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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 9, 2024

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This week, we review earnings reports from Adient (ADNT), Ammo (POWW), Baxter International (BAX), Brookfield Re (BNRE), Frontier Group Holdings (ULCC), Mattel (MAT), Newell Brands (NWL), Tyson Foods (TSN) and Western Union (WU).

Next week we anticipate earnings from TreeHouse Foods (THS), Vodafone (VOD), Goodyear Tire (GT) and Agnico Eagle Mines (AEM). Please know that some reporting dates are estimated based on the companies’ reporting history, others are confirmed dates. As always, it’s likely that some companies will report on a day different from what we anticipate.

Comments on Earnings

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 produced an impressive turnaround. Effective last year-end, Del Grosso has stepped down, replaced by Jerome Dorlack, who appears to be a capable successor.

Adient reported an uninspiring quarter, although management reaffirmed its 2024 guidance for an increase in earnings and margins. Flat revenues and weaker profits were partly due to effects of the labor strike at automakers and partly due to timing issues related to supplier refunds and product launches/conclusions. The turnaround thesis has largely played out, and the turnaround CEO has retired. Adient continues to move forward with new product wins and cost efficiency programs, but we see a slog ahead. The valuation isn’t particularly compelling at 5.3x EBITDA. Adient is a high-quality and increasingly well-run company but these strengths are largely offset by the aggressively competitive cyclical industry with erosion risk from Chinese customers who are shifting toward domestic suppliers.

In the quarter, the company repurchased 3% of its shares. The balance sheet, in terms of net debt, incrementally weakened by $150 million due mostly to the $100 million share buyback but remains sturdy with net debt at only 1.7x EBITDA. Free cash flow was $(14) million but fractionally better than a year ago.

In the quarter, revenues fell 1% and were 1% below estimates. Adjusted earnings of $0.31/share fell 9% and were 34% below estimates. Adjusted EBITDA of $216 million rose 2% but was 4% below estimates.

Ammo, Inc. (POWW) – Ammo produces rifle and pistol ammunition for sport, law enforcement and military uses and owns The 82-year-old founder, an old-school “American success story,” has handed the reins to a capable industry veteran who is bringing online a much more efficient production facility, shifting the company to higher-margin segments and installing a professional organizational structure. Ammo’s balance sheet is solid with more cash than debt and is profitable. The valuation overly discounts the improving fundamentals and the marketplace. Risks are high, however, given the company’s small/micro-cap business and the controversial and potentially legal liability-intensive nature of producing ammunition and selling guns.

The company reported decent fiscal third quarter results and indicated that it continues to make progress with its turnaround/build-out. Revenues continued to be pressured incrementally by industry-wide price and volume competition but higher-value mix helped to mostly preserve the company’s gross margin.

The balance sheet remains fortress-like with $55 million in cash that is only partly offset by $11 million in loans. Ammo repurchased 145,000 shares. The new website, which will allow multiple purchases, will launch on April 1st, which should boost revenues and earnings.

In the quarter, revenues fell 7% but were 3% above estimates. Adjusted earnings of $0.04/share were unchanged from a year ago and were double the $0.02 estimate. Adjusted EBITDA of $5.4 million fell 13% but was 13% above estimates. Only two analysts cover Ammo, Inc., so the consensus estimate may not necessarily be well-formed.

Regarding the lawsuit by prior owner Steve Urvan, the 10Q said that “The Court of Chancery held a hearing on both motions to dismiss in the consolidated action on December 18, 2023. The parties are currently awaiting a ruling.” A separate but related lawsuit is scheduled for a one-day trial in February 2024.

Baxter International (BAX) This medical devices and supplies company will spin off its kidney care operations in 2024. 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.

The company reported a reasonable quarter that was incrementally above consensus estimates, but its 2024 guidance was incrementally below consensus estimates. Baxter is a complicated company whose earnings reports offer a lot of information but not entirely the kind of information we need. We will be looking forward to the company’s cash flow statement and balance sheets (not provided in today’s release – we will need to wait for the 10K), as well as more financial details on the Kidney Care business to be spun out this year (details to be provided in advance of the spin).

For now, we are satisfied that the story remains on track at this very early stage.

In the quarter, revenues rose 4% and were 2% above estimates. Adjusted earnings of $0.88/share increased 13% and were 2% above estimates.

Brookfield Reinsurance Ltd (BNRE) – Recently partly spun out of highly regarded Canadian investment management firm Brookfield Asset Management, BAM Re is a new investment company that acquires the assets of and future contributions to pension plans and life insurance books. It invests these assets with the expectation that the returns will be significantly greater than the build-up in the related payout obligations. Over time, excess returns can build up considerable value for shareholders.

Brookfield Re reported an encouraging quarter, with distributable operating earnings of $258 million increasing 51%. Profits are rising as the company is shifting its investment assets into higher-yielding strategies, and as it increases its asset total.

Total assets increased 41%, as the company added the assets from its recently completed purchase of Argo Group and as it originated new funds from revenues from various insurance products. The acquisition of American Equity Life should close soon, bringing Brookfield Re’s total assets to over $100 billion. Brookfield remains well-capitalized and well-positioned to continue its profitable growth.

The company raised its quarterly dividend by one cent to $0.08/share.

Frontier Group Holdings (ULCC) - Frontier is an ultra-low-cost airline focused on leisure travel. Our initial Recommendation looked like an opportunistic purchase of a financially strong airline that was trading near an all-time low and 50% below its IPO price. However, in hindsight, this was ill-timed as weak demand has pressured the company’s ability to fill its increasing capacity. The company’s balance sheet carries more cash than debt. Management is capable and entrepreneurial.

Frontier reported weak results that were significantly better than dour estimates, driving the shares sharply higher. Available seat miles (capacity) rose 15%, while prices fell 15% (as measured by revenue per available seat mile). Costs per available seat mile fell 10%, such that costs fully offset revenues and thus erased any profits.

Management’s outlook for 2024 was incrementally encouraging in that costs/available seat mile were anticipated to decline. With revenues being unpredictable, lower costs suggest that the company can continue to undercut its rivals without overly sacrificing its profits. Management provided some reasonable indicators that the summer 2024 season would be a profitable one for the airline.

The company provided a 2025 adjusted pre-tax margin target of 10-14%. We view this as aspirational rather than likely. Still, it shows that management is relentless in its aggressive pursuit of more revenues and lower costs. This attitude goes a long way toward buttressing our Frontier thesis.

Frontier is relentless in its expansion strategy, even in the face of industry over-capacity in the leisure markets. Frontier’s fourth-quarter capacity increased 15% and the company said it would further expand capacity by 12-15% in 2024. It announced new routes and expanded operations in several new markets that it believes are overpriced and underserved, took delivery of four new aircraft, and announced new crew bases in four cities.

The company’s opportunistic mindset and tactical flexibility allow it to quickly shift away from glutted markets into tighter markets – giving it the ability to bypass much, but not all, of the effects of the industry’s overcapacity. This strategy works as long as demand and pricing remain reasonable, Frontier can maintain its low costs, and its balance sheet can withstand reasonable cash outflows.

The balance sheet remains cash-heavy, with $609 million in cash against $470 million in debt.

All of Frontier’s aircraft are Airbus jets, so it is avoiding the maintenance and reputational damage from Boeing’s quality debacle. If passengers start to avoid Boeing aircraft, Frontier would be an incremental beneficiary.

In the quarter, revenues fell 2% but were in line with estimates. Adjusted earnings of break-even compared to earnings of $0.17/share a year ago but were sharply higher than the consensus estimate which called for a $(0.23) loss. Adjusted EBITDAR of $137 million fell 35% but was higher than the $95 million estimate. EBITDAR is EBITDA plus aircraft rent – basically, cash operating profit before financing costs for its aircraft. While this pushes the concept of “earnings” into the murky zone, it captures the underlying economics reasonably well.

Mattel (MAT) – At our initial recommendation in 2015, Mattel was struggling with its failure to adjust to the realities of how young children spent their playtime. This failure had produced years of revenue decay. In addition, its cost structure became bloated, and its debt levels increased. However, led by its new CEO, Mattel now appears to be finding its way.

Mattel reported results that were sharply better than a year ago even if they were shy of analyst estimates. Guidance for next year was reasonably strong.

Mattel is now generating significant free cash flow. For the year, free cash flow was $709 million. In 2018, the company bled almost $200 million in cash outflow. Today, thanks to the gusher of cash, Mattel’s debt net of cash is only $1.1 billion, down by $500 million from a year ago and down by $1 billion from 2020. Capable management has also helped clean up inventory and other balance sheet items.

We see a few hurdles that are keeping Mattel from reaching our $38 target price. First, while sales and profits are strong now, investors aren’t yet convinced of their sustainability. A recession, even if minor, would almost certainly weigh heavily on sales and profits, as would any changes in the trends supporting Barbie, Hot Wheels and other toys. Strong Barbie sales were boosted by the immense popularity of Barbie (the movie) which won’t be repeated.

Second, Mattel probably needs to show that it can turn around its lagging Fisher-Price and American Girl units. These have been rightfully cited by activist investors for their weak performance, with some calling for divestiture. Third, the company probably needs to show that it can monetize its brands through movies, streaming shows and other avenues. Another blockbuster like Barbie, that features a different Mattel brand, could go a long way toward achieving this.

Putting numbers to all of this: to reach our $38 price target, it might take higher earnings and a higher multiple: perhaps $1.4 billion in EBITDA and a 10x multiple, compared to our 2024 EBITDA estimate of $1.0 billion and a 7.7x multiple.

Activist investor Barrington Capital Group is pushing for changes at Mattel, so pressure on management to boost performance and perhaps accelerate share buybacks is now greater. The recent change-out of leadership at Fisher-Price, the addition of a talented strategy officer and two changes to the board of directors, along with a new $1 billion share buyback program, are good fundamental ideas but also indicate some worry by management that the activists might be correct. Activist pressure suggests that the company is undervalued – an opinion with which we agree.

In the quarter, revenues rose 16% but were 1% shy of estimates. Adjusted earnings of $0.29/share increased 61% but were 9% below estimates. Adjusted EBITDA of $234 million rose 48% but was 6% below estimates.

Mohawk Industries (MHK) – Mohawk is a high-quality, major global producer of flooring including carpets, tiles, laminates and vinyl. It favorably addresses the three basic questions when investing in cyclical companies: can the company survive until the upturn, what will industry conditions be like in the upturn, and does the current share price offer an attractive-enough entry point.

Mohawk reported stronger earnings that were above estimates. The company has been cutting costs, improving its productivity and taking other steps to remain profitable during the downturn, as well as investing in new products to remain highly relevant to consumers’ tastes. Free cash flow was weak but positive at a respectable $56 million, buoyed by a work-down of inventory, which helped reduce Mohawk’s already reasonable debt burden. For the year, free cash flow was a healthy $716 million.

First-quarter guidance is for adjusted earnings of $1.60-$1.70/share, down modestly from $1.75 a year ago but still quite respectable for what appears to be a cyclical bottom.

In the quarter, revenues fell 1% and 4% on an organic basis but were about 2% above estimates. Adjusted earnings of $1.96/share increased 48% and were 5% above estimates.

Newell Brands (NWL) – The company has struggled, literally for decades, with weak strategic direction and expense control, epitomized by its over-reaching $16 billion acquisition of Jarden in 2016. Pressured by activist investors last year, and now led by a capable new CEO, Newell appears to be finally fixing its problems, although the turnaround could take a while. The shares are significantly undervalued relative to their post-turnaround potential.

Newell reported declining sales but strong profit improvements, with both coming in above consensus estimates. However, the outlook for 2024 is for weaker revenues and earnings, which sent the shares tumbling. Our view: the turnaround is working but is in the early and ugly stages.

What is working: gross margins and operating margins are expanding meaningfully. The 4Q gross margin of 32.3% and operating margin of 7.7% were sharply higher than 26.6% and 4.9%, respectively, a year ago. This reflects the company’s new productivity initiatives, elimination of low-profit products, improvements of the front-end commercial capabilities, and cost reductions. The new leadership is aggressively fixing the company’s internals – this is highly encouraging.

The balance sheet is stronger. Inventory is 31% lower than a year ago, which has released $670 million in cash. Cutting this much inventory while expanding gross margins is an impressive feat. And, lean inventory is key to future product and merchandising flexibility. The debt balance is down 9%, or $800 million, from a year ago, even as the cash balance ticked higher.

Full-year free cash flow is sharply higher – we give credit to the new CEO who arrived last May. Operating cash flow was $930 million, a complete reversal of the year-ago $(272) million outflow.

The 2024 outlook is for a 5-8% revenue decline and a 28% per-share earnings decline. Importantly, however, operating margin guidance of 8% is higher than the 2023 margin of 7%.

We will have more comments next week after we’ve reviewed the conference call transcript and worked some new numbers in our model.

In the quarter, revenues fell 9% but were 5% above estimates. Normalized earnings of $0.22/share increased 38% and were 29% above estimates.

Tyson Foods (TSN) Tyson is a major food company specializing in beef products (37% of sales), chicken (32%), pork (12%) and Prepared Foods (18%). Its chicken operations are vertically integrated, while its beef and pork operations buy from independent farmers. The shares have slid sharply due to an unusual simultaneous downcycle in all three protein groups. The profit wipe-out, combined with a multi-year boost in capital spending, had led to elevated debt. While Tyson is admittedly an average company in a commodity industry, its share price assumes dim earnings prospects. We see an eventual upturn that offers considerable upside potential. The hardest time to invest in a cyclical company is at the bottom of the cycle, when it appears that there is little chance of a recovery.

Tyson reported a decent quarter relative to still-dour expectations. Conditions in the chicken and pork markets are improving, with the two segments’ profits increasing to $260 million from $58 million. Beef conditions remain depressed and the segment slipped into a $(117) million loss compared to a $129 million profit a year ago. The Prepared Foods segment continues to generate decent profits and margins. Overall volumes were flat but pricing ticked up 0.4%.

The company generated $950 million of free cash flow in the quarter, helped considerably by working capital improvements. Tyson accumulated this cash on the balance sheet which reduced its hefty net debt burden by 9%.

Tyson incrementally raised its full-year outlook for the chicken and pork segments, while trimming its capital spending guidance. All-in, the turnaround continues to grind forward.

In the quarter, revenues were up fractionally compared to a year ago and to estimates. Adjusted earnings of $0.69/share fell 19% but were 64% above estimates. Adjusted EBITDA of $744 million fell 6% but was 17% above estimates.

The Western Union Company (WU) – This widely-recognized money transfer company is facing secular headwinds from the transition to digitalized money movement. Prior efforts to diversify away from the core retail business using the company’s sizeable cash flows were unsuccessful, but a new CEO with impressive fintech experience brings the real possibility of a meaningful improvement in both execution and strategy as it makes its transition to the digital world. Investors have aggressively sold WU shares, ignoring the company’s relatively stable revenues, sizeable free cash flow and valuable intangible assets as well as its generous dividend yield.

Western Union reported an encouraging fourth quarter and year that continued to illustrate how the company is (so far) a cash flow machine (no pun intended). Revenues and margins were stable for the quarter and year, full-year cash from operations was nearly $800 million and free cash flow was $635 million. For perspective, $635 million is 15% of the company’s market value. Guidance is for 2024 to be basically a repeat of 2023, with incrementally lower revenues, higher margins and flattish EPS.

Western used its cash to pay its generous $0.235/share quarterly dividend (totaling $346 million for the year) and repurchase 6% of its shares (cost was $300 million) while trimming its net debt by $100 million. The new CEO is not only executing a complicated turnaround but is also returning the cash to investors.

Underlying fundamentals remained stable to improving. Consumer transactions rose 5% while the cross-border dollar amount rose 7%. Branded digital transactions rose 13% and are now about 21% of total company revenues (up from 19%), suggesting that the company’s digitization migration is moving in the right direction. The sharp decline in transactions a year ago, which spooked investors, appears to have been a one-time shock as volumes are convincingly stabilizing.

The turnaround has a long way to go. The leadership is showing great promise and results so far, but these could be derailed by ill-advised acquisitions and changes in a wide range of macro and micro conditions. It is this seeming fragility that is keeping most investors on the sidelines of the Western Union turnaround.

In the quarter, revenues fell 4% but were 3% above estimates. While reported revenues fell 4%, they fell only 1% after adjusting for divestitures, currencies and Argentina inflation. Adjusted earnings of $0.37/share rose 16% and were in line with estimates. Adjusted EBITDA was unchanged but was 8% below estimates.

Friday, February 9, 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 16 minutes and covers:

  • Comments on earnings
  • Comments on recommended companies
    • Warner Bros Discovery (WBD) – Joins partnership to stream live sports
    • Kopin Corp (KOPN) – Huge trading volume
    • Elanco Animal Health (ELAN) – Parts with its aqua health business.
    • Walgreens Boots Alliance (WBA) – New CEO moving quickly.
  • Final note
    • The Super Bowl and kudos to Las Vegas.

Market CapRecommendationSymbolRec. IssuePrice at Rec.Current Price *Current YieldRating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.20 -Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 4.93 -Buy (20)
Small capDril-QuipDRQMay 202128.28 20.32 -Buy (44)
Small capL.B. FosterFSTRJul 202313.60 23.82 -Buy (44)
Small capKopin CorpKOPNAug 20232.03 2.22 -Buy (5)
Small capAmmo, Inc.POWWOct 20231.99 2.21 -Buy (3.50)
Mid capMattelMATMay 201528.43 18.87 -Buy (38)
Mid capAdient plcADNTOct 201839.77 33.62 -Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 18.485.4%Buy (33)
Mid capViatrisVTRSFeb 202117.43 11.564.2%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 43.10 -Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 45.291.8%SELL
Mid capThe Western Union Co.WUDec 202116.40 12.087.8%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 40.550.8%Buy (93)
Mid capPolarisPIIFeb 2022105.78 90.912.9%Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 13.61 -Buy (24.50)
Mid capJanus Henderson GroupJHGJun 202227.17 30.575.1%Buy (67)
Mid capSix Flags EntertainmentSIXDec 202222.60 25.21 -Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 26.927.4%Buy (50)
Mid capFrontier Group HoldingsULCCApr 20239.49 7.32 -Buy (15)
Mid capAdvance Auto PartsAAPSep 202364.08 64.141.6%Buy (98)
Mid capMohawk IndustriesMHKJan 2024103.11 109.61 -Buy (165)
Large capGeneral ElectricGEJul 2007304.96 139.050.2%Buy (160)
Large capNokia CorporationNOKMar 20158.02 3.683.3%Buy (12)
Large capMacy’sMJul 201633.61 19.243.4%Buy (25)
Large capNewell BrandsNWLJun 201824.78 8.453.3%Buy (39)
Large capVodafone Group plcVODDec 201821.24 8.1612.5%Buy (32)
Large capBerkshire HathawayBRK.BApr 2020183.18 397.49 -HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 48.352.9%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 57.12 -Buy (78)
Large capElanco Animal HealthELANApr 202127.85 15.87 -Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 22.544.4%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 14.296.4%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 9.83 -Buy (20)
Large capCapital One FinancialCOFNov 202296.25 135.381.8%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 7.537.2%Buy (24)
Large capTyson FoodsTSNJun 202352.01 53.973.6%Buy (78)
Large capAgnico Eagle MinesAEMNov 202349.80 47.173.4%Buy (75)
Large capFidelity Natl Info ServicesFISDec 202355.50 61.443.4%Buy (85)
Large capBaxter InternationalBAXFeb 202438.79 40.462.9%Buy (60)

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.

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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.