Wednesday, November 4, 2009

Taking a Look at the Georgia Gulf (GGC) Earnings Report

Georgia Gulf reported net income of $230.2 million for the third quarter of 2009. However, like sausage or legislation, you have to be very careful about what is going into this net income number.

Specifically: In the third quarter of 2009, Georgia Gulf successfully exchanged $736 million of its outstanding notes for 1.3 million shares of its common stock and 30.2 million shares of its convertible preferred stock. The debt exchange resulted in a $400.8 million pre-tax gain.

You really need to back out that gain for the numbers to make sense for valuation purposes. The $9 "earnings/share" number is a mirage.

Here are the Q3 numbers to focus on for now:
Operating income $38.6 million
Interest expense 30.7 million

A meaningful number is operating income minus interest expense: $7.9 million. This is EBT for the third quarter. That is $31.5 million annually if you multiply by four, which would be naive since Q3 is their big quarter. After tax we would be looking at about $20 million.

At $16, with a market cap of about $540 million, GGC trades at about 27x the high end of what I think are possible annual earnings. I would prefer to see a multiple of about a third of that (9x) which would put the stock at $5.33.


misha said...

So a couple of points,

1) They just retired about half their debt, according to the press release. So going by that (I haven't looked into what the rates are on the remaining debt) interest expense going forward should be only about $15M. That means 39-15=24M/quarter, or about 96M by simple annualization (again, I haven't looked at their seasonality). That's 5X higher than your $20M estimate.

Now, on the other hand, they computed "weighted shares" outstanding for the quarter at 20M-odd shares, not the 33M that are now outstanding.

96M/year / 33M shares = $3/share. More like a PE of 5 at a round $15 share price.

I'm rounding heavily since I'm away my notes.

What am I missing?

CP said...

Yeah - I forgot that the debt exchange was on July 31 so it was in Q3 not Q2.

The quarterly interest expense in my model should be reduced, but would not be cut in half. August and September accrued interest at the post-restructuring rate.

So your $100M number is too high.

That's the same reason the 20 million shares is too low - because in July there were vastly fewer shares than in August and September.

CP said...

By the way, feel free to email me at

PD said...

check out my ggc comments on

Penny shares said...
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misha said...

Whoa, the rate to borrow GGC at InteractiveBrokers is 88%!

The hell with shorting this puppy; go long and lend it!

The borrowing rate has raced up from 55% on Oct 27, to 88% today.

eh said...

How much of that 88% would you get?

Seems like this conversion play has just about run its course. And GGC has normally such low volumes that trading it is not that attractive to me.

Still great work on this and sincere thanks for sharing your idea.

misha said...

Interactive Brokers has a new feature (which I haven't tried out yet) that apparently let's you bid and offer your stock for shorting purposes.

Weird but true.

CP said...

Really? How do you access it?