Please ensure Javascript is enabled for purposes of website accessibility
Turnaround Letter
Out-of-Favor Stocks with Real Value

October 15, 2021

This week’s update includes our comments on earnings from Walgreens Boots Alliance (WBA) and Wells Fargo & Company (WFC) as well as commentary on several stocks.


This week’s update includes our comments on earnings from Walgreens Boots Alliance (WBA) and Wells Fargo & Company (WFC) as well as commentary on several stocks.

Next week, Baker Hughes (BKR), Mattel (MAT), Dril-Quip (DRQ) and Xerox (XRX) are scheduled to report earnings.

With this note, we are moving shares of Meredith Corporation (MDP) to SELL, following the company’s agreements to sell its two businesses. Shareholders will receive a total of $59.17/share in cash – meaningfully above our $52 price target – following the completion of these two deals. With the stock trading essentially in line with this price, and a slim chance of a higher bid from another group, investors should exit their positions. The Meredith investment produced a 78% total return from our initial recommendation in January 2020.

Earnings updates:
Walgreens Boots Alliance (WBA) – Once a retail pharmacy powerhouse, Walgreens faces hefty secular challenges from an overbuilt and mature store base, with customers who have plenty of alternatives to visiting its often poorly-run and expensively-priced stores. And, pricing pressure from private and government payors is squeezing its prescription profit margin. Walgreens’ strategic plan seems unclear and unoriginal. Yet, the company has several appealing traits. Its shares are bargain-priced at 7.3x EBITDA, and even cheaper when Amerisource’s value is delineated. Walgreen is in solid financial condition, produces large and stable profits and cash flow, and has a new CEO who brings a much-needed fresh perspective. We also like the 4.1% dividend yield.

The fiscal fourth-quarter earnings report was stronger than investors anticipated. Revenue rose 12.8% from a year ago and was about 3% above the consensus estimate. Adjusted earnings were $1.17/share, up 28% from a year ago and 15% above the consensus estimate. Free cash flow of $4.2 billion was about 12% higher than a year ago when the effects of the Alliance divestiture are removed. Most metrics in the United States looked relatively strong, while International segment metrics were broadly strong as the United Kingdom and other regions re-opened after the pandemic.

The company said that it continued advancing its various strategic initiatives during the quarter, including reaching its $2 billion+ of cost savings a year ahead of schedule. The balance sheet improved, with net debt declining $6.6 billion, slightly better than we had anticipated, using proceeds from the Alliance divestiture.

WBA shares rose 7% on the day, with some help from their Investor Conference, where the new CEO acknowledged the company’s “unclear strategy and disjointed culture” and outlined a clearer plan for the future. A core part of the plan is to turn the glut of stores into an asset by emphasizing the value of local healthcare. This will include accelerating and expanding its various healthcare service initiatives (like their just-announced $5.2 billion deal to acquire a controlling stake in VillageMD), as well as upgrading their digital/omni-channel capabilities and strengthening their brands. Their new Walgreens Health concept has as a goal, of sorts, to become the McDonald’s of neighborhood healthcare.

The new strategy uses ingredients that were already at Walgreens, augmented by recent acquisitions with more to come, yet has the advantage of an explicit and clearly stated direction and purpose whereas previously Walgreens seemed mostly to be accumulating businesses in a murky, primordial ooze.

We like that the company set some clear revenue and profit metrics, including an additional $1 billion cost-cutting goal. which will allow investors to track its performance. Walgreens said its earnings per share will not grow in FY2022 due to revenue and cost headwinds and dilution from acquisitions. But the company said its strategy will produce earnings growth that will accelerate to 11-13% by FY2025.

From a capital management perspective, the plan includes selling off unneeded assets, increasing the stock dividend, returning cash to shareholders, maintaining their investment grade credit rating and making additional acquisitions to further develop their strategy.

We like the new strategy and focus. To succeed, it requires execution. Its acquisition strategy will consume some of its financial flexibility, replacing hard cash with speculative but promising investments. New CEO Roz Brewer is off to a good start, and we believe is up to the task. Guidance is low enough to be exceeded, an important next step for investors. Fortunately, we started the Walgreens investment at a low valuation, leaving plenty of margin for safety.

Wells Fargo & Co. (WFC) – Wells Fargo is one of the nation’s largest banks. Under its previously weak leadership, the company never fully recovered from the 2009 financial crisis and its loose compliance culture led to a fake accounts scandal and other reputation-tarnishing problems. Also, like all banks, it is struggling with low interest rates and limited loan growth, although the much-feared pandemic-related loan losses no longer look likely. An additional constraint is a regulator-imposed cap on Wells Fargo’s asset size. Under new CEO Charles Scharf, the bank is aggressively restructuring its operations, cost structure and regulatory compliance.

Overall, the third-quarter earnings report showed incremental progress on expenses and credit quality, while revenues and loan volumes were weak. Wells continues to struggle under its asset cap and other regulatory pressures, along with overly-complex operations and a probably still-unhealthy culture. There was nothing in the report that changed our view on WFC shares. The shares trade at about 127% of tangible book value of $35.54/share and below our $49 price target.

Reported net income was $1.17/share. This compares to reported net income of $0.70 a year ago, but both periods contained numerous positive and negative charges, and the consensus estimate doesn’t treat these consistently. So, we’d conclude that the company had a much better quarter than a year ago and modestly beat the broad market consensus estimate. Regardless, broad progress toward achieving its goals will take more time.

A key indicator of a bank’s profits is pre-tax pre-provision profit, or PTPP. This is basically operating profits before credit losses. For Wells, PTPP rose 35% to $5.5 billion (a healthy amount) from a year ago, but slipped 20% from the prior quarter. Driving the changes: revenues shrank only 2% from a year ago while expenses fell 13%. Revenues fell 7% from the prior quarter while operating expenses were flat.

The reason revenues dipped is because Wells is experiencing a continued decline in loan demand (loans fell 8% from a year ago and were flat compared to the prior quarter). Loan growth has been a chronic problem for Wells and nearly all banks as consumers and companies remain flush with cash and profits, and as alternative sources of funding including private lending – similar to private equity – siphon off demand. We anticipate little change in these trends.

A fractional increase in the net interest margin from the prior quarter helped revenues a tad, but compared to a year ago the net interest margin continued to weaken. The margin is generally tied to the yield curve. Rising interest rates may help if long-term rates increase more than short-term rates, but we’re in new territory given the highly unusual post-pandemic environment.

Fee revenues were flat compared to a year ago and down 13% from the prior quarter, partly as mortgage banking and trading revenues slipped on lower activity.

Favorably, operating expenses fell 13% from a year ago (but were flat from the prior quarter) as the bank had fewer restructuring charges, slashed outside professional fees and had lower Covid-related costs. Cost-cutting is a controllable and critical piece of the Wells turnaround, and this quarter’s progress was modestly encouraging.

New credit losses continued to decline to remarkably low levels. Even after the reduction in its reserves, Wells has considerable remaining reserves to absorb future losses. Its capital remains strong at 11.6% CET1 (a complex regulatory metric), although the highly encouraging $5.3 billion share buyback in the third quarter weighed slightly on its capital ratio. Wells has planned for up to $18 billion in buybacks over the next year. The bank is generating enough profits to fund its repurchases without hurting its capital ratio as long as current conditions prevail.

Wells has a lot of work to do, operationally and regulatory wise, and seems to be making incremental progress.

Ratings changes:

Friday, October 15, 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 15½ minutes and covers:

  • Brief updates on:
    • Meredith Corp (MDP) – move to SELL, vindicating focus on value, not price.
    • Walgreens Boots Alliance (WBA) and Wells Fargo & Company (WFC) – earnings updates.
    • Vistra (VST) – New $2 billion share repurchase highlights strong free cash flow.
    • Elanco (ELAN) – Starboard makes their case for $58/share in value.
    • Toshiba (TOSYY) – Two former directors’ claims won’t have much impact.
    • Signet Jewelers (SIG) – small acquisition and another guidance raise.
    • General Motors (GM) – claws back $1.2 billion from LG Chem.
    • Altria (MO) – FDA approval of competitor’s product is favorable to Altria.
    • Baker Hughes (BKR) – We discuss the sharp oil producer spending decline.
    • Macy’s (M) – We appreciate JANA Partners’ attention.

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.

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.