Risky yes, but not as risky as a startup company for which seasoned business angels typically accept a 40% discount on future valuations. To be very conservative, I propose to apply a 40% yearly discount to the future value of the firm though, over the next two years, as by that time the verdict on the firm’s future should be known (if the downturn lasts two more years it will be, by a wide margin, the longest one experienced by Hornbeck in its existence).
This discount factor gives us a present value for the firm which is half the future value, or $ 700 m under the recovery scenario. We can deduct from these figures that the market assigns a less than 20% probability to the recovery, as 20% x $ 700 m = $ 140 m is still higher than the current market cap. Conversely, a higher than 80% probability of bankruptcy is built-inbuilt into the current stock price, which implies that not only did the market already judge and condemn Hornbeck but in addition, it seems to believe that the bankruptcy is likely to occur soon.
What if it were not the case?