The company announced Monday that the SEC was conducting an inquiry and that a subpoena was issued for certain accounting records. The timing of the inquiry could not have been worse because the company had just announced strong earnings and guided earnings higher to $1.20 a share for 2004 (although that figure excludes some horrific charges).
In February, the company was announcing restructuring charges, asset writedowns, and debt refinancing. Unlike peers that went into bankruptcy, United was able to refinance $2.1 billion in debt at lower interest rates and with longer maturities. The combination, along with strong rental prices and an increase in same-store rental revenue, made for a favorable outlook.
The SEC investigation caused Standard & Poor's to put the company's credit on watch for a downgrade. With total debt high -- roughly equal to annual revenue -- and the company operating in the battered rental industry, debt concerns spooked investors and caused at least one analyst to downgrade the stock.
Are investors buying a troubled rental company or getting a great speculation? Little is known about the SEC investigation. With its debt refinancing behind it and United focused on generating cash, there would appear to be little the SEC could do to knock the company off its path to recovery. If that conclusion is true, the stock has been discounted to truly bargain levels. But then again, this is the SEC we're talking about, so we'll have to wait and see what the commission's concerns are.
Based on analyst estimates, the stock is currently selling for nine times 2005 earnings. Ah, but those estimates could change in a heartbeat, making this bargain a true mirage. Selling at a new 52-week low, the stock is a speculation until the SEC's concerns are identified.
Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.