February 2, 2024

In today’s note, we discuss the recent earnings reports from Janus Henderson Group (JHG) and Polaris (PII). Our note also includes the monthly Catalyst Report and a summary of the February edition of the Cabot Turnaround Letter, which was published on Wednesday.

We encourage you to look through the Catalyst Report. This report is a listing of all of the companies that have reported a catalyst in the past month. These catalysts include new CEOs, activist activity, spin-offs and other possible game-changers. We source many of our feature recommendations from this list. You will find it nowhere else on Wall Street.

In this month’s edition of the Cabot Turnaround Letter, we focus exclusively on spin-offs. Spin-offs should be part of every turnaround investor’s toolkit, as they can provide outstanding investment opportunities. We discuss why companies undertake spin-offs, what an “ideal” spin-off might look like, and how management is a key risk in a spin-off. We examine seven attractive spin-offs.

Our Buy recommendation this month, Baxter International (BAX), will be involved in a spin-off transaction later this year, not as the spun-off company but as the parent of a spin-off. We believe this side of the transaction offers contrarian investors an opportunity to buy an out-of-favor company that will have much better fundamentals, partly resulting from the separation.

Comments on Earnings

Janus Henderson Group (JHG) – Janus is a global investment management company focused 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, the firm’s largest shareholder with a 19% stake, is 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 uncorked an impressively strong quarter compared to a year ago and consensus estimates. A rebound in performance fees, encouraging stability in asset outflows and a strong equity market boosted revenues while expenses were somewhat contained – this combination boosted the operating margin by 3.9 percentage points. The performance of its funds is incrementally improving, which is key to Janus’ turnaround. Cash flow was strong and the balance sheet remains solid with net cash of $864 million.

From a big-picture perspective, Janus is a cash flow machine that mostly needs to maintain its profits to be valuable to shareholders. This machine worked again in 2023. Full-year earnings of $435 million matched last year’s $434 million. This allowed Janus to tick up its dividend and repurchase about 1.4% of its shares – returning $321 million in cash to investors. What would drive the stock to our 41 price target is higher assets (particularly if resulting from better investment product performance) and stabilized expenses.

We notice that the fully diluted share count (which includes stock options) didn’t decline, suggesting that the company is issuing options that fully offset the repurchases. From an economic perspective, Janus’ $62 million in buybacks is an expense that would reduce full year adjusted income by about 14%. We’re not highly concerned about this, but investors should be aware that value is being transferred to employees in a subtle way.

All-in, the turnaround under new CEO Ali Dibadj is making progress. We like the strategy, but more improvements are needed from investment performance. The value of better performance can be seen by how asset flows were helped by strong 3Q performance (weak 4Q performance will probably nick 1Q24 flows).

In the quarter, revenues rose 12% and were 10% above estimates. Adjusted earnings of $0.82/share rose 34% and were 49% above estimates.

Polaris (PII) – Shares of this high-quality manufacturer of powersports equipment like off-road vehicles, snowmobiles, motorcycles and boats fell out-of-favor due to concerns over a post-stimulus falloff in demand as well as supply chain disruptions. We believe the company’s long-term prospects remain intact. Polaris produces strong profits and free cash flow, has a solid balance sheet, and a strong, shareholder-friendly management team.

Polaris reported weak results compared to a year ago and estimates. Demand is weakening and margins are being nicked by rising promotional expenses, higher warranty costs and higher finance costs for its distribution channel. The 2024 outlook is for further incremental revenue and profit weakness but stable cash flow. A $150 million cost-cutting program will help the company’s efforts to maintain margins. Polaris’ core offroad/snow mobile business is reasonably healthy.

The company overall remains decently profitable, generates strong enough free cash flow and has a solid balance sheet, so we are not worried about failure. And, the valuation is depressed at 6.6x estimated 2024 EBITDA. However, we are unlikely to see a meaningful recovery in the shares until demand improves, which could be a ways away. For now, we remain patient but uninspired.

Polaris raised its quarterly dividend by 1 cent, to $0.66/share.

In the quarter, revenues fell 5% but were about 2% above estimates. Adjusted earnings of $1.98/share fell 43% and were 24% below estimates. Adjusted EBITDA of $235 million fell 31% from a year ago and was 17% below estimates.

Friday, February 2, 2024 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:

• Comments on earnings
• Comments on recommended companies
  
  • Bayer AG (BAYRY) – Loses a pesticide lawsuit.
  • Fidelity National Info Service (FIS) – Sale of 55% stake in Worldpay is done.
  • Western Digital (WDC) – Restart of merger talks with SK Hynix?
  • Dril-Quip (DRQ) – Weak on news of Saudi capacity limits
  • Volkswagen AG (VWAGY) – Success with Lamborghinis
• Elsewhere in the markets
  
  • Macro: focus on the season, not tomorrow afternoon’s temperature
• Final note
  
  • Stunning amount of momentum in Magnificent Seven stocks.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

The Catalyst Report

Continuing a trend from December, several pharma companies announced large biotech acquisitions in January. GSK (GSK), Johnson & Johnson (JNJ) and Sanofi (SNY) each announced biotech acquisitions worth at least $1 billion, while Merck (MRK) announced a $680 million deal. Novartis (NVS) terminated its $10 billion deal for Cytokinetics (CYTK).

The restaurant industry had several catalysts, including new CEOs at Wendy’s (WEN), BJ’s Restaurants (BJRI) and Shake Shack (SHAK), and the new CEO at Restaurant Brands (QSR) is driving an acquisition of franchisee Carrol’s Restaurant Group (TAST).

The Catalyst Report is a proprietary monthly report that is unique on Wall Street. It is an extensive listing of companies that have experienced a recent strategic event, such as new leadership, a spin-off transaction, interest from an activist investor, emergence from bankruptcy, and others. An effective catalyst can jump-start a struggling company toward a more prosperous future.

This list is intended to be comprehensive. While not all catalysts are meaningful, some can bring much-needed positive changes to out-of-favor companies.

One highly effective way to use this tool is to pair the names with weak stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. The spreadsheet indicates these companies with an asterisk (*), some of which are highlighted below. Market caps reflect current market prices.

The following catalyst-driven stocks look interesting:

Holcim Ltd (HCMLY) $46 billion market cap – This Swiss-based cement and construction materials maker announced that it will spin off its North American operations in 2025. With a valuation of as high as $30 billion, this deal will be worth watching. We’re familiar with Holcim as it was a previously recommended name which produced a 48% return.

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Talen Energy (TLNE) $3.9 billion market cap – This company recently emerged from bankruptcy. Talen is an independent power producer with a fleet heavily weighted toward nuclear power and carbon-light natural gas turbines. What adds to the intrigue is that the company is building a data center to be powered by one of its nuclear facilities, offering the potential for fixed-cost and highly reliable power for this critical use. The shares have run up a bit since its bankruptcy exit, but there is likely considerably more upside if the strategy successfully plays out.

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 bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. 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.

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