A potential Turnaround stock - Peter Lynch Investor
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A potential Turnaround stock

May. 16, 2019   Category: Turnarounds

In One Up on Wall Street, Peter Lynch speaks of his investment in companies that have gone bankrupt.

One example, Chrysler, is striking for its impressive returns. He says, “I made a lot of money for my shareholders by buying Chrysler. I started buying at $6 in 1982 and watched it go up fivefold in less than two years and fifteenfold in five years.”

It’s true, Turnarounds can be great investments. It’s perhaps why private equity funds like Elliot Management and Appaloosa LP have been scooping up shares in PG&E (PCG).

PG&E (PCG)

Lynch would classify this as a “the-bail-us-out-or-else” kind of turnaround.

PG&E is northern California’s largest utility. It declared bankruptcy in January 2019 after liabilities from its involvement in the wildfires of the previous year approached $30 billion dollars.

Since then the company has reorganized its management and looks to implement new safety policies. It’s still working out its liabilities with creditors in court but it appears the state government is willing to step in to relieve some of the costs.

PG&E stock 5-year chart
5-year chart with Price and Enterprise Value

Governor Newsom has assembled a task force to counter the impact of liabilities. They are suggesting a fund between $10 – $30 billion be setup to help pay creditors. The details are still being worked out but government financial support appears to be coming for PG&E.

It’s early days in the bankruptcy and it’s still possible the stock could go to zero. The city of San Francisco has suggested purchasing a part of the company. With an enterprise value of just over $7 billion, simply breaking the company up and selling it won’t cover its liabilities.

Still, this is not the first time the utility has been bailed out. It happened in 2000-2001 when it got caught up in the Enron energy deregulation fiasco. If history is a predictor of the future, then policymakers are likely to fix PG&E rather than turf it entirely.

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