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Turnaround Letter
Out-of-Favor Stocks with Real Value

August 5, 2022

This note includes our review of earnings from Adient (ADNT), Conduent (CNDT), Gannett (GCI), Goodyear Tire & Rubber (GT), Ironwood Pharmaceuticals (IRWD), Kaman Corporation (KAMN), Molson Coors (TAP), Organon & Co. (OGN), Vodafone (VOD), Western Digital (WDC) and Western Union (WU). Next week the deluge tapers with six companies reporting.

There were no ratings or price target changes this week.

This note includes our review of earnings from Adient (ADNT), Conduent (CNDT), Gannett (GCI), Goodyear Tire & Rubber (GT), Ironwood Pharmaceuticals (IRWD), Kaman Corporation (KAMN), Molson Coors (TAP), Organon & Co. (OGN), Vodafone (VOD), Western Digital (WDC) and Western Union (WU). Next week the deluge tapers with six companies reporting.

There were no ratings or price target changes this week.

Earlier this week we published the August edition of the Cabot Turnaround Letter. When considering turnaround situations, our most-preferred catalyst is a chief executive officer change. When a business is sliding backwards, this could be exactly the change needed to restore its prosperity. For frustrated shareholders, the change can bring immense potential. We discuss six new CEO situations that look appealing.

Long ago, astute investors noticed that the stocks with the highest dividend yields in the Dow Jones Industrial Average tended to become the index’ best performers in future years. Following the recent market sell-off, we revisited this group to look for interesting opportunities. We discuss six of the highest-dividend-yielding Dow stocks, and leave out three that have immense strategic and profit pressures.

Our feature recommendation this month is Volkswagen AG (VWAGY). The shares have plummeted after our timely sale last year for a 182% total return and we take this opportunity to repurchase them at the current low price. The financially sturdy company has a new CEO and another possible catalyst from a Porsche initial public offering.

Earnings Update

Adient (ADNT) – Adient, one of the world’s largest automobile seat makers, struggled due to weak leadership after its 2016 spin-off from Johnson Controls. We became interested in late 2018, after the shares fell sharply, due to the arrival of Doug Del Grosso as CEO. While we were a bit early on this name, Del Grosso’s highly capable leadership has produced an impressive turnaround so far.

Adient reported a strong fiscal third quarter that showed much improvement over concerningly weak results a year ago. The company continues to face headwinds from Covid lockdowns in China, elevated commodity and labor costs, and supply chain inefficiencies, but is seeing some easing that it anticipates will further improve over the next several quarters. We consider Adient to be one of the best-run companies in the automotive industry and its actions to mitigate the negatives effects of its headwinds continue to be impressive.

The company fractionally trimmed its full-year revenue guidance and raised its full-year adjusted EBITDA guidance to around the consensus estimate. Essentially, Adient is confirming that the estimates are about right, which is a positive.

The company continues to reduce its debt balance – despite the operating challenges, Adient has reduced its net debt by 16% since its September 30 fiscal year end.

In the quarter, revenues rose 2% after adjustments for divestitures and were in line with estimates. Adjusted net income of $0.08/share improved from a loss of $(0.53) a year ago and was significantly better than the $(0.09) estimate. Adjusted EBITDA of $143 million rose 21% from a year ago but was slightly below estimates.

Conduent (CNDT) – Conduent was spun off from Xerox in 2017. After a promising start, the company’s revenues fell sharply due to management problems, leading to a collapse in its share price. In late 2019, the company replaced the CEO, who began a major overhaul that is starting to show progress. Activist investor Carl Icahn owns 18% of Conduent’s shares, while Darwin Deason (who sold his business to Xerox which later was spun off as Conduent) holds a 3.3% stake.

The company’s headline numbers were reasonable compared to estimates but fell sharply compared to a year ago. While year-ago results made for a tough comparison, the company’s performance metrics appear to be reasonably steady after scrubbing out the year-ago, one-off growth. Full-year guidance was incrementally positive. However, the shares fell hard (and later partly recovered) on the news that Conduent decided against spinning off the Transportation division – a disappointment as we believe that focus is critical to the Conduent turnaround. When previously announced divestitures/spins are cancelled, it usually signals that the company didn’t like the valuations or bids received. Such was the case with the Transportation division as the capital markets have been too unsteady this year to float a small-cap specialty company.

Conduent will release details on its new growth plans and goals later this year and will hold an Investor Day early next year. The balance sheet remains sturdy with $519 million in cash, providing plenty of time for Conduent to fix its problems before major maturities come due in 2026 and 2028. Yet, we are growing impatient with this turnaround that never seems to arrive.

In the quarter, revenues fell 8% on a comparable basis and were in line with estimates. Adjusted earnings of $0.03/share fell 85% from a year ago and were shy of the $0.05 estimate. Adjusted EBITDA of $87 million fell 27% from a year ago but was slightly higher than estimates.

Gannett (GCI) – Gannett, publisher of the USA Today and many local newspapers, is racing to replace its declining print circulation and ad revenues with digital revenues. It also is aggressively cutting costs to maintain its profits and help cut its expensive and elevated debt. The biggest challenge for Gannett is to overcome investors’ perception that the company is not viable.

Shares of Gannett plummeted 28% following a dismal quarter and sharply lower full-year revenue and profit guidance. The most important metric, free cash flow, was guided to breakeven to $20 million from the prior guidance given only a quarter ago for $160 million to $180 million. The company attributed the decay to a fall-off in traditional advertising and subscriptions, as well as tight labor markets. The Digital Marketing Solutions segment showed higher revenue and profits compared to a year ago.

What also is ailing Gannett is its costs. We see that “EBITDA costs” rose even as revenues fell. In Gannett Media (traditional media), EBITDA costs rose by $4 million. In the Digital segment, costs rose by over $6 million. Combined, EBITDA costs increased by $10 million. We would have thought that this amount would have fallen by perhaps a combined $20 million or more. Gannett is implementing a cost-cutting program, but this is a behind-the-curve step.

In the quarter, revenues fell 7% from a year ago and were about 5% below estimates. Adjusted losses of $(0.20)/share compared to a $.10/share profit a year ago and estimates for a $0.03 profit this quarter. Adjusted EBITDA of $51 million fell 56% a year ago and was 37% below estimates.

The balance sheet remains marginally respectable. But liquidity may become a concern, which might prompt us to take a loss and move on. But, for now, given the already-large hit to the share price, we will hold tight.

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 for what look like short-term reasons. Investors aggressively sold the shares following the company’s disappointing outlook provided during its fourth-quarter earnings call. However, demand and pricing will likely remain robust, more than enough to offset rising input costs. And, the benefits from Goodyear’s acquisition of Cooper Tire provide additional value. The company’s balance sheet is sturdy.

Goodyear reported a healthy quarter, with revenues and profits increasing meaningfully and suggesting that the company is navigating the end-market volume slowdown and rising costs reasonably well – certainly better than dour investors anticipated. Revenues per tire, a proxy for pricing, improved by 14%. This is encouraging that the company can push through higher prices without a significant decline in volume. The company gave basically unchanged assumptions for full-year 2022 other than a 15% reduction in its expected capital spending.

In the quarter, revenues rose 31% from a year ago, although adjusted for the Cooper Tire acquisition revenues rose 15%. Revenues were about 5% above estimates. Adjusted net income of $0.46/share rose 44% from a year ago and was 31% above estimates.

Ironwood Pharmaceuticals (IRWD) – After years of weak leadership, Ironwood has one remaining product, Linzess, so investors view the company as a failed business. However, Linzess is a steady revenue producer with growing volumes that offset its slow per-unit price decline. As cash accumulates on the balance sheet and now exceeds its debt, Ironwood is repurchasing its shares. Respected activist investor Alex Denner, who now holds a board seat, is exerting his influence, including ousting the CEO and slashing spending. Ironwood’s shares trade at a highly discounted valuation.

Ironwood reported an uninspiring quarter as the Linzess franchise showed incremental revenue weakness and higher commercial costs and expenses. Favorably, the company’s research and development expenses were slightly lower than a year ago. The Linzess franchise is a cash cow, and we would like to see Ironwood continue to milk this valuable asset rather than divert some cash flow to fund new treatments. Nevertheless, the company is funding development of new uses for Linzess (sounds like a good idea to us) but also new treatments (perhaps one or more will pay off, but we consider these to be lottery tickets).

The company’s credible full-year guidance was reiterated, which provided some encouragement that the Linzess weakness was temporary. Ironwood has a solid balance sheet ($109 million of net cash). But we worry that it will spend this on an acquisition. We would be happy to sell our shares to newly enthusiastic growth investors if they bid up the stock on such news.

In the quarter, revenues fell 7% but were about 6% below estimates. Adjusted earnings of $0.21/share fell 38% from a year ago and were 30% below estimates. Adjusted EBITDA of $56.0 million fell 14% from a year ago and was 17% below estimates. The company completed its $150 million share buyback program and repaid the balance of its 2022 Convertible Notes.

Kaman Corporation (KAMN) – Based in Connecticut, Kaman is a high-quality defense and aerospace company. A reconfigured board along with a new CEO and several other new senior executives are prioritizing Kaman’s high-value precision engineering operations and are emphasizing higher margins and shareholder returns while exiting/de-emphasizing the company’s lower-value businesses. The company is profitable, and its sturdy balance sheet provides a solid foundation.

Kaman’s results were broadly and sizably below the year-ago results and the consensus estimates. The company trimmed its full-year revenue guidance but maintained its full-year earnings and free cash flow guidance. The gem of Kaman, the Engineered Products, is performing well, with rising revenues (+14%), EBITDA (+32%) and orders (+33% YTD). The dogs, which includes Precision Products (primarily fuses) and Structures, showed dismal results that when combined more than offset the strength of the Engineered Products unit.

Kaman’s strategy is somewhat standard fare in a turnaround: rebuild a company around a solid core and work to improve the laggards which will likely be divested at some point. We think the company under the new leadership is doing the right things, and we remain encouraged and patient here in the early stages of this turnaround.

Revenues fell 12% and were about 10% below estimates. Adjusted earnings of $0.31/share fell 45% and were 28% below estimates. Adjusted EBITDA of $16.4 million fell 39% and was about 24% below estimates.

Molson Coors Beverage Company (TAP) – Molson Coors is struggling with weak growth yet is working under a new CEO to more aggressively develop specialty/higher-end beverages and reduce its reliance on mainstream and value offerings. Also, the company is increasingly focusing on its cost structure. Molson Coors continues to trade at a discount to its peers and its fundamental prospects.

The company reported in-line results and guidance, but the shares tumbled about 10% on the news as investors worried about slowing industry volumes, and perhaps that Molson’s push into premium brands has come at the wrong moment as consumers start to trade down. The company reaffirmed its full-year guidance. The decline in the share price does not diminish our appetite for the stock.

Revenues rose 2.2% excluding currency changes and in line with estimates. Adjusted earnings of $1.19/share fell 25% yet were also in-line with estimates. Non-GAAP underlying EBITDA of $566 million fell 18% from a year ago and was about 5% weaker than estimates. The company reaffirmed its full-year revenue, profit and free cash flow guidance.

In the quarter, prices rose 7% but volumes fell 5%. Brand volume, which excludes volumes that Molson produces for third-party beers, fell only 2%, indicating some reasonably resilience of in-house brands relative to others. Volumes for the industry as a whole were weak in the second quarter, so it appears that Molson is gaining share. The company said that it is roughly balanced between premium brands and lower-priced brands – a mix that is more sensible today as many consumers are trading down due to inflation and the weak economy.

Profits slipped due to sharply higher materials, transportation and energy costs, as cost of goods sold in aggregate rose nearly 12% despite the flattish revenues. Marketing costs rose 7.5%, a high number but not a total surprise as management has highlighted its interest in spending to promote its new brands. The decline in underlying EBITDA in the U.S. was 20%, while the decline elsewhere was 23%.

Molson continues to chip away at its debt balance even as it repurchases its shares.

Organon & Co (OGN)Recently spun off from Merck, Organon specializes in patented women’s healthcare products and biosimilars. It also has a portfolio of mostly off-patent treatments. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings.

Organon reported a reasonable quarter that was better than estimates and which points to a slow but steady grind forward for revenues. Excluding currency headwinds, volumes looked good with a 5% growth rate. The company fractionally trimmed its full-year revenue guidance and took 2 percentage points out of its Adjusted EBITDA margin guidance. The profit cut was due to higher R&D costs from its acquisitions. Overall, the company is making progress.

Sales in the Women’s Health segment ticked up, but Biosimilars revenues rose 42%. Established Brands sales rose 4%. Management was optimistic about stronger sales for the core Nexplanon product later this year and for revenues from other new treatments. Organon continues to marginally chip away at its debt.

In the quarter, revenues fell fractionally but were about 3% ahead of estimates. On a currency-adjusted basis, revenues grew 5%. Adjusted earnings of $1.25/share 27% from a year ago but were 5% above estimates. Adjusted EBITDA of $512 million fell 18% from a year ago but was 8% above estimates.

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. The company generates free cash flow and holds plenty of cash to buy time for the turnaround and to help pay down its elevated debt.

The company reported reasonable fiscal fourth-quarter results given the difficult end-market and cost challenges. But, dismal fiscal first-quarter guidance, which has revenues slipping 27% (and 23% below estimates) and earnings collapsing 80% compared to a Covid-laden period a year ago points to a weaker-for-longer outlook. The company cites a slowing environment for its memory devices, and still-elevated costs, in its outlook. WDC shares are sliding 5% in early trading.

In the quarter, revenues fell 8% and were slightly below estimates. Adjusted earnings of $1.78/share fell 18% from a year ago but were 3% above estimates.

Cloud revenues (now almost half of total revenues) remain steady/improving, while Client Consumer revenues continue to slip.

The company is whittling away at its debt, with net debt down 12% from a year ago. Western’s debt remains elevated, particularly given the choppy near-term conditions and outlook. We welcome further reductions.

The Western Union Company (WU) –This widely recognized money transfer company is facing secular headwinds from the transition to digital money. Prior efforts to diversify away from the core retail business using the company’s sizeable cash flows were unsuccessful, but a new CEO with impressive fintech experience brings the real possibility of a meaningful improvement in both execution and strategy as it makes its transition to the digital world. Investors have aggressively sold WU shares, ignoring the company’s relatively stable revenues, sizeable free cash flow and valuable intangible assets as well as its generous dividend yield.

The company reported moderately weaker revenues but better profits. The top-line weakness was acceptable, and the profit expansion which is partly due to changes under the new CEO is encouraging. Western Union trimmed its full-year revenue guidance as two key retail agents in Europe are exiting the category – an unfortunate but perhaps recurring issue for a secularly challenged company like Western Union. The departures will drag revenues down by about 2 percentage points by the end of 2023.

However, Western raised its full-year operating margin guidance based on new initiatives by the new leadership team. The company will provide more color on its outlook and plan at an Investor Day in October.

The shares fell 6% on the day, but this reflects investors’ already-tenuous view of Western such that any incrementally non-positive news is given disproportionately high weight.

In the quarter, revenues fell 12%, but excluding currency changes fell only 4%. The company suspended operations in Russia and Belarus, dragging down sales by 3%, but inflation in Argentina helped revenues by 1%. All-in, revenues were reasonably stable with little competitive erosion. Compared to estimates, revenues were in line.

Adjusted earnings of $0.51/share rose 6% from a year ago and were 24% above estimates. Lower share-count and a wider operating margin drove the increase – two reasons that we like to see. The adjusted EBITDA margin expanded by over 3 percentage points to 27.2% in the quarter.

The company paid $21 million in dividends and repurchased $91 million in shares in the quarter. The share count is down by nearly 6% from a year ago. Net debt is down 16% from year’s end. All of these suggest that the company continues to generate solid free cash flow and is putting that money directly or indirectly into shareholders’ pockets.

Friday, August 5, 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 12½ minutes and covers:

  • Earnings
    • Comments on recommended companies reporting earnings.

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 2.30 -Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 9.66 -Buy (20)
Small capDril-QuipDRQMay 202128.28 22.11 -Buy (44)
Small capZimVieZIMVApr 202223.00 19.78 -Buy (32)
Mid capMattelMATMay 201528.43 22.81 -Buy (38)
Mid capConduentCNDTFeb 201714.96 4.25 -Buy (9)
Mid capAdient plcADNTOct 201839.77 33.44 -Buy (55)
Mid capLamb Weston HoldingsLWMay 202061.36 80.631.2%Buy (85)
Mid capXerox HoldingsXRXDec 202021.91 17.495.7%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.48 -Buy (19)
Mid capViatrisVTRSFeb 202117.43 9.625.0%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 32.413.5%Buy (46)
Mid capTreeHouse FoodsTHSOct 202139.43 43.50 -Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 31.312.6%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 16.255.8%Buy (25)
Mid capBrookfield ReBAMRJan 202261.32 50.261.1%Buy (93)
Mid capPolarisPIIFeb 2022105.78 116.37 -Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 12.57 -Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 46.24 -Buy (67)
Mid capJanus Henderson GroupJHGJun 202227.17 24.916.3%Buy (67)
Mid capESAB CorpESABJul 202245.64 44.31 -Buy (68)
Large capGeneral ElectricGEJul 2007304.96 73.670.4%Buy (160)
Large capShell plcSHELJan 201569.95 51.093.9%Buy (60)
Large capNokia CorporationNOKMar 20158.02 5.231.7%Buy (12)
Large capMacy’sMJul 201633.61 17.673.6%HOLD
Large capToshiba CorporationTOSYYNov 201714.49 19.923.2%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 9.284.7%Buy (16)
Large capNewell BrandsNWLJun 201824.78 19.574.7%Buy (39)
Large capVodafone Group plcVODDec 201821.24 14.387.1%Buy (32)
Large capKraft HeinzKHCJun 201928.68 37.034.3%Buy (45)
Large capMolson CoorsTAPJul 201954.96 52.912.9%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 292.91 -HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 42.772.8%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 49.91 -Buy (78)
Large capElanco Animal HealthELANApr 202127.85 19.02 -Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 38.984.9%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 19.953.8%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.