Thursday, June 9, 2016
In April 2016, solar energy company SunEdison filed for Chapter 11 bankruptcy. Yesterday, the company won court approval for a $1.3 billion operating loan, but in an indication of the contentious nature of the bankruptcy, part of the loan is designated to fund a creditor probe into the company's activities, particularly in November. During that time, the company reconstituted the boards of two yieldcos, fired the conflicts committees of those yieldcos, and named Sun Edison's own CFO as the CEO of both yieldcos. A shareholder lawsuit in the bankruptcy argues, in part, that the corporate governance was insufficient as conflicts committees were reformed when the yieldcos would not prepay for solar projects that were being developed in India.
As we mentioned in the textbook, when you are examining ratios, it is important to not only learn if a ratio has changed, but why it has changed. A recent article about the PE ratio highlights our discussion. Most people believe that an increasing PE is due to an increasing stock price, but as with any fraction, a change can also occur due to a change in the denominator. Currently, the PE ratio of the S&P 500 is about 19, above the 5-year and 10-year averages of about 16. As a result, many market analysts are predicting a declining stock market. However, even with a falling PE ratio, stock prices can still increase as long as earnings per share increase at a faster rate than stock prices. While we are not predicting the stock market, the article does note there are many periods in stock market history that earnings growth exceeded stock price growth, PE multiples declined, yet the bull market continued.
T-Mobile recently announced that it would reward customer referrals with a share of the company's stock. When a customer refers a friend who joins the company's network, T-Mobile will credit the customer's account in the amount of the stock price at the time, and for subsequent referrals, it will give the customer a share of the company's stock. T-Mobile will not issue new shares for the stock awards, but will purchase its shares on the open market. Of course, Uncle Sam will benefit as well. While the billing credit is not taxable, the shares of stock awarded will have to be listed as taxable income by the recipients. And when the stock is later sold, taxes will have to be paid on any capital gains above the original price.