When executives scurry for the exit, investors should be right on their heels. Yet shareholders in hard-disk-drive manufacturer Maxtor (NYSE:MXO) who have stuck around, even as the CEO, four CFOs, and a president left the building last year, have been strangely rewarded for their loyalty. But a new debt offering may leave them less than happy.
Back in November, I likened the stampede for the exits at Maxtor to cockroaches scattering when the lights go on. Maxtor had just reported a loss more than twice what the Street was expecting, and the stock was being pummeled. At around $4 a share, the stock was trading some 70% below its 52-week highs. So what did investors get for sticking around?
How about a 50% increase in the share price?
Since November, shares of Maxtor have climbed to around $6 each, despite a series of company and industry setbacks. Back in May, the company announced that it had to restate its first-quarter results because of a data-entry error that caused a $4 million understatement in inventory and an equal overstatement in its net loss. It then revised guidance by saying it might miss its sales estimates but that losses could be narrower than expected. In addition, the industry is rapidly moving toward a new technological standard -- perpendicular magnetic recording, or PMR -- where competitor Seagate Technology (NYSE:STX) holds a commanding lead. Add all that to Western Digital's (NYSE:WDC) continuing strong presence in consumer electronic devices, and Maxtor could rightly be seen as waning.
Undoubtedly, part of the stock's strength has stemmed from staffing changes. The new management team has brought in former (and significantly more trustworthy) Maxtor executives and some industry heavyweights to lend gravitas and help craft a turnaround plan for an otherwise shaky corporate structure. Those moves helped the company surprise investors with a profitable second quarter (assuming no "data-entry errors" this time) full of strong enterprise performance.
So shareholders must have been disappointed with Maxtor's recent announcement that it was issuing some $300 million in convertible notes, with an option to buy $45 million to cover overallotments. The company already has $362 million in long-term debt, and the notes will simply add to that burden. Plus, since the notes are convertible -- they can be exchanged for Maxtor shares -- investors' ownership slice will be similarly diluted. Though Maxtor is using the money to retire older debt, it remains an added encumbrance on the first faint flickerings of a highly uncertain recovery. Even a broken clock is correct twice a day; just because the drive maker managed to post a profit this quarter, it won't necessarily keep doing so. There are a lot of trends shaping the industry that Maxtor still has to catch up to.
Maybe some investors hung around because it just wasn't worth selling their shares, or maybe they actually believed in the new management's turnaround plan. Either way, Maxtor remains in a precarious situation. Added debt and greater share dilution won't do much to cure it.
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Fool contributor Rich Duprey does not own any of the companies mentioned in the article. The Motley Fool has a disclosure policy.
