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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 17, 2023

This week, we comment on earnings from Conduent (CNDT), Ironwood Pharmaceuticals (IRWD), Organon (OGN), Toshiba (TOSYY) and TreeHouse Foods (THS).

Earnings updates:

Conduent (CNDT) – Conduent was spun off from Xerox in 2017. After a promising start, the company’s revenues fell sharply due to management problems, leading to a collapse in its share price. In late 2019, the company replaced the CEO, who began a major overhaul that is starting to show progress. Activist investor Carl Icahn owns 18% of Conduent’s shares, while Darwin Deason (who sold his business to Xerox which later was spun off as Conduent) holds a 3.3% stake.

Conduent 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 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.

Ironwood Pharmaceuticals (IRWD) – After years of weak leadership, Ironwood has one remaining product, Linzess, so investors view the company as a failed business. However, Linzess is a steady revenue producer with growing volumes that offset its slow per-unit price decline. As cash accumulates on the balance sheet and now exceeds its debt, Ironwood is repurchasing its shares. Respected activist investor Alex Denner, who now holds a board seat, is exerting his influence, including ousting the CEO and slashing spending. Ironwood’s shares trade at a highly discounted valuation.

Ironwood reported a respectable quarter, with the 8% decline in revenues attributable to a work-down of Linzess inventories in the sales channel, as end demand (measured by prescriptions) rose 9%. In our view, we need to see only fractional revenue growth, so the growth in end demand is encouraging and overrides the decline in actual sales. The Linzess franchise appears to be retaining its durability.

Profits met the company’s prior guidance – also encouraging as they continue to invest in new treatments (not our preferred use of cash) without sacrificing profit stability/growth. We grudgingly see the new treatments almost as free options, given the tight expense control and the very close relationship between the new and existing treatments. This proximity greatly reduces the risk as opposed to pursuing unrelated treatments which would amount to expensive lottery tickets.

Forward guidance for 2023 was encouraging, calling for 3-5% growth of U.S. Linzess sales and 7% total revenue growth, with adjusted EBITDA remaining above $250 million.

Free cash flow for the year was robust at $270 million. The company continues to improve its balance sheet (has fully repaid the convertible notes in cash) and now has $260 million of cash in excess of debt, even as it repurchased $126 million worth of its shares.

In the quarter, revenues fell 8% from a year ago and were about 1% below estimates. Adjusted net income of $0.27/share was unchanged but came in about 4% above estimates. Adjusted EBITDA of $69 million rose 21% and was about 1% above estimates.

Organon & Co (OGN)Recently spun off from Merck, Organon specializes in patented women’s healthcare products and biosimilars. It also has a portfolio of mostly off-patent treatments. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

Organon reported a complicated quarter that left us needing more time and information to assess where to go from here with our investment. The spin-off was to produce at least stable and large free cash flows with a reasonable potential for growth with, essentially, traits of a modern era “cigar butt” that was a dull but undervalued asset worthy of a higher share price. However, the management is morphing Organon into a company with more expensive growth aspirations that are weighing down free cash flow even as revenues continue to fall. The company has yet to release its balance sheet and cash flow information.

In the quarter, revenues fell 7% from a year ago but were essentially in line with estimates. Adjusted earnings of $0.81/share fell 28% and were 11% below estimates. Adjusted EBITDA fell 19% and was 10% below estimates.

Full-year 2023 sales fell 2% and adjusted EBITDA fell 8%, both within guidance provided on the third-quarter earnings call but moving in the wrong direction.

Management is now clearly emphasizing growth, not profits or cash flow, that requires elevated spending on research and development as well as selling and promotions. Overhead spending for the year rose by 3.3 percentage points of revenue, to 31.9% of revenues. In the fourth quarter, overhead reached 37.5% of revenues.

Pressures on gross margin aren’t helping. While the company met its late-2021 guidance for 2022 gross margins of mid-60% (actual was 65.7%), fourth-quarter results slid sharply to 63.1% compared to the year-ago 66.0%. Management attributed most of the decline to production issues at one of its plants, but this seems like cherry-picking. Forward guidance is for about 63%.

The pressure on gross margins and higher spending are weighing on profits. In late 2021, the company guided to a 2022 EBITDA margin of 34-36%. The actual for 2022 was 33.8%. Guidance for 2023 is for margins of 31-33% (so, 32% at the mid-point) – clearly moving in the wrong direction. We get a sense that management has great confidence in its abilities to create impressive new products and identify/acquire others at bargain prices. We aren’t so confident.

Another problem is the separation costs. The spin-off was completed in mid-2021, allowing plenty of time for a full weening. But last year those costs were $226 million, and we would think that they would approach zero in 2023, which would provide a sizeable profit tailwind. But, management said the 2023 costs would match the 2022 costs. We appreciate the complexities of spin-offs but the “one-time costs” are now recurring even as they continue to be waived out of adjusted EBITDA.

So, with more questions than answers, but a somewhat cheap stock statistically (6.9x EV/EBITDA) that was heavily sold yesterday, we will wait for more information.

Toshiba (TOSYY) – This Japanese industrial conglomerate is recovering from its nuclear power plant construction business (Westinghouse Electric) debacle, which forced it to sell a majority stake in its Kioxia memory chip production operations. We are looking for a breakup of the company. Note: ¥100 = $0.75.

Toshiba reported a weak third quarter, with sloppy semiconductor and hard disk drive industry conditions, along with various non-cash charges, weighing on results. The company’s guidance for full-year results was mildly discouraging, calling for incrementally weaker revenues and profits for what already was tilting toward a disappointing year. Operating profits were guided to a 40% slide from last year, again, partly due to charge-offs.

In the quarter, revenues fell 4% from a year ago, while operating earnings fell 88%. Most of the sharp profit decline was due to various accounting charges and write-offs, but losses worsened in the Energy Systems & Solutions and Electronic Devices & Storage Solutions segments. The balance sheet remains solid.

The shares are being supported by the likely forthcoming bid by Japan Industrial Partners. We are OK fans of merger arbitrage, and this stock is now becoming sort of such a situation. But, not true merger arbitrage, as no firm offer is on the table. So, we must wait, perhaps uncomfortably, for a bid that will almost certainly be inadequate and followed by further legal and other arguments about the size of the bid, the bidder’s motives, management’s motives and other demoralizing if not amusing drama.

TreeHouse Foods (THS) – As a major contract producer of private-label foods, TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy even as the private-label food industry remains healthy. The company remains profitable and generates reasonable free cash flow. Respected activist investor JANA Partners has a large 9.2% stake and is likely to pressure this undervalued company to either sell or change its strategy and leadership.

TreeHouse stumbled through its fourth quarter with reasonable results. The company continues to be plagued by poor execution, bloated inventory and weak underlying profit in its core business, supported mostly by sharp pricing increases that are likely one-time in nature and may not be entirely supportable in future years (may be given back if competition increases).

Favorably, the company is showing positive unit volume growth while the overall industry categories are flat/negative. TreeHouse is chipping away at its debt, generously helped by cash from its divestiture. Guidance was encouraging, with sales and adjusted EBITDA (see our comments later in this note) pointing to decent improvements over 2022. Their 2024-and-beyond guidance, particularly with their guidance for at least $200 million of annual free cash flow, is encouraging, but we view this with skepticism.

We are staying with the stock given the positive fundamental trajectory and the ongoing close monitoring by activist Jana Partners, although we note that the fund has trimmed its THS position by 7% recently.

In the quarter, revenues rose 22% from a year ago but fell 2% short of the consensus estimate. Adjusted earnings of $0.98/share compared to $0.23 a year ago but were 1 cent below the consensus estimate. Adjusted EBITDA of $120 million, which TreeHouse generously calculates, nearly doubled from the year-ago $70 million and were 9% above the consensus estimate. The 12% adjusted EBITDA margin was among the highest in a few years.

We are disappointed that TreeHouse continues to purvey an overly massaged EBITDA number. The most flagrant violation of clarity is its $19 million add-back for “Growth, reinvestment, restructuring programs & other.” They provide no breakout of how much is “restructuring” which may be reasonably excused. Their removal of “growth” and “reinvestment” is abusive of shareholders’ sensibilities at best – isn’t every company supposed to invest in growth as part of its daily activities? The $19 million add-back is 10% of fourth quarter EBITDA and the $85 million for the full year is 30% of EBITDA. This treatment shows that the leadership is disingenuous and should be removed. We will use the company’s EBITDA guidance the same way we use the EPA mileage estimates on cars – in no way representative of our actual mileage but useful in that the calculation method is consistent across time.

Friday, February 17, 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 11 minutes and covers:

  • Earnings reports
  • Comments on other recommended companies:
    • Vodafone (VOD) – Liberty Global takes a 4.9% stake.
    • Bayer AG (BAYRY) – Gets its new CEO sooner than we anticipated. The choice looks like a good one.

Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.90 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.15 - Buy (20)
Small capDril-QuipDRQMay 202128.28 31.78 - Buy (44)
Small capZimVieZIMVApr 202223.00 11.83 - Buy (32)
Mid capMattelMATMay 201528.43 18.42 - Buy (38)
Mid capConduentCNDTFeb 201714.96 4.17 - SELL *
Mid capAdient plcADNTOct 201839.77 44.34 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 16.716.0%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.35 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.654.1%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 24.874.5%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 48.50 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 25.383.2%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 14.106.7%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 36.081.6%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 35.38 - Unrated
Mid capPolarisPIIFeb 2022105.78 119.80 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.70 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 58.23 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 28.555.5%Buy (67)
Mid capESAB CorpESABJul 202245.64 58.98 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 28.96 - Buy (35)
Large capGeneral ElectricGEJul 2007304.96 84.050.4%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.731.9%Buy (12)
Large capMacy’sMJul 201633.61 22.292.8%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 16.146.4%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 12.193.6%Buy (16)
Large capNewell BrandsNWLJun 201824.78 15.306.0%Buy (39)
Large capVodafone Group plcVODDec 201821.24 12.208.4%Buy (32)
Large capMolson CoorsTAPJul 201954.96 51.403.0%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 308.18 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 47.222.5%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 42.57 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 13.25 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 36.325.3%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 17.864.3%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 15.31 - Buy (20)
Large capDowDOWOct 202243.90 60.094.8%SELL *
Large capCapital One FinancialCOFNov 202296.25 111.552.2%Buy (150)
Large capMeta PlatformsMETA Jan 2023118.04 186.53 - SELL *
Large capBayer AGBAYRYFeb 202315.41 15.923.4%Buy (24)

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.