Standard Brands Investors Paint a Rosy Picture

Buying shares of retailers emerging from bankruptcy has been a nearly foolproof way to make huge profits over the past year. So some investors now are zeroing in on Torrance-based Standard Brands Paint.

Standard, which operates 115 neighborhood paint stores in the West (mostly in California), came out of bankruptcy on June 15, with its stock trading at $2.50 a share on the New York Stock Exchange.

By Thursday’s close, the price had surged 35% to $3.375. Trading has been active all week.

Since 1991, Wall Street has swooned for a horde of other reorganized retailers. Seaman Furniture, an East Coast chain, emerged from Chapter 11 bankruptcy on Oct. 14 of last year with its stock at $5. The price has since rocketed 240% to $17.

Closer to home, Broadway department store owner Carter Hawley Hale in Los Angeles has seen its shares surge from $6.50 last October, after it reorganized, to $16.125 now, a 148% gain.

Each retail bankruptcy is different, of course. And given the relatively short time that the 1992 bankruptcy graduating class of retailers has been back on the market, it’s tough to say whether the stocks deserve the reception they’ve gotten.

But a big part of the attraction of these former dogs is that you’re often buying in alongside some very savvy investors, most of whom got involved during or after the bankruptcy.

In Carter Hawley’s case, Chicago-based “vulture” investor Sam Zell now is running the show, to generally great reviews.

In Standard Brands’ case, the Fidelity Capital & Income junk-bond mutual fund in Boston became the biggest shareholder after it bought $27 million worth of Standard’s debt from BankAmerica last fall for an undisclosed price. In the reorganization, the fund got 9.49 million shares and a $12-million note in exchange for the debt.

The Fidelity fund, co-managed by David Breazzano and Dan Harmetz, has been one of the hottest junk funds of the last two years, thanks largely to its managers’ sharp eye for undervalued assets. The fund’s total return was 28% last year, No. 1 among junk funds.

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But is Standard really an undervalued asset? New management’s financial forecasts for the next few years aren’t much to get excited about, on the face of them.

This year, helped by “fresh-start” accounting adjustments, Standard expects revenues of $206 million and a net profit of $16 million, or 72 cents a share (based on 22.3 million shares outstanding).

In 1994, however, earnings are projected at just $422,000; in 1995, $4.04 million, or 18 cents a share.

Still, bankruptcy experts note that new managers of Chapter 11 companies can low-ball their estimates on purpose--so that the eventual turnaround appears that much more powerful.

Can Standard beat its own estimates? That depends on a few unknowns:

* The new CEO. The controlling shareholders named Martin S. Ackerman, 60, to guide Standard’s recovery. A New York attorney, Ackerman is a professional “workout” engineer who has been involved in reviving numerous other bankrupts (he most recently was named to bankrupt jeweler Zale Corp.’s board).

Fidelity used Ackerman to advise it on the BankAmerica debt purchase, and apparently thought enough of the advice to bring him on permanently. And as a major incentive, Fidelity and one of its co-investors transferred 2 million of their Standard shares directly to Ackerman.

“He has a great resume, and they needed a substantial package to bring him on,” said one bankruptcy analyst. But Ackerman isn’t a day-to-day operations type; he’ll need to name an on-site manager.

* The value of the assets. Insiders at Standard claim that the company’s problems never were at the store level but rather at the corporate level. After taking on a huge debt load in 1987 to fend off a hostile takeover, former management made no real attempt to cut overhead, people familiar with the company say.

“They just chewed up the profits at the corporate level,” one knowledgeable insider says.

New management plans to take the current 115 stores down to about 80. All of the stores that will remain are currently profitable, Standard says--despite the awful retail climate in California.

Standard also has other assets that have been severely underutilized, insiders say. Its Torrance paint factory, for example, has been operating at just 60% of capacity. One solution new management has mapped out: Push to produce paints not just for Standard’s own stores, but for other retailers as well, on contract.

“A paint factory in California has real value,” says Chris Street, a workout specialist in Corona Del Mar. Because of tough environmental restrictions, he notes, it’s almost impossible to open a new paint factory in the state.

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Likewise, because Standard owns all but nine of its stores outright, the value of the company’s real estate may be a big lure for investors--assuming they’re willing to wait for the California real estate market to recover.

“The brightest part of this deal is the real estate,” says one major shareholder who asked not to be named.

Still, some analysts worry that Standard’s biggest problem is simply that its neighborhood paint store concept is a dinosaur in an age when Home Depot and other gigantic home-improvement retailers are eating more and more of the market.

“They have great locations and great real estate, but it’s a dying breed of store,” says Paul Debban, a bankruptcy specialist at Seidler Amdec Securities in Los Angeles.

While the stock may be an interesting speculation--especially given Ackerman’s incentive to produce--analysts warn that this is a much dicier long-term situation than many of the larger, more diversified retailers that barreled out of Chapter 11 over the last year.

Reorganized Retailers: Usually, Hot Stocks Torrance-based Standard Brands Paint emerged from Chapter 11 bankruptcy last week, another in a long line of rescued retailers. Here’s a look at some of the retailers that emerged from bankruptcy in 1991 and 1992 and their performance.

Stock price Pct. Retailer (market) Start* Now chg. * Seaman Furniture (O) $5.00 $17.00 +240% * Southland Corp. (O) $1.31 $4.25 +224% * Paul Harris (O) $1.75 $5.25 +200% * Carter Hawley (N) $6.50 $16.13 +148% * Interco (N) $7.63 $12.88 +69 % * Ames Dept. (O) $1.50 $2,38 +58% * Revco Drug (N) $8.63 $11.75 +36% * Federated Dept. (N) $17.25 $22.13 +28% * Sprouse-Reitz (O) $4.00 $2.50 -38%

* Initial day of trading after court confirmation of reorganization plan. All of these retailers emerged from Chap. 11 in 1992, except for Southland, which emerged in 1991. Key: N--New York Stock Exchange; O--NASDAQ Source: Times research; New Generation Research