Morningstar calls Forest City stock worthless, but FCE vehemently objects

This news may not be news to people who follow Forest City Enterprises more closely than I do, but I hadn’t seen anything about any of this until this morning in this post at Atlantic Yards Report, a blog that does follow FCE very closely.

First, Morningstar, on 12/9/08, in an article subtitled, “We’d prefer a pack of gum to these businesses”: [emphasis mine]

Last month, we highlighted five stocks, each with a fair value that we estimated at a nice, round “zero.” Since then, zero-dollar fair value estimates have experienced a virtual renaissance, with the total number of such calls more than doubling to 32 ( Click here to see a full list). I thought this phenomenon merited a second look, so this month, we present five more stocks that look completely worthless to Morningstar’s team of analysts.

From the Analyst Report: “At nearly 83%, Forest City’s debt/total gross PP&E is much higher than peers’. With EBITDA/interest expense expected to dip below 1 times during the next three years, Forest City could face severe financial distress, since it may need to refinance debt at ever-increasing interest rates while operating cash flow declines.”

The Washington Post writes about it on 12/21/08 in an article called, “Not Worth the Paper They’re Printed On”:

Morningstar tried to put it delicately and hedged enough to say things could change, improving the companies’ fortunes, but in the end there was no polite way out: “If we think a stock is worthless, there’s no point in saying otherwise,” the investment research company said in a recent report.

(Hattip to No Land Grab.)

Now, the Plain Dealer, on 12/25/08, in “Forest City Fights Back”:

Forest City Enterprises Inc. on Wednesday strongly disagreed with a recent Morningstar Inc. article, saying the author’s opinion that Forest City’s stock is worthless was based on flawed assumptions and inaccurate interpretations of the company’s debt obligations and its construction costs.

“We disagree in the strongest possible terms with Morningstar’s opinion,” spokesman Jeff Linton wrote in a statement. “Further, we are astonished and appalled that Morningstar would issue such an opinion without having made contact with Forest City.”

Linton said no Morningstar representative has contacted or spoken to any senior-level executive at Forest City in two years. In a recent article, Morningstar analyst Matthew Coffina named Forest City among five stocks that he considered to have a fair value of zero. Five analysts who regularly cover Forest City have taken a neutral stance on the stock or expect it to perform slightly better than the market.

The Atlantic Yards Report feels that FCE’s concerns are reasonable, and I have no idea how these things work  My only question is, why did it take more than two weeks for Forest City to issue this rebuttal?  And, again, it looks like this battle over the rating has been kept very very down-low. Given the economic times, that’s not surprising, but is it proper news provision on the Plain Dealer’s part?

The day before the Morningstar analysis was published, on 12/8/08, the PD published this item about FCE withholding dividends, but the Plain Dealer didn’t publish anything about Morningstar’s 12/9/08 review of FCE until two days ago, on 12/24/08, more than two weeks after Morningstar published its review. Do not even try to convince me that the PD didn’t know about the Morningstar pan before then.  Then, the FCE objection was published…yesterday, two and a half weeks after the hit.

So – only if it comes home, we hear about it?  Otherwise, it’s too business wonky?

Two things going on in this post:

1. Editorial filters should feel free to weigh in: what was the hold up on reporting on Morningstar’s analysis of 12/9/08? Why did FCE take so long to rebut the analysis in the Cleveland press?

2. I have no idea about the health of FCE or the value/veracity/accuracy of the Morningstar report.  But this he said/she said of the PD – does anyone else think that maybe the PD should do its own analysis, given the importance of Forest City to the NEOhio economy?

If I’ve missed that PD coverage, major apologies. But in my searching, I could not find anything else on these topics in the PD archives online.

18 thoughts on “Morningstar calls Forest City stock worthless, but FCE vehemently objects

  1. I think “someone who knows” works for Forest City and is being paid to say what they’re saying.

    Our organization also are people “who know” and we believe they are way in over their head right now. What’s their excuse for the very sloppy way they handled the Atlantic Yards project?

    Does anybody really think it will ever get off the ground? What about the money they’re losing on the nets? Anybody ever bother to read reviews of what residents think of these 95 percent full apartments? Especially outside Ohio? Check out Pavilion reviews in Chicago.

  2. Ugh, one big typo and two small ones to correct. Instead of…

    “When they became aware they we were attempting to get their largest shareholders to bail out, what they do?”

    It should be…

    “When they became aware that WE were attempting to get their largetst shareholders to bail out what did they do?”

  3. I’ll try to make a long story short regarding my own dealings with Forest City.

    Never have and never will like these animals. However since the economy started struggling, they’ve gone from bad to worse.
    They’ll cut as many corners as possible to try to stay afloat. IF they’re trying to stay afloat. And, that’s a BIG IF!

    When they became aware they we were attempting to get their largest shareholders to bail out, what they do? They sent us a list of the rest of their shareholders and dared us to call them too. That was last September. Between September and November their stock went from 40-3. But instead of trying to negotiate a peace treaty with our organization they continued to ignore us.

    Are they expecting a government bailout? Perhaps they’re putting a lot of faith in their campaign contributions. I hope too much faith. These people make Enron seem like Mother Therisa.

  4. Someone who knows -

    Thanks for taking the time to read and leave a comment. I think I’ve made it pretty clear – doing financial analyses is not something I, you know, do. Except for my own household budget etc. I’m fascinated by it, but I do not have any formal or even informal depth of experience in it.

    My post focuses mostly on the fact that certain information became available that could sound very damaging, even if it’s inconsequential, but is about a corporation of great importance to NEOhio.

    I still stand by my question: why did Forest City debunk Morningstar sooner? Why didn’t the PD have anything about it in their paper before Forest City finally objected?

    If you’re telling me it’s because the PD business people knew that it was bunk, I suppose that could be said but I still fail to see how it isn’t NEWS that an entity like Morningstar is using descriptions like “worthless” in regard to a corporation like Forest City. That seems like big news. Which SHOULD be debunked.

    But not more than two weeks later.

  5. First let me point out that some analyst without any knowledge of Forest City’s obligations or finances should not be downgrading stocks they know nothing about. This is what causes the market ups and downs is people and opinions. Just because Morning Star thinks Forest City is worthless definately does not understand that even though difficult economic times FCE has managed to get through tough times given the diverse portfolio. Therefore, maybe development maybe hurting. However, the Residential division that includes all the Military Housing and over 80 residential FHA and Luxury housing that is overall at a 95% filled for vacancy and the increase in that division should say something. Hello lets think that the government money is a guarentee. However, I am sure the analyst that just graduated from High School knows all about Forest City. The problem with these analysts is they create market instabilties by making an opinions about companies and attempting to hurt them with no facts. Now if Morningstar has not talked to FCE in two years it appears more that FCE is being punished for not talking to them. I can tell you one thing. The primary shareholders that founded that company Ratner, Miller, have majority and plenty of money to keep things going. I bet if they took it back private, they would be better off so would most the other companies that get affected by opinions and market values. Just because you say that my bank account has zero dollars does not mean that million sitting there is worth zero dollars. Again, fact and opinion don’t match. Has anyone seen large returns on what Morningstar states to invest in? I had someone call me today and said you know I have been watching FCE stock all year and this is the time to buy. This is a steal, he was like this guy is nuts. Here’s a challenge, do the opposite and invest in Forest City, they will be up and you will be thanking my blog in the future. Forest City Enterprises is not the largest national real estate company in the United States by being careless but by being careful. Please keep in mind that Forest City Ratner Companies is now being managed by Forest City as of last year and the whole Atlantic Yards or other issues I am sure will go away. As we see with the no land grab blog, some people already went away. I know what I know based on fact. The analyst has to say something for his job.

  6. Jill,

    I guess the point is, in hindsight, it was an error to ignore the Morningstar comments. I agree. However, as an analyst, i can see why they did not feel they would even comment. Remember, they had just had an extensive earning call on 12/05 and answered all kinds of extremely detailed questions, I think this stuff looked remedial to them. I suspect they will be more proactive in future, because perception does matter.

  7. I think you make an excellent case for how FCE could have debunked the report immediately and convincingly. My question, raised in my posts, has to do with why the company didn’t do that immediately. In this day, when news can travel quickly and in unexpected ways (which actually shouldn’t be unexpected if PR etc. are doing their job), it’s CRITICAL that a company with the size and import of Forest City get out in front and then, they can always point to, “we already debunked that – you can see here…”

    That’s all I’m saying. But I really appreciate your knowledge.

  8. Jill,
    I’m not blaming media, I’m only saying there is a BIG distinction on the level of coverage Morningstar offers on this name vs. KBW, Wachovia, or even RBC. My point is only on the quality of the comments:

    From the Analyst Report: “At nearly 83%, Forest City’s debt/total gross PP&E is much higher than peers’.

    Which peers? How does this compare to past levels? What is the metric debt/PP& even relevant?

    With EBITDA/interest expense expected to dip below 1 times

    Who expects it? What assumptions? Right now FCE/A is generating roughly $2 per share in FCF (after paying all interest!)per the last conference call. This includes stable sources like miliary housing, government renters etc.

    during the next three years, Forest City could face severe financial distress, since it may need to refinance debt at ever-increasing interest rates while operating cash flow declines.”

    How is this different than any other REIT? Did the analyst notice that the rates FCE/A has been getting on refinancing have actually gone DOWN.

  9. Blaming the media, btw, is incredibly transparent, esp. in a case where the media – the PD in particular, has done very little reporting on this. The FCE PR people should have been on this from the beginning. To suspect that it would go no where, esp. with a blog like Atlantic Yard Report operating, is foolhardy.

  10. I completely disagree that FCE didn’t know about Morningstar. Please. If they aren’t following what entities like that write or say about them, even at the most basic level through clipping or some other mechanism, then maybe they deserve whatever happens as a result of the publication of such information. This is the news age where people can find anything as much as say anything. Any business that isn’t following all the buzz, even at a cursory level, is in danger.

  11. as an addendum it looks like the analyst is a Level III CFA candidate based on his linked in profile on web. this is not an attempt to undermine this kid, just to put this in perspective ie.
    1) morning star does not really cover FCE/A in the way that say Keefe Brunette does i.e., no in-depth report, not on conference calls etc.
    2) the analyst writing on FCE/a is a generlist and not an industry specialist.
    3) the analyst isn’t particuarly experienced. i know because when i was 2 years in i was very dangerous
    i think all of this is really the medias fault, blowing a neat article on stocks that could go to zero in a way that makes it seem like an in-deth serious piece of research.

  12. I think the comments were off Forest City’s radar screen. The guy at Morningstar does not cover FCE/A per se, he only mentioned the stock in an article about stocks he concludes are worth zero and FCE/A has said that Morningstar never contacted them. No analyst puts out work w/out talking to company, because quality of management is always a key factor. The point is there was no heavy duty analysis here. Coffina admits that previous “zero” picks have in some cases been 10x baggers! I saw the kid speak on TV, he was very nervous, but cleary bright. The point is i’ve been a securities analyst for 15 years and studied FCE/A and it’s tough for me to get my head around the b/sheet. I think the level of analysis done was superficial, and there’s no way that guy has the industry experties to make that opinion. Now, the outcome may make him look brilliant (we are in severe recession) but I mean seriously there’s no analysis there.

  13. CharterHolder: So why didn’t Forest City take him down? Or wait so long to respond? Also in their eventual comments that came through the PD, why didn’t they mention your critique?

  14. The kid, and I emphasize kid who wrote this article has very little experience as a securities analyst (graduated oberlin college 2006/07) and operates as a generalist i.e., he has no particular expertiese in the real estate industry. he doesn’t even appear to have financial credentials (say a CFA or MBA) and I can’t even find him on bloomberg. From a quick internet search he talks about stocks raninging from wagers to biotech! This is like a guy 2 years into med school talking about brain surgery. FCEA may go BK, it’s possible, but it won’t be because of the analystical skills of a morningstar analyst. i didn’t even know morningstar had individual stock analysts before this. crazy that the media would even indulge this the way it has. sad.

  15. Pingback: More on the Tower City bailout | Brewed Fresh Daily

  16. While Morningstar issued the first iteration of its report on December 9, an analyst report was issued December 18, which likely triggered the December 21 WashPost article.

    Why FCE took more than a few hours to respond to that article, however, is a good question.

    Maybe the PD can get the Morningstar analysts and the ones cited by FCE to butt heads and sort out where exactly they disagree. A year ago, btw, Morningstar thought things were peachy for FCE.

  17. The longer they wait the less it should cost, the tax increase should be accumulating…is it?
    It should change with each delay basically like saving money to buy a home, the more you put down the less you finance and the less interest you pay. The total cost drops.

    The additional tax should have been invested…oh maybe it was? Maybe it actually melted away?

    I’m not telling them you tell them….

    The price of construction does not go up in a recession…it should go down. The fuel cost alone changed the cost estimates or should have, more changes coming do not be in such a hurray.

    Recession are not inflationary!!!! Hurry build now before the prices fall further?

    Unfortunately, that increase in tax may not be a surplus today, recession cause total tax revenue to fall sharply.

    As it gets real bad people will cry like babies, then others will come up from behind hit them over the head and take what little they had to cry about…and say as they run off, “now you really have something to cry about”.

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