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Turnaround Letter
Out-of-Favor Stocks with Real Value

January 29, 2021

Today’s note includes earnings updates, ratings changes, the podcast and the Catalyst Report.


Today’s note includes earnings updates, ratings changes, the podcast and the Catalyst Report.

Earnings Reports
This week we had four companies reporting earnings – General Electric (GE), Valero Energy (VLO), Western Digital (WDC) and Xerox (XRX).

Next week, Biogen (BIIB), Nokia (NOK), Oaktree Specialty Lending (OCSL), Meredith Corp (MDP), Royal Dutch Shell (RDS/B) and Adient (ADNT) report earnings.

General Electric (GE) – Led by impressive new CEO Lawrence Culp, GE finally appears to be righting its otherwise severely damaged business. Key ingredients include a clear strategic focus on execution, cash flow and debt reduction, and leadership changes deeper in the company.

Overall, fourth-quarter results were encouraging, particularly with free cash flow showing continued strength. Adjusted earnings of $0.08/share was 60% lower than the $0.20 earned a year ago, and was 1 cent below estimates. Industrial organic revenue fell 14%, while the adjusted Industrial profit fell 52%. However, GE Industrial free cash flow of $4.4 billion rose 12% from a year ago and was 43% higher than consensus estimates.

This FCF number is probably the key metric, as GE’s core problem is its overextended balance sheet. Revenue and operating profits matter, as they are a major driver of FCF, but working capital, taxes, capital spending and other cash sources/uses are just as critical to the turnaround.

GE’s net Industrial debt of $32.3 billion was 33% lower than a year ago. This is good progress, but at 5.9x Industrial EBITDA, the debt is clearly is too high. The company is targeting a 2.5x level, implying perhaps another $12 billion in lower debt on perhaps $8.0 billion in EBITDA, compared to the $5.4 billion in EBITDA produced in 2020 and $11.4 produced in 2019.

The company’s guidance was for a better 2021, with roughly 1-3% organic Industrial revenue growth, a 2.5 percentage-point expansion in the Industrial profit margin, and Industrial free cash flow of $2.5 billion to $4.5 billion. GE will hold an investor update on March 10, open to the public.

Valero Energy (VLO) – As the world’s largest independent oil refinery, Valero suffered from sharp revenue and margin declines during the pandemic. The company’s outlook is much better than its overly discounted stock price suggests. Valero has high-quality and irreplaceable assets, strong leadership, an investment grade balance sheet, generates considerable free cash flow, and should benefit from a re-opening of the economy. Its Diamond Green Diesel joint venture may hold hidden value. Valero’s high dividend looks sustainable.

The adjusted fourth-quarter loss of $(1.06)/share was way down from a profit of $2.13 a year ago. However, it was considerably better than the consensus estimate for a $(1.39) loss. Revenue fell 40%, but was slightly stronger than expectations.

Most of the profit decline was due to lower oil refining volumes (-16%) and margins. The per-barrel refining margin of $4.64 was sharply lower than the $10.90/barrel margin a year ago. In the smaller segments: renewable diesel volumes fell about 27% but the margin was essentially flat, while ethanol volumes and margins were down only slightly. Operating costs fell modestly.

The renewable diesel segment holds considerable promise. It is comprised of Diamond Green Diesel – the largest renewable diesel producer in the country – a joint venture with Darling Ingredients (DAR). Volumes were weaker due to planned maintenance – otherwise volumes would have risen as capacity and productivity are increasing. The joint venture anticipates quadrupling its volumes by 2023.

Valero produced strong cash flow and maintained its hefty dividend with plenty of margin. The balance sheet holds $3.3 billion in cash, with debt of $14.7 billion. Compared with a year ago, net debt of $11.4 billion is up about $4.3 billion due to the company’s losses.

Valero’s outlook continues to improve. In addition to higher volumes and margins as the economy recovers, several competitors’ refineries are permanently closing, helping provide a tailwind to Valero’s profits.

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 considerable free cash flow and holds plenty of cash to buy time for the turnaround and to help pay down its elevated debt. At our initial recommendation, the shares traded at a highly discounted valuation.

Western reported strong earnings and provided an encouraging outlook. Fiscal second-quarter revenue of $3.9 billion fell 7% from a year ago and was fractionally higher than estimates. Adjusted earnings of $0.69/share was 11% higher than a year ago and about 28% higher than estimates. The company’s fiscal third-quarter guidance range means estimates will be rising.

The revenue decline was due to ongoing weakness in its Data Center Devices and Solutions segment, which saw a sharp 46% drop in sales. However, management commented that demand in this segment has bottomed and will begin a rebound in the third quarter.

The adjusted gross margin and adjusted operating margin both expanded. Western’s operating expenses fell 9% from a year ago as cost-efficiency improvements are having an effect.

Xerox Holdings (XRX) – While the near-term outlook remains clouded, as office workers remain in work-from-home mode, we believe the company’s revenue and cash flow will recover post-pandemic. Investors underestimate Xerox’s value due to its zero-growth prospects, but the company’s hefty free cash flow has considerable value. The balance sheet is strong, new and capable leadership is working to drive shareholder value higher, and its attractive dividend remains reliable.

Adjusted fourth-quarter earnings of $0.58/share fell 56% from a year ago and was about 8% below the consensus $0.63 estimate. Revenue of $1.93 billion fell 21% from a year ago but was fractionally higher than estimates. Free cash flow for the quarter was $221 million, down about 42% from a year ago. Compared with the third quarter, revenue (+9%), per-share profits (+21%) and free cash flow (+150%) were stronger.

Equipment sales fell 17%, while service/maintenance and supplies revenue fell 22% partly due to a one-time license fee a year ago.

Xerox’s balance sheet remains sturdy, with $2.6 billion in cash and a modest $1.4 billion of corporate debt. The remaining $3.0 billion in debt is funding for its leasing operations. Given the sizeable free cash flow, the sturdy balance sheet and management’s stated commitment, the dividend looks solid, providing a 4.7% yield.

Management’s full-year 2021 guidance is for 2.5% revenue growth and at least $500 million of free cash flow. These are generally in line with consensus estimates, but the actual results are highly dependent on how quickly workers return to offices.

The new and capable CEO is making structural changes to Xerox. The market wasn’t impressed, but we see this as an important step in that the CEO is ready to make bold moves to boost the company’s value.

The largest change is that three businesses will be operated and reported as separate units, with the intent to highlight their value, potentially create more growth opportunities and perhaps at some point to spin them out or sell them. This all makes good sense to us. The software business is a collection of strong and average businesses only tangentially related to the core equipment business. Xerox Financial Services will expand to provide leasing for non-Xerox equipment. The Palo Alto Research Center (PARC) is probably a cost center and as such a drag on XRX share valuation.

Xerox will also establish a $250 million venture capital fund.

The company also reached an agreement with Carl Icahn and Darwin Deason, likely buying the company time to implement its plans.

Ratings Changes
Macy’s has surged well past our 13 price target. We’re not inclined to raise the price target much, yet we are not yet ready to sell, either. The Reddit crowd appeared to tag the shares earlier this week, moving them up to over 22 intraday – a price we’d probably be happy to take – but the shares fell back to the 16 range by the market close. We’ll leave the shares with the current Buy status and price target, waiting for a better price.

Friday, January 29, 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 16 minutes and covers:

  • Brief updates on:
    • General Electric (GE) – encouraging earnings report.
    • Valero Energy (VLO) – encouraging earnings report.
    • Western Digital (WDC) – encouraging earnings report.
    • Xerox Holdings (XRX) – minimal progress, but interesting strategic changes.
    • Macy’s (M) – Above our 13 price target, but holding on.
    • General Motors (GM) – End of gas-powered cars by 2035?
    • Viatris (VTRS) – Clarifying the dividend yield.
    • Biogen (BIIB) – Renewed hope for its Alzheimer’s treatment.
    • Nokia (NOK) – Caught in Reddit trading?

  • Elsewhere in the market:
    • The “new” market?

  • Final note

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.

Catalyst Report
This month saw many mergers/acquisitions along with a smattering of CEO changes and activist campaigns. We continue to expect a busy year for catalysts of all types.

The Catalyst Report is a proprietary monthly report that is unique on Wall Street. It is an extensive listing of companies that have experienced a recent strategic event, such as new leadership, a spin-off transaction, interest from an activist investor, emergence from bankruptcy, and others. An effective catalyst can jump-start a struggling company toward a more prosperous future.

This list is intended to be comprehensive. While not all catalysts are meaningful, some can bring a much-needed positive change to out-of-favor companies.

One highly-effective way to use this tool is to pair the names with weak stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. The spreadsheet indicates these companies with an asterisk (*), some of which are highlighted below. Market caps reflect current market prices.

You can access our Catalyst Report here.


Berkshire Hills Bancorp (BHLB) $877 million market cap – This Boston-based bank, with $12.8 billion in assets, has struggled for years with operating, cultural and leadership issues. The new CEO joins from Webster Bank, a bank based in nearby Connecticut. Trading at 80% of tangible book value, Berkshire Hills could make for an interesting turnaround.


Amerant Bancorp (AMTB) $604 million market cap – Once owned by the Venezuelan bank, Mercantil Servicios Financieros, Amerant is now an independent company based in Coral Gables, Florida. Investors wonder whether its former parent is still a warning sign or an opportunity to buy this 40-year-old community bank at a discounted 80% of tangible book value.


Stellantis (STLA) $30.7 billion market cap – This unfamiliar name is actually the new FiatChrysler, following its now-completed acquisition of Peugeot. The company is led by Peugeot’s former CEO, Carlos Tavares. Tavares is a turnaround legend in the auto industry and could work wonders at the newly-combined company.