Can A Company With Strong Cash Flow, Survive Without Earnings ?

[ownyourfuture]

The company is Consolidated Communications (CNSL)
I sold a ‘large long-term position’ in 2018. I purchased a minuscule amount for my IRA earlier this year.
My interest in the company isn't for investment purposes, as I believe a dividend cut is inevitable, & have no interest in adding shares.

’Part’ of this company used to be my hometown telephone provider, & I'm friends with a couple people who've worked there over 25 years.
Obviously they're concerned.

Shares were trading at $12 early this month, but have suffered a horrific descent over the last 8 trading days, & are now below 9.00
Dividend yield is around 17.00%

The last time CNSL made money, was Q-2 of 2017, 16 cents.
They’ve lost money in each of the following 5 quarters. Losses ranged from 0.04 to 0.10
2019 estimates are for a loss of 0.04 & a loss of 0.41 in 2020

In Q2-2017, when they last showed a profit, revenues were 170 million. (This was before the latest merger)
Revenue for the following 5 quarters. $356.40 - $356.04 - $350.22 - $348.06 - $344.80 million - a sequential drop, & losses every quarter.
Revenue estimate for the current quarter is $338.35 million, another sequential drop.

All figures included were taken from this site.
https://www.marketbeat.com/stocks/NASDAQ/CNSL/earnings/

 

[aja8888]

I don't know where you live, but CC is competing against Comcast and AT&T around here (south Texas) and from what I hear, their customer service and product choices are terrible. Plus, the last time I went on their website to check a plan pricing against what I have, the site said i am not in their service area, which I am as I have neighbors signed on with them.

I wouldn't buy their stock or their services and expect a dividend cut if things continue as you show.

 

[pb4uski]

Just an off the cuff guess that why they might have positive cash flow but not profits is because of depreciation.... business like this have significant investments in plant and equipment... and therefore significant depreciation expense... which is a non-cash expense... they can probably limp along like they are for quite a while.

They provide landline and DSL service where we live... we had them for landline but got rid of our landline in favor of Ooma VOIP in 2011 and we had them for DSL until last summer. I'm skeptical of their business model as they made absolutely no effort to keep me as a DSL customer... I offered to stay and sign a new 2-year committment if they offered me the same deal as what they were advertising for new customers but they refused to make any concessions at all.... so I left.

 

[njhowie]

https://www.sec.gov/Archives/edgar/data/1304421/000155837019001019/cnsl-20181231x10k.htm

If you jump to page 30, you see that pb4uski is correct in his guess - simply a huge amount of depreciation and amortization at $430M in 2018.

Now, further adding to these (non-cash) losses, if you look at their balance sheet you can see that they have $1B of goodwill. The problem arises in that at this time, the shares have fallen so much, unless they move significantly higher by year end they will be forced to write down that goodwill substantially. Accounting standards require that companies "test" their goodwill annually to determine if it needs to be written down. One of the tests compares "the part to the whole". Simply put, the amount of goodwill must be appropriate to the market cap of the entire company. In this case, there is the $1B of goodwill, and at this time the total market cap is about $650M. You cannot have the goodwill being more than the value of the entire company. So, if the shares were to end the year exactly where they are today, they would need to write down (expense) at least $350M of the goodwill - or about $5/share.

https://www.lw.com/thoughtLeadership/declining-market-capitalizations-and-the-impairment-of-goodwill

Another company in this same situation is CVS. By my estimates, as a result of the amount of goodwill from the huge acquisitions they've made, they will likely need to take big write downs this year (if the shares don't move significantly higher from where they are today). It's possible the bottom line on their income statement will show a loss on the order of $25/share!

 

[ownyourfuture]

Thanks for the replies!

 

[ownyourfuture]

I was right to be concerned about the dividend. They eliminated it today.
Shares are down 32.00% as I type.
https://finance.yahoo.com/m/7b66c38c-80f8-36c0-9f2a-dd0f7923f326/consolidated-communications.html

Now I feel pretty good about unloading it @ a little over 11.00$ last year.
Everyone makes investing mistakes, God knows I've made my share.
Buying stocks as they cratered in late 2000 & 2001, thinking they were a bargain, only to see them continue downward, was my worst one. But I learned a valuable lesson, many times a stock is way down for a reason.

.
I'll say it was approximately 10 months ago, that someone on that same message board stated that management said the current dividend wasn't sustainable. I checked the 10K & verified his statement. I copied & pasted that part of the 10K at the message board, but 90% of the people said I was FOS, & continued buying all the way down ?

Yesterday one particular poster stated that he was backing up the truck, because, at its current price, all the bad news was already built-in. I feel sorry for him if he really did, because he's already down 32.00%

Some people are always attracted to low priced stocks, especially those with high dividend yields. The yield on this particular one was over 17.00% as of yesterday's close.

 

[pb4uski]

.... Now, further adding to these (non-cash) losses, if you look at their balance sheet you can see that they have $1B of goodwill. The problem arises in that at this time, the shares have fallen so much, unless they move significantly higher by year end they will be forced to write down that goodwill substantially. Accounting standards require that companies "test" their goodwill annually to determine if it needs to be written down. One of the tests compares "the part to the whole". Simply put, the amount of goodwill must be appropriate to the market cap of the entire company. In this case, there is the $1B of goodwill, and at this time the total market cap is about $650M. You cannot have the goodwill being more than the value of the entire company. So, if the shares were to end the year exactly where they are today, they would need to write down (expense) at least $350M of the goodwill - or about $5/share.

https://www.lw.com/thoughtLeadership/declining-market-capitalizations-and-the-impairment-of-goodwill .....

Anytime a company's goodwill exceeds its shareholders' equity that is a huge alarm bell for me.... and in Consolidated's case its goodwill is 249% of shareholders' equity.... I wouldn't get anywhere near this pig in terms of an investment.

 

[njhowie]

Good job!

Many times knowing when to cut your losses and what to avoid is as good as making a profit...you avoided a loss.

I've found that in the current market, many, many folks are completely brain dead when it comes to understanding risk. Lots of these folks you run into on message boards are youngsters, weren't even of legal age at the time of the financial crisis, and think that the market only goes up. They attack anyone who is anything less than completely optimistic about their stock/company and rely on intimidation to get people to agree with them - as if there's some importance in it.

Anyhow, again, great job - pat yourself on the back.

 

[ownyourfuture]

Good job!

Many times knowing when to cut your losses and what to avoid is as good as making a profit...you avoided a loss.

I've found that in the current market, many, many folks are completely brain dead when it comes to understanding risk. Lots of these folks you run into on message boards are youngsters, weren't even of legal age at the time of the financial crisis, and think that the market only goes up. They attack anyone who is anything less than completely optimistic about their stock/company and rely on intimidation to get people to agree with them - as if there's some importance in it.

Thanks howie!
Couldn't agree more on your observation that many folks are completely brain-dead relating to risk.

Today, many of those same people who were telling me I was FOS when I first started stating concerns about the future of the dividend close to a year ago, are making the following posts.

“The lawsuit I'm sure is being drafted right now. seems it may have some legs since there was an intimation in management discussions that the dividend was safe”

“Management and BOD should all be sued in a class action!”

“it was so puzzling; I bought 1111 shares yesterday at $8.73 thinking I got in good.... and then, while I was sleeping here on the West Coast... "some people did something"! #insideTrading ==> no two ways to answer it!”

“looking back over the past few days in light of the ex-dividend price carnage... I smell insider trading”

“Dividend wasn't reduced, it was eliminated entirely. Someone knew this was coming. It stinks to high heaven. I will participate when the inevitable class-action suits start”

The insider trading charges might have some merit.
Daily volume exploded over the previous 6 trading days. Sure looks like 'someone' knew something, & they weren't retail investors.