When a company's operations deteriorate to the point that management needs to embark on a turnaround strategy, it generally means one of two things: Investors can either pick up shares on the cheap and make out handsomely if the plan succeeds, or stand to lose a whole lot of their hard-earned money.
Unfortunately, the turnaround strategies of Calumet Specialty Products Partners (CLMT -3.90%), Ferrellgas Partners (FGP), and Northern Dynasty Minerals (NAK -1.31%) haven't been working out so well for investors in the last year. The best-performing stock of the trio has posted a one-year loss of 27%, compared to the 1.5% gain of the S&P 500 in that span. Is it time for investors to give up on these businesses?
Plenty of progress, but plenty of room for improvement
Units of Calumet Specialty Products have lost about 49% of their value in the last 12 months. To be fair, CEO Tim Go has done a remarkable job making the most of the company's assets in recent years, but the financial profile of the business was in such a dire state when he took over that a significant amount of progress is still needed.
As is often the case with companies in the midst of a turnaround, Calumet Specialty Products is being held captive by interest payments on its massive debt balance. The business ended 2018 with "only" $1.6 billion in debt (the lowest total since at least 2014) and paid "only" $155 million in interest expense last year (it paid $183 million in interest in 2017). But that still resulted in a net loss of $51 million from continuing operations last year.
Considering most of the debt payments made last year were made possible by the sale of a major refinery, the company will likely have to primarily rely on improving operations to chip away at debt over the next few years. Calumet Specialty Products is making progress on that front. It increased the share of total revenue earned from high-margin specialty products to 39.5% in 2018, up from 34.5% in the year before. That helped to boost operating cash flow to $75.2 million, but the business is going to need a lot more than that to make a dent in its debt balance.
Simply put, this specialty petroleum products manufacturer is on the right path, but barring another major asset sale or other transaction, it's going to take many years before the business can create sustainable value for unitholders.
Have recent growth investments backfired?
Units of Ferrellgas Partners have lost over 64% of their value in the last 12 months. Unlike Calumet Specialty Products, not much has gone right for the propane distributor during its ongoing turnaround. The business has seen its long-term debt balance increase in the most recent six-month period. It ended its fiscal second quarter 2019 (the period ending Jan. 31, 2019) with a book value of negative $1.08 billion -- also a worsening trend over the past year.
The debt increases have been largely driven by management's particular flavor of turnaround strategy: boost investments in future potential growth and hope it pays off later. That's always been a questionable strategy, but it's been made worse by the fact that noncore asset sales have delivered lackluster windfalls for the business.
Is there a silver lining for investors? Well, recent winter weather was favorable for the business, which is expected to result in a much-improved fiscal third quarter 2019 when the dust settles. And the business should be able to generate double-digit operating margin now that the bulk of the portfolio-shuffling transactions (and accompanying asset impairment charges) are behind the propane supplier. But Ferrellgas Partners has paid $174 million in interest expense in the last year, which is going to weigh on the business for the foreseeable future.
Long story short, there's no visibility into how the propane distributor is going to begin lowering its incredible debt balance. That means this business is much too risky for individual investors at this time.
Will this gold and copper mine ever be developed?
Shares of Northern Dynasty Minerals have lost 27% in the past 12 months. The company owns the Pebble Project in Alaska, which is the largest undeveloped gold and copper mine in the world. The mine's proximity to the world's largest sockeye salmon fisheries in Bristol Bay and the accompanying questions over its potential environmental impact have tripped up its development in the last decade.
But investors are hopeful nonetheless. Northern Dynasty Minerals is going it alone to develop a downsized section of the Pebble Project after losing a deep-pocketed partner last year, which might allow it to finally monetize what's only amounted to a big patch of dirt for the business. The asset has significant local and regional support (which is important to consider, since most opposition arises outside of Alaska). And federal regulators are moving along with the environmental impact studies.
That said, investors need to keep their expectations in check. Developing even the scaled-back site at Pebble will require a significant investment, four years of construction, and likely another year or so to ramp up production. Northern Dynasty Minerals reported just $30 million in cash, cash equivalents, and investments at the end of September 2018 (the last period for which data are available). It raised gross proceeds of $10 million through a recent stock offering, but much more capital will be needed.
Put another way, Northern Dynasty Minerals has simply not lived up to its potential over the years -- and there's a reason Wall Street has pegged the company's stock price under $1 per share and market cap to just $220 million. Investors shouldn't consider this stock a buy.