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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 26, 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.

The earnings calendar is thinning out, with Berkshire Hathaway (BRK/B) reporting tomorrow (Saturday), and Signet Jewelers (SIG) and Duluth Holdings (DLTH) reporting on March 18th.

All ratings and price targets remain unchanged, except we are raising our price target on Macy’s (M) from 13 to 18.

Several stocks are trading near or above our price targets, including Baker Hughes (BKR), Valero Energy (VLO), Jeld-Wen (JELD), Western Digital (WDC), Mohawk Industries (MHK) and Signet Jewelers (SIG). We will be reviewing these for either upgrades or sells. Generally, the fundamentals look strong for all of these, particularly if the pending $1.9 trillion stimulus package is passed as well as any follow-on infrastructure build-out packages. However, valuations are no longer stand-out bargains, weighing on our thinking.

Earnings Reports
Gannett (GCI) – Gannett, publisher of USA Today and many local newspapers, is fighting for relevancy, as its traditional circulation and ad revenues face secular decline. It is aggressively transitioning to the digital world. The turnaround was set back by the pandemic-induced decline in advertising revenues. However, aggressive cost-cutting has helped the company maintain positive cash flow (a key to the story) and whittle away at its debt and interest expense.

Overall, a reasonable fourth quarter for Gannett. Results were complicated by numerous one-off items including a $74 million loss on hedges to its convertible notes, $71 million in integration costs, and several impairment and other charges. On a “clean” operating income basis, Gannett had an operating profit of $85 million compared to $31 million a year ago. It is unclear what the $(0.32)/share consensus estimate had in it, so we will not focus on it. Revenues of $875 million fell 16% on a same-store basis but were slightly higher than the consensus estimate. Adjusted EBITDA of $149 million, grew 5.4% from a year ago on a same-store basis – fairly impressive as the pandemic-driven advertising depression hasn’t fully lifted.

The company is still seeing sizeable erosion in its core revenues, although this continues to improve compared to previous sequential quarters, indicating that the company is participating in the recovery and staying relevant. The cost cutting is staying ahead of the revenue declines, with more cutting ahead. Gannett significantly trimmed its cash interest expense with several refinancings and debt paydowns. While the new convertible notes risk significant share dilution, the conversion price is at a 180% premium to the current share price, so it is less of a concern. The company expects to reach its $300 million in run-rate cost savings goal by year-end 2021 and sell $100 million to $125 million in additional assets to help lighten its debt burden.

Its digital transition is gaining traction. The company now has 1.1 million paid digital-only subscribers (up 29% from a year ago). Digital-only circulation revenue grew 46% on a same-store basis from a year ago, indicating that its content has value in a digital-only world.

Gannett said they are “well-positioned to significantly grow adjusted EBITDA this year (2021) as compared to 2020.” We remain patient with this turnaround.

GCP Applied Technologies (GCP) – After an initially strong start following its spin-off from WR Grace in 2016, the company’s weak leadership led to a steady stream of disappointing results. Activist investor Starboard Value successfully replaced most of the board, and the CEO in May 2020, as the opening round of its turnaround.

The company delayed its earnings report until March 4th due to its discovery of a material weakness with its internal controls that will require revisions to its prior financial statements. Its news releases stated that the company did not expect the revisions to be material. This type of issue is not entirely uncommon, particularly with a turnover in leadership. We’ll wait for the published statements but are reasonably assured.

GCP reported preliminary results, with revenues of $243 million declining 6% from a year ago but about 4% above estimates. Adjusted EBITDA of $39 million fell 6% from a year ago but was about 1% above estimates. Relative to estimates, the turnaround is making progress. We’d like to see a return to positive EBITDA growth and margin expansion in 2021. Estimates already assume this, and we will be looking for more evidence that the company can execute its plan to produce these improvements. GCP earlier reported that it made two outside hires: a new general counsel and a new chief information officer.

LafargeHolcim (HCMLY) – This Switzerland-based company is the world’s largest producer of cement and related products. After its troubled 2015 merger and a payments scandal, LaFarge Holcim hired Jan Janisch, a highly capable leader whose turnaround efforts are showing solid results, particularly by expanding the company’s profit margins and cash flow. A possible overhang on the shares is the carbon-intensity of cement production, but the company’s efforts in reducing its carbon footprint are impressive. (CHF is Swiss francs, CHF1.00 = US$1.10).

LaFarge produced a strong fourth quarter. Revenues on a like-for-like (adjusted for acquisitions/divestitures and currency) rose 1.5% from a year ago, while like-for-like recurring operating profits rose 14%. Its operating profit margin rose to 17.3% from 15.6% a year ago. Full-year results were healthy as well, despite the pandemic. Sales fell 5.6% but profits fell only 2%. Free cash flow of CHF8.5 billion rose nearly 8% compared to 2019. Lafarge reduced its net debt by 16%, to only 1.4x adjusted EBITDA, which is arguably underleveraged. Leverage will increase to about 2.0x after its US$3.4 billion pending acquisition of Firestone Building Products. Indicating the reputation of FBP, it provided the roofing material for Apple’s new ‘space ship’ HQ in Cupertino.

The company’s 2021 outlook is for at least 7% like-for-like operating profit growth, cash conversion above 40% and capital spending of less than CHF1.4 billion (in-line with its 2019 cap-ex pace). Management’s guidance is based on generous government infrastructure programs coming on-line in 2021, including the yet-to-be-passed U.S. program.

Macy’s (M) – With a capable new CEO since February 2018, Macy’s is aggressively overhauling its store base, cost structure and ecommerce strategy to adapt to the secular shift away from mall-based stores. Its sizeable debt is not crippling the company but remains an overhang. Macy’s was hit hard by the pandemic, setting back its turnaround from a financial perspective, but the company’s acceleration of its overhaul shows considerable promise.

Fourth quarter adjusted earnings of $0.80/share fell 62% from a year ago but was about 7x the consensus $0.11 estimate. Revenues fell 19% but were 4% higher than estimates. Adjusted EBITDA of $789 million fell 32% from a year ago and was about 2x the consensus estimate.

Overall, a very respectable quarter. For a retailer with a heavy mall-based focus to see only a 32% decline in EBITDA during a pandemic is impressive. Their aggressive shift to digital (now comprising 44% of sales), their similarly aggressive cost cutting (SG&A as a percent of sales matched that of a year ago at 30%) and a focused effort to keep inventory fresh (inventory fell 27% from a year ago and faster than the decline in sales), provides encouraging evidence that the company might make the transition successfully. It will be fascinating to see how they do when the economy fully re-opens – it would be ironic if store-based sales surge as people exuberantly return to the malls, fueled by their stimulus checks.

Macy’s guided to a return to adjusted net profits in 2021, of about $0.40-$0.90/share. This compares to a $(2.21)/share loss in 2020 and $2.91/share in adjusted profits in 2019.

The balance sheet improved from a year ago – again, impressive given the heavy operating losses earlier in 2020. Net debt of $3.18 billion fell by $295 million, or about 8.5%, compared to a year ago. The $1.4 billion reduction in inventories provided the cash. Management commented that “we are well on the path to returning to investment grade metrics.” A return to investment grade debt would be a shocking (positive) surprise to most investors.

Macy’s is by no means out of the woods. Even with its aggressive transformation pace, the franchise continues to erode due to the ever-expanding, one-click-away options for consumers to buy their merchandise elsewhere. The pandemic exacerbated and accelerated this trend. Thus, the company is shrinking. A 19% sales decline, 17% fall-off in comparable store sales and 32% EBITDA decline – these are huge numbers on an absolute basis. The revenue and profit guidance implies stability and likely a large degree of conservatism, but the company has a lot of work ahead and the next three quarters could be a loss-making slog.

We are raising our price target from 13 to 18 to reflect the improvements and pace of changes so far.

Viatris (VTRS) – Viatris was formed in November 2020 through the merger of pharmaceutical generics producer Mylan, N.V. and Pfizer’s Upjohn division. Investor expectations are low, with major concerns over its declining revenues, limited visibility into its new drug pipeline, elevated debt, production quality problems, loss of exclusivity for Lyrica in Japan, and reforms to China’s volume-based procurement programs. Faced with this long list of doubts, particularly in a surging bull market, investors have turned their attention elsewhere. We see the discounted valuation, combined with Pfizer executives in the key CEO/CFO roles, clearer governance and better transparency and communications as drivers of higher earnings, strong free cash flow, lower debt and a higher valuation multiple.

The company’s update on February 22 was disappointing and provided a frustrating start to the new company’s public life. Revenue, EBITDA and cash flow guidance were meaningfully below expectations, as was the implied $0.44/share annual dividend rate (about half our estimate). Management cited transaction closing delays, high cash costs to create synergies, higher generic erosion of several of its proprietary products, Chinese procurement reforms and Covid-related slowness. Partly offsetting these, Viatris will accelerate the completion of its cost-cutting program by a year and committed to reducing its net debt by $6.5 billion by the end of 2023. In short – a lot of excuses and a bad start.

However, the pressure is on for management to execute. Most patent expirations are in the past, cash generation should strengthen, management’s guidance detail is improving and the upcoming March 1st investor day should provide clarity on their plans. With the shares down 15%, the set-up looks favorable from here.

Volkswagen AG (VWAGY) – Following the emissions scandal and VW’s sharp share price decline, we recommended its shares for their deep undervaluation and likely improvement in earnings power. Since then, the company has also starting making a sizeable bet on electric vehicles (EVs), looking to become a major producer. VW continues to make progress on all fronts, including improving operating and capital efficiency in its otherwise unwieldy and massive organization. For reference, the current exchange rate is $1.00 = €0.83.

The company reported summary results, indicating that its profitability and cash flow continue to improve following the pandemic. Management guided that vehicle deliveries to customers will be “significantly up,” but that net cash flow will be in-line with 2020 (probably due to working capital rebuilding, but still a surprisingly decent year, at €6.4 billion, down only 41% from 2019). We anticipate a more detailed report in the near future.

Ratings Changes
Macy’s (M) – We are raising our price target on Macy’s from 13 to 18. The company is making decent progress with its Polaris initiatives as well as whittling down its debt.

Friday, February 26, 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:

      • Wells Fargo (WFC) – Sells investment management operations.
      • General Motors (GM) – Maybe chip shortage isn’t so bad after all.

  • Elsewhere in the Market:
    • Charlie Munger comments
    • “Peak” Facebook, Google and Amazon
    • Comments on surge in 10-year Treasury yields
    • If EV stocks collapse, would that make GM shares a sell, or a buy? Email us.

  • Final note
    • GameStop – the most creative and effective brand-building project ever?

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
February saw several large acquisitions as well as many spin-offs and CEO changes. Also, the number of activist campaigns seems to be ramping up. Some of the catalyzed stocks have surged on the news, so they can’t be considered “out of favor,” but are worth watching for the opportunity to buy if the shares pull back. 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.


Bausch Health Companies (BHC) $11.1 billion market cap– After its collapse from a misguided, debt-driven and wildly overpriced acquisition spree, the company is undertaking a complete overhaul including changing its name from Valeant Pharmaceuticals. Activists are circling, with Carl Icahn recently taking a 7.8% position and gaining two board seats.


FirstEnergy (FE) $18.2 billion market cap – This otherwise dull electric utility got caught up in an embarrassing bribery scandal. While the outcome remains unclear, the ever-present Carl Icahn sent a letter to the board and is acquiring shares as they remain heavily discounted.


Principal Financial Group (PFG) $15.9 billion market cap – Activist Elliott Management is pressing Principal to offload its life insurance operations and make other strategic changes. The company agreed to undertake a strategic review and give Elliott two board seats.