Walter Industries is cutting costs and making good money. So why is the Tampa homebuilder's stock price stuck in low gear?
Bad information, says Mike McCarthy, a frustrated research director at Shapiro Capital Management Co. of Atlanta. Shapiro owns 10 percent of Walter's stock and has been buying up the stock on behalf of his value-oriented clients for years.
Problem No. 1, as McCarthy emphasized during the company's recent conference call with analysts, is asbestos. Although Walter earned immunity from a former subsidiary's asbestos liability upon emerging from bankruptcy in 1995, part of the deal meant bankrolling an Asbestos Settlement Trust, which remains the company's third-largest shareholder. Potential investors who see that name may mistakenly assume Walter is still exposed to lawsuits.
A second problem is debt, McCarthy says. Walter has long-term bank debt totaling just over $300-million, an amount some investors might consider reasonable given the company's broader financial picture. But it also has nearly $1.8-billion in bonds, which helped finance Walter's home loan portfolio.
An investor using a computer to crunch numbers of, say, Fortune 1000 companies may see only that Walter has debts totaling $2.1-billion. "They say, "Oh, my God,' and they keep on moving," said Joe Troy, Walter's senior vice president for financial services.
What investors should know is that the $1.8-billion is in nonrecourse loans. If every homeowner in Walter's portfolio were to default on his mortgage, Walter would bear less than 5 percent of the loss. Bondholders would suffer the rest.
McCarthy says Walter can eliminate the asbestos misunderstanding by buying back all of the Asbestos Settlement Trust's stock. In a surprise move last week, the company took a step in that direction by buying back a half-million shares.
Solving the debt illusion will be tougher. Troy says the company could make adjustments so that future mortgage financing did not appear on the company's balance sheet. But it's too late for the existing $1.8-billion.
The only way out? Educate investors. But with thousands of stocks to choose from, many buyers are loath to waste the time. Walter's stock closed Friday at $10.72, up 27 cents.
