In a private message someone reported on very happy tidings trading AWE. As part of my response I penned the following first cut analysis and thought many others might be interested, so here it is:
nice to hear you have been successful playing AWE, I hope you play it only short term. I see the potential of another WCOM here if the market turns south. Main reasons, they have a big chunk of assets on their book (some $16 B or so) in equipment on which the returns are decreasing rapidly, due to industry wide over capacity and fierce competition. That means that in a case of distress, these cannot be disposed of at even close to what they are carried on the book. Their debt service coverage is poor at under two times, so any decline in business and they may get into trouble. Most important, though, they have a net negative tangible book value, because they have a net of $20 B of goodwill and intangibles on their books. If they were to amortize these (as they had to in the old GAAP) that would have cut some $250 to $500 MM quarterly (depending on whether they took 10 or 20 years to amortize these), meaning, they would not be profitable. Their accounting is a classic "smoke and mirrors" and one day, the price will have to be paid, so be nimble.
Zeev
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