Surprisingly, the election of Donald Trump has sent a shot of adrenaline into the markets. In the two months after the election, the S&P 500 is up more than 6%, with the Russell 2000, an index of economically sensitive small-cap stocks, up more than double the S&P 500's return. The best takeaway is that the investor class has high expectations for the economy under the president-elect.
In spite of the obvious optimism, even if it "Trumponomics" sends exceeds expectations, it may be too late for Sears Holdings (OTC:SHLDQ), Supervalu (NYSE:SVU), and Canadian Solar (NASDAQ:CSIQ). Let's see what our Foolish contributors have to say about these three companies.
It could be lights out for this solar-panel producer in 2017
Sean Williams (Canadian Solar): While we Fools don't take lightly the suggestion that a company may not survive the year, I'm struggling to see how solar-panel manufacturer Canadian Solar (NASDAQ:CSIQ) makes it through the year unscathed.
Over the past couple of years, Canadian Solar has been an aggressive acquirer. It gobbled up Recurrent Energy for $265 million from Sharp U.S. in 2015 and bought a 49% stake two Suzlon Energy units in India. It's not hard to see why Canadian Solar was so bullish on the future of solar. The Environmental Protection Agency in the U.S. has come down hard on emissions standards, and with pollution levels getting bad in major cities in China, there's liable to be a push to alternative energies in one of the world's fastest growing economies in the not-so-distant future.
However, Canadian Solar ran into two brick walls at the same time. First, crude prices (at one point) collapsed more than 75% before finding a floor, removing the urgency consumers, businesses, and even utilities felt to make the switch to solar from other energy sources. The other issues is solar supply flooded the market. Canadian Solar wasn't the only solar manufacturer to anticipate a surge in demand. But when that demand began to fizzle, the pricing power for solar manufacturers plunged. What's left is Canadian Solar lugging around nearly $3.2 billion in debt, or more than $2.7 billion in net debt.
The good news for current Canadian Solar shareholders is that the company is profitable -- but for how much longer remains a real concern. Foolish solar industry specialist Travis Hoium pointed out in late November that Canadian Solar's 2.4% net margin isn't much to fall back on with solar pricing continuing to creep lower. Furthermore, a majority of Canadian Solar's highly profitable projects are now in the rearview mirror, leaving the company with the prospect of selling some of its projects to reduce its debt. Doing so would be expected to adversely impact its cash flow in the process.
It's also possible that Trump's ascent into the Oval Office could further pressure alternative energy, considering his plans to bolster U.S. oil and gas drilling. Long story short, Canadian Solar has more than $3 billion in debt to service, and it's very possible that cash outflows and possible losses could push this solar giant to the brink.
This grocery player is a shell of its former self
Dan Caplinger (Supervalu): One company that has been going through the process of a major transformation in recent years is grocery store retailer Supervalu. Already, Supervalu has taken steps to shrink its footprint dramatically, and although it has said it has growth plans for the remainder of its business, it seems more likely that Supervalu won't survive as an independent company by the end of the year.
In 2013, Supervalu completed the sale of its Albertsons, Acme, Jewel-Osco, Shaw's, and Star Market chains to private-equity company Cerberus Capital Management and a host of other private investors. In exchange, Supervalu received $100 million in cash, and Cerberus agreed to assume $3.2 billion in debt, dramatically cutting the grocery chain's leverage levels. Yet after having hopes that its Save-A-Lot discount chain would lead the way forward, Supervalu decided instead to sell the chain late last year, this time choosing Canadian private equity company Onex and getting $1.37 billion in cash.
At this point, Supervalu has fewer than 200 traditional grocery stores left, and its primary business is with 1,850 stores operated by wholesale customers for which Supervalu provides distribution services. Supervalu also surprised investors by reporting a loss of $11 million in its fiscal third quarter report earlier this month. With falling same-store sales and minimal growth in the wholesale segment, Supervalu has shrunk to the point at which it's most likely either to become a takeover target or simply continue to fade away.
Trump's tax plan is exactly what Sears doesn't need at this time
Jamal Carnette, CFA (Sears Holdings): It's clear that Sears Holdings has seen better times. The company recently announced that it will close 150 stores and eliminate thousands of jobs in 2017. Like many department stores, Sears is struggling with competition from online retailers, most notably Amazon.com, as a secular shift to e-commerce has hurt all brick-and-mortar companies. Sears has been hit harder than most from this shift, as poor management has compounded its problems.
The last thing Sears, and most other terrestrial retailers, needs at this point is unfavorable tax policy. But that appears to be what's on the GOP's agenda. In a bid to increase domestic jobs, a recent plan from the House incorporates a border-adjusted tax, which disallows a company from deducting costs paid for imports, which means the company will pay the full tax rate (lowered to 20%) on imported goods sold to domestic consumers.
Throughout fiscal year 2016 (three reported quarters), Sears has paid approximately $39 million in taxes on $16 billion in sales, good for a tax rate of 0.24%, less than 1%. Assuming Goldman Sachs' report (by way of Business Insider) pegging approximately 35% of apparel as imported, Sears' border-adjusted tax bill would be more akin to $1.1 billion during this timeframe. While there are differences between Trump's nascent tax plan and the House GOP's, harsh treatment of imports is one broad tenet where there is agreement.
Currently, Sears is generating negative cash flow from operations, which would be exacerbated by paying more in taxes, and has only $258 million in cash on its books. As such, it's likely that the company would have to generate cash by issuing debt, asset sales, or a share issuance to pay this new tax bill. It's unlikely there's a great deal of demand for Sears paper or equity, considering even suppliers are reducing product shipments in fear that the company is on a path to bankruptcy.
In the event that Trump's economic boom doesn't materialize, which would boost sales and profitability, while the border tax forces underperforming retailers like Sears to pay Uncle Sam a large tax bill in competitive, price-sensitive market, it could find itself closing its doors for good.