Comment by lesuorac
2 years ago
You have a wonky definition of a dieing company.
If a company makes $X in reveune and has $X - Y (Y<X) in costs that doesn't seem to me like a dieing company. Of course if you use PE to purchase that company and add in $2X in costs then it sounds like a dieing company. However, it was perfectly fine until you came along and strangled it.
The price of RL share prices is pretty irrelevant to whether PE can kill it or not. Honestly the higher the price the better it is. If you can spend $100M to buy a company and gut it for $300M that sounds a lot more attractive then buying 100 $1M companies to gut for $3M a peice.
The company wasn't dying, but it was undervalued on the market. It also sounds like the component parts of the company were more valuable separate than together.
>Honestly the higher the price the better it is.
IF you have to buy at $300M, and can only sell for $100, then higher prices are not better.
A dying company is one that fails to produce enough earnings to justify the assets it consumes or holds.
As an absurdism, if Walmart only made $1 a year in profit we would probably wonder why the hell it takes them millions or billions in inventory and real estate to produce less profit than a child’s lemonade stand.
Red Lobster is like that. It’s not that they’re unprofitable, it’s that their profits don’t justify occupying that much real estate.
A clear cut example would be if locations were making less in profit than other companies were willing to pay in rent. Ie RL would make more money by not being RL anymore.
> The price of RL share prices is pretty irrelevant to whether PE can kill it or not.
The share price isn’t directly relevant, it’s the share price relative to assets. Companies with expensive stocks are usually worth several to many times more than the assets they hold, so buying them out to sell the physical assets is just lighting money on fire.
PE looks for companies where the market either disbelieves in the company so much their stock is worth less than their assets, or companies where the market has undervalued those assets.