If you’re on the prowl for penny stock bargains, Exela Technologies (NASDAQ:XELA) is a name you’ve likely come across. While facing a Nasdaq exchange delisting, for now XELA stock is, according to Finviz, one of the lowest-priced stocks listed on a major U.S. exchange.
However, make no mistake, being one of the lowest-priced stocks does not make Exela one of the most undervalued stocks out there. There’s a good reason you can enter a position in this business process automation and outsourcing firm today for just 4 cents per share.
In fact, XELA’s current trading price, rather than overly reflect the company’s deteriorating financials, may actually fail to fully account for them. Instead of representing a discounted valuation, Exela’s under-a-nickel valuation may in effect be merely a rounding error, and not one that benefits you.
This stock is likely worth zero. Here’s why.
Price vs. Value
“Price is what you pay, value is what you get,” is an investing maxim coined by value investing pioneer Benjamin Graham, and popularized by legendary investor Warren Buffett. It seems appropriate to reference it here, even if Graham and Buffett would likely be horrified to be mentioned in the same article as Exela Technologies.
With XELA stock, you pay just 4 cents per share, but what you get hardly represents good value. As Louis Navellier discussed earlier this month, despite all the talk of the company being in the business process automation business, in reality Exela is primarily a provider of back office services.
A low-moat, low-margin business even in good times, recent economic headwinds have made it highly unprofitable. According to Seeking Alpha, Exela’s operating losses have totaled $56.1 million over the past twelve months.
Falling revenue coupled with rising labor costs has placed Exela in a tough spot, made significantly worse by over $1.1 billion in long-term debt on its balance sheet. Servicing this debt adds another $163 million annually to its losses.
While the company is trying to turn around the ship, these efforts seem more akin to rearranging the desk chairs on the Titanic.
Why a Total Loss Appears Likely
The issue with XELA stock today is that the company’s debt exceeds its underlying value. Reporting only $14.6 million in EBITDA over the past twelve months, even if its operating business fetched an EBITDA multiple of 50, this wouldn’t even come close to repaying debt-holders.
Yes, management has touted plans to slash as much as $75 million in operating expenses this year. Almost all of this would fall to the bottom line. Even if we assume Exela can overcome hurdles such as soaring labor costs and shrinking demand for its services, and increase its annual EBITDA by $75 million this year, it’s questionable whether this enterprise would be worth more than $1.1 billion.
Adding $75 million to the trailing twelve month figure gets us to around $89.6 million. Other outsourced services firms like Startek (NYSE:SRT) and Conduent (NASDAQ:CNDT) trade at EV/EBITDA ratios in the 6 to 7 range.
Hence Exela would likely fetch an EBITDA multiple of 7 if it were to be acquired. Applying this multiple to our post-turnaround EBITDA figure, and again enterprise value ($627.2 million) falls short of the outstanding debt.
Sure, after implementing cost-reductions, Exela could in theory further improve its profitability. The company’s EBITDA could in a few years move back to a level that gives it an underlying value well in excess of its debt, resulting in big gains for shareholders.
However, I wouldn’t count on this long-shot outcome playing out. In the meantime, Exela’s debt servicing issues aren’t going away. Even if EBITDA were to rise to nearly $90 million this year, the company would continue coming up short with interest payments, given it is carrying this debt at double-digit interest rates.
Absent a cash infusion, Exela will undoubtedly need to file for bankruptcy in this scenario. If the company were to file for Chapter 11, common shareholders would likely walk away with nothing.
Taking all of this into account, it’s clear why I believe XELA stock today isn’t worth even a penny.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.