broadvision: The bubble that won't pop
Ah, Broadvision (Nasdaq: BVSN  ) . I remember first encountering the company during the bubble years, when I was still working in Silicon Valley. Fitting, too, since it's probably fair to say Broadvision was among those that helped blow the bubble in the first place.

This, of course, isn't to say Broadvision was never a good business. But should it have ever entered the public markets? I'm not so sure. Broadvision makes software that lets Web browsers and buyers help themselves in a highly personalized manner. Call it the white glove treatment, delivered via computer. Sounds good to me, but there, again, lies the problem: Broadvision was the ultimate story stock. All sizzle, no steak.

Broadvision first started trading on the Nasdaq in 1996. Through 1999, the company saw solid growth. In fact, in '99, its second full year of profitability, earnings grew by more than 300% from the prior year. Apparently management got drunk with its success, as first signs of long-term failure started to show as early as 2000. Indeed, at the height of the bubble, Broadvision saw its sales rise by some $300 million, yet net income dropped by $180 million. And gross margin went lower by five percentage points. Remember, folks, we're talking about software here. This is an industry whose penchant for killer margins has been known to make narcotics dealers jealous.

One year later, Broadvision was talking about "containing costs." But it was too late; one spending bender created a four-year hangover. And owners have paid the price. Shareholders' equity has declined annually since hitting its 2000 peak, burning $800 million from 2000 to 2001 alone. To its credit, management is paying down $28 million in debt and is working to stabilize the business. But only $67 million in cash remains. Plus, free cash flow is still running negative by more than $20 million annually. It's time for this bubble machine to pop.

US Airways: The unfriendly skies

This one is easy, too. I've covered the turbulence that has forced the slow and steady descent of US Airways in recent months, and its bankruptcy filing ought to surprise no one. Indeed, the economics of the airline industry are so bad that even discount flyers such as FLYi (Nasdaq: FLYI  ) , parent of Independence Air, and ATA Holdings (Nasdaq: ATAH  ) are ailing.

Yet US Airways gets its place on this list because, according to Morningstar, it has run 10 consecutive years of negative tangible shareholder equity. That means if you've had stock in US Airways any time since 1994 you owned nothing more than the paper your stock certificates were printed on. (To be fair, however, it's the very rare case where a company with positive equity liquidates and returns some excess to shareholders.)

The truly remarkable thing about this is that other struggling competitors don't even get close to this record of ineptitude. Not Delta (NYSE: DAL  ) , not AMR Corp's (NYSE: AMR  ) American, not UAL Corp's (OTC BB: UALAQ) United. Not even Continental (NYSE: CAL  ) , which has been in and out of bankruptcy twice. Seems it's time US Airways was grounded for good.

Qwest: Hello, are you there?
This one hurts the most, because it's a local company for me. But Qwest (NYSE: Q  ) has been screwing up for years. I respect the new management under Richard Notebaert, yet it appears the best he and the rest of his team can do is create a telecom company that's just good enough to not go out of business. At least, not soon.

Fellow Fool David Meier explored the underbelly of Qwest's business in explaining why he was selling the stock, so I won't repeat the litany here. Instead, let's run the numbers and see just how much shareholder value this beast has eaten. Today's Qwest was born of a merger between the upstart telco and Baby Bell US West in June 2000. Back then, tangible shareholders' equity was nearly $9 billion, while the firm's operating profit margin was a healthy 42%. Now all of the surplus equity is gone, and the firm has increased the deficit for the last four quarters running. The latest pegs the total at nearly $2 billion. Oh, and operating margins? Yeah, they're down too, to 22% at the end of last year, according to researcher Value Line (Nasdaq: VALU  ) .

This all wouldn't be so bad if Qwest didn't compare so poorly with other beaten-down competitors in a depressed industry. Take Sprint (NYSE: FON  ) , for example, which has steadily increased its operating margin since 1999 to last year's 30%. The firm also reported more than $5 billion in tangible shareholders' equity in its latest quarter and pays a market-beating dividend.

With no economic advantages and few, if any, distinguishing features left in its business, there's no reason to expect meaningful gains from an investment in Qwest stock. And that leaves zero incentive for anyone to become an owner.

Krispy Kreme: Sorry, folks, they're just doughnuts
My guess is this pick will generate the most hate mail. In fact, I'll bet some of you saw this subhead and started typing immediately. "What? You're talking about a national brand! A beloved product! A Motley Fool Stock Advisor pick! You've lost it, pal," you write. Yeah, maybe. But you know what? They're just doughnuts. I don't care whether the classic glazed come across to some as a religious experience. It isn't. And the economics of the business prove it.

I'll admit that some of my judgment of Krispy Kreme (NYSE: KKD  ) is influenced by what I see. For example, we have two stores near where I live, both in high-traffic areas. But both are generally busy only in the morning or late at night. Although these "factory stores" are also generating meaningful sales by supplying local supermarkets, I'd expect the large footprint of each outlet to require a fair amount of on-site traffic. But I don't see it. Perhaps that's why Krispy Kreme in August announced flat same-store sales and a 56% decline in net income.

Of course, one bad quarter is never enough to write off a company. But Krispy Kreme's weird practice of buying back ailing franchises at a premium to help cover the cost of company-funded loans raises serious questions about management's priorities. Sure, it helped preserve the thin veneer of presumably healthy growth, but image should never trump fundamentals. Unfortunately, Krispy Kreme had been unapologetic about its accounting and was curiously quiet when the SEC ordered a formal investigation in early October.

Krispy Kreme may be the best of our list when it comes to delivering additional equity to shareholders, but the balance sheet is still telling. Were you to back out all the intangible assets under review because of the SEC probe, Krispy Kreme's massive growth from 2000 to 2004 drops from better than 800% to more than 400%. Yeah, that's good, but hardly what was promised.

The Foolish bottom line
Fools, companies go public to get access to needed capital. You exchange your moolah for an ownership interest. The implied promise in that exchange is that management will use your hard-earned dollars wisely to grow the business and return profits to you. Sometimes, despite good intentions, this simply doesn't happen.

But Trump Hotels, Broadvision, US Airways, Qwest, and Krispy Kreme don't fit the classic mold. Each has spent more than enough time destroying shareholder value. No, I don't believe they did it on purpose, although the Securities and Exchange Commission is looking into Qwest's and Krispy Kreme's actions. Instead, I think the issue is larger. I think they failed to understand that in going public they were ceding control to thousands of new owners to whom they were ultimately accountable. Some of these firms may still fail to get that concept, and they are the ones that should exit the public markets as fast as possible. For their sake, and ours.

Fool contributorTim Beyershas no plans to go public any time soon, although his editor once thought ofgiving it a try. You can view Tim's Fool profile and stock holdingshere. The Motley Fool has adisclosure policy.


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