Earnings season is in full gear this week, with six companies reporting. We review Albertsons (ACI), Baker Hughes (BKR), Biogen (BIIB), Freeport-McMoRan (FCX), Mattel (MAT) and Trinity Industries (TRN). All companies retain our Buy ratings.
We are raising our price target on Duluth Holdings (DLTH) to 17.50 from 15, as its fundamentals appear stronger than we had initially expected.
Earnings reports by Cabot Turnaround Letter recommended companies:
Albertsons (ACI) – After years of acquisitions, divestitures and other deals, this grocery company looks 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.
The fiscal second quarter report was encouraging. Identical store sales (similar to same-store sales) grew 14% while digital sales grew 243% from a small base. Overall, revenues increased 11.2% to $15.8 billion, and were slightly ahead of consensus estimates.
Adjusted per share net income of $0.60 compared to $0.17 a year ago and estimates for $0.26. The strong results were driven by the higher revenues, as fixed costs were largely unchanged, delivering more to the bottom line. Albertson’s sold a more profitable mix of goods, as well.
Adjusted EBITDA of $948 million increased 67% from a year ago and was 42% ahead of the consensus estimate. Both the adjusted net income and adjusted EBITDA had a lot of adjustments that we don’t necessarily agree with. We’ll be watching this in future quarters.
The company also made some incremental progress with its balance sheet, paying down $279 million in debt in the quarter and refinancing some of its expiring debt at lower interest rates.
Consumers continue to buy more of their food from grocery stores due to concerns about the pandemic, even as restaurants and other away-from-home venues re-open. Also, as more people are working from home, more meals are being prepared at home. And, compared to restaurants, food prepared at home costs less, helping many consumers as they tighten their spending.
Albertsons raised their guidance for full-year earnings per share to a range of $2.75 to $2.85, about 22% higher than the consensus $2.23 estimate, partly driven by higher identical store sales growth guidance of 15.5%.
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 recovery.
The company reported 3rd quarter revenues that were down 14% from a year ago, but were about 6% higher than estimates. Baker’s diversified revenue stream helped support results. While its Oilfield Services segment revenues fell 31%, Oilfield Equipment segment revenues were flat and its Turbomachinery/Process Solutions revenues rose 26%. Revenues increased 7% sequentially from the 2nd quarter. New orders fell about 34% from a year ago, but were up 4% from the 2nd quarter. These suggest that the weakness may be flattening out although clearly not recovering yet.
Per share earnings of $0.04 were 80% lower than a year ago but in-line with consensus estimates. All four of its segments produced positive operating profits, with encouraging progress on margins. Baker remains on-track for meeting its $700 million reduction in operating costs this year, although corporate costs rose 5% from a year ago. Free cash flow was $52 million in the quarter. Debt net of cash increased by $60 million sequentially from the 2nd quarter.
Baker pays $123 million in dividends every quarter, or about $500 million a year, a rate that might not endure through the turnaround. However, the dividend yield is not a meaningful part of our thesis for the stock, yet provides helpful interim cashflow to investors pockets.
Biogen (BIIB) – This biopharma company generates vast amounts of free cash flow, has a sturdy balance sheet and a low share valuation. The primary concern is rising generic competition for its Tecfidera treatment for multiple sclerosis. A wildcard that could be an enormously positive catalyst (potential for a 50% or more share price gain if a complete success) or a possible 25% downside risk, is the outcome of its aducanumab Alzheimer’s treatment that is currently working its way through the FDA approval process.
In the quarter, Biogen reported revenues that fell 6% from a year ago, or 5% excluding currency changes. The decline was driven by a 15% decline in Tecfidera and a 10% decline in Spinraza (a treatment for spinal muscular atrophy). Royalties from Ocrevus (a multiple sclerosis treatment) increased 45%, helping offset these declines. Revenues were slightly stronger than consensus estimates, as investors have anticipated the revenue decline.
Adjusted per share earnings of $8.84 fell 4% from a year ago, but were about 10% higher than consensus estimates.
Biogen reduced its full-year guidance due to increased pressure from generic versions of Tecfidera, which was somewhat expected. Spinraza weakness appears likely to stabilize. Full-year revenue guidance fell about 5%, while full-year adjusted earnings guidance fell about 6%.
The company generated about $1.1 billion in cash flow from operations after capital spending, or about 10% of its market cap on an annualized basis. With about $7.4 billion in debt, partly offset by $3.6 billion in cash, Biogen’s balance sheet is sturdy. We note, however, that the debt net of cash increased from nearly zero at year-end to about $2.8 billion, as the company has repurchased nearly $6.3 billion of its shares, as well as funded some acquisitions.
On November 6th, the FDA will convene an advisory committee to review data supporting aducanumab as an Alzheimer’s treatment. Analytical data for the meeting will be released to the public no later than November 4th. This is an important but not final catalyst, one way or the other. We expect considerable share price volatility around this meeting.
Freeport-McMoRan (FCX) – Freeport’s turnaround is led by the cyclical recovery in copper prices, as well as increased visibility of progress on its giant Grasberg mine conversion in Indonesia.
Third quarter revenues rose 22% from a year ago on 7% higher copper volumes and 15% higher copper prices. Adjusted earnings of $0.29 compared to a $(0.01) loss a year ago. Lower copper mining costs helped boost profits. The company generated about $1.2 billion in operating cash flow in the quarter. Freeport guided to continued strong results.
The balance sheet strengthened from the 2nd quarter, as net debt of $7.6 billion fell about 10%. Freeport has improved its financial flexibility by refinanced a considerable portion of its debt at favorable terms and longer maturities. Overall, its financial condition appears sturdy, buttressed by its rising free cash flow.
Its Lone Star project in Arizona is now completed, and Freeport’s Grasberg project remains on-track.
Copper prices continue to increase, driven partly by the global economic recovery and partly by what appears to be some copper stockpiling in China. Investors may also be bidding up copper prices as the metal is a key ingredient in electric vehicles. Freeport is approaching our $20 price target.
Mattel (MAT) – At our initial recommendation in 2015, Mattel was struggling with its failure to adjust to the realities of how young children spend 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, and 3rd quarter results were highly encouraging.
For the 3rd quarter, Mattel reported surprisingly strong revenue growth, up 10% from a year ago and up 11% excluding currency changes. This was 12% higher than consensus estimates, which expected a decline in sales year-over-year. Sales of Barbie increased by 29%, with strength in both North American and internationally. Hot Wheels, action figures and other products grew as well, while Fisher-Price/Thomas & Friends remained basically flat. For the nine months (YTD), overall sales fell only 1%. Mattel seems to have stabilized/reversed its former revenue decay.
Adjusted per share earnings of $0.95 was more than triple the $0.26 from a year ago and more than double the $0.38 consensus estimate. Compared to a year ago, Mattel continues to increase its gross margin (now at 51.0%, up 4 percentage points) and reduce its operating expenses (down $22 million), helping adjusted operating income to more than double to $401 million. The adjusted operating margin was 24.6% - vastly stronger than the barely respectable 11.1% margin a year ago. The adjusted EBITDA margin of 28.8% was impressive.
Adjustments were minor, so the adjusted results were fairly clean.
The company provided full-year Adjusted EBITDA guidance of $625 million to $650 million, nearly 25% above current estimates.
Comparing Mattel to the assumptions for our $38 price target: Mattel has a good chance of reaching $5 billion in revenues by 2022, but our $6 billion in revenue milestone appears too optimistic. However, its impressive cost structure improvements point to the company reaching our 16.7% adjusted EBITDA margin by 2022. The company’s strong cash flow is on a path to reducing its current $2.8 billion in net debt to our $1.7 billion target by 2022. Mattel’s share count remains in-line with our assumption. Also, the shares trade at our target EBITDA multiple of 15x. All-in, the reduction in sales from our milestone pulls the implied target to $31.
Mattel’s turnaround is shifting into a higher gear, so we will retain our $38 price target for now, recognizing the sizeable revenue gap ahead but also appreciating the many new initiatives, including film, television and digital games.
Trinity Industries (TRN) – Trinity is shifting from a railcar production company to a railcar leasing company. This has greatly reduced its revenue and profit volatility, and allowed it to borrow to repurchase shares. While the railcar production industry is currently in a deep recession, the leasing business remains stable. Trinity continues its transition and is cutting costs and releasing capital from unproductive uses.
In the 3rd quarter, Trinity’s results showed that it continues to suffer from the deep railcar recession but remains financially durable, helped by its leasing operations. We are essentially in a holding pattern with TRN shares, waiting for conditions to improve.
Trinity reported revenues that fell 44% from a year ago. However, leasing revenues fell only 3% and comprised a third of total revenues excluding sales of used railcars. Total revenues were in-line with consensus estimates but revenues from the sale of used railcars make this comparison somewhat meaningless.
Operating profits fell 46% from a year ago. Leasing profits of $86.8 million rose 9% from a year ago, while railcar production profits fell 95%.
Adjusted per share earnings of $0.17 were down sharply from $.39 a year ago, but were well-ahead of the $.07 consensus estimate.
The leasing business remains mostly stable, with utilization of 95% slipping a bit from 97% a year ago. The railcar production segment is clearly struggling, with orders and deliveries continuing to look weak. Trinity’s balance sheet and liquidity are sturdy and the company produced about $209 million in cash from its operations after capital spending. As Trinity is expanding its leasing fleet, it spent an additional $189 million on railcars for its fleet. The company repurchased $90 million in stock in the quarter and announced a new $250 million repurchase program.
Next week’s earnings (15 companies), in order of reporting: GE, WDC, BWA, CNSL, CS, DD, NOK, VWAGY, KHC, RDS.B, TAP, WY, NWL, MHK and HCMLY.
Friday, October 23, 2020 Subscribers-Only Podcast
Covering recent news and analysis for our portfolio companies and other topics relevant to value investors.
Today’s podcast is about 16 minutes and covers brief updates on:
- Earnings updates from Albertsons, Baker Hughes, Biogen, Freeport-McMoRan, Mattel and Trinity Industries.
- Duluth Holdings (DLTH) – raised our price target to 17.50 from 15.
- Western Digital (WDC) and Toshiba (TOSYY) – Intel’s announced sale of its NAND memory chip business is a positive for our two companies.
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.