Significant Regulatory Changes

Some regulatory changes make minimal impact on company valuations - at least in the short-term. Other regulatory changes, such as tax rate changes, affect almost all companies equally. But some regulatory changes affect only a small group of companies, and in a big way!

In late 2009, a new federal law was enacted that significantly expands the Net Operating Loss carry-back opportunity for businesses. In effect, this allows companies that experienced large losses in 2008 and 2009 to offset them against gains they experienced in the five previous years, allowing them to recuperate tax payments they have previously made.

For most companies, this regulatory change may mean nothing at all; for companies that broke even or incurred only small losses in 2008 and 2009, or for companies that incurred large losses in 2008 and 2009 but don't have correspondingly large gains in immediate prior years, this tax treatment change makes little difference. But for some companies, the change can turn a company from a sell into a buy!

Consider Chromcraft Revington (CRC), producer and distributor of residential and commercial furniture. The company has had a particularly rough couple of years. In 2008 alone, it lost $25 million on revenue of just $99 million! In previous years, however, it has been rather profitable. As such, the refund the company is to receive based on the regulatory change is $6.5 million. To put this in perspective, the company's market cap is just $15 million! The regulatory change alone turns this company into one that trades at a discount to its net current assets!

Paying constant attention to regulatory changes can be an arduous task. Most changes make little to no difference in the vast majority of company valuations. For those paying close attention, however, opportunities can arise when a regulatory change has a significant affect on a company's finances.

Disclosure: None