The Latest News Is Too Little, Too Late for XELA Stock
After a string of bad news, including no interest payments and a possible delisting, Exela Technologies (NASDAQ:XELA) recently had something relatively positive to say to investors. However, don’t expect this development to change the story of XELA stock.
On March 6, Exela announced plans to improve its operational performance. While this plan is a step in the right direction, it may not solve the company’s problems as this unprofitable company needs to turn around.
This has everything to do with Exela’s heavily indebted balance sheet. It is not enough just to make the operating result positive again. The company also needs to generate enough cash flow to service its $1.16 billion in outstanding debt, much of which carries double-digit interest rates.
With little out there showing that Exela can achieve this without taking drastic action, consider this news too little, too late.
| XELA | Exela Technologies | $0.054 |
Cost reduction efforts and XELA inventory
As I’ve argued, this description is misleading, even though this company likes to call itself a “business process automation provider.” Though Exela has tried to modernize its business, it remains largely a provider of low-tech, low-margin back-office services.
The labor intensive nature of the company’s underlying business is the main cause of its poor operational performance. Soaring labor costs, coupled with a steady decline in sales, have resulted in exorbitant losses for Exela.
With that said, at first glance it might sound like the above plan to improve operational performance will help spur a recovery in XELA stock, which has fallen more than 99.5% over the past year.
Finally, management believes this plan will result in cost savings of between $65 million and $75 million in 2023. Since the company reported a negative operating loss of $56.1 million for the trailing 12 months, that at least means it’s out of the red on a earnings before interest and tax (or EBIT) basis.
However, when you factor in Exela’s high debt servicing costs ($163 million over the past 12 months), it’s clear that these efforts won’t do much to save the company.
Which is likely to come next
Barring a surprise improvement in employment trends, this company will remain financially strapped despite the cost-cutting efforts ahead. So what’s next for the XELA share?
Exela is still on track to slash interest payments on its outstanding debt, and Exela has only two ways out. It can either raise additional capital or file for Chapter 11 bankruptcy. Pursuing any of these actions will likely result in further losses for XELA investors.
Raising additional capital hurts existing shareholders as it will almost certainly result in severe dilution. Whether it’s selling new shares or selling convertible shares, a capital raise will put pressure on the stock.
The company will also minimize the potential upside if Exela improves its profitability more than currently expected.
If Exela goes its way to Chapter 11, it will no doubt result in a total loss for anyone holding XELA today. The company, in its current state, is likely worth far less than its outstanding debt. That likely means no equity, not even a splitter, for existing shareholders in a Chapter 11 reorganization.
take that away
Exela Technologies’ latest press release does nothing to boost the attractiveness of XELA stock. That could explain why the stock barely moved on this news.
This has been, and will continue to be, a situation where those who continue to hold a position are faced with the prospect of either suffering an additional heavy loss (due to dilution) or a total loss (due to bankruptcy).
The takeaway here is obvious. Even if you’re an aggressive investor who isn’t afraid to invest in high-risk, high-reward situations, XELA stock remains a no-go as it has too much of the former and far from enough of the latter .
The XELA share receives an F rating in portfolio grader.
At the time of publication, neither Louis Navellier nor the InvestorPlace researcher primarily responsible for this article held any position (either directly or indirectly) in any of the securities mentioned in this article.