Doral (DRL)

[HenryTo]

This popped up on my radar screen at $20 but I didn't have enough guts to short it at that point. It is now trading at just over $10. I believe this was also one of the Prudent Newsletter's buy recommendations?
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Doral defaults under indentures, sees writedown
Thu May 26, 2005 06:39 PM ET
CHICAGO, May 26 (Reuters) - Doral Financial Corp. (DRL.N: Quote, Profile, Research) , Puerto Rico's largest mortgage lender, on Thursday said it is in default of its reporting obligations under two bond indentures because the company did not file its fiscal first-quarter report by May 25.
San Juan-based Doral also now expects to write down its holdings by $600 million before taxes to correct how it values some floating-rate, interest-only securities. It previously forecast a $400 million to $600 million writedown, resulting in $290 million to $435 million of after-tax, non-cash charges.

Doral said it has four public debt issues with $937.3 million outstanding under one of the indentures, and one public debt issue with $75 million outstanding under the other. It said if it fails to cure the defaults in a timely manner, then it might be forced to pay off the debt sooner.

The U.S. Securities and Exchange Commission last month opened an informal probe into Doral's planned restatement of five years of financial statements.

[nodoodahs]

Henry,

At first glance it does appear to be a good long opportunity, with EPS growth and low PE. That's why I like the cash flow statement as a check on quality of earnings. Usually I'll look for FCF consistency, and if there isn't, ask why (sometimes growth companies or very capital intensive companies can be "forgiven" for a year of negative FCF). Then I check that net income is smaller than OCF, if it isn't that's a red flag to go check inventories and receivables to sales ratios. I'll also check for OCF going down while net income goes up - which again is a red flag.

I don't expect to see negative OCF in a single year, much less negative OCF over a five year period or 4/5 years of negative OCF!

It saves me time if I look at the annual statement data before doing any other reading ...

[HenryTo]

Bill,

Initially, this came up on my radar screen as a potential long - but the more I looked at it (not necessarily just the numbers), the more scary it looked - especially the way management was handling the whole situation (they were very optimistic throughout). I also tried to gauge investors' sentiment (by doing it the old-fashioned way - going to the message boards at yahoo and fool.com, and so forth) and it looked like that investors were buying this throughout the decline to $20.

Derivatives was also huge factor and holding so much IO strips can be very dangerous in today's complex economy - the fact that there wasn't much disclosure certainly raised a red flag. Earnings were good and the dividend payouts were in line with other finance companies but the latter were not enough to convince me that earnings were sound. Like you said, looking at the cashflow statement would have been a very applicable exercise in this case.

At this point, buying this stock would be a pure speculation play:

http://biz.yahoo.com/fool/050527/111721602123.html?.v=1

Have a great weekend,

Henry

[nodoodahs]

Henry,

What brought this one on your radar at $20? And why would you have thought it a good short at that point? I'm curious and want to learn how you think.

I have not seen this stock before today. Spending 5 minutes on a bottom-up analysis would have kept me out of any long "value" position (leaving only speculation/timing as an option). This stock is a prime example of the importance of looking at the cash flow statement.

This company has been consistently unable to generate cash from operations. When you're out of cash, you're out of business. The negative free cash flow while showing growth in earnings reminds me of Krispy Kreme.