Today’s note includes earnings updates, ratings changes and the podcast.
Several stocks continue to trade above our price targets, including Valero Energy (VLO), Volkswagen (VWAGY) and BorgWarner (BWA).
We’re moving Valero (VLO) to a Sell. We see valuation being fairly full here. Since our initial purchase recommendation just last November, the shares have gained about 80%.
Many other CTL recommended stocks are either at or just below our price targets. These are for now probably not “true” Buys, but rather “Holds.” We want to think more about their valuation and fundamentals in the context of the rising interest rate environment we are now in.
Earnings Reports
Berkshire Hathaway (BRK/B) – Recommended at the end of March 2020, in the depths of the market’s pandemic-driven sell-down, Berkshire Hathaway is an exceptionally well-managed financial and industrial conglomerate.
In the fourth quarter, Berkshire reported $5.0 billion in operating earnings, up 14% from a year ago. Unlike the net earnings of $35.8 billion, operating earnings exclude the effect of realized and unrealized gains and losses in its massive investment portfolio. The full-year operating earnings of $21.9 billion fell 8% from full-year 2019, reflecting weakness during the pandemic earlier in 2020. Overall, the businesses performed reasonably well.
Berkshire repurchased an estimated $9 billion of its shares in the fourth quarter and a total of $24.7 billion in 2020. Total shares outstanding declined just over 5% for the year. This is a major step-up in volume. The company clearly has the cash, with its float now totaling $138 billion.
The shares have reached our price target – this target is now under review.
The annual meeting will be remote again this year, with both Warren Buffett and Charlie Munger on stage in Los Angeles, on Saturday, May 1st. This is a great chance to hear from the two on a wide range of topics. Buffett’s annual shareholder letter, released with the earnings report, offered some Berkshire history and comments on the current market. It is, as always, well-worth the time to read.
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. During 2020, the company laid the foundation for better revenue growth, margin improvement and cash production.
Full but preliminary results were reported this past Thursday. Recall that the company delayed its earnings report from February 23rd due to its discovery of a material weakness with its internal controls that will require revisions to its prior financial statements but which it says will not be material.
Fourth quarter revenues of $243 million declining 6% from a year ago. The weakness was attributed to slow construction markets. Adjusted EBITDA of $39 million fell 9% from a year ago. The gross margin expanded by 1.5 percentage points, while SG&A costs fell by 1%. These suggest that the company is starting to make progress on its efficiency initiatives.
The turnaround is making progress but it is still early. We’d like to see a return to positive EBITDA growth and margin expansion in 2021. Management stated that improving these two metrics is their strategic focus this year. Consensus estimates already assume this will happen, and we will be looking for more evidence that the company can achieve these improvements.
Cash increased to $483 million from $325 million a year ago, while the $352 million debt balance was essentially unchanged. The cash build was generated by higher profits, proceeds from its HQ building sale and a small improvement in working capital. Unlike most other industrial companies, GCP has an overfunded pension plan (by $30 million) – a small but useful hidden asset if the company were ever to be acquired.
Ratings/Price Target Changes
We are moving Valero Energy to a Sell. The long-term outlook for refining is average although we see some interesting potential for their renewable diesel operations. However, our initial rationale was for an opportunistic purchase of a depressed stock with a huge and readily funded dividend. We’re fine with taking an 80% profit in the four months since our recommendation.
Friday, March 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 12 minutes and covers:
- Earnings updates from companies that reported this week
- Brief updates on:
- Viatris (VTRS) – Monday’s investor day: management’s low credibility and the low share valuation could be enticing for an activist.
- Toshiba (TOSYY) – Fireworks ahead at their March 18 shareholder meeting. Read Farallon’s 77-page slide deck for an in-depth look at their campaign
- Meredith Corp (MDP) – Surged 30% this week on favorable comments
- Xerox (XRX) – Added two new board members and Icahn nominates two more.
- Jeld-Wen (JELD) – Major shareholder Onex sells ¼ of their stake in offering
- Elsewhere in the Market:
- In sloppy market for high-flying tech stocks, value investing is doing just fine.
Please feel free to share your ideas and suggestions for the podcast with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. 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.