Out of Bankruptcy, into Your Portfolio?

By Gene Marcial With so many companies forced to file for Chapter 11 bankruptcy protection over the past couple of years, is it worthwhile to bargain-hunt among those that have emerged from the experience? Believe it or not, some market strategists believe that post-bankruptcy companies can be real fire-sale bargains and offer good investment value.

"Definitely, there are opportunities in such stocks," says George Putnam, editor of The Turnaround Letter, in Boston. But it's important to recognize that not every company coming out of bankruptcy is a buy, or of real value, he warns. While some have been solid winners, many have gone nowhere -- and a fair number have gone back to bankruptcy, he notes (for more on investing in companies still in Chapter 11, see BW Online, 5/9/02, "The Empty Truth about Bankruptcy Stocks").

If used properly, he says, the bankruptcy process enables a company to solve its major problems, reshape its business -- and emerge stronger. An ex-bankrupt company is usually shunned by Wall Street. And bankruptcy normally taints an investor's view of the company long after it has emerged from Chapter 11. In many cases, new stock distributed after bankruptcy to creditors or bondholders is typically dumped by them to recover part of their losses -- thereby adding more downside pressure to the stock.

SAME BASICS. Still, some companies truly take advantage of the reprieve that Chapter 11 provides and get to fix all or most of their problems. The factors to look for in post-bankruptcy stocks are no different from what you'd want to see in other stocks. "Ideally, we like to see a company with a strong core business, good brand name, solid balance sheet, and a new or at least revitalized management team," says Putnam.

One such company, he says, is Chiquita Brands International (CQB), a leading worldwide grower and marketer of bananas and other fresh fruits. The company, which also produces private-label canned fruits and vegetables, owns substantial landholdings in Central and South America, and has smaller operations in Africa, Australia, and the Philippines.

Chiquita went into bankruptcy on Nov. 28, 2001, after being overwhelmed by tremendous debt taken on under the leadership of former controlling shareholder Carl Lindner. Adding to the pressure was the cumulative effect of a quota system imposed in 1992 by the European Union, which gave an advantage to banana imports from countries that were former European colonies in Africa and elsewhere -- to the detriment of producers in Central America, such as Chiquita. Predictably, its sales and earnings skidded.

NEW LEADERS. Chiquita came out of Chapter 11 on Mar. 19, 2002 -- a relatively short period because it was able to work out most of its reorganization terms with creditors even before it went into bankruptcy. "The company has emerged stronger," says Putnam, in part because the EU has revised its quota system. Consequently, Chiquita has been able to quickly rebuild its sales to a much healthier level, notes Putnam. It also slashed its heavy debt load by about half by issuing stock to its bondholders.

At the same time, a new management team led by Cyrus Friedman, formerly vice-chairman at consulting firm Booz Allen & Hamilton, has taken the reins as chairman and CEO. Chiquita's strong brand name, says Putnam, gives it a solid foundation on which to build future growth.

Currently trading at 17, Chiquita's stock is cheap, says Putnam, selling at about 10 times conservative earnings estimates for 2002 -- and about six times estimated cash flow. "Both of these measures are low, compared to its food industry peers," says Putnam.

FOOD FOR DOLE? And the story has a delicious kicker, argues Putnam: "Chiquita could be an acquisition target for a larger food company." New Chief Operating Officer Robert Fisher is a former president of Dole Food. "Fisher's past affiliation with Dole could perhaps lead to a combination of the two companies," says Putnam.

Also of interest to some investors: CEO Friedman is 66 years old and COO Fisher is 64. "It is possible that they expect to have relatively short careers at Chiquita while they shape up the company for an eventual sale," says Putnam. While it's certainly not without risk, the post-bankrupt Chiquita could be a low-hanging fruit. Marcial is BusinessWeek's Inside Wall Street columnist

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