After a spate of negative news, including missed interest payments and a possible delisting, Exela Technologies (NASDAQ:XELA) just recently had something relatively positive to tell investors. However, don’t expect this development to change the story with XELA stock.
On March 6, Exela announced plans to improve its operating performance. While a step in the right direction, this plan may not solve the company’s issues as this unprofitable firm needs to turn itself around.
It all has to do with Exela’s highly leveraged balance sheet. It’s not enough merely to get its operating earnings back to positive. The company also needs to generate sufficient cash flow to service its $1.16 billion in outstanding debt, much of which is at double-digit rates of interest.
With little out there that shows Exela can achieve this without taking drastic measures, consider this news too little, too late.
Cost Reduction Efforts and XELA Stock
As I have argued previously, while this company likes to call itself a “business process automation provider,” this descriptor is misleading. Although Exela has attempted 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 root cause of its poor operating performance. Soaring labor costs, coupled with a steady drop in revenue, have led to ballooning losses for Exela.
With this, at first glance, it may sound as if the above operational performance improvement plan will help jumpstart a recovery for XELA stock, which is down by more than 99.5% over the past year.
After all, management believes that this plan will cause between $65 million and $75 million in cost savings during 2023. As the company has reported negative operating losses of $56.1 million over the past twelve months, that implies a move out of the red, at least on an earnings before interest and taxes (or EBIT) basis.
However, when you factor in Exela’s high debt servicing costs ($163 million over the past twelve months), it’s clear that these efforts won’t do much to save the day.
What Likely Comes Next
Barring a surprise improvement in labor trends, even with the forthcoming cost reduction efforts, this company will stay financially distressed. So then, what happens next for XELA stock?
Still on track to come up short making interest payments on its outstanding debt, Exela has only two ways out of this. It can either raise additional capital, or it can file for Chapter 11 bankruptcy. Pursuing either of these measures will probably result in further losses for XELA investors.
Raising additional capital will damage to existing shareholders, as it will almost certainly result in heavy dilution. Whether raised via the sale of new shares, or from the sale of convertible stock, a capital raise will place pressure on the stock.
The company will also minimize potential upside, in the event Exela improves its profitability to a greater extent than currently expected.
If Exela goes the Chapter 11 route, it will undoubtedly result in a total loss for anyone holding XELA today. The company in its present state is likely worth far less than its outstanding debt. That likely means no equity, not even a sliver, for existing shareholders in a Chapter 11 reorganization.
The latest press release out of Exela Technologies does nothing to increase the appeal of XELA shares. That may explain why the stock barely budged on this news.
This has been and will continue to be a situation where those continuing to hold a position to face the prospect of either experiencing an additional heavy loss (because of dilution), or a total loss (because of bankruptcy).
The takeaway here is obvious. Even if you are an aggressive investor, not afraid to invest in high-risk, high-return situations, XELA stock remains a no-go situation, as it has too much of the former, and far from enough of the latter.
XELA stock earns an F rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.