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Turnaround Letter
Out-of-Favor Stocks with Real Value

November 18, 2022

Earnings Updates

Macy’s (M) – With a capable new CEO since February 2018, Macy’s is aggressively overhauling its store base, cost structure and e-commerce strategy to adapt to the secular shift away from mall-based stores. Macy’s acceleration of its overhaul shows considerable promise.

Macy’s reported strong earnings, raised (fractionally) its full-year 2022 earnings guidance and indicated that its inventory remains fresh and at appropriate levels (up only 4%), all of which drove the shares sharply higher. The balance sheet is sturdy, and the share count is 9% lower than a year ago. We are raising our price target to $25.

In the quarter, revenues fell 4% from a year ago but were in line with estimates. Adjusted earnings of $0.52/share fell 60% but were nearly triple the $0.19 estimate. Adjusted EBITDA of $439 million slipped 43% but was about 30% above estimates.

Sales were weaker than a year ago as the economy is slowing and consumers are shifting to non-apparel purchases. As the company has not changed its store count, its total sales and comparable store sales are essentially the same (down about 4%). However, sales were up 1% compared to the pre-pandemic 2019 period, illustrating that the company is maintaining its relevance with customers. Macy’s growing digital presence is helping the company transition from its brick-and-mortar base, as digital sales were 35% above 2019 levels while physical store sales were down 9%. Also, higher-end offerings at Bloomingdales and cosmetics offerings from Bluemercury are boosting total sales.

The number of active customers at Macy’s branded stores rose modestly but was positive, while the number of active customers at Bloomingdales and Bluemercury rose quickly, indicating that the company is succeeding in finding new customers.

Profits slipped due to promotions to help keep inventory under control and to higher staffing costs as most open positions from a year ago have now been filled.

Toshiba (TOSYY) – This Japanese industrial conglomerate is recovering from its nuclear power plant construction business (Westinghouse Electric) debacle, which forced it to sell a majority stake in its Kioxia memory chip production operations. We are looking for a breakup of the company. Note: ¥100 = $0.71.

Toshiba reported fiscal first-half 2023 results that were reasonably stable overall. The company guided for a 23% increase in full-year (March 31) adjusted operating income, but investors apparently included write-offs in their analysis so the guidance was taken at face value (calling for a 30% reduction to ¥125 billion). Toshiba’s investor relations function is among the worst we’ve seen for a major company, so investors’ confusion is understandable. Toshiba is implementing a cost-savings plan, with an emphasis on its hard disk drive operations. All-in, the company is performing reasonably well, but the shares are largely driven by the buyout process. In this regard, no updates were provided.

In the period, revenues rose 3% from a year ago while adjusted operating income rose 6%. Higher input costs were more than offset by favorable currency changes and stronger constant currency revenues. Reported EBITDA fell 33% but this appears to artificially deflate the current period by including some write-downs. Net debt fell fractionally to ¥80.5 billion (about $560 million) and remains small compared to the company’s $1.7 billion in EBITDA.

Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider. CEO Nick Read is focused on increasing the company’s return on capital by strengthening its telecom “connectivity” platform, improving its operating efficiency and spending its capital more efficiently. In 2019, Vodafone acquired Liberty Global’s German and Eastern European assets, and will soon spin off its European cell tower business (named Vantage Towers). 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 another disappointing half year in which nearly every key performance metric deteriorated. While the divestiture of Vantage Towers and some turnover on the executive committee are encouraging, there is little other good news, and Vodafone’s turnaround will likely remain stalled without a change in the CEO seat. Vodafone shares demonstrate how significant asset value can remain locked up by a stubborn leadership team. Our interest is fading, but the excessively depressed valuation, elevated dividend yield and perhaps some potential for more shareholder activism will keep us in our seat likely through year’s end.

In the period, the primary bright light was that service revenues rose 2.5%. But even there, excluding hyper-inflationary Turkey, service revenues would have risen by an uninspiring 1.4%. Earnings of €0.06/share was in line with estimates, but we have little doubt that the company skillfully guided analysts to hit the number.

Other key metrics were weak: EBITDAaL fell 3%, adjusted free cash flow turned negative (€513 million) from a positive €23 million a year ago, net debt increased by 3%, and the company reduced its full-year adjusted EBITDAaL and free cash flow guidance (incrementally). The new €1 billion cost-cutting program will likely end up being barely noticeable after much is reinvested in new initiatives or is lost to higher costs elsewhere within Vodafone’s €32 billion expense base. The EBITDAaL metric is reasonably close to EBITDA and fortunately the company provides a reconciliation to GAAP operating profits.

Vodafone’s operations in continental Europe continue to weaken – the overall stable company results have been supported by healthy growth in the U.K. and Vodacom/Africa.

Earlier this month, Vodafone announced a deal that advances the divestiture of its Vantage Towers business. Vantage is now a publicly traded company in Europe but still 82% owned by Vodafone. The deal creates a joint venture with KKR and GIP (Global Infrastructure Partners) that will hold all of Vodafone’s Vantage Tower stake, with Vodafone taking a 50% stake in the joint venture (“JV”). The JV will then acquire all of the publicly traded Vantage shares so that it will eventually own all of Vantage Towers’ shares. The valuation on the share buyback is a generous (as in “high”) 26x EBITDA.

For Vodafone, the transaction will generate at least $3.2 billion in cash proceeds. However, a full divestiture would have generated more cash, simplified Vodafone’s operations and indicated that the management could fully let go of non-core assets, so we see this partial divestiture as a negative. This half measure is yet another sign that the leadership will slow-walk any changes to unlock the sizeable value of Vodafone’s asset base.

Friday, November 18, 2022, 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 11 minutes and covers:

  • Earnings updates
  • Comments on other recommended companies:
    • ESAB (ESAB) – Parent company Enovis is divesting of their remaining ESAB stake.
    • Xerox (XRX) – Added a new president to bolster the leadership team of the new CEO.
  • Elsewhere in the markets
    • Sell-off in hyper-growth tech stocks driven by collapsing earnings as much as by rising interest rates.
  • Final note
    • Getting ready for the Ohio State-Michigan game after Thanksgiving.
Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.14 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 8.60 - Buy (20)
Small capDril-QuipDRQMay 202128.28 26.46 - Buy (44)
Small capZimVieZIMVApr 202223.00 9.08 - Buy (32)
Mid capMattelMATMay 201528.43 17.28 - Buy (38)
Mid capConduentCNDTFeb 201714.96 3.91 - Buy (9)
Mid capAdient plcADNTOct 201839.77 38.50 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 15.336.5%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.33 - Buy (19)
Mid capViatrisVTRSFeb 202117.43 10.964.4%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 23.924.7%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 47.62 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 19.994.0%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 13.936.7%Buy (25)
Mid capBrookfield ReBAMRJan 202261.32 44.971.2%Buy (93)
Mid capPolarisPIIFeb 2022105.78 110.00 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 10.73 - Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 43.05 - Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 25.016.2%Buy (67)
Mid capESAB CorpESABJul 202245.64 45.47 - Buy (68)
Large capGeneral ElectricGEJul 2007304.96 85.390.4%Buy (160)
Large capShell plcSHELJan 201569.95 56.693.5%Buy (60)
Large capNokia CorporationNOKMar 20158.02 4.731.9%Buy (12)
Large capMacy’sMJul 201633.61 22.672.8%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 17.356.0%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 9.994.4%Buy (16)
Large capNewell BrandsNWLJun 201824.78 13.167.0%Buy (39)
Large capVodafone Group plcVODDec 201821.24 11.558.8%Buy (32)
Large capKraft HeinzKHCJun 201928.68 37.754.2%Buy (45)
Large capMolson CoorsTAPJul 201954.96 53.012.9%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 307.44 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 45.992.6%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 36.53 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 11.84 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 40.134.8%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 19.104.0%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 10.96 - Buy (20)
Large capDowDOWOct 202243.90 50.135.6%Buy (60)
Large capCapital One FinancialCOFNov 202296.25 99.442.4%Buy (150)

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.