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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 19, 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, Berkshire Hathaway (BRK/B), Macy’s (M), Trinity Industries (TRN), ViacomCBS (VIAC), Gannett (GCI) and LafargeHolcim (HCMLY) report earnings.

All ratings and price targets remain unchanged, except we are moving Trinity Industries (TRN) from Buy to Sell. Earlier this week, we raised ViacomCBS (VIAC)’s price target to 65 and moved the shares from Buy to Hold, with the suggestion that investors may want to sell half of their position.

Baker Hughes (BKR) is trading above our 23 price target and we will be reviewing it shortly.

Next Wednesday, we will publish the March 2021 Cabot Turnaround Letter issue.

Earnings Reports
Credit Suisse (CS) – This Swiss bank is shifting its strategy to more stable Switzerland banking and global investment management and away from weak/volatile trading and investment banking, to help it fully recover from the decade-ago financial crisis. The bank is making progress but not fast enough, in our view. The new CEO and incoming new board chairman will likely increase the pace of the bank’s operating improvement.

The company reported a good-enough quarter. Fourth quarter profit before taxes of CHF 861 million (1 Swiss franc, or CHF, is equal to $1.12), fell 11% from a year ago. Revenues declined 4% from a year ago. Earnings and revenues came in slightly above consensus estimates. Expenses were elevated but credit costs remained subdued. Capital levels are strong, with the CET1 metric at 12.9%. The company continues to make progress with its migration to more stable and recurring revenue businesses like banking and wealth management, although its investment banking operations are benefitting from strong capital markets activities like IPOs and merger advice.

CS shares trade at about 80% of tangible book value (CHF15.80 tangible book value x 1.12 exchange rate into dollars) compared to current $14.10 share price.

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 then was spun-off as Conduent) holds a 3.3% stake.

Despite encouraging fourth quarter results, the shares are down about 13% in mid-day trading. We think the problem is that guidance for 2021 is for essentially a repeat of 2020, with slightly less free cash flow production. Many of the easy operational fixes, including deferring taxes and releasing cash trapped in working capital, seem to be completed, so the turnaround from here will need to come from more fundamental fixes. Higher revenues and stable costs are critical. This year will likely be a transition year, with some one-time revenue headwinds from well-known client losses that mask underlying growth. So, investors will need to hold on through the year for a more prosperous 2022, which we think is well-worth the wait.

Adjusted per share earnings from continuing operations of $0.20 rose about 11% from a year ago and were 5% higher than the consensus estimate. Revenue of $1.1 billion fell 4% from a year ago and was slightly better than estimates. Adjusted EBITDA rose 2% with the margin expanding to 12.6% from 11.8% a year ago.

New business signings continue to show sharp improvement, rising 148% year-over-year to $519 million. For the year, new signings were $1.9 billion, up 94% from the prior year.

Ironwood Pharmaceuticals (IRWD) – After years of weak leadership, Ironwood has one remaining treatment, 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. The company is generating strong free cash flow such that its already-sizeable cash balance will likely fully offset its outstanding debt in a year. Respected activist investor Alex Denner, who now holds a board seat, is exerting his influence, most recently with the ousting of the company’s CEO. Ironwood’s shares trade at a highly discounted 8.1x EBITDA.

Linzess, is marketed by pharmaceutical giant AbbVie. Marketing, operating, research and development and other costs are deducted. The resulting net profit is split 50/50 between AbbVie and Ironwood, and comprises essentially all of Ironwood’s revenues.

Revenues of $117 million fell 8% from a year ago and were 8% above estimates. Adjusted earnings per share of $0.36 rose 20% from a year ago and were 24% above estimates. Adjusted EBITDA rose 21% from a year ago. Ironwood continues to cut its overhead and research and development costs, which fell by $15 million, or 23%, in the quarter. Ironwood generated $52 million in cash from operations in the fourth quarter (about 32 cents/share). On an annualized basis, this would be $1.28/share, or nearly 14% of the current share price. Management’s 2021 EBITDA guidance of “>$190 million” compares to $161 million in 2020. At this pace, the company could produce close to $200 million in free cash flow.

The cash is starting to pile up. The company holds $363 million in cash, more than double the year-ago total. By year-end 2021, it will likely exceed the $430 million in total debt outstanding, perhaps by $100 million or more.

Jeld-Wen Holdings (JELD) – The window and door maker is undergoing a turnaround led by a new CEO after weak operating results shook investor confidence. Jeld-Wen is showing healthy progress, helped by robust pandemic-driven demand for housing construction.

Fourth quarter revenue rose 8% from a year ago and was 4% above the consensus estimate. Core revenues (which excludes the effects of currency changes and acquisitions/divestitures) rose 5% and grew in all three regions, including North America, Europe and Australasia. Adjusted earnings per share of $0.45 were more than twice the year-ago $0.21 and about 13% higher than consensus estimates. Adjusted EBITDA, a measure of cash operating earnings, rose by 29% to $115 million and was slightly ahead of consensus estimates.

Overall, growth and profit margins continue to recover following the pandemic and efforts by the relatively new leadership to improve its operations. However, we’re surprised that the growth wasn’t stronger when housing markets, particularly in the U.S., are surging. North America revenues rose only 4.5%, and that was entirely due to higher prices as volume/mix was negative. Part of the problem is that the company is struggling with Covid-related absenteeism at several U.S. manufacturing facilities. Jeld-Wen shares fell 5% on the news, likely because of that weakness and also because of comments that free cash flow would decline in 2021 from higher capital spending and repayment of Covid loan programs.

Jeld-Wen’s free cash flow is stronger, as is the balance sheet. Total debt less cash fell by about $260 million, or 20%. Leverage, as measured by net debt/EBITDA, is now a reasonable 2.3x.

The company’s outlook remains encouraging: it should more significantly participate in the North American housing boom, while European and Australasian volumes should remain steady. Jeld-Wen seems capable of pushing through price increases to offset inflation. The turnaround also entails more margin improvement. Management guided to 4%-7% revenue growth and adjusted EBITDA to around $500 million, compared to $446 million in 2020.

Mosaic (MOS) – This slow-moving and still-struggling turnaround (initially recommended in Sept 2015) remains on the Recommended list as we see the potential for higher commodity prices over the next few quarters and as its CEO continues with the sizeable cost-cutting program. We see little chance of it reaching its original price at recommendation of 40.55, but it still has a reasonable chance of reaching its recently raised 35 price target on higher pricing and volumes.

The fourth quarter results were good and the outlook is improving fairly rapidly. The shares fell 9% on the news, perhaps due to disappointment that results were not even stronger, but the shares merely returned to their price from last Friday prior to a pre-earnings run-up.

Mosaic reported $0.57/share in earnings, compared to a $(0.29)/share loss a year ago, but were nearly triple the $0.21/share estimate. Revenues of $2.5 billion rose 18% from a year ago and were 14% higher than the consensus estimate. Sharply higher phosphates volumes and pricing drove the increase. Potash prices remain weak from a year ago although volumes are sharply higher. Profits in the Brazil-based Mosaic Fertilizantes increased from better prices but volumes remain subdued.

Mosaic commented that market conditions remain strong and that it expects commodity prices to continue to increase in 2021, but did not provide revenue or earnings guidance. Interest and capital spending for 2021 were guided to about the same levels as in 2020. Liquidity remains strong although the debt was reduced by only $90 million to $4.0 billion and remains modestly elevated.

On March 11, the International Trade Commission will decide on whether tariffs on Moroccan phosphate producers should be sustained. If sustained, MOS shares would respond favorably, although a decision to eliminate the tariffs would weaken the shares. We see a good likelihood of the tariffs remaining in place.

Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider based near London. It is two years into its five-year turnaround program. The turnaround is driven by boosting its return on capital through strengthening its telecom “connectivity” platform, improving its operating efficiency and spending its capital more efficiently. This should lead to rising revenues, wider margins and better cash flow, and thus a higher share price. The turnaround is led by relatively new CEO Nick Read (October 2018), who previously was the CFO. Its 2019 acquisition of Liberty Global’s assets in Germany and Eastern Europe provide new efficiency and growth opportunities. Its pending spin-off of its European cell tower business (named Vantage Towers) will advance shareholder value. The company has a few obscure assets: it is the leading provider of mobile data and payments services in Africa and has a vast network of high-capacity data pipelines that may increase in value as 5G rolls out. From a cyclical perspective, Vodafone should benefit from rising business activity once the pandemic subsides.

The company provided a “Trading Update” which means only revenues. Fiscal third quarter service revenues returned (fractionally) to positive, increasing 0.4% on an organic basis, driven by strength in Turkey, Egypt and South Africa which offset chronically weak Italy revenues. Equipment and other revenues (about 16% of total revenues) slipped 9%. Most of the statistics on customer counts and usage improved, indicating steady (if slow) progress in its drive to remain relevant to customers.

The company reiterated its 2021 guidance for adjusted EBITDA of between €14.4 billion and €14.6 billion, with free cash flow (before spectrum license purchases and restructuring spending) of at least €5 billion.

The spinoff of Vodafone’s cell tower business is on-track for the next few months. Now called “Vantage Towers,” the business has about 82,000 towers. Management guided for 2021 revenues of about €960 million and recurring free cash flow of about €380 million.

Ratings Changes
Trinity Industries (TRN) – We are moving our rating from Buy to Sell. The shares have crossed our 30 price target, now trading above 32. The industry will likely remain depressed as the volume of railcars in storage is multiples of the typical new railcar demand. And, while we recognize the value of the company’s transition to more of a leasing company than a manufacturer, this value appears to be somewhat fully priced in and require more of a “growth investor” mindset than a turnaround investor mindset that is the focus of our research. TRN shares have produced a total return of approximately 90% since our initial recommendation in September 2019.

Friday, February 19, 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 15 minutes and covers:

  • Earnings updates on:
    • Six companies reporting earnings this week

  • Brief updates on:
    • Trinity Industries (TRN) – Moving from Buy to Sell.
    • BorgWarner (BWA) – Acquiring battery systems company.
    • General Electric (GE) – Expects negative free cash flow in 1Q.
    • Kraft Heinz (KHC) – Encouraging comments from CAGNY conference.
    • Wells Fargo (WFC) – Important step toward asset cap relief
    • Volkswagen (VWAGY) – May spin off Porsche
    • Xerox (XRX) – Icahn raises stake again

  • Elsewhere in the Market:
    • Texas snow and the future of EVs
    • SPACs continue to surge in number

  • Final note
    • Mars expedition

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.