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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 6, 2023

With today’s note, we make changes to ratings on two stocks (Macy’s and GE Healthcare Technologies), discuss the earnings report from Walgreens Boots Alliance (WBA) and provide updates on several recommended stocks.

Next week, Wells Fargo (WFC) reports earnings, with the deluge starting the week of January 23.

Shares of Macy’s (M) have ticked above our recently raised $20 price target. We continue to like the shares, as the company is executing well, and its customer base seems to be doing fine as the labor market remains strong, and the shares remain undervalued. So, we are raising our price target to $25.

General Electric (GE) spun off its GE Healthcare Technologies (GEHC) business on Tuesday, January 4. GE shareholders received 1 GEHC share for every 3 GE shares owned. General Electric continues to own 19.9% of GE Healthcare but will gradually divest this stake. We are moving the shares from Unrated to Sell.

The new company is primarily a healthcare equipment maker, focusing on imaging (MRI, CT, others) and ultrasound gear. It also sells patient care solutions (data analysis) and pharma diagnostics products (imaging consumables). Revenue growth is likely to be modest, at perhaps 3-5%, as the industry is mature and served by several large competitors while the number of buyers is limited yet they have increasing negotiating power. About half of the company’s sales are recurring. We would consider the leadership to be good.

Like most spin-offs, the new company is emphasizing its expectations for healthy sales growth and expanding margins (EBITDA margin is targeted to increase from about 15% to a goal of perhaps 18%), buttressed by its market leadership, new product innovations and efficiency programs.

Our view is that GE Healthcare may well be a decent company, but its growth rate potential is limited, and its profit margin expansion will be grinding due to competition and likely higher research, development and other costs. And, the company has probably already cut considerable expenses under GE CEO Larry Culp. We think it will struggle to even come close to its 18% margin goal. GE Healthcare has an over-levered balance sheet at 3.5x EBITDA that will likely constrain its financial flexibility. We see 2023 as a transition year that will probably be uninspiring.

The share valuation is reasonable at best, at 12x EBITDA and 17x per share earnings based on 2023 estimates. The free cash flow yield of 5% is not attractive.

We see little chance of a meaningful post-spin-off bounce in the shares, given the long lead-time that investors have had to prepare for the transaction. The shares joined the S&P 500, but index demand is likely already priced in. At about 8 basis points of index weight, GEHC shares aren’t big enough to drive demand by closet indexers, either. Over a 2–3-year period, we see the shares having perhaps 15-25% upside potential, which is respectable but not in the 50% range that we look for in turnaround situations.

All-in, the shares aren’t attractive enough to include on our recommended list, so we are moving them to SELL.

With the spin-off, we are now reviewing our rating on shares of stub General Electric (GE).

Earnings updates:

Walgreens Boots Alliance (WBA)Once a retail pharmacy powerhouse, Walgreens faces hefty secular challenges from an overbuilt and mature store base, with customers who have plenty of alternatives to visiting its often poorly-run and expensively priced stores. And, pricing pressure from private and government payors is squeezing its prescription profit margin. Walgreens is concentrating on the United States market where it is developing its stores into a healthcare network, led by the much-needed fresh perspective from the new CEO. The company’s shares are bargain-priced even as Walgreens is in solid financial condition and produces large and stable profits and cash flow.

Walgreens reported mixed fiscal first quarter 2023 results. Revenue and activity metrics moved in the right direction, but profits fell. The company maintained its fiscal 2023 earnings guidance. Walgreen’s core business may produce reasonable profit growth in 2023 but the new guidance for break-even profits in the new Healthcare segment a year earlier than originally guided seems driven more by the acquisition of Summit Health than better underlying profitability. We are left with more questions and concerns than answers as the Healthcare build-out continues. The shares are impressively inexpensive, but we wonder if the upcoming fundamental slog will produce our anticipated endgame.

Revenues fell 2% but rose 1% on a currency-adjusted basis. When further scrubbed of the effects of acquisitions and the shrinking AllianceRx Walgreens business, sales rose 3%. Revenues were about 1% above estimates. The company incrementally raised its full-year fiscal 2023 revenue guidance to a fractional increase over 2022. Growth of 8-10% in its core businesses was guided to be offset by currency headwinds and weak Covid vaccine traffic compared to a year ago.

Adjusted earnings of $1.16/share fell 31% from a year ago but were about 2% above estimates. The company reiterated its full-year fiscal 2023 earnings guidance ($4.45 midpoint) that points to an 11% decline from 2022. Driving the decline is the lack of outsized profits earned last year from elevated Covid vaccine traffic as well as the continued drag from the strong dollar which should more than offset stronger core business trends.

The company recorded a huge $6.5 billion charge for opioid litigation and settlements. We would like to think that this ends the overhang, but there could be more charges down the road.

Constant currency sales in its traditional U.S. and U.K. operations as well as the German wholesale business are respectable at around 4-5%. Some investors apparently viewed these results as being below expectations. Gross margins and operating margins slipped due to higher Covid vaccine profits a year ago, yet also due to higher costs and reimbursement rate pressures. Many of these issues are chronic, although Walgreens is working to trim its overhead and other costs, even as it spends more on efficiency improvements. The floundering AllianceRx Walgreens business appears to be operating at breakeven, so its sliding revenues don’t meaningfully hurt profits.

Sales in the U.S. Healthcare segment, which is the segment that the company wants to be the driver of future profit growth, rose 38% on a pro forma basis. Like some others, we are wondering if 38% is adequate growth given the huge investments. EBITDA profit was a loss of $(124) million as these segments ramp their build-out. Walgreens accelerated its timeline for positive EBITDA in its U.S. Healthcare segment, saying it should now happen by the end of 2023 rather than by the end of 2024. But the recent acquisition of the remaining stake in Summit Health brings onto the books a highly profitable business, so it is unclear how much of the underlying profits of U.S. Healthcare are actually improving. The deal essentially “buys” profits, but the key challenge for Walgreens is to convert today’s “bought” profits into a steady stream of rising profits in years to come. The jury is still out on this question.

The balance sheet remains reasonably leveraged but free cash flow isn’t covering the dividend due to weaker profits and elevated capital spending. Walgreen’s opioid settlements will drain over $400 million a year from its cash flow every year for at least a decade – weighing on its balance sheet and free cash flow.

The company is selling down its non-core assets – these transactions generated about $3.2 billion in proceeds in the quarter – to fund its healthcare services build-out. Walgreens said it will pause new acquisitions, which should help clarify for investors the underlying profits of the Healthcare segment as well as preserve cash for Walgreens and allow it to integrate its already-completed acquisitions. However, we view this “pause” as a temporary feature that will be terminated when the next must-have target hits Walgreens’ sights.

The new CEO continues to add senior leadership talent to help execute the core and build-out strategies. We see this as both encouraging but also a tad worrisome as new talent takes several quarters, or longer, to be fully effective, and not all new leadership works out.

Friday, January 6, 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 15 minutes and covers:

  • Ratings changes
    • Macy’s (M) – raise price target to $25.
    • GE Healthcare Technologies (GEHC) – moving rating from Unrated to Sell.
  • Earnings
    • Walgreens Boots Alliance (WBA)
  • Comments on our recommended companies:
    • Xerox (XRX) – Back-to-office improvements, and new financing deal.
    • Nokia (NOK) – Verizon says it is substantially done with 5G build-out. Nokia signs co-licensing deal with Huawei.
    • Meta Platforms (META) – settles one lawsuit but hit with fines in Europe.
    • Western Digital (WDC) – re-opening acquisition talks with Kioxia?
  • Elsewhere in the market
    • Bankruptcy judge says crypto deposits don’t belong to customers.
    • Crypto-bank Silvergate Capital near collapse?

Market CapRecommendationSymbolRec. IssuePrice at Rec.1/5/23Current YieldRating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.30 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.13 - Buy (20)
Small capDril-QuipDRQMay 202128.28 26.46 - Buy (44)
Small capZimVieZIMVApr 202223.00 9.19 - Buy (32)
Mid capMattelMATMay 201528.43 19.28 - Buy (38)
Mid capConduentCNDTFeb 201714.96 4.21 - Buy (9)
Mid capAdient plcADNTOct 201839.77 37.38 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 15.746.4%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 12.41 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.844.1%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 28.843.9%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 49.80 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 22.053.6%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 13.886.8%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 32.131.7%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 29.52 - Unrated
Mid capPolarisPIIFeb 2022105.78 101.71 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 10.67 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 49.93 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 24.476.4%Buy (67)
Mid capESAB CorpESABJul 202245.64 50.01 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 25.79 - Buy (35)
Large capGeneral ElectricGEJul 2007304.96 71.290.4%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.691.9%Buy (12)
Large capMacy’sMJul 201633.61 21.562.9%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 17.016.1%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 10.594.2%Buy (16)
Large capNewell BrandsNWLJun 201824.78 14.116.5%Buy (39)
Large capVodafone Group plcVODDec 201821.24 10.589.6%Buy (32)
Large capMolson CoorsTAPJul 201954.96 49.583.1%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 312.90 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 42.422.8%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 35.23 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 12.45 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 35.195.4%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 16.734.5%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 10.86 - Buy (20)
Large capDowDOWOct 202243.90 52.915.3%Buy (60)
Large capCapital One FinancialCOFNov 202296.25 93.982.6%Buy (150)
Large capMeta PlatformsMETA Jan 2023118.04 126.94 - Buy (180)
Large capGE Healthcare TechnologiesGEHCSpin-offna 59.00 - SELL

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.