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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 16, 2023

On February 14, after the market close, Conduent (CNDT) reported another mediocre quarter and year and offered a mediocre outlook for 2023. There is little reason to believe that this company can implement any meaningful improvements in its profit structure, even with the pressure from 18% owner Carl Icahn1, so we are moving the shares to Sell.

In the quarter, revenues fell 5%, although this was in line with estimates. Adjusted earnings of $0.01/share fell 92% and were sharply lower than the $0.04 estimate. Adjusted EBITDA of $95 million fell 10% and was below estimates.

Full-year revenues fell 5%, adjusted earnings fell 66% and adjusted EBITDA fell 12%. The company is break-even on free cash flow and carries $1.3 billion in debt. While it holds nearly $600 million in cash, we believe that this is effectively not available for debt reduction as it provides vital confidence to customers that Conduent has financial durability.

Since our initial recommendation in the February 2017 Cabot Turnaround Letter following the spin-off from Xerox, CNDT shares have generated approximately a (72%) loss. Unfortunately, not all turnarounds, nor turnaround investments, are successful. This one clearly was a dismal failure. We are disappointed in this outcome, but thankfully it is a rare exception to our otherwise favorable track record.

1. The $154 million position is a tiny 0.7% of Carl Icahn’s estimated $22 billion portfolio and apparently a low priority.

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.