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Turnaround Letter
Out-of-Favor Stocks with Real Value

April 23, 2021

Today’s note includes earnings updates and the podcast.


Today’s note includes earnings updates and the podcast.

Baker Hughes (BKR), Biogen (BIIB), Credit Suisse (CS), LafargeHolcim (HCMLY), Mattel (MAT) and Xerox Holdings (XRX) reported earnings.

Next week’s earnings reports include Albertsons (ACI), General Electric (GE), Jeld-Wen Holdings (JELD), Kraft Heinz (KHC), Meredith Corp (MDP), Mohawk Industries (MHK), Altria (MO), Nokia (NOK), Newell Brands (NWL), Molson Coors (TAP) and Western Digital (WDC).

There were no ratings or price target changes this past week. Adient (ADNT) is above our price target – we are reviewing this name. Also, Jeld-Wen Holdings (JELD) is above our price target. The company reports next Friday. There is upside potential but we are weighing this against rising lumber costs and slowing housing demand.

Earnings Updates
Baker Hughes (BKR) – Baker is one of the world’s largest diversified energy service companies. It is currently beleaguered by the depression in global oil and gas drilling activity. Also, the shares are being weighed down by General Electric’s sale (over 3 years) of its huge 377 million share stake. The company’s investment grade balance sheet and positive free cash flow should provide it with the ability to endure until the industry’s eventual (at least partial) recovery.

First quarter adjusted earnings of $0.12/share was 1 cent above year-ago earnings and in-line with consensus estimates. Revenues of $4.8 billion fell 12% from a year ago but was also in-line with consensus estimates. Free cash flow was a healthy $498 million, much stronger than the year-ago $152 million.

Oilfield conditions remain depressed but are slowly improving, helped by oil prices remaining above $60/barrel. Baker’s international service operations are likely to recover before its North American service operations, although the North American business in the first quarter was stronger than they had anticipated. The company remains well positioned to benefit from long-term resilience in LNG demand as well as from non-hydrocarbon-related projects, including industrial, carbon capture, mining, hydrogen and others.

Baker continues to pare its cost-structure and trim its oilfield equipment offerings. Backlog and orders remain reasonably stable. The balance sheet is strengthening as the strong free cash flow is whittling down Baker’s debt load. For the full year, the company could generate over $1 billion in free cash flow.

Overall, Baker is making slow but steady progress with its turnaround.

Biogen (BIIB) – This biopharma company generates considerable free cash flow, has a sturdy balance sheet and a low share valuation. Since our initial recommendation in August 2019, at $242/share, rising generic competition in the United States has eroded Biogen’s revenues more than we had anticipated, although revenues outside of the country remain stable. The company’s future is now heavily tied to the future of its aducanumab Alzheimer’s treatment that is currently working its way through the FDA approval process. On June 7, the FDA will make what appears to be a major decision of some type. The outcome is not predictable. Approval would be an enormously positive catalyst (potential for a 60% or more share price gain), but denial would bring considerable downside risk of 30% or more. The shares would likely gap up/down by these amounts when the decision is announced.

First quarter revenues fell 24% compared to a year ago, as U.S. product revenues declined by 43% while Rest of World product revenues were essentially flat. Royalty revenues fell 23%. Revenues were about 2% above consensus estimates. Adjusted earnings of $5.34/share fell 42% from a year ago but were 8% higher than estimates.

Falling revenues and rising operating expenses drove the sharp earnings decline. Biogen generated a hefty $676 million of free cash flow, but this fell sharply from a year ago. The balance sheet carries $3.4 billion in cash and $7.3 billion in debt.

In many ways, the quarter’s results aren’t that important, other than to put some context around a future without aducanumab. The company would have a smaller revenue base (U.S. revenues would continue to erode) that would approach stability in a few years, some pipeline optionality, with likely sharply lower expenses, while its cash flow and balance sheet would be supportive. Management raised their full-year earnings guidance, but this includes FDA approval for aducanumab, so it is not meaningful.

Biogen remains strongly optimistic about its chances with the FDA. Also, public pressure for approval seems fairly robust but that is not a scientifically based perspective nor a basis for approval, although it would seem to be an implicit tailwind. Also, Biogen has filed for approval in other countries, opening a new front for potential revenues and a possible pressure-point for future U.S. approval.

We are keeping our Buy rating, acknowledging the high risks with BIIB shares.

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 struggling with chronic bad decision-making and a loose risk-control culture that could threaten its existence if not aggressively addressed. We have high hopes for major changes under the incoming board chairman.

First quarter revenues rose 31% from a year ago, driven almost entirely by higher investment banking revenues. Operating expenses fell 2%. But for the alarming $4.4 billion provision (compared to $568 million a year ago), the results would have been highly encouraging. The bank posted a net loss of $(252) million compared to a $1.3 billion profit a year ago.

The bank expects to take another $600 million in Archegos losses in the second quarter. It likely faces litigation and considerable regulatory scrutiny, only adding more costs to its already-burdened future.

To bolster its finances, CS is raising about $2 billion in fresh capital with the sale of 203 million shares through convertible notes, creating about 8% dilution of its current shareholders.

The $4.4 billion provision reflects the Archegos, Greensill and perhaps other write-offs. If we were convinced that they truly were one-offs, we could look through them to the otherwise solid profits. But, we have little confidence in Credit Suisse’s ability to identify and contain its risks – there are probably other losses lurking in its books. And, the strong investment banking revenues won’t likely be repeated, as the gun-slinging culture that produced them will be sharply suppressed in response to the huge losses. CEO Gottstein’s flurry of executive firings and other “decisive actions” are too little-too late, an attempt (in our view) of a CEO who well-knows his days in the seat are numbered but is making a desperate attempt to stay in place.

One path forward: shut down the investment banking operations, which would release considerable capital that could be returned to shareholders. Focus on the core wealth management and Swiss banking businesses. These two segments are high-multiple businesses – the shares would likely return to at least tangible book value and would likely be valued on earnings. Currently, the stock trades at about 67% of its $16/share in tangible book value.

For now, we are retaining our Buy rating on Credit Suisse (CS) shares but are reviewing the valuation given what has and what may transpire.

Lafarge Holcim (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, LaFargeHolcim 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$1.09).

First quarter revenues of CHF 5.4 billion increased 1.3% from a year ago, although when adjusted for currency and divestitures the growth was a robust 7.4%. Compared to pre-pandemic first quarter 2019, like-for-like revenues grew 4.4%. First quarter revenues were about 3% above expectations – for a cement company, that is encouraging.

Sales in Europe/Middle East/Africa grew 4.0% but fell 6.5% in North America. Latin America and Asia revenues grew 31% and 17%, respectively.

Recurring EBIT, or operating income, was CHF 528 million, sharply higher than CHF 262 million a year ago and also more than 2x the results of the first quarter of 2019.

The company recently received top marks for its ESG practices, helping alleviate an unquantifiable overhang on the shares.

LafargeHolcim’s turnaround is clearly making progress. In addition to strong trailing performance, the company anticipates accelerating demand in the second half of 2021 and that it will reach its 2022 revenue, profit, debt and other targets a year ahead of schedule.

Mattel (MAT) – At our initial recommendation in 2015, Mattel was struggling with its failure to adjust to the realities of how young children spent their playtime. This failure had produced years of revenue decay. In addition, its cost structure became bloated and its debt levels increased. However, Mattel now appears to be finding its way.

Mattel reported impressively strong first quarter results. The adjusted loss of $(0.10)/share was sharply better than $(.56)/share a year ago and much better than estimates for a $(.35)/share loss. Revenues of $874 million rose 47% from a year ago and were 28% higher than estimates.

While the year-ago results were partially impacted by the start of the pandemic, Mattel’s growth appears to be driven more by new consumer interest in its products, supported by federal stimulus checks (although this affected only U.S. demand). Demand was strong across all product groups and geographies. Mattel is making impressive progress with updating its offerings, and has several movies and other media-related initiatives in the works to monetize its highly valuable brands.

The company’s cost structure is improving – the gross margin expanded while overhead margin fell, producing $28 million in adjusted operating profits compared to a $(133) million loss a year ago.

Free cash flow is improving as well although net debt is largely unchanged. However, its credit metrics are better, with net debt/Adj EBITDA of 3.8x, down from a towering 7.5x a year ago, as its earnings are higher. Better credit ratings helped Mattel refinance $1.2 billion of its expensive 6.75% notes with new notes at a blended 3.65% rate, trimming about $40 million off of its huge $200 million annual interest costs. Once Mattel reaches investment grade, it should be able to refinance more of its expensive debt.

Mattel incrementally raised its revenue and earnings guidance for the year, although it trimmed its gross margin guidance due to rising raw material inflation. Headwinds remain, and it is unclear how much demand was pulled forward by the stimulus checks and the stuck-at-home-with-kids factor. Still, the company is clearly turning around its fortunes.

Xerox Holdings (XRX) – While the near-term outlook remains clouded, as office workers are largely still in work-from-home mode, we believe the company’s revenue and cash flow will recover. 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 (4.2% yield) remains reliable.

First quarter earnings of $0.22/share rose 5% from a year ago but was 24% below the consensus estimate. Revenues of $1.7 billion fell 8% net of currency changes but was about 8% above consensus estimates. Free cash flow of $100 million was reasonable but down from $150 million a year ago.

Equipment sales were up 17%, driven by a 45% surge in entry level machines and positive growth for larger machines. This is encouraging and points to steadier post-pandemic demand. Post-sale revenues fell 13%, as paper, supplies and services usage were weak with many workers still working from home. This lower volume may be slow to recover and is dependent upon the pace of workers returning to offices – a wildcard, certainly. The gross margin fell modestly, dragged down by lower-margin entry level machines and the lack of high-margin post-sale revenues. Tighter expense control helped boost operating margins and operating profits compared to a year ago. Xerox repurchased $162 million in shares in the quarter. Its dividend remains well-covered.

The company reaffirmed its full-year 2021 guidance, including free cash flow of “at least $500 million.”

Xerox continues to internally separate its leasing, software and PARC technology segments. We believe this will ultimately result in some of these being sold off – most likely the leasing and software segments. The leasing segment has a book value of about $500 million. Given its high-quality asset base, it could sell for up to a 30% premium, or $650 million in total value. Divesting this segment and possibly the software segment would make Xerox a smaller bite for Hewlett-Packard to acquire – a combination seemingly underway just before the pandemic.

Activist investor Carl Icahn is the largest shareholder, with a 15% stake worth about $700 million. Icahn has recently made changes at his Icahn Enterprises company and elsewhere, suggesting he is becoming more aggressive in fixing/liquidating his holdings. Major changes at Xerox are coming, in our view.

Ratings Changes

Friday, April 23, 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:

  • Brief updates on:
    • Baker Hughes (BKR) – improvements continue.
    • Biogen (BIIB) – fate tied to June 7 decision by FDA on the Alzheimer’s treatment.
    • Credit Suisse (CS) – but for the $4.4 billion loss in its investment banking segment, results were solid. The bank is in a precarious position due to its disastrous risk controls. We expect the incoming chairman will turn things around.
    • LafargeHolcim (HCMLY) – the turnaround is going well, and accelerating.
    • Mattel (MAT) – the turnaround is showing impressive progress.
    • Xerox Holdings (XRX) – a modestly disappointing quarter as workers remain in work-from-home mode. Important strategic changes underway.
    • Altria (MO) – possible new restrictions on nicotine content/menthol cigarettes.
    • Toshiba (TOSYY) – CVC offer suspended.

  • Elsewhere in the Market:
    • Bitcoin – some flaws exposed.

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.