Judgment day for Congress and the American public now sits just two weeks away. A combination of tax cuts put in place throughout the Bush presidency and extended through the first term of the Obama presidency and a series of spending cuts in the defense sector, collectively known as the fiscal cliff, are set to trigger in the first two days of January if both Congressional parties don't come together to strike a compromise.
The combination of higher taxes and lower spending is widely expected to be a negative for the economy as a whole and could thrust the U.S. back into a recession. For some companies, however, it won't matter whether or not we go over the proverbial fiscal cliff -- they're in trouble no matter what. Here are five companies you'll want to think really hard about before pulling the buy trigger heading into 2013.
SUPERVALU, the owner of grocery chains Albertsons, Save-A-Lot, and many others, is in dire straits whether or not taxes head higher for much of the American public. Buried under nearly $6.1 billion in net debt (a level that actually rose in its most recent quarter), SUPERVALU is attempting to restructure its debt and potentially sell parts of the company, or even the entire thing.
This is occurring while it's also trying to remodel many of its locations similar to how its rivals, Safeway (NYSE:SWY) and Kroger (NYSE:KR) have turned their stores into one-stop shops, complete with a fresh look inside and a fueling station outside. Simply put, SUPERVALU doesn't have the capital to orchestrate this type of remodel campaign, and it's losing business in rapid succession to Kroger and Safeway, which were quicker (and had more readily available capital) to make that change.
The grocery industry has razor-thin, unforgiving margins, and SUPERVALU looks like a casualty of its own devices.
Caesars Entertainment (NASDAQ:CZR)
Speaking of debt-ridden companies, let me introduce you to Caesars Entertainment, owner of high-end resorts and casinos in Las Vegas, Atlantic City, and around the world. Clearly, a tumble over the fiscal cliff would reduce consumers' disposable income and likely curb spending at its hotels and in its casinos. The problem is that Caesars is in trouble even if a fiscal cliff deal gets done.
The primary concern investors should have with Caesars is its unsustainable level of debt. The company went public earlier this year in order to raise capital to help pay down its debt, yet it's still left with nearly $20 billion in net debt. The interest payments on Caesars' debt alone will likely keep it from becoming profitable for years, if ever!
Another factor working against Caesars is its lack of a casino presence in Macau, possibly the only region in the world still exhibiting strong growth in the gaming industry. With heavy ties to the Las Vegas Strip and Superstorm Sandy-devastated Atlantic City, Caesars' prospects for growth from its current levels look tepid at best.
Seriously, who shops at RadioShack anymore? RadioShack stopped being the place to go to for electronic gadgets about 10 years ago, and whether or not we go screaming off the fiscal cliff, it'll be in serious trouble.
The first thing working against RadioShack is its terrible store locations. I remember when RadioShack stores used to be located in popular malls -- now they are relegated to strip-mall locations in order to reduce costs.
The second factor working against RadioShack is that you can buy nearly everything it offers through Amazon.com or some other online retailer for the same cost or less. There's absolutely no differentiating factor that makes consumers say, "Yes, I have to go to RadioShack to get this!" Plus, in its push to shrink store size in order to reduce expenses, its selection of electronics has grown anemic.
Finally, its reliance on pushing mobile devices could potentially get more people in the door, but the razor-thin margins on those devices aren't expected to help RadioShack turn a profit until 2016... that's right, 2016! C'est la vie, RadioShack!
As with the previous companies, a dive off the fiscal cliff will likely reduce disposable income, which means less eating out and partaking of daily deals. Groupon, though, was and still is in trouble no matter what Congress decides.
I first have to ask: Where is the differentiating factor between Groupon and its peers like LivingSocial? Sure, Groupon boasts 49% of all daily-deal market share, so it's often the first stop for small businesses looking to drive customer traffic, but what makes Groupon so different from the rest of the sector? The answer is: absolutely nothing. There's practically no barrier to entry in the daily-deals sector, which makes it increasingly difficult for a company like Groupon to command pricing power or any sort of healthy margins. We've already seen Google, Microsoft, Yahoo!, and Amazon enter into the fray, and it's quite likely more companies will join before too long.
Another major issue is whether or not we can trust the figures from Groupon's accounting department. In the past 15 months, shareholders have dealt with two major earnings restatements due to the way the company recognizes revenue, and it still refuses to comply with all of the Security and Exchange Commission's "suggestions" for better earnings transparency. To top this off, its CEO, Andrew Mason, has done little to reassure investors that his company's business model can survive over the long run.
US Airways (NYSE:LCC)
I was really, really, tempted to just write "every national airline" in the No. 5 spot, but specifically chose US Airways as the airline that's going to face the most challenges regardless of the fiscal cliff outcome.
As you might expect, there will probably be less travel occurring if taxes on the American public are higher, which will coerce US Airways to either reduce prices and margins in order to attract customers or simply eat empty seats on its flights, also hurting margins. But there are plenty of concerns even if a deal gets done.
For one, US Airways has the weakest leverage of the major national carriers. It's been working at a potential American Airlines merger for a year now, but the combined entity would still be buried under a mountain of debt, and US Airways would still be obligated to fulfill American's absurd 460-plane, $40 billion order from Boeing (NYSE:BA) and Airbus.
Also, these companies couldn't stay consistently cash flow positive if their lives depended on it! US Airways has had a net cash outflow in seven of the past 10 years and has declared bankruptcy twice in the past decade. In fact, none of the major national carriers has escaped the past decade without declaring bankruptcy at least once. As Warren Buffett notes, the airline industry is highly capital intensive and offers very negligible returns -- a perfect reason to avoid it like the plague.
With a sectorwide shift under way toward more nimble regional airlines that are able to undercut national carriers on price, US Airways looks like a company that once again is headed down the wrong path.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of Google, Microsoft, RadioShack, and SUPERVALU and is short RadioShack. Motley Fool newsletter services recommend Google, Microsoft, and SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.