Domestic Shares – Excess leverage is the financial drug of choice for corporate manic depressives

Nothing propels the highs, higher, nor the lows, lower. Consider the oil sensitives - Qantas as a winner and Origin Energy as a loser. Woodside has of course underperformed because it shares a reliance upon the oil price for its economics, but its underperformance has been half of Origin’s. Part of this is due to lesser operational leverage, but much more is due to lesser financial leverage. In 2013, Origin produced $1.1b in operating ebit and had $6.8b in net debt. In 2019 we forecast those same metrics at remarkably similar levels - $1.0b and $7.5b. And yet, Origin’s share price has more than halved from the $10 per share seen in 2013, due to the need in the interim to raise $2.5b and issue a large number of shares in an endeavour to address leverage woes arising from malinvestment. Qantas management have done a stellar job since 2008. The equity performance, though, has been magnified by not just the oil price fall. We explore some of these themes in “Taking Stock: A motley lot ignites diversity” (VIEW LINK)