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Turnaround Letter
Out-of-Favor Stocks with Real Value

August 12, 2022

This note includes our review of earnings from Berkshire Hathaway (BRK/B), Elanco Animal Health (ELAN), ESAB Corporation (ESAB), TreeHouse Foods (THS), Viatris (VTRS), Vodafone (VOD) and ZimVie (ZIMV).

There were no ratings changes or price target changes this week.

This note includes our review of earnings from Berkshire Hathaway (BRK/B), Elanco Animal Health (ELAN), ESAB Corporation (ESAB), TreeHouse Foods (THS), Viatris (VTRS), Vodafone (VOD) and ZimVie (ZIMV).

There were no ratings changes or price target changes this week.

Earnings Updates

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.

Berkshire reported a reasonable quarter, with operating earnings increasing 39% from a year ago, which were about 26% above the consensus estimate. For Berkshire, analysts and consensus aggregators use “operating earnings,” as reported on Berkshire’s news release and not found in its longer 10-Q filing. This number is divided by the Equivalent Class B shares. In the quarter, the metric was $4.21/share in operating earnings.

We further adjust Operating Earnings for any non-recurring gains or losses, as noted on the company’s news release. This quarter, Operating Earnings included about $1.1 billion of foreign currency gains on non-U.S. dollar denominated debt. As these profits are accounting only, rather than truly related to operations and which could easily reverse, we back them out to arrive at $3.70/share in earnings, up about 19% compared to a year ago. Still, the adjusted earnings were 11% above estimates and a good performance for the quarter.

All major segments reported higher profits, but Insurance Underwriting continues to struggle due to high prices for used cars and car parts at its Geico subsidiary.

Warren Buffett and Charlie Munger seemed unimpressed with the stock’s valuation as they repurchased only $1 billion of Berkshire shares in the quarter. Its “float,” or invested assets in its capital account and insurance operations, was $147 billion, unchanged from year-end. Notably, Berkshire added to its Occidental Petroleum position and now holds a 20% stake.

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. Following its September 2018 IPO at $24 as part of its spin-off from pharmaceutical giant Eli Lilly, Elanco shares have been lackluster, due to weak revenue growth, high expenses and an uninspiring new product pipeline. Veteran activist investor Sachem Head has a board seat, likely leading to an upturn in the company’s execution and driving its undervalued shares higher. The August 2020 acquisition of Bayer Animal Health offers additional opportunities for improved results.

The company reported a reasonably strong quarter but reduced its full-year revenue, adjusted EBITDA and adjusted EPS guidance, each by about 6%. Elanco blamed a wide range of macro, competitive and company-specific issues for the reductions. Also, the company pushed out by a year to 2024 its goals for reaching a 60% gross margin and a 31% EBITDA margin. The updated 2022 guidance, for reference, has the company earning a 24% EBITDA margin. We remain confident that Elanco can successfully execute its turnaround and remain patient even as it is delayed.

In the quarter, revenues fell 4% ex-currency but were in line with estimates. Adjusted earnings of $0.36/share rose 29% and were 44% above estimates. Adjusted EBITDA rose 3% and was 16% above estimates.

Elanco provided incrementally favorable updates on its new product pipeline. The balance sheet showed incremental improvement but remains over-leveraged.

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. Investors have bypassed ESAB’s shares.

ESAB reported an encouraging inaugural post-spin-off quarter, even when factoring in its exit from Russia. The company affirmed its full-year sales, adjusted EBITDA, adjusted EPS and free cash flow guidance. All in, this early-stage turnaround is on track.

Revenues rose 9% ex-currency and were 6% above estimates. Adjusted earnings of $1.14/share fell 8% from a year ago but were 13% above estimates. Adjusted EBITDA of $111 million rose 6% from a year ago and was 5% above estimates.

ESAB’s exit from Russia in the quarter affected its results. Adjusted for the exit, revenues rose 13% ex-currency – an impressive showing. Profits would have been $1.08/share, which still exceeded the $1.01 estimate.

The EBITDA margin expanded to 16.6% ex-Russia from 15.8% a year ago – an encouraging improvement helped by a strong 13% increase in pricing. Free cash flow was weak due to a drag from working capital, which we believe is temporary.

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 9.2% stake and is likely to pressure this undervalued company to either sell or change its strategy and leadership.

TreeHouse reported a weak quarter compared to a year ago but better than somewhat dour estimates. Its impressive price increases (+18%) have alleviated much of the pressure from dismal operational efficiency and the effects of weak leadership, but the turnaround still has a long way to go. The company raised its full-year revenue guidance but left its EBITDA guidance range unchanged, suggesting either extra conservatism on management’s part or further difficulties with margins even as revenues are looking healthier. No change to our rating or price target.

Subsequent to the quarterly release, TreeHouse announced a deal to sell a sizeable portion of its meal preparation business for $950 million. The divested products include pastas, dressings, sauces, chips and other products totaling $1.6 billion in revenues. The buyer is European private equity firm InvestIndustrial. TreeHouse is receiving an attractive 13.6x EBITDA valuation in the deal – however, it will receive a note instead of cash, for almost half of the total price. This is a bit disappointing – the credit quality and interest rate seem appealing but TreeHouse, and we, want cash today, not the promise of cash tomorrow. But, all in, a positive for TreeHouse as it monetizes at a respectable valuation a segment of the company’s operations, allows it to shrink to refocus, and perhaps position the company to sell the remaining operations.

In the quarter, revenues rose 20% and were 7% above estimates. The adjusted loss of $(0.04)/share compared to a profit of $0.26 a year ago but was sharply better that expectations for a $(0.13) loss. Adjusted EBITDA of $67 million fell 28% from a year ago but was 8% higher than estimates.

TreeHouse’s pricing strength added over $170 million in revenues – without this tailwind, the company would have reported an enormous EBITDA loss of nearly $100 million. The gross margin narrowed, indicating that the pricing power was not enough to offset cost inflation or chronic operating inefficiencies. Volume growth of 2% made little difference, and itself was surprisingly low given the boost from trading down to private label products by inflation-stressed consumers. Nevertheless, pricing power is real, and we’re happy to accept its benefits. And consumers’ shift to private label brands appears durable and supported by what appears to be an unusually wide price discount relative to branded foods. Operating expenses rose 14%, which was disappointing to us as this bucket should be shrinking.

The balance sheet showed little improvement, and inventories are rising but much of that could be due to higher input costs rather than more units.

Viatris (VTRS) – Viatris was formed in November 2020 through the merger of pharmaceutical generics producer Mylan, N.V. and Pfizer’s Upjohn division. Investors worry about its declining revenues, limited drug pipeline visibility, elevated debt, loss of exclusivity for Lyrica and Celebrex in Japan, and reforms to China’s volume-based procurement programs. We see Viatris as an undervalued stream of reasonably stable free cash flow. As evidence of this stability is produced, along with better capital allocation, governance and transparency, we see strong potential for a higher share price.

Viatris reported a reasonable quarter and said that it remains on track to meet its full-year earnings, free cash flow and debt repayment guidance and to complete the Biocon transaction. The company needs to maintain at least a slow grind forward on revenues, which appears likely, to maintain and incrementally increase its value. We remain patient for more substantial improvements including positive organic revenue growth, meaningful and sustained contribution from new product launches, margin expansion, cleaner earnings and a strong exit from its forthcoming Biocon stake, as well as clarity on its acquisition program and other uses of its free cash flow. This turnaround may take a year or more to fully develop. But, with the low 5.7x EV/EBITDA valuation, a reasonably sturdy balance sheet, strong free cash flow and a likely sustainable dividend (4.5% yield), we are keeping our Buy rating.

Revenues fell 3% excluding changes in currency and were about 2% below estimates. The highly scrubbed Adjusted earnings of $0.88/share fell 10% but were 6% above estimates. Adjusted EBITDA of $1.5 billion fell 12% but was about 3% above estimates. Free cash flow of $719 million rose 53% from a year ago. The company has repaid $1.5 billion of debt this year, on its way to meeting its $2 billion target.

Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider. The relatively new CEO Nick Read (October 2018) 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.

The company provided a trading update (revenues-only, in American parlance). Fiscal first quarter organic service revenues rose 2.5%, a healthy enough pace that extends the 2.0%-2.7% range of growth over the past four quarters. However, without the hyper-inflation-driven gain in Turkey the revenue growth would have been only +1.6%. Weak results in Germany – the heart of Vodafone – where organic service revenues fell 0.5% were offset by surprising strength in the U.K. (+6.5%). Overall, modestly positive growth is about all we can expect from Vodafone, but it is enough to keep the turnaround moving forward even if only incrementally.

Management said Vodafone remains on track to deliver on its adjusted EBITDAaL and adjusted free cash flow guidance. We would like to see more aggressive strategic changes at Vodafone, including market exits, a monetization of its valuable Africa franchise and (increasingly) new leadership. For now, we will remain patient.

ZimVie (ZIMV)Recently spun off from Zimmer Biomet Holdings, Zimvie specializes in dental and spinal implant products. Like with many new spin-offs, investors sold ZIMV shares for technical reasons, as well as due to concerns about the ability of the new company to fix its struggling spinal products division. The shares are attractive given their unusually low valuation, the company’s durable dental franchise and reasonable potential for a turnaround in its spinal products segment. ZimVie should generate considerable free cash flow, providing financial flexibility as its works down its modestly elevated debt burden.

ZimVie reported reasonable results in its inaugural quarter as a public company, although the size of the Spine segment revenue decay was disappointing. The company trimmed its full-year revenue outlook and cut its profit guidance by 14% which contributed to the sell-off in the shares. ZimVie is in the very early stages of its turnaround, so while the rough start is frustrating there is plenty of time for the company to execute its turnaround plan. The shares are trading at a low 6.8x EBITDA and 9x EPS on updated 2023 consensus estimates.

Revenues of $233 million fell 8% excluding currency changes. There was no consensus revenue estimate. Adjusted earnings of $0.67/share fell 6% but was 31% above estimates. Adjusted EBITDA fell 18%.

Dental segment revenues rose 3% ex-currency while Spine segment revenues fell 18%. While the Dental segment continues to maintain its strengths, the Spine segment continues to show its weaknesses. Some of the Spine decline was due to exiting unprofitable markets and discontinuing some products (good reasons) but also due to competitive pressures on the company’s generally weak product line.

Friday, August 12, 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 ½ minutes and covers:

  • Earnings reports
  • Comments on other recommended companies:
    • Walgreens Boots Alliance (WBA) – A federal judge ruled that the company can be held liable for opioid-related deaths in San Francisco.
    • Volkswagen AG (VWAGY) – The incoming CEO may shrink the board of directors. VW may sell its auto plant in Russia.

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.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

Market CapRecommendationSymbolRec.
Price at
Small capGannett CompanyGCIAug 20179.22 2.60 -Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 9.60 -Buy (20)
Small capDril-QuipDRQMay 202128.28 23.82 -Buy (44)
Small capZimVieZIMVApr 202223.00 17.76 -Buy (32)
Mid capMattelMATMay 201528.43 23.17 -Buy (38)
Mid capConduentCNDTFeb 201714.96 4.46 -Buy (9)
Mid capAdient plcADNTOct 201839.77 37.21 -Buy (55)
Mid capLamb Weston HoldingsLWMay 202061.36 80.311.2%Buy (85)
Mid capXerox HoldingsXRXDec 202021.91 18.445.7%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.55 -Buy (19)
Mid capViatrisVTRSFeb 202117.43 10.965.0%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 31.693.5%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 47.47 -Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 33.652.6%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 16.545.8%Buy (25)
Mid capBrookfield ReBAMRJan 202261.32 53.691.1%Buy (93)
Mid capPolarisPIIFeb 2022105.78 119.72 -Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 14.52 -Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 46.76 -Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 25.976.3%Buy (67)
Mid capESAB CorpESABJul 202245.64 44.80 -Buy (68)
Large capGeneral ElectricGEJul 2007304.96 78.900.4%Buy (160)
Large capShell plcSHELJan 201569.95 53.933.9%Buy (60)
Large capNokia CorporationNOKMar 20158.02 5.211.7%Buy (12)
Large capMacy’sMJul 201633.61 19.533.6%HOLD
Large capToshiba CorporationTOSYYNov 201714.49 19.023.2%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 9.584.7%Buy (16)
Large capNewell BrandsNWLJun 201824.78 20.754.7%Buy (39)
Large capVodafone Group plcVODDec 201821.24 14.767.1%Buy (32)
Large capKraft HeinzKHCJun 201928.68 38.734.3%Buy (45)
Large capMolson CoorsTAPJul 201954.96 56.702.9%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 296.47 -HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 45.252.8%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 49.06 -Buy (78)
Large capElanco Animal HealthELANApr 202127.85 19.57 -Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 40.074.9%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 20.313.8%Buy (70)

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.