September 1, 2004
The Standards are Poor When Trying To Value IBC

As previously noted  - Nov 2003 ~ IBC Report – IBC’s financial standing and earnings power has been in decline for some time. Things have taken a turn for the worse in 2004. 

On Monday Interstate Bakeries said that it failed to file its 10K because of “the convergence of a number of recently identified interrelated circumstances”. This is the second time IBC has delayed filing its 10K for the fiscal year ended May 20, 2004. The company also announced on Monday that it has hired turnaround company, Alvarez & Marsal, to “aggressively deal with these [accounting relating] matters and pursue an effective going-forward business strategy.”

After the announcement IBC shares plunged and bankruptcy rumors began to swirl.  Surprising, Standard & Poor's bucked the trend of beating up on IBC:

S&P said it saw "financial flexibility improving on more favorable sales trends during the second half of fiscal 2005" and noted that Monday's sell-off was "an overreaction.” S&P also said shares of Interstate Bakeries "are a worthwhile holding.” (link)

Interstate Bakeries can’t produce financial documents/restatements and S&P calls Monday’s sell-off an ‘overreaction’?  Perhaps someone should inform the S&P representative responsible for the above quotes that S&P currently has a junk rating on IBC debt (CCC+)?  Perhaps also the statement ‘worthwhile holding’ should be reserved for companies that do not run the risk of being defunct in a few weeks time? (If IBC does not file by September 26 it will be in default)

Will IBC Survive?

No one knows what the future holds for IBC.  Even S&P fixed income analyst, Ronald Neysmith, is not willing to put out a report until, and if, the company files.

Speculations: There is hope that IBC will be able to turn things around once its accounting issues are resolved.  Contrary to the S&P analyst quoted above, however, this turnaround is not likely to come in the second half of fiscal 2005, but in the first. Highlighted below are historical free cash flow totals.  The data suggests that a turnaround is most likely right now (or in the quarters ending in August and November). 


Despite cash flow speculations there is no definite turnaround on the horizon. Indeed, there is no horizon until the company files. You can blame sloppy accounting, commodity prices, or Atkins for IBC’s woes.  However, the more realistic observation is that 2004 is turning out to be a nightmare because IBC was slow to react to a degenerating financial position.  Remember that even without the restatements and accounting issues an Alvarez and Marsel would likely still be required to try and turn things around at IBC.


In short, betting on an IBC turnaround is currently gambling, not investing. The Sept 26 deadline looms: If the filing arrives and the company remains viable – i.e. if workers' compensation reserves remain the only major issue – the stock price will rally as investors buy the recovery story and shorts scramble. The alternative could be chapter 11.

IBC PR