Reddy Ice Feeling the Heat

Reddy Ice Holdings, Inc.’s (FRZ - Analyst Report) management is growing the company through an aggressive acquisition strategy. However, its high debt service costs and highly seasonal earnings are concerns. After lower-than-expected first-quarter results, the management lowered guidance for 2008 due to commodity inflation.

The stock’s recent significant price decline was due to the visit by the Antitrust Division of the Department of Justice to the company's Dallas corporate office. The stock is rated a Sell.

Rising commodity costs (primarily polyethylene, electricity and fuel) are negatively affecting the company’s profitability. Reddy Ice uses a large quantity of plastic bags, which accounts for approximately 7 percent of revenues. The company has a highly leveraged balance sheet with a debt-to-capitalization ratio of approximately 76 percent. Total debt level of the company as at March 31 was $357.9 million.

The stock only has a three-year trading history, most of which the stock traded at a negative Price-Earnings Ratio. In addition, the company’s earnings are extremely seasonal. Therefore, the stock is better valued on a P/S (Price-to-Sales) basis. The stock has traded in a P/S range of 0.82 to 2.01. The price target of $13.75 is based on a 0.90 P/S multiple.

Read the full analyst report on FRZ