Small Cap Stocks

Xerium Technologies (XRM – current price: $14), a leading global manufacturer of industrial textiles and rolls used primarily in the paper production process, emerged from bankruptcy in late May.

I believe the shares offer an interesting investment opportunity, since there is still alot of confusion concerning the emergence from bankruptcy, and the company is virtually unknown among investors. Interestingly, very few financial websites have even been able to update the financials correctly. XRM also has potential growth prospects in emerging markets, particularly Brazil. As the financial picture gets clearer over the next few quarters, I expect XRM’s share price could rebound significantly, as new equity funds take positions in the stock. The tiny float (only 2.5 million, ex shares owned by creditors), could greatly exaggerate price moves in the stock.

What is intriguing about XRM, is that old shareholders did not get completely wiped out in the bankruptcy proceedings. In fact, they ended up with 17.4% of the shares in the new company and warrants for an additional 10%.

As the company explains:

The Company has exchanged approximately $620 million of existing debt for approximately $10 million in cash, $410 million in new term loans maturing in 2015, and approximately 82.6% of the common stock of Xerium.

– Shares of the Company’s common stock held prior to today’s effective date have been cancelled and replaced with shares of new common stock that will commence trading on the New York Stock Exchange under the existing ticker symbol “XRM.” A total of 20 million shares of new common stock have been authorized. Shareholders of record prior to the effective date will receive new common shares representing approximately 17.4% of the issued and outstanding shares, which is equivalent to a 20-to-1 reverse split of the Company’s cancelled common stock. Shareholders of record will also receive four-year warrants to purchase up to an additional 10% of the fully diluted and outstanding shares of new common stock on the effective date.

In terms of numbers, I’ll keep this very simple (some might say ignorant), since in any bankrupt situation the financials are incredibly confusing (again an opportunity), and I am personally not interested in working out all the details.

According to a recent 8-K, about 15 million shares are currently outstanding and the Warrants are exercisable for a term of four years from the issue date at an exercise price of $19.55 per share of New Common Stock. (Note: The warrants are not publicly traded yet)

20 million shares of new common stock of the Company, par value $0.001 (the “New Common Stock”) were authorized, of which an aggregate of approximately 14,969,895 shares were issued and outstanding, as described below

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Basically, I noticed that XRM had traded between $6 and $8 (pre-bankruptcy) for quite awhile, so say an average of $7. Adjusting for the bankruptcy dilution, that implies a $1.90 price for common and for the 20-to-1 split a target of $38.

Furthermore, in looking at the bankruptcy proceedings, I saw that management’s projections (which are always conservative in bankruptcy) were as follows: 2011, they are forecasting $126 million in adjusted EBITDA growing to $140 million in 2012. Subtracting $45 million in interest and $30 million in cap-ex is about $50 million in free cash-flow. Divided by 15 million shares is $3.30 per share. Set against a $14 stock price, the cash-flow multiple looks attractive.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in XRM. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.