These ‘zombie’ companies can feel the cash burn, New Constructs warns

Carvana Co. may feel. and Freshpet Inc. and Peloton Interactive Inc that liquidity is burning as the Federal Reserve raises interest rates, according to independent equity research firm New Constructs.

The research firm, which uses machine learning and natural language processing to analyze corporate filings and model economic profits, warns that time is running out for cash-burning companies that are still standing with easy access to capital.

“As the Federal Reserve raises interest rates and ends quantitative easing, access to cheap capital is rapidly drying up,” New Constructs CEO David Trainer wrote in a research note released Thursday. “At the same time, many companies are facing low profit margins and may have to default on interest payments without the possibility of refinancing.”

As so-called zombie companies run out of cash to stay afloat, risk premiums will rise across the market, according to New Constructs. This, in turn, may increase liquidity pressure and create an escalating series of corporate defaults.

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Specifically, the coach highlights CVNA for Carvana,
+ 10.06%
“Dwindling money supply, intense competition, and a valuation rise,” which puts the stock at risk of falling to $0 a share.

“Carvana has failed to generate positive free cash flow in any year since it went public in 2017,” he added. Since 2016, Carvana has spent $8.3 billion in free cash flow.

Shares of the used-car retailer plunged 88% in 2022 amid cuts and losses, outpacing the S&P 500’s 20.5% decline. In April, Carvana reported larger-than-expected losses in the first quarter, citing a “uniquely challenging environment.” Last month, Carvana also announced plans to lay off more than a tenth of its staff.

Like the GameStop Corp. meme shares. GME,
-4.80%
and AMC Entertainment Holdings Inc. AMC,
+3.49%
Carvana is severely deficient. New Constructs put Carvana in the research firm’s “danger zone” in August 2020 and Trainer notes, in short, that it has outperformed the S&P 500 by 95% since then. However, even with the year-to-date declines, Trainer believes the stock has an even bigger downside.

Another zombie company is pet food maker Freshpet FRPT,
+ 3.79%And the
According to the CEO of New Constructs. He wrote: “Freshpet stock has soared during the pandemic, as investors shrugged off the company’s years of burning cash, and now, investors are finally waking up to the risks inherent in Freshpet stock, which could drop to $0 per share.” “Freshpet has grown the upper end at the expense of net profit, and sales growth has fueled the cash burn.”

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Freshpet’s stock is down 41% in 2022 and over the past 12 months, its shares are down 65.5%, compared to a 10.1% decline in the S&P 500 over the same period. The company recently gave guidance for the fourth quarter and full fiscal year that were below analyst expectations.

The coach also has a negative opinion of PTON for Peloton,
+ 4.76%
stock. “Peloton issues are well communicated — given the stock has fallen over the past year — but investors may not realize that the company has only a few months of cash left to fund its operations, putting the stock at risk of dropping to $0 per share,” he wrote.

“Despite rapid earnings growth, particularly in 2020 and 2021, Peloton’s free cash flow (FCF) has been negative every year since fiscal 2019.” He added that Peloton has since spent $3.7 billion.

Trainer also noted Peloton’s recent $750 million five-year loan from JP Morgan Chase & Co and Goldman Sachs, which he described as “extremely friendly” with creditors. “If we assume an average cash flow burn over the past two years, and include the additional capital raised a month ago, Peloton has only 11 months of cash left before it needs to raise capital or go out of business,” he wrote.

Peloton last month gave a pessimistic view when it announced its third-quarter financial results, citing “weak demand.” The company’s shares are down 71.53 this year and 91.3% in the past 12 months.

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