Onex Corp. has become an awfully fast-moving target, its direction almost relentlessly downward. Most investors would ascribe their paper losses to Celestica, in which Onex owns a large stake. Celestica's widget business has fallen on hard times, and the carnage has been exacerbated by an overvalued stock price (which doesn't look much more reasonable today, under the circumstances).
Onex advocates have been watching the company's stock fall below certain supposed value thresholds for weeks now, yet the stock has kept falling. The stock price now languishes near the value of the company's cash, which amounts to about $12 a share. The share price is $18.
A little perspective: Onex owns 19 per cent of Celestica. Celestica's market capitalization is about $8.7-billion, which makes Onex's interest worth $1.65-billion on the market or about $10 a share. Let's pretend (some might not find this too taxing on the imagination) that Celestica is twice as expensive as it deserves to be. That would make Onex's interest worth $5 a share. That means the market is valuing all of Onex's other businesses, which range from auto parts to building supplies to sugar interests, at $1 a share.
That hardly seems fair. True, this is not the most fortuitous time to be a purveyor to the auto and home renovation markets. But cyclical businesses are not worthless at the economic trough.
As a conglomerate, Onex has always traded, and will likely always trade, at a discount to its net asset value. UBS Warburg recently calculated the firm's 2001 NAV at about $50 (that was before the terrorist attacks on New York). The brokerage pointed out, furthermore, that Onex's traditional discount to NAV is 24 per cent. At the time, the discount was 35 per cent. It's probably greater now (although the near-term NAV is probably lower, too.)
Factor in the company's vaunted track record -- a 34-per-cent annual compound return on invested capital -- and Onex looks like a deep value. It probably is, although maybe not as much as some of these numbers suggest.
Net asset values, for example, are tricky beasts, derived, by necessity, from assumptions that don't always turn out to be true. After cash and Celestica, the biggest component of Onex's NAV (at about 12 per cent) is its ClientLogic unit, a profitless New Economy animal to which more conservative investors might reasonably assign no value. (Onex missed the opportunity to spin it off.)
The firm has made other, more dubious investments in more recent years as it strayed from its expertise of buying, building and selling outsourcing companies.
However, all that said, the market seems to have finally uncoupled Onex shares from Celestica's. Assuming the firm can live up to its reputation (it announced a share buyback recently), buying its assets at a discount will eventually pay off. Denying Air Canada The market seems to be in denial about Air Canada. The company isn't going to emerge from its troubles unscathed, and neither will its shareholders, even those buying the stock for $4.
Air Canada has $535-million in cash, or at least it did on June 30. Excluding sale and lease-back manoeuvres, it burned through $485-million in cash in the most recent quarter.
Air Canada's biggest operating expenses are wages and benefits, which amounted to $786-million in the most recent quarter, about 30 per cent of the total. Next came fuel, which accounted for 16 per cent of operating costs ($417-million). Overall, operating costs excluding depreciation and amortization were equal to revenues. (Interest payments, which aren't included in operating costs, were $88-million.)
Although the company said, when it warned on Monday of a loss in the current quarter, that it had been making progress cutting costs, the shutting down of the airways last week and the continuing turmoil will obviously more than offset the savings. Another massive outflow of cash is inevitable for this quarter and, given the dim outlook for air travel, probably for the next couple. That's even if the company can accelerate its cost-cutting measures, which in the best-case scenario looks like an expensive proposition. The above numbers suggest the massive slashing required to stanch the hemorrhaging of cash. The airline may have access to more liquidity. Some observers believe the company could sell planes for as much as $2-billion. Finding buyers willing and able to pay for them seems like a tall order at this point.
Air Canada's market cap has fallen below $500-million, but that might still be too much given the growing probability of a debt-for-equity swap -- a likely outcome if the firm's liquidity continues to deteriorate and the government refuses to offer a huge bailout.