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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 24, 2023

This week, we comment on earnings from Elanco Animal Health (ELAN), Gannett (GCI), Kaman Corporation (KAMN) and Warner Bros Discovery (WBD).

We also include the Catalyst Report and a summary of the March 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 the Cabot Turnaround Letter: While large restaurant companies cruised through the pandemic, smaller companies struggled. Some, however, are now undertaking promising turnarounds. We highlight four new ideas including Carrols Restaurant Group (TAST), Dave & Buster’s Entertainment (PLAY), Fiesta Restaurant Group (FRGI), and Potbelly Corporation (PBPB), and provide updates on two previously discussed small-cap restaurants, Red Robin Gourmet Burgers (RRGB) and El Pollo Loco Holdings (LOCO).

For struggling companies, free cash flow is their lifeblood. By using free cash flow yield, we can identify undervalued companies with plenty of cash flow that provides a margin of safety. We discuss three interesting stocks: Dell Technologies (DELL), Dropbox (DBX), and Gulfport Energy (GPOR).

Our feature recommendation this month is a high free cash flow yield situation. Retailer Kohl’s (KSS) is viewed by investors as a broken company left behind by time, trends and technology, with unsettled leadership, further pressured by bloated inventory, a possible recession, and rising labor and goods costs. We see a company with a history of stable revenues and cash flows, that now has a highly capable operator at the helm, whose shares have a free cash flow yield of 13%. The generous dividend pays out close to half of this cash flow, producing a 6.2% dividend yield.

Earnings updates:

Elanco Animal Health (ELAN) – Elanco is one of the world’s largest providers of pet and farm animal health products, ranging from flea and tick collars, to prescription treatments and farm animal nutritional supplements. Following its September 2018 IPO at 24 as part of its spin-off from pharmaceutical giant Eli Lilly, Elanco shares have been lackluster, due to weak revenue growth, high expenses and an uninspiring new product pipeline. Veteran activist investor Sachem Head holds a board seat, likely leading to an upturn in the company’s execution and driving its undervalued shares higher. The August 2020 acquisition of Bayer Animal Health offers additional opportunities for improved results.

Elanco reported a weak fourth quarter – even though the results were ahead of estimates, the revenues and profits fell noticeably from a year ago. And, full-year 2022 results were weaker than 2021 results, and the full-year 2023 guidance points to yet another down year for revenues, profits and margins. Elanco’s debt fell only slightly (about 8%) such that the balance sheet remains overleveraged, while inventories are bloated. About the only bright spot is that expenses are coming down, suggesting that the Bayer synergies and other efficiency efforts are taking hold. We are revisiting our Elanco thesis.

In the quarter, revenues fell 11% (6% excluding currency changes) but were fractionally ahead of estimates. Adjusted earnings of $0.19/share fell 10% but were 46% higher than estimates. Adjusted EBITDA of $174 million fell 19% and was 5% below estimates.

Gannett (GCI) – Gannett, publisher of 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.

Gannett reported decent results relative to dour expectations and provided encouraging guidance, sending its shares sharply higher as short-sellers (9% of shares outstanding) covered their bets. Results were almost uniformly weaker than a year ago and vs estimates, and showed some deceleration from recent trends, but we believe that the estimates were not fully reflective of how depressed investor expectations actually were.

The company is not out of the woods yet, but its news franchise appears to be robust enough. Gannett’s transition from a physical paper company to a digital news service has meant the loss of immense revenues and profits, but the company’s resilience is showing that the end game is stronger than the share price implies. Also, the company continues to cut costs and sell off unneeded assets, freeing up additional incremental cash. The debt burden is hefty at 4.4x EBITDA, but Gannett continues to chip away at it with $97 million (about 7%) less debt than at year-end 2021. Gannett’s strategic priorities are in the right place: Adjusted EBITDA growth and free cash flow generation.

Guidance for 2023 points to nearly stable revenues (down 5% or so) but higher EBITDA (by 13%) and sharply improved free cash flow to as much as $100 million from essentially break-even in 2022.

In the quarter, revenues fell 12% from a year ago and were about 2% below estimates. Adjusted earnings of $0.28/share were sharply higher than $0.05 a year ago and nearly double the consensus estimate. Adjusted EBITDA of $90 million fell 22% and was 15% below estimates.

While revenues weakened and the same-store sales decline worsened from its prior pace, the digital franchise continues to at least maintain its revenue base. Digital-only circulation revenues and digital marketing revenues showed encouraging growth and now comprise almost 60% of total digital revenues. Digital-only paid subscriptions rose 24% from a year ago.

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. The company is profitable and its sturdy balance sheet provides a solid foundation.

Kaman reported an encouraging quarter. While revenues dipped, profits jumped as the company benefitted from its acquisition as well as from stronger orders in its Engineered Products segment. Higher research and development costs are money well spent but incrementally weighed on profits, as did an accounting change to factor in lower profitability on some of its Structures contracts.

Guidance for 2023 was similarly encouraging, pointing to an 8% increase in sales and a 25% increase in EBITDA, with the EBITDA margin expanding to 13.5% compared to 11.7% this past year. Much/most of the increase is driven by its recent Aircraft Wheel and Brake acquisition, but price increases and efficiency improvements are expected to provide an extra boost to margins. Earnings per share guidance points to a sharp decline, but this is due to items below the operating profit line, like higher interest expenses, lower pension income and lower fuze orders – these are small drags on value relative to the improvements both underway and likely ahead in the core operations.

The new leadership is taking reasonably aggressive steps to right Kaman. The acquisition, sizeable write-offs of low-merit projects and goodwill, cost-cutting and its stated emphasis on shepherding cash while prudently investing in R&D, and other steps indicate that the CEO is attentive and working to improve the company.

All-in, the turnaround remains on track but there is still immense work needed.

Kaman’s balance sheet is now more leveraged due to its recent acquisition. Total debt is $561 million, up from $189 million a year ago. At 5.6x EBITDA, this is high. We also note that Kaman’s underfunded pension balance jumped by $30 million, to $52 million, this past year. This appears to be driven by the acquisition but we will need to check the 10-K. If so, it is a hidden increase in the price of the deal. We also note the $10 million investment in Near Earth Autonomy, an impressive early-stage firm that is developing autonomous flight. We hope this is money well spent.

In the quarter, revenues rose 13% but were 4% below estimates. Adjusted earnings of $0.42/share fell 13% from a year ago but were 68% above the pessimistic consensus estimate. Adjusted EBITDA of $31 million rose 32% and was 20% above estimates.

Warner Bros Discovery (WBD) – Warner Brothers Discovery is a global media company, with properties including the Warner Brothers film studio, HBO, the Discovery Channel, The Learning Channel, CNN, HGTV, DC Comics, TBS and Harry Potter. It generates revenues from distribution fees (49% of total revenues), advertising (28%), content licensing (21%) and various other sources (1%). Investors have taken a dour view of Discovery’s recent acquisition of AT&T’s WarnerMedia operations, given the integration risks, new debt burden and lateness to the streaming game, as well as secular erosion in its network segment and headwinds from a recessionary advertising climate. Acknowledging these issues, we see an investment primarily as a turnaround of the WarnerMedia assets within a stable and profitable Discovery business, led by an aggressive, determined and highly focused CEO. Warner 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.

Warner reported a reasonable quarter as it progresses through the early stages of its turnaround of the TimeWarner assets. There are many moving parts in this story. Cost-cutting is evident (down $818 million, or 30% from pro forma year-ago results), the streaming business losses are shrinking (at -$217 million compared to a loss of $728 million a year ago), and streaming subscriber numbers are still rising, albeit slowly (to 96.1 million, up 1% from the third quarter). However, revenues from advertising and distribution are falling due to lower viewership and cord-cutting, as well as general weakness in industry-wide ad spending.

Management remains intensely focused on free cash flow to reduce its unwieldy debt burden. Free cash flow in the fourth quarter was $2.5 billion – higher than most analysts expected. Forward guidance included a step-up in its cost-cutting target but also a subdued EBITDA outlook for just over $11 billion compared to its prior guide for around $12 billion (blaming the weaker ad market). While the company reported no asset sales, they suggested that some are coming. All these improvements, if they happen, will help cut debt directly through paydowns and indirectly by generating higher profits thus reducing debt relative to profits.

All-in, we believe the turnaround remains on track but an immense amount of work lies ahead.

In the quarter, revenues fell 9% ex-currency and were about 2% below estimates. Adjusted EBITDA of $2.6 billion fell 2% ex-currency but was about 3% above estimates. All results were pro forma for the Time Warner acquisition.

Friday, February 24, 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 12 minutes and covers:

  • Earnings
  • Comments on other recommended companies:
    • Toshiba (TOSYY) – our confidence is fading for a worthwhile buyout.
  • Elsewhere in the markets:
    • Wayfair (W) – pandemic hero now a zombie at best?
  • Final note:
    • The Fed, the stock market and diaper changes.

The Catalyst Report

February was a relatively light month for catalysts with about 30, with plenty of new CEOs moving in, along with a few activist campaigns and spin-offs. Several of our recommended stocks had catalysts, including Bayer AG (BAYRY), Kohl’s Corporation (KSS), Western Digital (WDC) and Brookfield Re (BNRE).

Two companies, Sumo Logic (SUMO) and Cvent (CVT), had recent IPOs but are returning to private ownership, an unusual trend that seems to be developing.

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.

You can access our Catalyst Report here.

The following catalyst-driven stocks look interesting:

KOPIN Corp. Logo

Kopin Corporation (KOPN) $128 million market cap – This tiny company has been around for nearly 50 years. The 78-year-old founder/CEO recently stepped aside to hire an outsider as CEO. Changes are afoot to turn this wonky but legit tech engineering hobby and money pit into a profitable business. Despite losses, it has zero debt, but its frequent equity raises have heavily diluted the owners. Kopin makes VR/AR headsets for military, commercial and consumers, which could see major growth.


RBI Logo

Restaurant Brands International (QSR) $35.6 billion market cap – This company owns the Burger King, Popeyes and Tim Hortons restaurants. Much of its revenues and profits are tied to franchise royalties. While RBI has mostly recovered from the pandemic, some of its Burger King franchisees are circling the bankruptcy drain (a major franchisee just filed for bankruptcy), helping lead to the appointment of a 36-year-old whiz kid as CEO. He will be the youngest CEO of any S&P 500 company. The new chief is prioritizing helping the ailing franchisees, which in turn should eventually help RBI. A major beneficiary might be Carrols Brands (TAST), a major franchisee that we discussed in the most recent Cabot Turnaround Letter. Bill Ackman’s Pershing Square is a 7.8% shareholder of RBI.


AMC Networks Logo

AMC Networks Class A (AMCX) $1.0 billion market cap – AMC is unrelated to the movie theatre company, but rather is a cable network company that owns the AMC, BBC America, Sundance, IFC Films and other network channels. Its Walking Dead, Mad Men and other mega-hits are past their prime, and cord-cutting is shrinking AMC’s revenues. A recent new CEO was fired and was replaced by Kristin Dolan, the wife of controlling shareholder James Dolan. Mrs. Dolan is perhaps not to be underestimated and could bring about either a turnaround, a new corporate structure or a sale at a much higher price. An indicator of renewed investor confidence: the shares are up 34% since the news. Even so, the shares remain deeply discounted.

Market CapRecommendationSymbol



Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 3.19 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.08 - Buy (20)
Small capDril-QuipDRQMay 202128.28 29.31 - Buy (44)
Small capZimVieZIMVApr 202223.00 11.01 - Buy (32)
Mid capMattelMATMay 201528.43 18.53 - Buy (38)
Mid capConduentCNDTFeb 201714.96 4.17 - SELL *
Mid capAdient plcADNTOct 201839.77 43.40 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 16.616.0%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.54 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.544.2%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 26.654.2%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 48.85 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 25.623.1%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 13.277.1%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 34.051.6%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 34.06 - Unrated
Mid capPolarisPIIFeb 2022105.78 115.68 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.30 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 56.28 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 27.635.6%Buy (67)
Mid capESAB CorpESABJul 202245.64 58.09 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 27.71 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 29.506.8%Buy (50)
Large capGeneral ElectricGEJul 2007304.96 82.940.4%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.652.0%Buy (12)
Large capMacy’sMJul 201633.61 20.743.0%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 15.786.6%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 12.203.6%Buy (16)
Large capNewell BrandsNWLJun 201824.78 14.826.2%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.888.6%Buy (32)
Large capMolson CoorsTAPJul 201954.96 53.502.8%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 303.07 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 46.252.6%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 39.79 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 12.06 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 36.215.3%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 17.894.2%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 15.73 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 109.512.2%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 16.083.4%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.