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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 22, 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 – Gannett (GCI) and Baker Hughes (BKR). Next week, four companies are scheduled to report earnings: Xerox (XRX), Valero (VLO), Western Digital (WDC), and General Electric (GE).

We raised our price target on General Motors (GM) to 62 from 49.

Earnings Reports:

Baker Hughes (BKR) – Baker is one of the world’s largest diversified energy service companies. It is currently beleaguered by the depression in global oil and gas drilling activity. Also, the shares are being weighed down by General Electric’s sale (over 3 years) of its huge 377 million share stake. The company’s investment grade balance sheet and positive free cash flow should provide it with the ability to endure until the industry’s eventual recovery.

Overall, an incrementally encouraging quarter. While earnings missed estimates, they were sizeable on an absolute level, considering industry conditions, and suggest that Baker has considerable staying power.

We see yesterday’s announcement by the new Biden administration of a 60-day moratorium on drilling on federal lands as a positive: if made permanent, it would likely drive up oil prices and spur new drilling globally. Also, Baker Hughes has only a moderate exposure to US drilling.

In the quarter, revenues of $5.5 billion rose 9% from the second quarter but fell 13% from a year ago, although they were modestly ahead of consensus estimates. The adjusted per share loss of $(0.07) was sharply lower than $0.27 in earnings a year ago, and was much weaker than the $0.16 estimate.

The company’s revenue base is recovering after the sharp declines earlier this year, but is still considerably weaker than the pre-pandemic level. The Turbomachinery & Process Solutions segment, at about 35% of current revenues, bucked the trend by reporting 19% year/year growth in sales. Total orders were 25% below a year ago but rose 2% from the second quarter, suggesting continued revenue weakness but not a collapse in coming quarters. Remaining Performance Obligations, which might be considered as backlog, were $23.4 billion.

Adjusted operating income of $462 million was healthy, declining only $84 million from a year ago while revenues fell $852 million. The decremental margin was 9.9%, compared to the company’s total margin of 8.4%. While we don’t have gross margin data, the decrement implies considerable cuts to overhead costs.

On an absolute basis, generating $462 million in operating profits, and $250 million in free cash flow at an industry low-point, is encouraging. The company expects free cash flow to improve significantly in 2021. Baker’s net debt balance of $3.5 billion is lower than the year-ago balance of $3.6 billion. Interestingly, the company has an embedded $1.4 billion profit (not counted in its adjusted operating profit numbers) on its equity stake in, a technology company that recently completed a very hot IPO. This stake (acquired for $69 million in June 2019) is held as a marketable security and counted in the net debt calculation.

Gannett (GCI) – Gannett has struggled following the late-2019 combination of legacy Gannett and New Media Investment Group due to pandemic-reduced advertising revenues. Also, its much-anticipated dividend was suspended. However, aggressive cost-cutting has allowed the company to maintain positive cash flow (a key to the story) and whittle away at its debt.

The company reported partial and preliminary results on Wednesday, indicating that the turnaround is working. Profits were strong, up slightly from a year ago – remarkable for a year when revenues fell about 17%. Gannett has cut over $180 million in costs over the past year and appears well on its way to reaching the $300 million synergy target. We look forward to seeing the full results when they are reported, likely in February.

Details: Revenues will be in the range of $865 million to $875 million, down about 17% from a year ago but slightly above estimates of $857 million. Adjusted EBITDA will be in the range of $142 million to $147 million, slightly above a year ago and about 55% above estimates. Advertising trends are rebounding and digital subscriptions growth remains robust. Gannett holds $171 million in cash, compared to $1.58 billion in debt.

Ratings Changes:

General Motors (GM)We raised our price target on General Motors (GM) to 62, following our review, as the shares have surged through our 49 price target.

As value investors in a remarkably robust (exuberant) stock market, full valuation impels us to want to sell a stock when it appears fairly priced. Such was the case with General Motors. We were on the razor’s edge of moving to a Sell. However, we raised the target price instead.

Our lengthy analysis outlining our new view, distributed on Wednesday, can be summarized in the quote from St. Augustine, “Lord, Please Make Me Chaste – But Not Yet.” Briefly, we believe that the new GM is worth more than the old GM and our in-depth rework of its valuation provided us with the confidence to hold on.

New GM’s conventional vehicle operations are a step-function better than “old GM.” The electric vehicle operations position GM well for the future, with it perhaps becoming a North American duopoly with Tesla. We see little value in the self-driving or battery business currently. We recognize the many risks in GM’s future, with our investment risk increasing as the share price increases. Our detailed valuation model, which captures on a sum-of-the-parts basis a more holistic view of GM’s future, supports our new 62 price target.

We are keeping the shares on a short leash. We “reserve the right to change our mind at any time” and thus move GM shares to a Sell even if they don’t reach 62. But in a surging stock market, and with GM’s remarkable progress in both conventional and new vehicles, let’s not be chaste, just yet.

Friday, January 22, 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 17 minutes and covers:

  • Brief updates on:
    • Baker Hughes (BKR) – Mildly encouraging quarter.
    • Gannett (GCI) – encouraging preliminary 4Q results.
    • General Motors (GM) – raised price target to 62 from 49.
      • How we get our 62 price target.
      • Thoughts on value investing in raging bull market.

    • HolcimLafarge (HCMLY) – acquired Firestone Building Products.
    • Molson Coors (TAP) – Selling India operations.
    • Credit Suisse (CS) – SPACs should boost their earnings.

  • Elsewhere in the market:
    • IBM (IBM) – is it finally a buy? No, not yet.

  • Final note:
    • Tom Brady

  • February Cabot Turnaround Letter will be distributed next Wednesday.

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.