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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 5, 2021

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


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

Next week, Mattel (MAT), General Motors (GM), Kraft Heinz (KHC), BorgWarner (BWA), Molson Coors (TAP), Newell Brands (NWL), Mohawk Industries (MHK) and Toshiba (TOSYY) report earnings.

All ratings and price targets remain unchanged for these companies, although we are raising Mosaic (MOS) to 35 from 27. Signet Jewelers (SIG) and Western Digital (WDC) have pushed above our price targets and we are reviewing these.

Earnings Reports
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, despite the pandemic.

Summary: Fiscal first quarter 2021 results show that the company continues to show impressive improvements with its turnaround. Adjusted earnings per share of $1.71 were 78% higher than a year ago and were nearly double the $0.88 consensus estimates. Revenues were fractionally ahead of estimates. Adient’s operations are showing sharp gains in efficiency even as they are producing more competitive vehicle seating products. The company is also highlighting its upgraded ESG efforts, adding to its appeal. Management’s outlook is likely conservative.

Details: Revenues were down only 2% from the pre-pandemic level, as the auto industry, and Adient’s competitiveness, have rebounded. Underlying trends were stronger, however, as the company had sold its YFAI unit, and on an unconsolidated basis, sales grew 11% excluding currency changes.

Adjusted EBITDA increased 27%, producing a profit margin of 9.8%, which was much higher than the year-ago 7.5%. The company continues to win new program placements, which essentially ensures a steady flow of orders during a vehicle’s model life. It is launching products more effectively, which reduces rework, shipping, materials and a range of other avoidable costs. Favorably, car seats will be in vehicles regardless of whether they are gas-powered or electric-powered.

Adient’s full year 2021 guidance appears to be conservative, as we had expected/hoped to see more free cash flow than its guide for $0 to $100 million. We expect that it will produce more than $100 million but we will have to wait to see. Operationally, the company will be indirectly hurt by the computer chip shortage, faces rising steel costs and battles a labor shortage, high freight rates and the complications from a heavy cadence of North American vehicle launches. Net debt is too high (the company has a high priority on reducing it) although it is about 9% lower than a year ago.

Biogen (BIIB) – This biopharma company generates vast amounts of free cash flow, has a sturdy balance sheet and a low share valuation. The primary concern is rising generic competition for its Tecfidera treatment for multiple sclerosis. A wildcard that could be an enormously positive catalyst (potential for a 50% or more share price gain if a complete success) or a possible 25% downside risk, is the outcome of its aducanumab Alzheimer’s treatment that is currently working its way through the FDA approval process.

Summary: Fourth quarter adjusted earnings of $4.58/share fell 45% from a year ago and was about 4% below consensus estimates. Revenues fell 30% compared to a year ago but were slightly higher than consensus estimates. The company’s fate is increasingly tied to the aducanumab Alzheimer’s treatment. With FDA approval, the company and stock will prosper immensely, but without approval the outlook is for sizeable decay in its core U.S. franchises and an uninspiring, at best, overall outlook. So, the risk/return is somewhat high with this stock.

Detail: Biogen’s revenues were hit by the sharp decline in United States’ sales of Tecfidera (- 63%) due to rising generic competition. Tecfidera is now only about 11% of total revenues, so its evaporation will have a smaller effect on the company – hence the CEO’s view that 2021 is a reset year. Weak sales of Spinraza (-34%) and Rituxan/Gazyva (-45%) dragged down results as well, as these treatments are also seeing higher competition. Total sales outside of the country were higher compared to a year ago, as these markets have different competitive conditions. These three products are in steady decline.

The Vumerity product (treats multiple sclerosis) offers considerable potential as the #2 MS product in the United States but remains small at less than 2% of total revenues.

Management’s 2021 guidance appears to be modestly ahead of consensus estimates but assumes FDA approval for aducanumab, an outcome that is impossible to gauge and ranges from blockbuster to zero. Without aducanumab, Biogen would likely be hobbled, given the erosion of its core franchises. Biogen said they believe there are “several hundred sites in the U.S. ready to start treating patients if aducanumab is approved.” Also, Eli Lilly’s Alzheimer’s treatment (not FDA approved, either) uses a roughly similar chemistry, adding credibility to Biogen’s. The company expects an FDA decision by early June.

Meredith Corporation (MDP) – Meredith has two businesses. Its National Media Group is the nation’s leading print magazine publisher, and its Local Media Group owns 17 television stations. Its media portfolio is high quality and steadily evolving to meet the changing distribution and digital landscape, although it faces secular headwinds and revenue pressure from magazine closures. The shares were initially recommended in January 2020, so they have been hit sharply as advertising revenues have declined.

Summary: Results were strong, with adjusted earnings per share of $3.13, nearly triple the year-ago $1.14 and 52% higher than consensus estimates. Revenues of $902 million were 11% higher than a year ago and 7% better than consensus estimates. Election-related political advertising was surprisingly strong, while non-political advertising remained below year-ago levels. Meredith generated $174 million in free cash flow, more than 2x the year-ago volume. The company continues to recover and the outlook remains encouraging. Beyond the cyclical recovery, Meredith looks increasingly well-positioned for future growth.

Details: Political advertising added $113 million of revenues compared to a year ago, such that without this, total revenues would have declined by about $22 million, or about 3%. Considering the difficult pandemic-related decline in advertising, we consider this a fairly encouraging result. Helping the results was the 22% increase in digital advertising in the magazine operations. Digital advertising revenues are, for the first time, the largest component (at 28%) of magazine revenues, eclipsing print advertising.

Cash operating expenses fell 3% from a year ago as the company is maintaining tight cost controls. Rising revenues and lower expenses produced $304 million in adjusted EBITDA, up 57% from the June 30 fiscal year end. The strong free cash flow helped boost the cash balance to $379 million. The debt balance was unchanged from the June 30 fiscal year end but up about $80 million from a year ago including the now-redeemed convertible preferred stock that Meredith repurchased in 2020. Debt reduction is the company’s stated top priority, and with the accumulation of cash – now at a high enough level – we expect future free cash flow to be applied to debt reduction.

Nokia (NOK) – Initially recommended in 2015, Nokia has struggled for years to regain its competitiveness. It appears that the new CEO, Peter Lundmark (March 2020), is capable of finally getting the company back into the game, particularly with the critical change-over to 5G over the next few years. Lundmark has re-segmented the company into four divisions, each with its own profit responsibility and plan for restoring its growth and competitiveness. This makes a lot of sense to us. Also, he announced plans to launch a cloud-based services segment – they are probably too late to this game but the effort is worth making as not having one may leave them at a disadvantage in the future.

Summary: Nokia appears to be making incremental progress but fourth quarter results were overall bland, although its cash balance continues to increase. Nokia shares were weak in post-earnings trading as investors had hoped for a stronger quarter, but this is a near-sighted view. Nokia said it may update its zero-dividend policy at its March 2021 Capital Markets Day.

Detail: Fourth quarter adjusted earnings of €0.14/share was one cent lower than a year ago but 27% higher than consensus estimates. Sales fell 5% but rose 1% when the effects of currency changes are removed. Adjusted gross margins and operating margins expanded as the company had stronger sales in North America (where margins are higher) and as it improves its product quality and cost structure. Its cash balance increased by 35% from a year ago to €8.1 billion, and cash net of debt rose to €2.5 billion.

NOK’s weak trading after the report was likely due to both the uninspiring results and perhaps because a large order was booked at the end of the quarter, which added nearly 4 cents to per share profits. But for this order, the company would have missed estimates. Also, its 2021 outlook could be viewed as marginally below consensus expectations, and despite its large net cash balance the company did not re-start its dividend.

There are many moving parts beneath the numbers, obscuring any progress. New leadership and organizational structure are now in place, which should begin to produce better results. The Nokia turnaround will take a while but the company appears to be moving in the right direction for the long-term secular transition to 5G.

Oaktree Specialty Lending (OCSL) – Highly regarded investment manager Oaktree Capital was voted in by shareholders to turn around this company in 2017. The company is now exceptionally well-managed yet remains undervalued.

Summary: First quarter results were good enough. Net asset value (NAV) per share of $6.85 rose 4% from the pre-pandemic year-ago quarter and 5% from the prior sequential quarter. The asset quality continues to improve, leverage remains subdued and the company raised the dividend to $0.12/quarter, a 9% increase and the third consecutive quarterly increase. OCSL shares are undervalued, trade at about 85% of NAV and provide an 8.2% dividend yield. The merger with sister company Oaktree Strategic Income (OCSI) is ontrack for a March 2021 close. We view this as a sensible and fair combination.

Detail: Fiscal first quarter adjusted net investment income, which essentially is adjusted net income, of $0.14/share was 40% above the year-ago results but slipped 18% sequentially. Unadjusted income rose 17% from a year ago. The adjusted number removed $0.07/share of incentive fees paid to Oaktree Capital, the third-party management company. While the incentive fees add up quickly, they are based on terms that first require a favorable hurdle rate of return to shareholders, and include other features which we believe are generally favorable.

The adjusted net investment income exceeded the $0.13/share consensus estimate although it is not clear how much of the incentive fees were included in the estimate.

Overall, the company continues to produce good results. Investment revenues rose about 22% from a year ago, with gains in all three primary categories (cash interest, PIK interest, fee income) although we’d rather see cash interest instead of PIK interest. Dividend income is small although it declined from a year ago. Expenses rose sharply, but due mostly to the higher incentive fees. The underlying portfolio value rose about 17% from a year ago and 9% from the sequentially previous quarter. Oaktree continues to make new investments at attractive yields yet also is keeping its credit quality high.

Royal Dutch Shell (RDS/B) – Shell has been on the recommended list for a long time (January 2015), so we are circumspect about its continued presence there. The company is well -managed and has navigated the weak oil/natural gas environment better than its peers, but its upside (and downside) is tied to unpredictable energy prices. The dividend now appears secure under its new policy but is uninspiring by itself given the company’s commodity exposure.

Summary: A reasonably encouraging quarter as depression-like conditions ease a bit. Earnings of $393 million slightly missed expectations, but this isn’t particularly important for now. Lower operating expenses and sharply lower capital spending helped buoy free cash flow to $882 million, although this was down 84% from the $5.4 billion a year ago. The company is raising its quarterly dividend by 4% in line with its new dividend policy.

Detail: Adjusted earnings of $0.05 were below the $0.08 consensus estimate, but given the small size of the earnings, estimating it precisely is unreasonable so we’ll look through the “miss.” Compared to a year ago, adjusted net income per share fell 86%, free cash flow fell 84%, and energy production (in barrels of oil equivalent per day) fell 10%.

Most of the profit decline was due, not surprisingly, to lower oil and natural gas prices. Combined, these dragged down earnings by $3.1 billion compared to a year ago. Lower refining margins hurt profits by another $1.4 billion. Chemicals segment profits increased to $381 million from a $(65) million loss a year ago.

The company is aggressively pulling back on its spending to help maintain its financial strength. For all of 2020, the $18 billion in capital spending was $6 billion (or 26%) lower than a year ago. Full-year operating expenses fell $4.5 billion (14% lower). Its debt, totaling $108 billion, remains too high but the company is starting to whittle this down. The balance sheet holds $32 billion in cash.

Overall, the company has stabilized, is generating positive free cash flow and reasonably well positioned to recover as long as energy prices don’t collapse again.

Ratings Changes
Mosaic (MOS) – the fundamentals in Mosaic’s fertilizer business continue to improve, helped by higher farm commodity prices (which encourages farmers to plant more crops) and higher fertilizer commodity prices. Also helping are recent trade barriers to underpriced fertilizer chemical imports. We are raising our price target to 35 from 27 to reflect Mosaic’s higher earning potential.

Friday, February 5, 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:

  • Earnings updates on:
    • Adient (ADNT) – Encouraging earnings report.
    • Biogen (BIIB) – Earnings report shows that its fate increasingly tied to unpredictable chances of Alzheimer’s treatment approval. Risk/reward is elevated in BIIB shares.
    • Meredith Corp (MDP) – Strong results.
    • Nokia (NOK) – Earnings report shows that progress is hard to see but moving in right direction.
    • Oaktree Specialty Lending (OCSL) – Good enough results, raises dividend 9%.
    • Royal Dutch Shell (RDS/B) – Reasonably encouraging results as depression-like conditions ease a bit.

  • Brief updates on:
    • Kraft Heinz (KHC) – Selling its Planters peanuts business at a good price.
    • Volkswagen (VWAGY) – Daimler’s truck spin-off may lift VW shares.
    • General Motors (GM) – Chip shortage affecting its production.
    • Macy’s (M) – Encouraging news from Kohl’s and Nordstrom may mean that Macy’s future isn’t quite so dour.
    • Gannett (GCI) – Refinancing another slice of its expensive debt.

  • Final note
    • Super Bowl: Maybe the the defense and special teams will decide the winner?

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.