Smith International Stock Rates as Gamble
If you like to gamble, but the poker dens of Gardena aren’t appealing and the glitter palaces of Las Vegas are too far away, consider calling your broker and buying a few shares of Smith International Inc.
Still listed on the New York Stock Exchange despite its recent filing for protection in federal bankruptcy court, a share of the Newport beach-based oil tools company costs little more than a lottery ticket and potentially could be just as rewarding.
This former high-flier once traded for as much as $70 a share before continued losses eroded its value. In early March, it hit an all-time low of $1.25 a share on news of Smith’s Chapter 11 bankruptcy. Since then Smith has rebounded slightly and now lingers at around $2.625 a share.
While buying into Smith today could wind up paying off richly, securities analysts warn that investing in the troubled company definitely isn’t for the buyer who is either unwilling or unable to risk some money on a highly speculative venture.
“It’s a roll of the dice,” remarked Sam Albright, who follows oil issues for the Dallas office of Kidder, Peabody & Co. “It’s for the very high-risk investment portfolio.”
Among the factors affecting Smith’s future, the analysts say, is whether the company can persuade a federal appeals court to reduce the $205-million patent-infringement judgment awarded earlier this year to arch-rival Hughes Tool Co.
“If you were to make a case for Smith as an attractive investment at this point, we would need a reduction in the damages, but the odds favor the courts upholding the ruling,” said James Carroll of the New York investment firm of Paine Webber Mitchell Hutchins.
Although an investor willing to bet on Smith coming out of bankruptcy alive could wind up making the “market’s biggest home run,” Carroll said he would steer clients away from buying the issue anyway.
“We tell them it’s not our recommendation. There is a potential for a spectacular payoff, but the risks are enormous,” he said.
Even more bearish is Jeff Freedman, who follows oil stocks for Smith Barney, Harris Upham & Co, of New York.
“The downside risk is 100% because the stock could become worthless,” he said. If the eventual outcome of Smith’s bankruptcy is the liquidation of assets to pay creditors, “the common shareholders would be left with nothing,” he cautions.
On top of the bankruptcy, Freed man added, the outlook for the domestic oil industry remains bleak, making Smith stock even less attractive. “I don’t think there is any urgency to buy this stock,” he said.
Though Kidder’s Albright believes that Smith’s value is mostly speculative, holding the stock for three to five years could pay off threefold if Smith can get a lowered judgment, coupled with a rebound for the domestic oil business.
“If I couldn’t at least get a triple over a five-year period, I wouldn’t buy it,” he said. “I think this has the potential to be a $9 stock.”
Despite the overall strong performance of savings-and-loan stocks last week, Financial Corp. of America, the Irvine-based holding company for American Savings & Loan Assn., took a beating on the Big Board as investors jettisoned shares of the troubled company.
On Friday alone, FCA made the most-active list, falling $1.625 a share on published reports that its bad loans would rise substantially. Volume Friday totaled more than 1.2 million shares. For the week, a total of 1.9-million shares of FCA stock was traded and the price dropped $2 to close Friday at $9.375 a share.
By contrast, Costa Mesa-based Downey Savings & Loan Assn. gained $2.375 a share last week to close at $21.125 a share on Big Board volume of 131,500 shares.
Posting a more modest gain was American Exchange-listed Mercury Savings & Loan Assn. The Huntington Beach-based S&L; closed Friday at $13.875 a share, up 25 cents for the week.
“The entire group was up, with the conspicuous exception of Financial Corp.,” said Jonathan Gray, thrift analyst for the New York investment firm of Sanford C. Bernstein & Co. “We’ve been telling our clients to sell their shares since February of 1984. We’re very bearish on Financial Corp.”
Bergen Brunswig Corp. made the AMEX’s most-active list last week, losing $4.50 a share on massive volume of 1.9 million shares to close Friday at $24.25 a share. In all, nearly 15% of the outstanding shares of the Orange-based pharmaceuticals company changed hands last week.
Last week, Bergen Brunswig reported a 66% decrease in earnings for its fiscal third quarter. As previously reported, the company’s net earnings during the three months ended May 31 were $2.3 million, down from $6.8 million a year earlier.
