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Turnaround Letter
Out-of-Favor Stocks with Real Value

April 30, 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. We publish the Catalyst Report on the Friday after each monthly issue of the Cabot Turnaround Letter.

This week’s note includes thirteen earnings reports, from Albertsons (ACI), Altria (MO), Dril-Quip (DRQ), General Electric (GE), Jeld-Wen Holdings (JELD), Kraft Heinz (KHC), Meredith Corp (MDP), Mohawk Industries (MHK), Molson Coors (TAP), Newell Brands (NWL), Nokia (NOK), Royal Dutch Shell (RDS/B) and Western Digital (WDC).

As discussed in the May 2021 issue of the Cabot Turnaround Letter, published this past Wednesday, we raised our price targets on Adient (ADNT), Western Digital (WDC) and Wells Fargo (WFC) and moved Jeld-Wen Holdings (JELD) to a HOLD.

We are making no changes to our ratings or price targets in today’s note, although we will be reviewing Jeld-Wen Holdings in light of some questions raised in its earnings release this morning.

Earnings Updates
Albertsons Companies (ACI) – After years of acquisitions, divestitures and other deals, this grocery company looked like a jumble of siloed and poorly-managed entities with minimal integration. Following its recent IPO, Albertsons has a lot of work ahead to boost its margins, reduce its debt and clarify its pension obligations. The new CEO looks capable and the pandemic tailwind will help as they make the necessary improvements.

Fiscal fourth-quarter results were encouraging. The company continues to benefit from the pandemic-related shift to at-home food consumption, although this effect has peaked such that revenues and profits in 2021 will be lower than in 2020. A key question is how long the tailwind will linger and how much will be permanent? We are more optimistic than the market.

Revenues of $15.8 billion rose 3% from the mostly pre-pandemic period a year ago, but after removing the effects of a 53rd week in the year-ago period and lower gasoline sales, identical store sales increased 12%. Digital sales nearly tripled. Revenues matched the consensus estimate. Adjusted per-share earnings of $0.60 were 82% above year-ago results and 15% above the consensus estimate.

The adjusted EBITDA margin expanded to 5.8% from 4.9% a year ago. This metric had a lot of adjustments, most of which seem reasonable but nevertheless we would like to see a cleaner number. Albertsons is chipping away at its cost structure: it reached its $1 billion cost savings goal and raised it to $1.5 billion. The benefits are still partly masked by still-elevated Covid protection spending. Albertsons said they “invested in price” during the quarter. This is a glossy version of saying that they cut their prices to help retain customers – not an investment in the usual sense but avoids words like “discounting” and “pricing pressure” that are toxic to Wall Street.

Albertsons provided full-year 2021 guidance for identical sales to decline between 6-7.5% compared to pandemic-boosted fiscal 2020. However, on a two-year basis, identical sales would be 9.4-10.9% higher, indicating that the pandemic (along with in-store merchandising improvements, physical upgrades and new e-commerce initiatives) will have a favorable enduring effect on revenues. Adjusted EBITDA was guided to decline about 20%, but would still be about 13% higher than two years ago. Also, Albertsons guidance assumes 1-2% food inflation, but inflation will likely run at more than 3%, providing an incremental profit tailwind.

The balance sheet improved to $6.6 billion of net debt from $8.2 billion a year ago, helped by $2.3 billion of free cash flow (operating cash flow less capital spending). There is $1.7 billion in cash on the balance sheet, and future cash production looks healthy, so an unanswered question is what the company will do with its surplus cash. We would like to see a combination of share buybacks and reinvestment in its stores.

Albertsons will benefit from the $86 billion provision in President Biden’s now-law pandemic spending plan that helps fund underfunded labor union pension plans. While company contributions won’t likely change, it takes off the table the risk of a possibly large future contribution to make up for an otherwise too-underfunded plan. This removes a major investor concern clouding Albertsons outlook.

Altria Group (MO) – Altria is the domestic seller of Marlboro cigarettes which hold a 43% market share (non-U.S. operations were separated years ago into Philip Morris International). The company has struggled with declining cigarette volumes, slow development of non-combustible products and its disastrous $12.8 billion JUUL investment. Other issues: possible new regulations on menthol cigarettes and nicotine content, an IQUS patent lawsuit, and the market’s focus on ESG-favored companies. However, Altria’s resilience is under-estimated by investors. Led by a new CEO, the company is developing promising new non-combustible products, and smokable volume declines have flattened while price increases buoy revenues. Altria generates and returns to shareholders considerable free cash flow, such that the 7%+ dividend yield appears secure.

First-quarter results were reasonable. Revenues net of excise taxes fell 3.3% from a year ago and were about 2% below consensus estimates. Adjusted earnings per share of $1.07 fell 2% compared to a year ago and were about 2% above estimates. The company reaffirmed its full-year 2021 guidance. Management had no insight into pending FDA decisions on new menthol or nicotine regulations, but commented that prohibition or other restrictions have historically not worked yet carry significant unintended consequences. They suggested that a better solution would be FDA-approved products, although this is entirely self-serving as it would restrict competition – something that we would, of course, fully support.

Sizeable price increases (as much as 6%) in smokable products helped boost revenues, as volumes fell 3.5% (after numerous reasonable adjustments). This volume decline is probably the biggest single number in the report as it points to Altria’s core fundamentals until it builds more reliance on non-smokable products. At 3.5%, the decline is a bit larger than we had expected, but a one-quarter trend following a pandemic makes for difficult forecasting. Smokable segment profits ticked down only 1%, suggesting some profit resilience despite lower volumes.

Revenues of oral/smokeless tobacco products including Skoal, Copenhagen and on! rose 4.4%. The company is expanding its distribution of the on! nicotine patch and its IQOS and other non-burnable tobacco products. So far, segment growth and market share trends are favorable. Altria acquired the remaining ownership of on! in the quarter.

Dril-Quip (DRQ) – Shares of recently-recommended Dril-Quip, a manufacturer of highly-engineered equipment primarily for offshore oil and natural gas fields, are deeply out-of-favor. Low oil prices, the ever-present threat of higher oil production from OPEC+ and ESG-driven pressure on its customers have created depression conditions. Yet, Dril-Quip remains highly relevant as oil and natural gas will continue to provide nearly half of global energy supply, with offshore production a key component. The company will likely produce positive free cash flow this year and holds $346 million in cash and zero debt, which provides exceptional resilience while the company waits for a recovery.

First-quarter results were mildly encouraging. Revenues of $81 million fell 15% from a year ago and were 7% short of consensus estimates. The adjusted loss per share of $(0.47) was worse than the $0.26 profit a year ago. The consensus estimate was for a loss of $(.03), but it is not clear if this included amortization and other charges. Dril-Quip produced adjusted EBITDA of $8.0 million compared to $6.5 million a year ago.

As revenues lag orders by at least a few quarters, Dril-Quip is still feeling the effects of the fall-off in demand from last year. However, the $57 million in new orders points to a trough in demand with at least stability going forward. Management had guided to orders in the range of $40-60 million.

Despite the revenue decline, adjusted EBITDA improved. The 9.9% margin compared to 6.7% a year ago. Legal expenses for its ongoing trade secrets theft trial may have dragged profits down by as much as $7 million – costs which will likely taper as the trial winds down (the outcome is unpredictable but which we believe will be at worst a minor setback). Additional efficiency improvements should contribute to wider margins, as well. Free cash flow of $11 million was in-line with guidance, and adds to management’s guidance credibility and to the company’s cash coffers.

General Electric (GE) – Led by impressive new CEO Lawrence Culp, GE finally appears to be righting its otherwise severely damaged business. Key ingredients include a clear strategic focus on execution, cash flow and debt reduction, and leadership changes deeper in the company.

First-quarter results were mixed but mildly encouraging. Industrial organic revenues fell 10%, clearly not a positive, as Aviation segment revenues fell 26% due to the pandemic-related fall-off in demand. Aviation orders fell 26%, so this segment won’t return to growth anytime soon. Healthcare revenues fell 9% and orders fell 15%, pointing to sloppy conditions for a while. While Power segment revenues declined only 3%, orders slipped by 12%, although some of this was due to exiting the coal business. Renewables was a bright spot, with sales rising 2% but orders jumping 15%.

Earnings per share of $0.03 was incrementally higher than earnings of $0.02 a year ago and higher than the $0.01 consensus. However, Industrial profits fell 20% and the margin narrowed to 5.1% from 5.5%. Modest improvements in the Power and Renewables segments were more than offset by lower profits in the Aviation and Healthcare segments. GE is making some progress but the challenging environment keeps dragging down their business.

GE Capital will become smaller after the sale of its aircraft leasing business, but will still be too large with too many unknowns, even as it will become consolidated into GE overall. However, GE will receive $26 billion in cash from the sale – a clear booster to its balance sheet.

The company reiterated its full-year 2021 outlook. For 2022, there is a strong possibility of a sharp recovery in Aviation revenues due to catch-ups from previously-deferred maintenance spending.

GE is wisely discontinuing its factoring program. In the past it provided an expensive but merely cosmetic cover to hide its weak operating performance. GE remains a work in progress. If it wasn’t for the pandemic, it probably would be in great shape by now. Even so, it is improving its cost structure, holds $22 billion in Industrial segment cash (such that it has zero Industrial net debt) and has a tame debt maturity horizon – in short, plenty of time to grind its way back to full health.

As a reminder, GE will complete a 1:8 reverse stock split, likely next month.

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.

Results showed decent improvements from a year ago. Revenues grew 12% and were about 5% above estimates. Adjusted earnings per share of $0.27 was more than double the year-ago $0.13 profit and was 35% higher than estimates. Adjusted EBITDA of $98 million was 31% higher than a year ago. Management raised their full-year revenue growth guidance by 3-4 percentage points and raised their adjusted EBITDA guidance by about 4%.

We are wondering why North American revenues weren’t stronger, as pricing and volumes would seem to be well-placed to benefit from the surge in housing construction. Also, we would like to learn more about the effects from rising lumber costs.

The company’s revenue growth wasn’t quite as impressive as it sounds, as about half of the growth came from currency translation. Still, of the 6% growth ex-currency, 4% came from higher pricing while 2% came from higher volumes and favorable mix. And, the quarter had fewer shipping days, which appear to have suppressed sales growth by about 3 percentage points.

Profit dollars and margins expanded in all regions, pointing to a rebound in activity, and was particularly encouraging given prior weak conditions in Australasia. The balance sheet slipped a tad, as net debt increased modestly although part of this was due to the company repurchasing shares.

Kraft Heinz Company (KHC) – Following a disastrous cost-cutting strategy that left the company with diminishing relevance to consumers, Kraft Heinz is rebuilding its brands and products, led by new CEO Miguel Patricio (July 2019). The pandemic is providing a much-needed tailwind, particularly as Kraft Heinz is carrying a sizeable debt burden.

First-quarter results indicate that the turnaround continues to work. Sales grew 3.9%, with positive growth in all geographies. Sales in Canada and the rest of the world showed impressive strength, rising over 7%. Both higher prices and volumes helped boost sales, even as the stronger dollar produced a modest headwind to non-U.S. revenues. Sales were about 2% above consensus estimates. Management reiterated its full-year 2021 guidance, and said that they are ahead of their plan.

Adjusted earnings per share of $0.72 were 24% above year-ago earnings and were 22% higher than consensus estimates. Adjusted EBITDA of $1.6 billion was 12% higher than a year ago. Profits were helped by higher prices as well as operating efficiency gains, which overcame higher ingredient, packaging and shipping costs and higher investment spending. Kraft also said that results were strong compared to the pre-pandemic 2019 period, as organic revenues grew 8.7% and adjusted EBITDA grew 9.7%, indicating that both the current sales strength and cost-efficiency improvements have some staying power.

The company generated $583 million of free cash flow, which it mostly used to fund its dividend. We would like to see much stronger free cash production in future quarters.

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 magazine portfolio is high-quality and is transitioning to a digital world as it faces the secular headwinds in print publications. The shares were initially recommended in January 2020, and have fully recovered from their sharp pandemic-related decline yet remain undervalued as Meredith continues to benefit from its digital transition and the strengthening economy.

Fiscal third-quarter results were reasonable. Revenues fell 5% and were fractionally below estimates. Adjusted earnings per share of $0.53 rose 8% from a year ago and were sharply higher than the $0.37 consensus estimate. Adjusted EBITDA of $112 million was 26% lower than a year ago.

In its magazine segment, Meredith’s transition from print to digital is going well. Its digital advertising, licensing and subscription revenues are growing, with improving engagement metrics. It looks like digital advertising revenues will exceed print advertising revenues for the full year, solidifying a trend that has been in place for a few quarters. This is a critical transition –it demonstrates the power and value of its brands. Print advertising was soft in the quarter, falling 29% while newsstand sales fell 12%, pulling down total segment sales by 8%. Adjusted EBITDA fell 35%.

Local TV station revenues rose 3% as non-political advertising was strong and retransmission revenues rose 6% on mostly better pricing. Adjusted EBITDA also increased 3%.

Meredith’s top priority is debt reduction. In the quarter they repaid $251 million in debt, mostly with excess balance sheet cash, as free cash flow was about $70 million.

Mohawk Industries (MKH) – We initiated a Buy on Mohawk shares in March 2019 when they had fallen heavily out of favor due to several sizeable earnings “misses.” The shares fell sharply during the March 2020 sell-off and on allegations of fraud. We think the fraud charges ultimately will not having a meaningful impact on the company and that Mohawk will continue to execute on its fundamental turnaround and improve its balance sheet.

Mohawk is producing impressive results that were nevertheless held back by the “good” problems of production capacity, labor and raw material shortages. Revenues grew 17% from a year ago although only 9% when adjusted for currency and more days in the year-ago quarter. Revenues were about 2% higher than estimates. Adjusted segment operating income more than doubled from a year ago. Adjusted earnings per share of $3.49 also more than doubled the $1.66 a year ago and were 24% above estimates. The company’s second-quarter guidance of between $3.57 and $3.67 was about 13% higher than current second-quarter estimates.

Revenues, profits and margins were stronger in all three segments. Commercial demand is starting to recover while residential demand remains robust. New orders continue to show impressive strength. The company is, so far, successfully raising prices to battle rising raw material, labor, fuel and transportation costs as well as constraints on global and local shipping capacity.

Free cash flow was strong and the balance sheet is fortress-like even after Mohawk repurchased $686 million of its shares at $179/share (about 14% below the current price).

Molson Coors Beverage Company (TAP)Molson Coors is struggling with weak growth, yet is working under a new CEO to more aggressively develop specialty/higher-end beverages and reduce its reliance on mainstream and value offerings. Also, the company is increasingly focusing on its cost structure. Molson Coors continues to trade at a discount to its peers and its fundamental prospects.

First-quarter results were encouraging and the shares jumped on the news. Revenues of $1.9 billion fell 10% from a year ago but were about 2% above estimates. Adjusted earnings per share of $0.01 compared to a $0.35 profit a year ago but compared favorably to the $(0.11) consensus estimate. Underlying (adjusted) EBITDA of $280 million fell 21% from a year ago. The company maintained its full-year guidance, including for operating margins of between 7-10%, against more dour investor expectations.

Comparisons to a year ago are complicated due to the numerous revenue and operational effects of the pandemic. However, Molson produced reasonable results despite some notable headwinds, including a full shutdown of all U.K. pubs, the Texas winter storm which closed a brewery for 11 days, and an unspecified cybersecurity problem (now fixed) that disrupted its operations. North American sales fell 6% but European sales fell 35% - reflecting a hole that should be filled in future quarters.

The company’s core brands gained market share and achieved 2% higher pricing. Non-beer/hard seltzer products appear to be selling well, and the company has a fairly aggressive new product introduction cadence that sounds encouraging.

Cash flow was a sizeable negative, at a $271 million outflow, but this appears mostly due to the timing of deliveries and payments. Total and net debt were largely unchanged.

Newell Brands (NWL) – The company has struggled, literally for decades, with weak strategic direction and expense control, epitomized by its over-reaching $16 billion acquisition of Jarden in 2016. Pressured by activist investors last year, and now led by a capable new CEO, Newell appears to be finally fixing its problems, yet the shares remain significantly undervalued relative to their post-turnaround potential.

First-quarter results showed decent improvements under the new CEO. Revenues of $2.3 billion rose 21% from a year ago and were 10% above estimates. Normalized earnings per share of $0.30 increased sharply from $0.09 a year ago and were more than double the $0.13 estimate. Management raised their full-year core sales growth by about 4 percentage points and normalized earnings per share guide by about 5%.

Teasing out the pandemic effect on revenues is complicated, but healthy revenue and profit growth is encouraging. Operating costs were unchanged from a year ago so the gross profit increase of $118 million flowed straight to the bottom line. All five segments showed positive sales and profit growth. Some segments still need improvement: Home Appliances produced only a marginal $8 million profit despite sales increasing by almost $100 million. Outdoor & Recreation also has an unimpressive 6% profit margin, and Commercial Solutions’ margin fell despite higher sales.

The balance sheet is incrementally better than a year ago, as its leverage ratio improved from 4.2x EBITDA to 3.3x EBITDA, helped by higher profits and a 13% reduction in its net debt balance. Compared to the prior quarter, leverage is lower, as well.

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.

First-quarter results were highly encouraging. Nokia reiterated its full-year 2021 guidance and its general 2023 outlook. The company demonstrated significant progress, indicating that the turnaround is underway.

Revenues grew 3%, and when adjusted for currency changes grew 9%. This is impressive, given concerns over its otherwise lagging technology. On a constant currency basis, Network Infrastructure sales grew 28% and Mobile Networks sales increased 2% even as the semiconductor shortage hampered sales. Sales to Greater China increased 23% - the company defines this region as including Hong Kong, Taiwan and the Philippines so it is not clear how much went to mainland China.

Earnings per share of €0.07 compared to €0.01 a year ago and to the €0.01 consensus. Higher sales of 5G gear (which carry higher margins) and lower costs drove operating margins up by a huge 8.5 percentage points, which was the primary factor in the higher earnings per share.

Free cash flow was a robust €1.2 billion, which helped increase Nokia’s cash balance net of debt to €3.7 billion. While no dividend was announced, the company is getting closer (maybe 2-4 quarters away?) from re-initiating a dividend.

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.

First-quarter results were reasonably strong. Shell is rebuilding its profitability and financial strength as well as investing in new post-carbon fuels. Overall, the first-quarter results are enough to keep us interested in the shares for the time being.

Adjusted EBITDA, when calculated on a constant cost of supply basis which excludes inventory profits, was $11.5 billion, up 38% from a year ago. Cash flow from operations (before working capital changes) nearly doubled to $12.7 billion, while capital spending fell to $4.0 billion. All-in, including proceeds from divestitures, Shell generated $7.7 billion of free cash flow, more than enough to repay $4 billion in debt and fund its dividend. Shell raised its quarterly dividend by 4%, though it remains at about 35% of its pre-cut level.

Western Digital (WDC) – Western’s new and highly capable CEO, David Goeckeler, who previously ran Cisco’s Networking & Security segment, is making aggressive changes to improve the company’s competitiveness in disk drives and other storage devices, as well as bolster its financial strength. The company generates free cash flow and holds plenty of cash to buy time for the turnaround and to help pay down its elevated debt.

Fiscal third-quarter results were stronger than the somewhat uninspiring consensus estimate. Revenues fell only 1%, to $4.1 billion, and were about 4% above consensus estimates. Adjusted earnings per share of $1.02 increased 20% and was 50% higher than the consensus estimate. The company’s fourth-quarter guidance of $1.30-$160/share was nearly 50% higher than estimates for just over $1.00.

While operating results were basically in line with a year ago, the trajectory is now up, rather than down. In the quarter, revenues fell 1%, gross profits fell only 2%, and operating profits fell 4% as costs increased modestly.

However, NAND flash demand is recovering from a cyclical downturn and looks stronger in upcoming quarters. Notebook/desktop and gaming console demand as well as retail storage product demand remain robust. Better pricing, helped by a ramp-up of the new 18 terabyte hard disk drive and other new products, should continue to boost revenue and profit growth. The company’s re-organization into two segments (flash and hard drives) is starting to produce operating efficiencies – the formal split will be completed by the end of the next quarter.

Free cash flow was a negative ($11) million, but the company was confident enough in its outlook to repay $212 million in debt. Western remains over-leveraged but higher earnings and incremental debt paydowns are leading to better leverage metrics. Management didn’t have any strategic-level comments on Toshiba or Kioxia.

Ratings Changes

Thursday, April 30, 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 13½ minutes and covers:

  • Brief updates on:
    • All companies reporting earnings
    • Duluth Holdings (DLTH) – hires a new full-time CEO to replace the founder who stepped in as interim.

  • Elsewhere in the Market:
    • How to become a billionaire (on paper).

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
April had a subdued level of new catalysts, perhaps as activists await the conclusion of proxy season. Still, more than a few companies announced changes at the CEO level, and acquisition activity was healthy.

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 much-needed positive changes 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.

Genesco logo

Genesco, Inc. (GCO) $769 million market cap – Activist Legion Partners holds a 5.6% stake and is nominating seven board candidates, saying that the footwear company’s strategy of acting like a private equity firm is misguided and a failure. You can read their 18-page letter here.

Danske Bank logo

Danske Bank A/S (DNKEY) $16.4 billion market cap – Danske is the largest bank in Denmark and an icon across its region. Following a humiliating €200 billion money-laundering scandal a few years ago, the replacement CEO resigned earlier this month after being named a suspect in a money-laundering probe at another bank. Perhaps the newest CEO will restore this bank’s previous luster.

Bristow logo

Bristow Group (VTOL) $801 million market cap – After a trip through bankruptcy, Bristow and former competitor Era Group are now combined into a much stronger provider of helicopter transportation to the offshore energy and search/rescue customers.