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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 15, 2021

This week we had two companies reporting earnings, one reports next week, and the earnings deluge starts the following week with at least seven companies reporting.


This week we had two companies reporting earnings – Albertsons (ACI) and Wells Fargo (WFC). Baker Hughes (BKR) reports next week, and the earnings deluge starts the following week with at least seven companies reporting.

Mohawk Industries (MHK) has moved above our price target and we are raising the price target to 180 from the current 147. We moved DuPont (DD) to a Sell as it has surged past our 75 price target and appear fully-valued. General Motors (GM) and Macy’s (M) have ticked above our price target so we are reviewing these stocks.

Earnings Reports:
Albertsons Companies (ACI) – After years of acquisitions, divestitures and other deals, this grocery company looks like a jumble of siloed and poorly-managed entities with minimal integration. Following its recent IPO, Albertsons has a lot of work ahead to boost its margins, reduce its debt and clarify its pension obligations. The new CEO looks capable and the pandemic tailwind will help as they make the necessary improvements.

Summary: Fiscal third quarter results indicate that the Albertsons turnaround is going well, aided by the pandemic-driven trend of consumers eating more meals at home. Revenues and profits increased sharply in the quarter, with profitability considerably higher than consensus estimates. The company raised its forward guidance as it sees some permanence in current trends. Albertsons continues to invest in on-line ordering, curbside pickup, meal kits and other innovations to stay relevant. Headwinds remain, from rising supplier and labor inflation, likely negative comps once the pandemic subsides, and the competitive environment, but overall Albertsons seems to be a better-managed and more valuable company.

Details: Revenues of $15.4 billion were 9% above a year ago and in-line with consensus estimates. Adjusted earnings per share of $0.66 were 175% higher than the $0.22 earned a year ago and were 57% higher than consensus estimates.

Revenue growth was driven by a 12.3% increase in identical store sales (stores open 15 months or longer, thus avoiding the impact from opening new stores). Since Albertsons’ store-count was essentially unchanged at 2,253 stores, the identical store sales were basically the same as total store sales. Analysts had expected identical stores sales growth of 11%. Compared to its peers, Albertsons is gaining market share and its efforts to improve store-level demand, accelerate its development of omnichannel capabilities, reduce unnecessary costs and improve its talent base/culture appear to be working. As the company operates gas stations at many of its locations, sharply lower gasoline sales pulled down the 12.4% identical store sales growth to the company total 9% growth.

Albertsons will become a Covid vaccine provider, which should help drive traffic to its stores.

Adjusted net income rose due to higher sales and wider gross margins (mostly due to tighter inventory control and more sales per unit of advertising and other fixed costs). Selling/administrative costs were higher, but mostly due to $286 million in costs to exit a union pension fund. Importantly, interest costs fell by nearly a third as the company repaid debt and refinanced some existing debt at lower interest rates.

Adjusted EBITDA (a measure of cash operating earnings) rose to $968 million from $634 million a year ago, and was 27% higher than estimates. While this measure scrubs out a number of costs, it indicates that the company’s core profitability is clearly improving. Adjusted EBITDA was 6.3% of sales compared to 4.5% a year ago. Albertsons continues to generate healthy free cash flow.

Debt net of cash fell to $6.5 billion compared to $8.2 billion a year ago, reflecting paydowns. However, when the convertible preferred shares are considered, net debt was essentially unchanged. Given the reduction in net debt, the company appears to now be underleveraged.

Albertsons’ labor force is unionized, and the national labor unions represent workers at other grocery store companies. As such, Albertsons could be called upon to fund any shortfalls in the pension plans of these national labor unions. These obligations are an overhang on the shares. This past quarter, Albertsons withdrew from one of these unions’ plans (the UFCW union), contributing $286 million in cash as part of its exit. We believe this is money well-spent.

Albertsons raised their full-year guidance: identical store sales guidance was raised by one percentage point to 16.5%, and Adjusted EBITDA guidance was raised by about 11%.

Interestingly, Albertsons said it owns a real estate portfolio that has been appraised at $11 billion.

Wells Fargo & Company (WFC) – Wells Fargo is one of the nation’s largest banks, with extensive retail and commercial banking, mortgage lending, investment banking, credit card and investment management operations. Under its previously weak leadership, the company never fully recovered from the 2009 financial crisis, and its loose compliance culture led to a fake accounts scandal and other reputation-tarnishing problems. Also, like all banks, it is struggling with low interest rates and the potential for high credit losses from the pandemic-weakened economy. An additional constraint is a regulator-imposed cap on Wells Fargo’s asset size.

Now led by highly credible CEO Charles Scharf, the bank’s operations and leadership are undergoing a complete overhaul. We expect a tightened compliance culture, better strategic focus and much more efficient operations to produce significantly higher earnings. We also expect Wells Fargo to successfully navigate the higher credit cost environment ahead.

Summary: Earnings were basically unchanged from a year ago but considerably stronger than the third quarter. The low interest rate environment is pressuring profits but lower operating and credit costs, along with lower taxes, are helping. Wells continues to make slow but steady progress and remains attractive.

We have a high degree of confidence that the self-help components (lower expenses, tighter compliance culture, regulatory relief) are achievable. Future credit losses remain a wildcard but the bank has plenty of capital and reserves to weather all but the worse conditions. The outlook for the market-based component (low interest rate environment) is unknown but it is unlikely to get any worse.

Details: Fourth quarter adjusted net income of $0.62/share, up about 3% from a year ago. The earnings had several adjustments, some of which may or may not have been included in the $0.63/share consensus. Unadjusted earnings were $0.64, so we would put this result as mixed/in-line.

A useful way to think about a bank’s profitability is to look at its operating profits before credit costs (called pre-tax, pre-provision profits, or PTPP). Compared to the pre-pandemic 4th Qtr 2019 period, Wells’ PTPP in the 4th Qtr 2020 fell 26%. Net interest revenues fell 17%, as spreads on loans relative to deposits narrowed in the low interest rate environment. Fee income was unchanged. Lower operating expenses, as the bank chipped away at its high-cost structure, only partly offset the lower overall revenues.

Fourth quarter credit costs were lower than a year ago. The bank’s overall credit picture was weaker, but its already-high reserves didn’t need additional replenishing. And, Wells Fargo will be selling its student loan portfolio, so it reduced its reserves for these loans. In total, these two changes allowed the bank to show much lower credit costs (actually a negative cost, which boosted profits) compared to a year ago. Lower taxes helped buoy profits.

Bank profits tend to not be seasonal, so sequential comparisons are useful. Compared to the third quarter, PTPP fell 14%. Net interest income was mostly stable, as interest rates didn’t change much. Fee income fell by 9% but lower operating expenses offset almost half of the lower revenues. The negative credit costs and much lower taxes helped boost profits by 52% compared to the second quarter.

The bank’s overall credit strength remains solid. Non-performing assets (in which payments are generally more than 90 days overdue) rose modestly from the third quarter to 1.00% of total assets. Credit loss reserves are more than twice this amount, providing some cushion. Wells charged off fewer loans this quarter than the last quarter. So, these statistics suggest that likely losses aren’t getting much worse.

Capital also remains robust. The CET1 capital ratio (the regulatory metric of Common Equity Tier 1) rose to 11.6% from 11.4% in the third quarter.

Management expects operating expenses for 2021 to decline about 8% and is targeting a return on tangible common equity of 15% in several years. While many hurdles remain, reaching this target would imply earnings of $6.00/share.

Ratings Changes:
Mohawk Industries (MHK) – Mohawk shares are now trading above our 147 price target. We had previously reduced its price target to 147 from 220 when it looked like the pandemic would significantly weaken the company’s turnaround efforts. However, it appears that the construction and remodel industries will remain reasonably healthy, so we are raising our price target to 180.

DuPont (DD) was moved to a Sell on Wednesday. With the pending sale of its Nutrition & Biosciences (N&B) unit, DuPont shares have surged past our 75 price target. The actual transaction has complicated mechanics, including an exchange into N&B shares at a discounted and yet-to-be-determined exchange ratio, followed by their conversion into International Flavors & Fragrances (IFF) shares.

The net effect is that DuPont retires a sizeable percentage of its shares and reduces its debt. However, the post-transaction valuation looks full and discounts a fairly prosperous future. We are moving DD shares to a Sell, with an estimated 85% total return since our March 2020 initial Buy recommendation.

Friday, January 15, 2021 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.

Today’s podcast is about 15½ minutes and covers:

  • Brief updates on:
    • Albertsons (ACI) – encouraging earnings report.
    • Wells Fargo (WFC) – OK results.
    • Mohawk Industries (MHK) – raising price target to 180.
    • DuPont (DD) – moving to Sell.
    • General Motors (GM) and Macy’s (M) – under review as the shares have moved above our price targets.
    • Signet Jewelers (SIG) – reported strong holiday sales.
    • Ironwood Pharmaceuticals (IRWD) – guidance in-line with expectations.
    • General Electric (GE) – finally getting some respect?
    • General Motors (GM) – more initiatives in electric vehicles.
    • Nokia (NOK) – involved in U.S. government 5G program.

  • Elsewhere in the market:
    • Market’s appetite for all things speculative remains hot: IPOs, SPACs and penny stocks.

Please feel free to share your ideas and suggestions for the podcast with an email to either me at or to our friendly customer support team at Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.