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Turnaround Letter
Out-of-Favor Stocks with Real Value

May 12, 2023

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This week’s note includes our comments on Goodyear Tire (GT), Warner Bros Discovery (WBD) and Berkshire Hathaway (BRK/B), which reported late last week. It also includes comments on the 12 companies that reported earnings this week: Bayer AG (BAYRY), Brookfield Reinsurance Ltd (BNRE), Dril-Quip (DRQ), Elanco Animal Health (ELAN), Goodyear Tire & Rubber Company (GT), TreeHouse Foods (THS), Six Flags Entertainment (SIX), Viatris (VTRS), Toshiba (TOSYY), Volkswagen AG (VWAGY), Warner Bros Discovery (WBD) and Western Digital (WDC).

First-quarter earnings season is winding down, with only Vodafone (VOD) scheduled to report next week, Kohl’s (KSS) the following week, and Macy’s (M) and Duluth Holdings (DLTH) reporting on June 1.

Earnings Updates:

Bayer AG (BAYRY)Bayer is a major German crop science, pharmaceutical and consumer health products conglomerate. Weak leadership has led to underperforming operations and the disastrous $63 billion deal for Monsanto in 2018 which brought major liabilities amid allegations that glyphosate, the active chemical in Roundup, causes cancer. Other worries include litigation risk from PCBs, glyphosate pricing pressure, and upcoming patent expirations on Xarelto and Eylea, its two largest pharmaceuticals. However, the company is significantly undervalued, despite the legal issues, with sizeable and stable profits and cash flow. A new outsider CEO should bring stronger operational execution and perhaps major strategic changes (break-up). The balance sheet carries a reasonable debt burden.

The company reported a disappointing quarter, as profits fell 15% due to weak glyphosate sales (mostly pricing), weak China results, cost inflation and investments in new initiatives. Bayer said its 2023 results would be near the low end of its narrow guidance range due to pricing pressure and cost inflation. Free cash flow was a negative €(4.1) billion, but guidance for €3 billion in full year free cash flow was reiterated. Net debt increased by about 5%.

While the results were weak, the new CEO has yet to start (first day is June 1). We anticipate more color on the issues and outlook once he has had a chance to review the company from the inside and has had time to formulate and communicate a plan.

Berkshire Hathaway (BRK/B) – Recommended at the end of March 2020 in the depths of the market’s pandemic-driven sell-down, Berkshire Hathaway is an exceptionally well-managed financial and industrial conglomerate.

The company reported a strong quarter, with operating earnings of $8.1 billion increasing 13% from a year ago. Insurance profits partly recovered, to $911 million compared to a profit of $167 million. Insurance segment investment income rose 68% to $2.0 billion. The remaining segments showed flat or down operating profits.

Berkshire continues to build value on a per-share basis, helped by $4.4 billion in share repurchases in the quarter. The company’s float was $165 billion, up $1 billion in the quarter. At the Annual Shareholders Meeting, the head of Berkshire’s insurance operations, Ajit Jain, spoke about the need for Geico to continue to develop its telematics and other technologies to regain its full competitive edge. Preparation for the eventual hand-off from Buffett to Greg Abel is underway. While Abel can’t begin to replicate the Buffett magic, he seems like a respected and skilled leader.

Brookfield Reinsurance Ltd (BNRE)Recently 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.

The company reported a good quarter in which it continues to make progress with its build-out. In addition to the already-announce deal to acquire Argo Group, Brookfield Re deployed $2 billion into new higher-yielding investments, originated over $900 million in new insurance premiums and closed over 20 pension risk transfer transactions. Assets, equity and distributable operating earnings are all increasing by step-function amounts.

Dril-Quip (DRQ) – A major supplier of subsea equipment, Dril-Quip is struggling with the downturn in offshore oil and natural gas drilling. It generates positive free cash flow and has a sizeable cash balance yet no debt, all of which should allow it to endure until industry conditions improve.

The company reported a quarter that showed clear improvement from year-ago results but the surprising 43% sequential decline in new orders helped drive the shares lower. Management’s full year guidance was unchanged.

In the quarter, revenues rose 9% from a year ago but were about 2% below estimates. Adjusted loss of $(0.01)/share improved from a $(0.29) a year ago and was in-line with estimates. Adjusted EBITDA of 8.8 million increased from $3.2 million a year ago and was 4% above estimates.

Dril-Quip changed its reporting segments to comprise Subsea Products, Subsea Services and Well Construction, and a separate breakout for Corporate costs. This is an improvement in our view, as it more clearly delineates activity by product/service type as well as isolates the Corporate expenses which hopefully will exert additional pressure for more cost-cutting. Under the new structure, Well Construction profits fell to barely above break-even, while Subsea Products and Subsea Services profits jumped sharply. Corporate expenses increased to $8.3 million from $6.0 million, mostly due to spending on its strategic plan.

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, prescription treatments and farm animal nutritional supplements. Its share price has tumbled since our initial recommendation, weighed down by concerns over its Seresto flea and tick collar (8% of 2022 revenues), lackluster new product roster and elevated debt. The shares have admittedly been a value trap – a falling share price but no change in valuation as earnings have tumbled. However, the company may finally be getting its act together: it has now fully integrated its Bayer Animal Health acquisition, has a promising new product pipeline and is seeing stabilization in its revenues, helped by price increases.

The company reported a modestly encouraging quarter that showed some degree of stabilization following a long stretch of flat or deteriorating fundamentals. Elanco ticked up the low end of its full year guidance, successfully completed the integration of the Bayer Animal Health business into the Elanco ERP tech system and received conditional USDA approval for a “breakthrough” dog parvo antivirus. Its Seresto revenues continue to slide, down 9% in the quarter ex-ERP effects, and its review by the EPA could still result in harsh new rules or a possible ban, which could drive the shares noticeably lower.

While the turnaround still requires immense work, and the company’s underlying value has eroded compared to two years ago at our original recommendation, we are holding tight as further progress would likely push the shares higher. The current valuation on what appears to be stabilizing profits, at 11.3x EPS and 10.4x EBITDA, is reasonable.

In the quarter, customers pre-ordered their supplies ahead of an April blackout period while Elanco changed over to its new ERP system. This boosted revenues by about 8%, such that net of the pre-orders revenues fell about 2% from a year ago. Compared to estimates, revenues net of the boost were roughly in-line. Adjusted earnings increased 25% from a year ago, down about 9% after allowing for the pre-orders but about 14% above estimates. Adjusted EBITDA fell 11% net of the pre-order effect yet this was 9% above estimates. Management said the pre-orders will result in lower orders in the second quarter, with little net effect across the first six months of the year. The increase in the low end of its full-year guidance reflected management’s view that end markets are improving and new product contributions look healthier.

Favorably, the company was able to raise its prices by about 5%, helping to incrementally widen the gross margin ex-ERP effects. This, however, was more than offset by higher operating costs, so the EBITDA margin ex-ERP fell about 1.5 percentage points.

The company has a fuller pipeline of new products, which could contribute significant revenues in late 2024 (admittedly a long wait from now). The dog parvo treatment would be a meaningful positive but we will need to wait for the actual commercial results to know with more certainty. Still, it is encouraging news, particularly as new products are an important driver of Elanco’s future revenue growth and share valuation.

Seresto and other related products in the industry are under investigation by the EPA due to elevated reports that their active ingredients may create potentially significant health issues for pets and children. Elanco and many in the pet care industry remain steadfast in their research-supported beliefs that the products are safe, but are apparently open to changes in labeling or other practices. However, sales of Seresto continue to slide and a favorable EPA ruling probably won’t change public perceptions enough to stop the decline. An unfavorable ruling including a ban could drag down profits by 16%. However, if the shares fell sharply on such news, they might be a stronger buy as the bad news likely couldn’t get any worse for Seresto.

Elanco’s leverage remains too high at 5.4x adjusted EBITDA. Management said they are fully compliant with all covenants. Favorably, no major maturities occur until 2027, providing some financial flexibility for at least three years.

The Bayer Animal Health integration has taken three years. To us, this seems like an unreasonably long time period. Integration costs last year were $194 million, which should trail off to near zero in 2024. We anticipate that the fully-integrated system will help drive revenues higher and recurring costs lower as the company should be better able to manage its business.

We note that highly respected value investment firm Dodge & Cox is the largest shareholder, at 17.3%, following their heavy purchases late last year.

Goodyear Tire & Rubber Company (GT) – An investment in Goodyear is an opportunistic purchase of an average company whose shares have fallen sharply out-of-favor. Demand should remain relatively stable and pricing will likely remain robust, more than enough to offset rising input costs. The benefits from Goodyear’s acquisition of Cooper Tire provide additional value.

Note: Activist investor Elliott Management (with a 10% stake) announced this week a campaign to overhaul Goodyear, driving the shares higher. We have more comments in our podcast.

The company reported a weak quarter but management provided some encouragement that its company-specific and industry problems are likely to ease. Revenues stabilized with a 4% increase ex-currency, helped by a 12% increase in prices which were only partly offset by the 7% decline in volumes. Goodyear is now getting price increases that more than offset its higher raw materials costs. However, segment-level profits fell 60% due to the lower volume and on-going wage, transportation and energy inflation which haven’t been offset yet by the price increases or cost-cutting. Maintaining its price level and ability to raise prices further will be a major component of its turnaround.

The outlook for the Americas and for Asia Pacific look reasonably favorable. The Americas are being helped by temporary channel destocking, resilient miles driven (+4% YTD and now higher than in 2019), China is recovering with an incremental tailwind provided by steady growth in EV, luxury and SUV vehicles that require more expensive (more profitable) tires. Globally, the Cooper Tire deal has now been fully integrated with cost-savings ahead.

The EMEA region remains a problem, with subpar margins and enduring cost and volume problems. Goodyear is undertaking a comprehensive review, with plans for sizeable operating cost reductions starting in 2024. The company may reduce its local manufacturing scale, brand roster and real estate. While it might make sense to simply exit EMEA, we currently believe that this is not likely given that its OEM customers are global. Goodyear might exit the replacement segment, however, where brand loyalty and carryover is limited outside of the local markets.

Goodyear’s balance sheet is over-levered, with $7.9 billion in net debt. This level is higher than the year-ago $7.3 billion due to the company’s negative cash flow over the past year. Favorably, Goodyear has limited debt due until 2026. Management seems well-aware of its debt burden. Helpfully, the bulge in working capital should fade such that, for the full year, working capital is a net source of about $100 million in cash.

In the quarter, revenues rose 1% from a year ago (+4% ex-currency) but were 2% below estimates. The adjusted loss of $(0.82)/share compared to a profit of $0.37 but was better than the estimated loss of $(0.26).

TreeHouse Foods (THS) – As a major contract producer of private label foods, TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy even as the private label food industry remains healthy. The company remains profitable and generates reasonable free cash flow. Respected activist investor JANA Partners has a large 8.5% stake and is likely to pressure this undervalued company to either sell or change its strategy and leadership.

The company reported results that were sharply ahead of a year-ago and above estimates. The improvements were driven entirely by higher pricing, with some offset by rising commodity and transportation costs, as well as incremental investments in its service levels and warehouse capacity. Despite the strong quarter, management’s second quarter guidance was weak, which may have dampened investor enthusiasm. However, some of the first quarter strength was due to early delivery of some orders, which will be felt in weaker second quarter results. Management retained its full year guidance and seems skilled in low-balling guidance so it can then exceed this guidance. Overall, the turnaround is moving in the right direction.

The company appears to be making operational progress and is benefitting from pricing power even as its bargain-priced end-customers are increasingly price-focused. TreeHouse Foods seems to be sitting reasonably comfortably under the umbrella of price increases from branded food products. As such, it may have more price increases ahead along with some volume-related tailwinds as customers trade down. No change to our rating or price target. The shares have about 13% upside to our 60 price target.

In the quarter, revenues rose 16% and were 5% above estimates. Adjusted net income (see our comments below) of $0.68/share improved from a loss of $(0.16) and was 70% above the consensus estimate. The adjusted EBITDA of $91 million increased from $37 million and was 26% above estimates.

The gross margin expanded to 17% from 13% a year ago, reflecting price increases net of higher costs. The incremental EBITDA margin (change in EBITDA divided by change in revenues) of 44% was impressive, also reflecting the price increases.

Surprisingly, the company’s net debt balance increased in the quarter, as a hefty working capital build absorbed cash, despite its selling of receivables (see comments below on this abysmal practice).

TreeHouse continues some awful practices. It sells some of its receivables to generate cash, but this is merely short-sighted and expensive. Also, it removes “Growth, reinvestment and restructuring programs” from its adjusted net income and adjusted EBITDA. These in reality are ongoing costs of doing business, not one-offs. And, if management thinks of these as one-offs, they are not qualified to run the business. In the most recent quarter, the company removed $0.27/share of such costs, boosting profits by 79%, before any tax effect. This is shameful at best.

Six Flags Entertainment (SIX)This company is one of the world’s largest theme park operators. Since mid-2018, the shares have collapsed due to stalled growth, over-expansion and the pandemic. This has led to a complete changeover in the board of directors and senior leadership. Six Flags is implementing a new strategy focused on raising prices while significantly improving the guest experience to attract more families. Investors worry that this strategy will not be successful. We see an asymmetric payoff: The shares assume a dour future but a reasonable turnaround could produce sharp gains. Six Flags generates considerable free cash flow that will help reduce the company’s elevated debt. A long-time 20% shareholder provides valuable shareholder-oriented oversight to keep management properly focused.

The company reported a quarter that was incrementally better on most metrics compared to a year ago and that was above consensus estimates. Driving the shares sharply higher: overly-dour expectations that the company would not be able to meet or beat the estimates, and that the new strategy may be working. Favorably, Six Flags also said it would test dynamic pricing, which pushes prices higher when demand is high, in an effort to exercise incremental pricing power. It appears that the management is learning from its over-zealous pricing strategy of last summer. All-in, a higher encouraging start to the year. However, the upcoming spring and summer months will provide a clearer picture of the merits of the company’s new strategy.

Attendance fell 6% while total spending per guest increased 7%, which is part of the new leadership’s strategy of raising prices and quality even if some customers are turned off. Management said that attendance would have been stronger but for severe weather at its California and Texas parks.

In the quarter, revenues rose 3% and were 7% above estimates. The $(0.84)/share net loss deteriorated from a $(0.76) loss but was incrementally better than estimates. The adjusted EBITDA loss of $(17) million was unchanged but better than estimates for a $(24) million loss.

Six Flags replaced soon-to-mature debt with new notes that mature in 2031, providing more financial flexibility. The balance sheet and cash flow were in-line with a year ago, although the share count is 3.5% lower.

Toshiba (TOSYY) – This major Japanese industrial conglomerate is struggling from decades of weak management and the Westinghouse Electric bankruptcy debacle. We had expected a break-up of the company, but apparently have to settle for an undervalued takeover by a local consortium. Note: ¥100 = $0.74.

Toshiba reported full-year and fourth-quarter fiscal 2022 results, with revenues increasing 1% from a year ago and operating profits rising 43%. The company provided an uninspiring forecast for fiscal 2023, expecting sales to fall 5% and operating income to remain unchanged.

The company said that it is “working with JIP to quickly complete the ($15 billion buyout) transaction,” aiming to commence the tender offer in late July 2023. Toshiba’s board of directors apparently has not yet decided whether to recommend that shareholders tender their shares at the ¥4,620/share price. In prior comments, the board has suggested that the price is unsatisfactory – a sentiment that we and other investors fully share. No new offers have been received from other potential bidders.

We continue to wait (hope) for a better outcome to the Toshiba saga than tendering to the lowball bidder.

Viatris (VTRS) Viatris was formed in November 2020 through the merger of pharmaceutical generics producer Mylan, N.V. and Pfizer’s Upjohn division. Declining revenues, limited drug pipeline visibility, elevated debt, and a confusing change in strategy have continued to drag the shares lower since our initial recommendation. However, a new CEO along with increased visibility into its new strategy and better operational execution offer the potential for a fundamental turnaround and a higher share price.

Viatris reported a reasonable quarter that provided some encouragement that the fundamentals seem to be generally flattening out after a steady decline. The company reaffirmed its full-year revenue, profit and free cash flow guidance, as well as its commitment to produce $500+ million in revenues from new products. The shares jumped on relief that results weren’t worse and that perhaps the company’s new strategy won’t be a complete disaster – maybe only a major one. Also, the change to a new CEO is giving investors some reason to continue to be patient.

Revenues from branded and generic products stabilized at flat – encouraging in that these didn’t decline. The entire decline in total revenues was generated by the 65% falloff in the Complex Gx product group, which management attributed to murky “phasing” of various products. Revenues in the JANZ region (Japan, Australia, New Zealand) fell 11% on an organic basis, suggesting little progress there. Revenues in China rose 5%.

Continues to make incremental progress with its strategic overhaul: it completed the Eye Care acquisition and remains on track for its planned divestitures. Viatris paid down $546 million in debt. However, due to the decline in EBITDA, both the gross and net balance relative to EBITDA actually increased. Management said the company remains committed to repaying $1.3 billion in debt in 2023 and to retaining their investment grade credit rating. Favorably, the company repurchased $250 million in share buybacks at the currently low stock price. Compared to a year ago, the share count is 1.4% lower.

In the quarter, revenues fell 2% on an organic basis following the biosimilars divestiture and were 2% below estimates that projected flat sales. Adjusted net earnings of $0.77/share fell 17% but were 10% above estimates.

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. China is Volkswagen’s largest market, (38% of vehicle unit sales), followed by Western Europe (32%) and North America (10%). Investors worry about the sizeable China exposure, large but unsettled bet on electric vehicles, complicated governance structure, issues with its in-car software, and the likely effects of a recession. We acknowledge the numerous headwinds, yet believe the market is over-discounting these while over-looking the company’s strengths, including its sturdy balance sheet and sizeable profits and free cash flow, which 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 reported results that showed strong improvement from a year ago. Revenues rose 22%, supported by a 24% increase in automotive segment sales. Total vehicle units rose 6%. Unit sales of all-electric vehicles rose 42% and now comprise nearly 7% of all vehicle deliveries at Volkswagen. Operating earnings of €7.1 billion, which excludes a change in the valuation of VW’s commodity hedges, rose 35% compared to a year ago. The implied margin of 9.3% rose a percentage point from a year ago and demonstrates both better pricing and better cost controls. VW Financial Services profits fell 25% due to higher interest rates. Credit costs remain exceptionally low.

The company confirmed its full-year 2023 outlook. VW’s Automotive balance sheet is sturdy with €49 billion in cash that exceeds its €19 billion in financial liabilities and is well-supported by strong free cash flow. VW Financial Services remains healthy with exceptionally low credit losses supported by a robust 16% equity capital ratio.

In China, sales fell 24% reflecting accelerating buying last year in front of expiring government incentives. Despite the weak overall car market and VW’s market share slippage, the company is optimistic that full-year operating profits will reach €2.8 billion.

VW continues to press its aggressive plans for its EV business and continues to work on its struggling software platform. The Capital Markets Day on June 21 should provide more color on these and other initiatives.

In the quarter, revenues of €76 billion rose 22% from a year ago and were about 5% above estimates. Automobile revenues of €63.5 billion increased 24%, while Financial Services revenues rose 11%.

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. Legacy Warner Brothers 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.

The company reported a reasonable quarter. The highlight was that the streaming (Direct-to-consumer, or DTC) segment produced a profit, and management said that it will be profitable for the full year, about a year ahead of schedule. Warner Bros Discovery seems to be making much more progress with its streaming profit goals than peers like Disney and Paramount which are struggling with ongoing streaming losses. Dragging on results was the Networks segment (52% of revenues), which featured a 14% decline in ad revenues and a 10% decline in segment profits. Critically, the company reiterated its favorable free cash flow and debt reduction guidance for this year – which are perhaps the two key issues in the turnaround.

Warner Bros Discovery is not out of the woods. Results still depend on advertising not sliding further (which it readily could if the economy slows), unexpectedly negative results in the DTC business (including customer defections and higher marketing spending), and other potential headwinds. On balance, the story remains on track.

In the quarter, revenues fell 6% on a pro forma basis following its acquisition last year of the TimeWarner assets and were in-line with estimates. Excluding the year-ago Winter Olympics, revenues fell 3%, suggesting some relative stability on a “clean” basis. Adjusted EBITDA of $2.6 billion rose 10% on a pro forma basis and 12% ex-currency but was about 3% shy of estimates (a rounding error in our view).

DTC subscriber totals increased about 2% from the fourth quarter. We think the DTC subscriber base is probably reaching its limits, so we are alert to management boosting spending to push growth artificially higher. Management said it expected DTC to be profitable on a full-year basis and generate $1 billion in profits in 2025 and beyond.

While revenues fell, margins expanded and EBITDA rose 12%. By far the biggest driver was the DTC segment’s $50 million EBITDA profit compared to a $(654) million loss a year ago. The company cut DTC expenses by $760 million compared to a year ago, reflecting management’s impressive abilities and the equally impressive bloat that existed at TimeWarner. Despite the decline in Network segment revenues, the segment EBITDA margin expanded incrementally.

Free cash flow was an outflow of $930 million, largely due to the ongoing cash drain in the Time Warner assets, but also due to semi-annual bond payments of about $800 million (as opposed to quarterly for most bonds) and restructuring spending of about $500 million. Management reiterated its expectations for neutral free cash flow in the first half, and guidance for full-year free cash flow to be about 33%-50% of adjusted EBITDA of around $11 billion, or $3.6 billion to $5.5 billion. The company guided to a year-end net debt/EBITDA level of “comfortably below 4.0x” compared to 5.0x at quarter-end. Achieving this would be an impressive step toward reducing the company’s financial risk and immense interest costs. Free cash flow and debt reduction remains management’s key focus.

For perspective on the shareholder impact of debt repayment: if the company cuts $3 billion in debt, this accretes directly to the equity. On 2.4 billion shares, this paydown alone would lift the per-share value of the stock by about $1.50, or about 11%.

Western Digital (WDC) – Western’s new and highly capable CEO, David Goeckeler, who previously ran Cisco’s Networking & Security segment, is making aggressive changes to improve the company’s competitiveness in disk drives and other storage devices, as well as bolster its financial strength. Following our initial recommendation, the shares approached our price target, then slid sharply due to a deep industry downturn. The company has plenty of financial strength to endure to the next upturn, offering considerable share price upside.

The company reported a reasonable quarter but forward guidance was a bit lower than expectations. Western is in the depths of a cyclical downturn, which will have an unknowable duration. There are signs that the worst may be either at hand or near, as channel and customer inventories appear to be reaching appropriate levels and as end-demand remains relatively strong. The company is generating losses and cash is flowing out (a hefty $527 million outflow in the quarter). Western is conserving its cash as best as it can and will survive this downturn. Its balance sheet holds $2.2 billion in cash, compared to $7.9 billion in debt and convertible preferred stock. The company continues to develop advanced technologies that will help it maintain relevance. There were no meaningful updates on Western’s plans with Elliott Management, a Kioxia deal or other strategic changes.

Revenues fell sharply across all three segments (Cloud, Client and Consumer) due to lower volumes and lower prices. Reflecting the difficult conditions in the flash memory commodity markets, Western’s Flash segment gross margin was a negative (5%), a level likely consistent across the industry and one that won’t be indefinitely maintained. Partner Kioxia and competitor Samsung have announced capacity cuts to help restore profits. The hard disk drive segment revenues, average price and margin increased compared to the prior quarter, encouraging indicators that the segment’s hemorrhaging has some downside limit.

In the quarter, revenues fell 36% from a year ago but were about 4% above estimates. The adjusted loss of $(1.37)/share compared to a profit of $1.65 a year ago but was about $0.19 better than estimates.

Separately, Western said that a recent cyber hacker copied customer databases from its online store, but that the data was encrypted in such a way that the hackers might find it difficult to use. Clearly this is an embarrassment for a company that is on the frontlines of memory storage and security.

Friday, May 12, 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 16 minutes and covers:

  • Comments on earning from recommended companies
  • Comments on other recommended stocks
    • Berkshire Hathaway (BRK/B) – Intangibles from attending the ASM
    • Goodyear Tire & Rubber (GT) – Activist Elliott Management launches campaign
  • Final note
    • Eagle Boy Scout
Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 1.99 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 5.43 - Buy (20)
Small capDril-QuipDRQMay 202128.28 24.58 - Buy (44)
Mid capMattelMATMay 201528.43 18.53 - Buy (38)
Mid capAdient plcADNTOct 201839.77 35.66 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 14.047.1%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 10.26 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 9.365.1%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 52.66 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 22.203.6%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 11.967.9%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 31.581.8%Buy (93)
Mid capPolarisPIIFeb 2022105.78 103.46 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 14.23 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 70.29 - Buy (71)
Mid capJanus Henderson GroupJHGJun 202227.17 26.785.8%Buy (67)
Mid capESAB CorpESABJul 202245.64 59.351.6%Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 26.18 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 20.189.9%Buy (50)
Mid capFirst Horizon CorpFHNApr 202316.76 9.776.1%Buy (24)
Mid capFrontier Group HoldingsULCCApr 20239.49 7.93 - Buy (15)
Large capGeneral ElectricGEJul 2007304.96 99.510.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.002.3%Buy (12)
Large capMacy’sMJul 201633.61 14.994.4%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 16.406.3%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 12.873.4%Buy (16)
Large capNewell BrandsNWLJun 201824.78 9.509.7%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.289.0%Buy (32)
Large capMolson CoorsTAPJul 201954.96 64.002.4%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 322.64 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 38.333.1%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 32.55 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 8.79 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 31.176.1%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 16.275.7%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 12.38 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 87.422.7%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 14.813.6%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.