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Turnaround Letter
Out-of-Favor Stocks with Real Value

August 4, 2023

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We comment on earnings from Adient (ADNT), Dril-Quip (DRQ), ESAB Corp (ESAB), Frontier Group Holdings (ULCC), Gannett (GCI), Goodyear Tire (GT), Janus Henderson Group (JHG), Kaman Corporation (KAMN), Warner Bros Discovery (WBD) and Western Digital (WDC).

Next week, eight companies report results.

Earnings Updates

Adient (ADNT) – Adient, one of the world’s largest automobile seat makers, struggled due to weak leadership after its 2016 spin-off from Johnson Controls. We became interested in late 2018, after the shares fell sharply, due to the arrival of Doug Del Grosso as CEO. While we were a bit early on this name, Del Grosso’s highly capable leadership has produced an impressive turnaround so far.

Adient reported a strong quarter and raised its full-year guidance for revenues, earnings and free cash flow. The company is benefiting from enduring strength in new vehicle production as well as better execution and lower input costs, particularly compared to a challenging period a year ago.

Revenues increased 16% and were 4% above estimates. Earnings of $0.98/share improved from $0.08 a year ago and were more than double the consensus estimate. Adjusted EBITDA of $276 million rose 93% and was 30% above estimates.

Full-year guidance was increased for revenues (by 4%), adjusted EBITDA (by 8%) and free cash flow (by 28%, to $278 million).

Adient’s free cash flow is now positive, at +$196 million YTD compared to an outflow of $(132) million in the same period last year. The balance sheet carries about the same amount of net debt, but is now stronger as profits and free cash flow are positive and healthy. If the year plays out as management expects, debt/EBITDA will be only 1.8x. Reflecting this improvement, Adient repurchased $37 million in shares in the quarter – a token amount but it now places the company in the “buyback-underway” realm.

An enduring risk is that Adient has large and profitable operations in China. Any significant move by local companies or foreign suppliers building cars in China toward substitute seat makers could hit Adient hard. We currently see little likelihood of this becoming a near-term problem.

Dril-Quip (DRQ) – A major supplier of subsea equipment, Dril-Quip is struggling with the downturn in offshore oil and natural gas drilling. It generates positive free cash flow and has a sizeable cash balance yet no debt, all of which should allow it to endure until industry conditions improve.

The company reported a mixed quarter. Results across the board were below estimates. However, the company finally generated positive free cash flow, net bookings increased 47%, and guidance now calls for second half adjusted EBITDA margins of 14-16% compared to about 10% in the first half. Management made encouraging comments about the improving offshore market and their footprint optimization program. These favorable trends more than offset the dreary actual results. All-in, the story is improving which drove the shares higher on the news. No change to our rating.

Despite the favorable big-picture news, the management itself is weighing on the stock price. First, we’re unimpressed with the share buyback results. Dril-Quip holds over $250 million in cash, has zero debt, its shares are trading at depressed levels and management is optimistic about a sustained industry upturn on the horizon. This is an ideal set-up for meaningful buybacks – the company could readily repurchase 7-10% of its total share count, immediately, without meaningfully jeopardizing its cash hoard. Yet, the total buyback volume this year: zero.

Our fear is that the management will spend its cash on acquisitions. Which it is. DrilQuip announced an $80 million all-cash purchase of a Canadian equipment company. This deal may make strategic sense, but it looks odd. The company generates wide 25% EBITDA margins and management says the margins can expand to 35%, but Dril-Quip is paying a small 3.2x multiple. The seller was a savvy private equity firm, so we wonder further about the valuation. Are there hidden liabilities, or major customer concentration, or other issues? Will it require elevated expenses and new capital infusions to restore its competitiveness? Maybe this deal explains management’s boost in its capital spending plans compared to only a quarter ago. Another way to say this: the new management is not showing much skill at capital allocation.

Sort of related: Management spoke about how they “delivered another quarter of strong operational performance.” But results were weaker across the board. Management is either being disingenuous or is not seeing the results as they are. It’s not clear which is the worse offense.

Related, the company’s financial reporting is dismal. It re-organized itself into new segments (fine…), and even touts how it will “provide better visibility into Dril-Quip’s business” but doesn’t provide any segment financial details to investors beyond revenues. In another example, the press release uses the term “gross operating margin” – this term exists nowhere else in the business world and is meaningless. And, the slide deck touts “35% gross margins improvements” but this is unclear wording at best. Frustratingly, the IR team forces readers to click through 21 marketing slides before getting to the financial results in their quarterly slide deck.

In the quarter, revenues fell 5% and were 9% below estimates. Adjusted loss of $(0.03)/share compared to a $(0.10) loss a year ago and estimates for a profit of $0.08. Adjusted EBITDA of $8.8 million fell 6% and was 16% below estimates.

ESAB Corporation (ESAB)This company produces specialty welding, cutting and flow control equipment. In April 2022, ESAB was spun off from highly regarded Colfax. Investors worry about the company’s cyclical revenues in a slowing global economy as well as its asbestos liabilities. But, the company has a strong leadership team with a credible plan that is likely to succeed, follows the impressive Colfax “business excellence” philosophy, and has steady revenue growth with strong profits and free cash flow. Its balance sheet carries a readily manageable debt balance. While the asbestos liabilities are a risk, most of the claims have been dismissed with no payment, and insurance and other mitigants appear to cap the company’s maximum burn.

ESAB reported a strong quarter that was above estimates. Full-year revenue guidance was raised due to better organic sales and more favorable currency changes. Full-year EBITDA guidance increased 4%, implying some margin expansion. Free cash flow is robust and increasing, the balance sheet is sturdy and the company is executing well.

The company is striking a healthy balance between volume increases (+3%) and price increases (+3%). Its new product initiatives in automation are seeing decent customer purchases. The EBX operating efficiency strategy (a continuous improvement mindset carried over from Colfax) is working, as margins and productivity are improving.

In the quarter, revenues rose 6% on an organic basis and were 2% above estimates. Net income on a “core” basis of $1.21/share increased 12% and was 16% above estimates. Adjusted EBITDA of $127 million rose 20% and was 12% above estimates.

Frontier Group Holdings (ULCC) - Frontier is an ultra-low-cost airline focused on leisure travel. Investor worries about potentially slowing demand, a possible price war and rising fuel and labor costs have pulled Frontier’s shares down 50% from the IPO price to just above the March 2022 low. However, while we appreciate the risks, demand has recovered to 2019 levels and continues to increase, supported by a strong economy and robust employment and wages. Constrained and possibly tightening industry seating capacity limits the chance of a price war. The airline’s profits are recovering, it is generating free cash flow, and its balance sheet carries more cash than debt. Management is capable and entrepreneurial. The share trade at a modest valuation of 4.7x EBITDA (or, 4.5x using EBITDAR) on depressed earnings.

Frontier reported a good quarter but cut its full-year profit margin guidance by a third, sending the shares lower. The margin cut was attributed to weather-related cancellations, higher fuel costs and weaker fares due to competitive pricing pressures as customers shift toward international travel and away from domestic travel. Also, Frontier is creating its own problem by boosting its capacity by over 20%. This by itself is spawning a price war, which is the most dreaded event in the airline industry, other than a crash.

Revenue growth was a reasonable 6% but ticket prices slid and were only partly offset by ancillary fees. Fuel costs are ticking up again and most of the profit increase came from the 39% decline in per-gallon fuel prices. Essentially all other operating metrics were stronger.

Revenues rose 6% and were in-line with estimates. Adjusted earnings of $0.30/share improved from $0.09 a year ago and were about 11% above estimates. Adjusted EBITDAR, a measure of cash operating profits for airlines, increased 54% and was about 8% above estimates.

Gannett (GCI) – Gannett, publisher of the USA Today and many local newspapers, is racing to replace its declining print circulation and ad revenues with digital revenues. It also is aggressively cutting costs to maintain its profits and help cut its expensive and elevated debt. The biggest challenge for Gannett is to overcome investors’ perception that the company is not viable.

The company uncorked a strong quarter, as the revenue decline tapered, adjusted EBITDA rose 40% and free cash flow nearly tripled to $38 million. Gannett incrementally raised its full-year profit and free cash flow outlook – the fact that the changes had positive signs rather than negative signs is highly encouraging in that Gannett might actually turn the corner. The company is using its cash flow and cash proceeds to chip away at its huge debt burden, which is the greatest risk to the company’s viability.

Digital revenues, which are the future of Gannett, had positive growth. Digital-only subscription revenues rose 17%, helped by rising prices and subscriber numbers. Total digital revenues were nearly 40% of total revenues.

In the quarter, revenues fell 11% while same store revenues fell 9%. Revenues were about 2% below estimates. Adjusted loss of $(0.09)/share compared to a loss of ($0.39) a year ago and was 3 cents worse than the consensus estimate. Adjusted EBITDA of $71 million rose 40% and was 15% above estimates. The adjusted EBITDA margin of 10.6% improved from 6.8% a year ago.

The balance sheet carries $1.2 billion in debt including the convertible debt. When compared to the EBITDA guidance of $305 million, leverage is 3.9x. For perspective, we would target about 1.5x.

Goodyear Tire & Rubber Company (GT) – An investment in Goodyear is an opportunistic purchase of an average company whose shares have fallen sharply out-of-favor. Demand should remain relatively stable and pricing will likely remain robust, more than enough to offset rising input costs. The benefits from Goodyear’s acquisition of Cooper Tire provide additional value. The recent 10% stake by activist Elliott Management adds pressure for the company to revitalize itself.

Goodyear reported a shockingly weak quarter, with revenues falling 7% resulting in an adjusted loss of $(0.34)/share compared to a $0.50 profit a year ago. While pricing rose 6%, volumes fell 11%. Earnings were far below the $0.16 consensus estimate. Management seems incapable of accurately forecasting its business, and incapable of moving aggressively to improve its operations. Clearly, this management team is mediocre, as we outlined in our initial recommendation. However, we underestimated the duration of the cost and operational issues which seem to be overwhelming management’s capabilities. Despite the awful results, we will keep our Buy rating.

Favorably, management said that raw material costs should fall noticeably in the second half of the year, which would allow full year operating margins to end up at around 8%. Revenues will be incrementally weaker than prior guidance. We’ll take these updates with a grain of salt.

The company blamed inventory destocking by tire distributors. Management said the destocking was now essentially completed with revenues later in the year likely to more closely match end-demand. Favorably, end-demand was generally flattish overall, which would suggest a return to more typical volumes during the third quarter. Demand by car manufacturers was positive as global car production continues to ramp up. But, disappointingly, Goodyear lost market share in the quarter.

Goodyear’s gross margin fell to 16.5% from 20% a year ago. Weaker volumes were partly offset by better net pricing (prices rose faster than raw materials costs). But pricing isn’t offsetting other inflation in wages, transportation, utilities and other overhead costs. Overhead costs fell only $9 million compared to the $225 million decline in gross profits. Reflecting this, the segment operating margin slid to 2.4% from 7.0% a year ago.

Goodyear continues to review its European cost structure. This market may be structurally unfavorable for Goodyear due to lower volumes. The EMEA market, which includes the Middle East and Africa along with Europe, is only half the volume of the Americas market, yet its product complexity is likely equal to that of the Americas.

The Asia Pacific segment was a bright spot, with sales rising 3% and profits doubling, helped by stronger volumes and pricing.

With the loss, Goodyear continues to pile on more debt. Total debt is now $8.8 billion, up from $8.4 billion a year ago. Debt service isn’t an issue yet, helped by the company’s rising cash balance and positive free cash flow as it shrinks its working capital and offloads unnecessary assets. The company’s next major maturity is in 2025 (at $800 million).

On a side note, management might want to ditch the over-produced 34-page earnings release and move to a much shorter report that emphasizes what, specifically, the company is doing to improve its miserable performance.

Janus Henderson Group (JHG) – Janus Henderson Group is a global investment management company focusing on publicly-traded equities and bonds. The 2017 merger of Denver-based Janus Capital Group and London-based Henderson Group was unsuccessful on most counts. Activist Trian Partners is the firm’s largest shareholder, with a 19% stake, and in pressing a major overhaul by replacing the CEO and taking two board seats. Janus is highly profitable, has a fortress balance sheet and pays a generous dividend.

Janus reported a marginally acceptable quarter in which profits were flat but margins contracted and investment flows returned to negative territory. Overall, the quarter provided little of value in assessing the outcome of the new turnaround program. We are encouraged that Trian and Janus’ new leadership appear to be on the right track this time, that Janus will improve its investment product performance and thus generate more funds inflows, but we recognize that this takes time.

Revenues fell 6% and were in-line with estimates. Adjusted earnings of $0.62/share fell one cent from $0.63 a year ago and were about 7% above estimates. Operating costs rose even though revenues fell, which led to a nearly 5 percentage point decline in the operating margin, to 30.2%.

The balance sheet remains “fortress” with $997 million in cash compared to $306 million in debt. Janus generated a strong $171 million in operating cash flow in the quarter.

Kaman Corporation (KAMN) – Based in Connecticut, Kaman is a high-quality defense and aerospace company. A reconfigured board along with a new CEO and several other new senior executives are prioritizing Kaman’s high-value precision engineering operations, and are emphasizing higher margins and shareholder returns while exiting/de-emphasizing the company’s lower value businesses.

Kaman reported a decent quarter with results showing strong growth and beating estimates. However, much of the actual growth was due to the acquisition of Aircraft Wheel & Brake (AWB), which was a rather expensive acquisition but strategically sensible. The company incrementally raised its full-year EBITDA guidance although overall profit guidance is unchanged due to the drag from higher interest expenses.

The current year will continue to see improvements in the core Engineered Products group. The Precision Products and Structures segments remain in overhaul mode, with a range of changes including rebuilding some core operations while fixing/divesting others. Kaman is still very much a work in progress even as it moves in the right direction.

In the quarter, revenues rose 8% excluding the effect of the AWB deal and were 5% above estimates. Adjusted earnings of $0.22/share fell 27% but were sharply higher than the $0.08 consensus estimate. Adjusted EBITDA of $32.0 million doubled from a year ago and was 29% above estimates.

While difficult to tease out the profit improvement ex-AWB, we see that the incremental EBITDA margin was 46%, above the 40% margin of pre-deal AWB. This suggests that Kaman is expanding its profitability excluding the AWB effect, which is key to the company’s turnaround.

Warner Bros. Discovery (WBD) – Warner Brothers Discovery is a global media company with a vast portfolio of properties including the Warner Brothers film studio, HBO, the Discovery Channel, The Learning Channel and CNN. Investors worry about the integration risks and enormous debt burden that accompanied its acquisition of the Warner Media operations from AT&T. Other concerns include Discovery’s streaming challenges and the secular erosion in its network segment. Acknowledging these issues, we see an investment primarily as a turnaround of the Warner Media assets within a stable and profitable Discovery business, led by an aggressive, determined and highly focused CEO. Legacy Warner Brothers is healthy and profitable and produces a large and growing stream of cash flow, buying it time for a turnaround while capably servicing its elevated debt.

The company reported a decent quarter that reflects progress with its integration of the Warner Media assets. Revenue ticked 4% lower on weaker sales of produced content and a slower advertising market, partly offset by strong streaming revenue growth. While revenues were $465 million lower, adjusted EBITDA was nearly $400 million higher (up 23%) due to impressive cost-cutting. Management raised their cost synergy target to above $5 billion.

Discovery’s streaming (Direct-to-Consumer) subscriber count slipped 2% from the prior quarter but segments profits jumped to break-even.

Free cash flow, which is the key metric given the overbearing $47.8 billion in debt, was a strong $1.7 billion in the quarter. The company is on-track for full year free cash flow of $4.5 - $5.0 billion. Management is using much of the cash flow to pay down its debt. Favorably, the average interest rate on the debt is a reasonable 4.6% and most of the debt is due after five years.

Revenues fell 4% on a pro forma basis but were in-line with estimates. Adjusted EBITDA of $2.1 billion rose 23% and was about 9% above estimates. Adjusted loss of $(0.41)/share was not comparable to a year ago and was worse than the $(0.08) consensus estimate.

The company said the Hollywood strike could weigh on future results as production of new shows and films has stalled.

Western Digital (WDC) – Western’s relatively new and highly capable CEO, David Goeckeler, who previously ran Cisco’s Networking & Security segment, is making aggressive changes to improve the company’s competitiveness in disk drives and other storage devices, as well as bolster its financial strength. Following our initial recommendation, the shares approached our price target, then slid sharply due to a deep industry downturn. The company has plenty of financial strength to endure until the next upturn, offering considerable share price upside.

Western reported another large loss during the current industry downturn. Favorably, the pace of the downturn has flattened as revenues fell only 5% from the prior quarter, with Client and Consumer segments showing sequential growth. Management commented that the beleaguered flash market has likely reached its nadir as some key indicators are starting to turn upward. We remain patient with this turnaround.

Free cash flow remained negative, at $(219) million. The balance sheet is sturdy enough with $2.0 billion in cash partly offsetting $7.1 billion in debt. New debt covenants have eased some constraints on the company.

The hard disk drive (HDD) products remain reasonably profitable, posting a gross margin of 20.7% in the quarter, compared to 28.2% a year ago. This is Western’s core group before it acquired flash memory maker SanDisk in an ill-fated deal in 2016. In the most recent quarter, the flash segment gross margin was negative, at (11.9)%. Western’s new management is working to unwind this deal through some combination with Kioxia or other structure.

In the quarter, revenues fell 41% from a year ago but were about 6% above estimates. The adjusted loss of $(1.98)/share compared to a profit of $1.78 and was incrementally better than estimates.

Friday, August 4, 2023 Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 13 minutes and covers:

Comments on recommended companies

  • Volkswagen AG (VWAGY) – Investing $700 million for a 5% stake in Chinese electric vehicle maker XPeng.


  • Shooting (or at least gaslighting) the messenger on the downgrade of U.S. Treasury credit rating.


  • Baseball season is more interesting this year with the new rules and with the Chicago Cubs and Boston Red Sox in wild card contention.

Market CapRecommendationSymbolRec. IssuePrice at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 3.11 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 7.32 - Buy (20)
Small capDril-QuipDRQMay 202128.28 28.11 - Buy (44)
Small capL.B. FosterFSTRJul 202313.60 14.43 - Buy (44)
Small capKopin CorpKOPNAug 20232.03 1.86 - Buy (5)
Mid capMattelMATMay 201528.43 20.50 - Buy (38)
Mid capAdient plcADNTOct 201839.77 44.59 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 15.546.4%Buy (33)
Mid capViatrisVTRSFeb 202117.43 10.454.6%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 51.96 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 22.493.6%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 11.897.9%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 32.721.7%Buy (93)
Mid capPolarisPIIFeb 2022105.78 132.28 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 13.21 - Buy (24.50)
Mid capJanus Henderson GroupJHGJun 202227.17 26.835.8%Buy (67)
Mid capESAB CorpESABJul 202245.64 72.721.3%Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 24.10 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 28.936.9%Buy (50)
Mid capFirst Horizon CorpFHNApr 202316.76 13.414.5%Buy (24)
Mid capFrontier Group HoldingsULCCApr 20239.49 8.27 - Buy (15)
Large capGeneral ElectricGEJul 2007304.96 112.360.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 3.892.3%Buy (12)
Large capMacy’sMJul 201633.61 16.014.1%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 16.026.5%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 13.803.2%Buy (16)
Large capNewell BrandsNWLJun 201824.78 10.802.6%Buy (39)
Large capVodafone Group plcVODDec 201821.24 9.2611.0%Buy (32)
Large capBerkshire HathawayBRK.BApr 2020183.18 353.81 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 45.153.1%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 43.26 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 11.71 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 30.316.3%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 15.525.9%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 12.89 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 112.922.1%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 14.093.8%Buy (24)
Large capTyson FoodsTSNJun 202352.01 56.273.4%Buy (78)

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time. Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at or to our friendly customer support team at Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.