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Turnaround Letter
Out-of-Favor Stocks with Real Value

May 19, 2023

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This week’s note includes our comments on earnings from Vodafone (VOD). Next week, Kohl’s (KSS) reports, with Macy’s (M) and Duluth Holdings (DLTH) reporting on June 1.

Yesterday, we moved shares of M/I Homes (MHO) from Buy to Sell, as the shares reached our recently raised 73 price target. The shares have benefitted from being significantly undervalued at our recommendation date combined with strong earnings and resilient housing demand. The shares now trade at about 1.0x tangible book value, compared to .68x at our recommendation date. Industry conditions remain favorable, but the risk/reward has moved to neutral at best due to the valuation. The shares have generated a 66% total return, compared to a roughly zero total return for the S&P 500, since our initial recommendation in late April 2022, at 44.28.

Earnings Updates:

Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider. This company has produced dismal operating results since our recommendation, so we were on the edge of exiting the position in late 2022. However, following the forced departure of the CEO along with heightened activist pressure and the sharp undervaluation of the shares, we are now much more optimistic about this stock. From here, we want to see a skilled and motivated outsider CEO take the helm with a strong turnaround plan that can be implemented successfully. A sharp dividend cut could readily be part of this plan. Vodafone has a few obscure assets: it is the leading provider of mobile data and payments services in Africa and has a vast network of high-capacity data pipelines that may increase in value as 5G rolls out.

Vodafone reported reasonable second-half results, but weak FY2024 guidance and a lack of concrete plans to dismantle the company by the new CEO drove the shares lower. The company maintained its nine-euro dividend, which now offers a 9.6% yield, but the market is showing little confidence in the payout as the yield provides essentially no support for the shares. Dividend payouts will be about 75% of FY2024 free cash flow.

Vodafone reports revenues by quarter but profits only on a semi-annual basis. This adherence to an old tradition shields the management, particularly one attempting a turnaround in company fundamentals and investor perception, from the more frequent accountability that global investors increasingly demand.

Fourth-quarter organic service revenues rose 1.9% and were incrementally better than the consensus 1.6% estimate. However, growth in the U.K. (+3.8%) and Germany (-2.8%) deteriorated while growth in Spain (-3.7%) and Italy (-2.7%) remained weak. Overall revenue growth was supported by Turkey and other markets outside of Vodafone’s European core.

Adjusted EBITDAaL, the company’s overly scrubbed version of cash operating profits, fell 3% in the second half of FY 2023 (labeled as H2 23/22 by the company) and was about 3% worse than estimates that projected a flat result compared to a year ago.

For FY2024, management guided for flat like-for-like adjusted EBITDAaL at €13.3 billion and for €3.3 billion in adjusted free cash flow. This adjusted free cash flow would be a 21% decline from last year – a disappointing outlook. Favorably, the balance sheet carries 20% less net debt due to cash flow and the cash proceeds from the Vantage Towers sale. Management said its leverage is 2.5x, which is still too high given the company’s operational and strategic struggles.

Fundamentally, Vodafone isn’t unraveling – but its steady grind-off of profits and cash flow needs to be reversed or it risks a downward financial, then operational, spiral.

The new CEO outlined her roadmap for turning around Vodafone, including cutting 11,000 employees (~10%), reducing its overly complex organization and investing in a better Consumer (as opposed to Business) experience, especially in Germany. This sounds fine, but the company can’t effectively compete in all of its markets – some need to be divested. This was not the immediate message. Favorably, each market will be managed on a local basis, which should increase accountability and also make them easier to divest at some point.

We understand investor frustration, but Vodafone is too early in what is probably a real turnaround, and the shares are too out of favor, to exit our position. However, further deterioration and a dividend cut would likely lead to another share price drop. No change to our rating.

Friday, May 19, 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 10 minutes and covers:

  • Comments on earnings from recommended companies
  • Comments on other recommended stocks
    • Western Digital (WDC) – Kioxia talks heat up again.
    • Newell Brands (NWL) – Cuts dividend to 7 cents from 23 cents.
    • Goodyear Tire (GT) – Possible new particle rules ahead.
    • Walgreens Boots Alliance (WBA) – Incremental good news for a difficult turnaround.
    • Tough days for retailers like Macy’s (M), Kohl’s (KSS) and Duluth Holdings (DLTH).
  • Elsewhere in the market:
    • Difficult year so far for value investors as tech giants drive S&P 500, but trees don’t grow to the sky.

Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.27 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 5.52 - Buy (20)
Small capDril-QuipDRQMay 202128.28 23.91 - Buy (44)
Mid capMattelMATMay 201528.43 19.01 - Buy (38)
Mid capAdient plcADNTOct 201839.77 36.00 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 14.626.8%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 10.22 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 9.375.1%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 51.12 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 23.053.5%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 12.457.6%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 32.321.7%Buy (93)
Mid capPolarisPIIFeb 2022105.78 108.40 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 14.25 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 73.49 - SELL
Mid capJanus Henderson GroupJHGJun 202227.17 26.835.8%Buy (67)
Mid capESAB CorpESABJul 202245.64 59.881.6%Buy (68)
Mid capSix Flags EntertainmentSIXDec 202222.60 27.03 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 20.689.7%Buy (50)
Mid capFirst Horizon CorpFHNApr 202316.76 10.995.5%Buy (24)
Mid capFrontier Group HoldingsULCCApr 20239.49 8.04 - Buy (15)
Large capGeneral ElectricGEJul 2007304.96 104.010.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 4.012.3%Buy (12)
Large capMacy’sMJul 201633.61 15.874.2%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 16.216.4%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 12.963.4%Buy (16)
Large capNewell BrandsNWLJun 201824.78 8.983.1%Buy (39)
Large capVodafone Group plcVODDec 201821.24 10.2510.0%Buy (32)
Large capMolson CoorsTAPJul 201954.96 61.882.5%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 329.76 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 40.213.0%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 38.74 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 8.70 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 31.466.1%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 16.065.7%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 12.40 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 99.232.4%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 14.663.7%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.