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Turnaround Letter
Out-of-Favor Stocks with Real Value

March 10, 2023

This week, we comment on earnings from ESAB (ESAB), Duluth Holdings (DLTH) and preliminary results from Volkswagen AG (VWAGY). Next week, Volkswagen reports its full results – we’ll include more comments as needed. That should wrap up this earnings season. Walgreens Boots Alliance (WBA) is an off-cycle company and reports on March 28.

We are moving shares of ZimVie (ZIMV) from HOLD to SELL. The shares haven’t bounced even a little so it is time to exit.

Earnings updates:

Duluth Holdings (DLTH) – This retailer of rugged workwear and outdoor gear struggled with a disjointed and overly aggressive store expansion strategy. Duluth ousted the CEO in September 2019, brought the founder back to the CEO seat on an interim basis, terminated the failed strategy, and hired a new, permanent CEO in May 2021. The company has immense opportunities – its challenge is to strike a successful balance between pursuit and execution.

Duluth reported a modestly encouraging quarter. Profits were better than expected, but the company continues to struggle with weak margins and weak customer traffic. Guidance for 2023 was supportive and the balance sheet carries net cash. All-in, the company probably won’t reach our $20 price target, but it remains remarkably inexpensive at 3.4x EBITDA and is worthy of retaining a position. We remain patient with the Duluth Holdings story. No change to our Buy rating.

One source of weakness was that Duluth chose to pull back on marketing spending during the holiday season – tactically this doesn’t make sense to us but management felt that spending more would be wasteful as competitors were aggressive while customer demand was uncertain.

Guidance for 2023 was supportive. Sales were guided to be flat although profits were guided to increase about 10%. Unfortunately, the $5 million in higher profits will be more than offset by $23 million in higher capital spending. While most of this incremental spending is going toward a website and e-commerce upgrades, this is a huge increase. We wonder if this spending will have a worthwhile payoff.

Favorably, the company has a solid balance sheet with $46 million of net cash and no debt. The previously elevated inventory appears to be nearly back to normal. This gives the company staying power as it works through its turnaround and gives us comfort that they are shepherding their capital reasonably well.

In many ways, brand recognition is the company’s biggest problem. This seems to be behind the weak traffic trend in the quarter, worsened by the reduced marketing spending. Once consumers are in the store, the conversion rates (more customers buy once in the stores) apparently are good and improving. We are curious to see how more marketing spending this year will affect sales.

In the quarter, revenues fell 11% from a year ago and were essentially in-line with estimates. Adjusted earnings of $0.23/share fell 57% but were 5% above estimates. Adjusted EBITDA of $21 million was about 10% above estimates.

ESAB Corporation (ESAB) – This company produces specialty welding, cutting and flow control equipment. In April 2022, ESAB was spun off from highly regarded Colfax, which retains a 10% stake. Investors worry about the company’s cyclical revenues in a slowing global economy as well as its asbestos liabilities. But, the company has a strong leadership team with a credible plan that is likely to succeed, follows the impressive Colfax “business excellence” philosophy, and has steady revenue growth with strong profits and free cash flow. Its balance sheet carries a readily manageable debt balance. While the asbestos liabilities are a risk, most of the claims have been dismissed with no payment, and insurance and other mitigants appear to cap the company’s maximum burn.

ESAB reported a good quarter that showed rising sales and wider profit margins. Guidance for 2023 was modest, calling for core organic sales growth of 3-5% and about $430 million in core adjusted EBITDA – these were a bit weaker than our model but generally a tad higher than consensus estimates. All-in, our thesis remains on track.

The global industrial goods market remains strong and ESAB is directly benefitting. ESAB’s acquisition program appears to be working (encouragingly, funded with cash flow not new debt or shares) but we will need to watch over the next year or so to more fully gauge its merits. Inventories have improved, helping boost efficiency, margins and cash from working capital. ESAB’s net debt was incrementally higher compared to the third quarter, but as EBITDA increases the relative burden declines. The year-end net debt/EBITDA multiple was 2.7x, which we consider reasonable given the company’s strong free cash flow conversion (approaching 100%).

In the quarter, revenues of $664 million rose 6% from a year ago (+11% organic, adjusted for acquisitions, divestitures and currency changes) and were about 11% above estimates. Adjusted core earnings of $1.05/share were flat but 15% above estimates. To arrive at the adjusted core number, ESAB made reasonable adjustments in our view and also removed $0.06/share of profits in Russia which is now considered “non-core.” We would like to see at least one cleaner quarter in the near future, as the adjusted-out costs are real despite being waived away. Adjusted core EBITDA of $107 million rose 9% from a year ago and was 11% above estimates. The adjusted core EBITDA margin of 17.4% expanded from 17.0% a year ago.

ESAB’s management is showing their public company experience, learned no doubt from the former parent company. Full-year results were ahead of guidance provided in the third quarter – a testament to good guidance skills but also to solid execution.

Volkswagen AG (VWAGY) – Volkswagen is one of the world’s largest car makers, with a portfolio of brands including Volkswagen, Audi, Porsche and Lamborghini, as well as commercial trucks and a major financial services unit. Investors worry about the sizeable China exposure, large but unsettled bet on electric vehicles and complicated governance structure, as well as the likely effects of a recession. Our view is that the market is over-discounting these risks while over-looking the company’s strengths including its sizeable profits and free cash flow and sturdy balance sheet that give it plenty of time to execute its plans. Several important catalysts look primed to unlock value within the company, including the Porsche IPO and new leadership.

The company unexpectedly reported preliminary results last Friday, in advance of its full report next week on March 14. We’ll update our comments if any meaningful incremental information is provided in the full report.

In brief, the full-year preliminary results were strong and generally in-line with consensus estimates, while the 2023 outlook was encouraging. VW raised its dividend by 16%. Given the market’s dour outlook, VWAGY shares have been strong since the report.

Volkswagen’s full-year revenues of €279 billion rose 12% from a year ago but were generally in-line with consensus estimates and the company’s guidance. Lower volumes (-7%) were more than offset by higher-priced mix and more sales of vehicle add-on equipment and options. Supply shortages crimped volumes. EV sales surged 26% and now comprise 7% of VW’s total volume, on its way to a targeted 20% share by 2025. Overall vehicles orders (backlog) remain at a healthy 1.8 million units.

Adjusted operating income of €22.5 million rose 13% from a year ago and produced an 8.1% return on sales (margin) – both decent results.

The 2023 outlook includes sales growth of 10-15%, lifted by stronger volumes as parts shortages ease. VW said it should produce a return on sales of 7.5-8.5%. The margin appears to include higher R&D expenses (and capital spending) as the company presses its EV development although these incremental costs would likely be offset by wider production margins. Cash flow was guided to increase in 2023.

Friday, March 10, 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:

  • Earnings reports
  • Comments on other recommended companies
    • General Electric (GE) – trimming its position in AerCap and provided an encouraging outlook for 2023.
    • Walgreens Boots Alliance (WBA) – problems with regulators.
  • Elsewhere in the markets
    • Spin-offs in the healthcare sector
    • Bank meltdowns
Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.57 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 6.75 - Buy (20)
Small capDril-QuipDRQMay 202128.28 30.70 - Buy (44)
Small capZimVieZIMVApr 202223.00 5.63 - HOLD
Mid capMattelMATMay 201528.43 17.15 - Buy (38)
Mid capAdient plcADNTOct 201839.77 42.57 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 16.106.2%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 10.72 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 10.134.7%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 23.274.8%SELL
Mid capTreeHouse FoodsTHSOct 202139.43 46.80 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 24.233.3%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 11.358.3%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 31.591.8%Buy (93)
Mid capBrookfield Asset MgtBAMSpin-offna 32.82 - SELL
Mid capPolarisPIIFeb 2022105.78 113.83 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.28 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 60.35 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 26.365.9%Buy (67)
Mid capESAB CorpESABJul 202245.64 61.47 - Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 27.16 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 26.247.6%Buy (50)
Large capGeneral ElectricGEJul 2007304.96 91.560.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.741.9%Buy (12)
Large capMacy’sMJul 201633.61 20.473.2%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 15.486.7%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 12.443.5%Buy (16)
Large capNewell BrandsNWLJun 201824.78 13.027.1%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.578.8%Buy (32)
Large capMolson CoorsTAPJul 201954.96 53.062.9%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 304.82 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 41.132.9%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 37.06 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 10.11 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 33.295.7%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 18.634.9%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 14.77 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 100.942.4%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 15.263.5%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.