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Turnaround Letter
Out-of-Favor Stocks with Real Value

November 6, 2020

This week, ten companies reported earnings, with Berkshire Hathaway (BRK.B) reporting tomorrow (Saturday): Barrick Gold (GOLD), Conduent (CNDT), Gannett (GCI), GCP Applied Technologies (GCP), General Motors (GM), Jeld-Wen Holdings (JELD), LaFargeHolcim (HCMLY), Meredith Corporation (MDP), Mosaic (MOS), and ViacomCBS (VIAC).


This week, ten companies reported, with Berkshire Hathaway (BRK.B) reporting tomorrow (Saturday): Barrick Gold (GOLD), Conduent (CNDT), Gannett (GCI), GCP Applied Technologies (GCP), General Motors (GM), Jeld-Wen Holdings (JELD), LaFargeHolcim (HCMLY), Meredith Corporation (MDP), Mosaic (MOS), and ViacomCBS (VIAC).

There were no ratings changes this week.

Friday, November 6, 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 15½ minutes and covers:

  • Brief updates on:
    • Updates on the 10 companies that reported earnings.
    • Biogen (BIIB) – the shares remain halted as an FDA panel is meeting to determine whether to recommend Biogen’s Alzheimer’s treatment for FDA approval.

  • Elsewhere in the market:
    • Hopefully we will have the full election results by Monday.

  • Final note

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.

Earnings reports by Cabot Turnaround Letter recommended companies:
Barrick Gold (GOLD) – After enduring years of weak gold prices and unimpressive operating management, yet also steadily paying down its huge debt, Barrick acquired Randgold in early 2019, bringing an impressive new CEO onto the team. Since then, rising gold prices have boosted revenues while better mining efficiency has restrained costs, leading to a sharp increase in profits and cash flow.

Barrick reported a strong quarter, producing $0.41 per share in adjusted earnings, up 173% from $0.15 a year ago, and about 28% higher than consensus estimates. Adjusted EBITDA of $2.2 billion was 71% higher than a year ago and about 16% above estimates. Barrick generated $1.3 billion in free cash flow in the quarter, more than the full-year 2019 total. All-in, a solid quarter.

Driving the increases: revenues grew 32% due to higher gold and copper prices, while production costs were flat/down. Gold volumes fell about 5% while copper volumes rose about 78%.

Barrick’s debt net of cash is now only $417 million. The company retained its guidance for 4.6 to 5.0 million ounces of gold production for the year. Barrick raised its quarterly dividend by 12.5% to 9 cents.

We continue to like GOLD shares even as they are approaching our $30 price target.

Conduent (CNDT) – Conduent was spun-off from Xerox in 2017. After a promising start, the company’s revenues fell sharply due to management problems, leading to a collapse in its share price. In late 2019, the company replaced the CEO, and began a major overhaul that is starting to show progress. Activist investor Carl Icahn owns 18% of Conduent’s shares, while Darwin Deason (who sold his business to Xerox which was then spun-off as Conduent) holds a 3.3% stake.

The company’s results were encouraging. While revenues fell 5% from a year ago, the pace of decline is falling – important for a services company. More interesting, new contract signings rose 100% from a year ago and recurring revenues of signings rose 35%. Both of these rates were strong and showed acceleration from the prior quarter. Conduent is showing signs that its revenue problems are abating – perhaps the most critical component in its turnaround.

Profits are also increasing, pointing to both higher quality new contracts and better operating efficiency. Adjusted earnings of $0.26/share was 63% higher than a year ago and more than double the consensus estimate. Cash operating profits, or EBITDA, increased 11% from a year ago, and the margin of 13.5% was almost 2 percentage points higher.

Conduent’s balance sheet has about $1.2 billion in debt net of cash, a bit too high in our opinion but not debilitating, particularly as the company is generating positive free cash flow, has plenty of cash, and appears to be solving its revenue problem.

Investors underestimate the scale and scope of improvements at Conduent. CNDT shares trade at about 5x estimated EV/EBITDA even as the EBITDA estimate will likely be rising. We think there is considerably more potential for revenues and profits to increase, driving the shares higher.

Gannett (GCI) – Gannett has struggled following the late 2019 combination of legacy Gannett and New Media Investment Group due to pandemic-reduced advertising revenues. Also, its much-anticipated dividend was suspended. However, aggressive cost-cutting has allowed the company to maintain positive cash flow (a key to the story) and whittle away at its debt.

Gannett’s quarter was encouraging. Revenues adjusted for the merger fell a grim-sounding 19.6% from a year ago but that was slightly better than consensus estimates. Per-share loss of $(0.24) was meaningfully better than estimates of a $(.41) loss. Adjusted EBITDA of $88 million was about 11% better than estimates. Free cash flow was a respectable $43 million in what is generally a seasonally weak quarter. Gannett has a long way to go to reduce its $1.6 billion in net debt to a reasonable total, but is making progress. The first milestone is to refinance its expensive 11.5% interest rate term loan.

Other signs of progress included: digital subscriptions grew to over 1 million and increased 31% from a year ago, Gannett sold $100 million (including early 4Q) in non-core assets and real estate, which will be used for debt reduction, and the company is on-track to reduce costs by $300 million by the end of 2021, with about $200 million already achieved. Expenses fell 19% in the third quarter.

Gannett has a long way to go, but it is making more progress than investors give it credit for. The value, at 5.5x EV/EBITDA, and some interesting potential catalysts are there to help drive the shares up over the next few years.

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, this past May, leading to the promising start of a turnaround.

Third quarter results were encouraging, but clearly more work is ahead for GCP. Revenues fell 7% due to weak volumes in its construction end-markets. However, despite the lower sales, both the gross margin and operating margin expanded, in both of its two segments, on efficiency improvements. Per share earnings of $0.30 rose 7% from a year ago and were sharply higher than the $0.21 consensus estimate.

The company produced $59 million in operating cash flow. Total debt remained essentially unchanged (at $353 million) from the second quarter, while the cash balance increased by $155 million, to $473 million.

GCP’s turnaround is making good progress.

General Motors (GM) – GM is making immense progress with its years-long turnaround from a poorly-managed, post-bankruptcy car maker to a highly profitable gas and electric vehicle producer. We would say it is perhaps 75% of the way through its gas-powered vehicle turnaround, and is well-positioned but in the very early stages of its EV development.

The company produced a remarkable third quarter. Adjusted earnings of $2.83/share were 65% higher than the pre-pandemic earnings a year ago and nearly double the $1.43 consensus estimate. From a different perspective, the company’s revenues were the same as a year ago, but the $5.3 billion in adjusted operating profits was $2.3 billion, or 78%, higher. GM North America profits grew by $1.3 billion and GM Financial profits rose by $500 million. GM International, including China, and Cruise showed profit increases as well. The Automotive segment generated $9 billion in free cash flow, partly offsetting $7.6 billion in negative free cash flow in the first half of the year. Compared to the pandemic-stricken $(500) million loss in the second quarter, GM has produced a remarkable recovery.

The profit increase came partly from a favorable comparison against the labor strike a year ago, yet is also due to improvements in operating efficiency and higher pricing this year (including lower incentives), as new and used vehicle inventories have been low. Highly-profitable truck sales have remained robust and GM gained market share in North America.

Inventories remain lean, as strong U.S. demand means that vehicles are often sold within a few days of arriving on dealer lots.

Much of GM Financial’s profit increase was driven by higher used vehicle prices as well as lower credit losses. Delinquencies fell to 2.9% from 4.2% a year ago.

GM’s balance sheet is impressive. Automotive segment cash exceeds Automotive debt again, after repaying about $5.2 billion in debt while actually increasing its cash balance in the quarter. GM Financial’s capital position remains sturdy.

On the conference call, GM discussed its impressive array of electric vehicle and autonomous vehicle initiatives. There are many – we won’t go through all of them here – so the key takeaway is that the company continues to aggressively develop its capabilities, and clearly has the necessary financial capacity. GM spoke only briefly about Nikola, saying that discussions continue.

The company said it would likely reinstate its dividend in mid-2021. It also urged investors not to extrapolate the strong 3Q results, as costs and cash flow demands will rise in the fourth quarter and next year. Overall, the company’s outlook is for a strong 2021, with perhaps a return to the $6.50 earnings per share range that it would otherwise have earned this year.

Jeld-Wen Holdings (JELD) – The window and door maker is undergoing a turnaround under 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.

The company reported strong third quarter earnings. Revenues grew 2% from a year ago – average pricing rose 3% but was offset by 3% lower volumes, so growth was produced by a 2% favorable currency change. Per share earnings of $0.52 grew 100% from a year ago and was about 18% higher than consensus estimates. Adjusted EBITDA of $131 million increased 20% from a year ago and was about 7% higher than estimates, helped by stronger pricing and by efficiency improvements. Jeld-Wen continues to pay hefty legal fees ($28 million in the quarter) for an on-going dispute that has been partly resolved.

Prices rose 6% on average in North America, helping to widen Jeld-Wen’s profit margins. Overall, North America and Europe produced good results, while the Australasia region remains mired in a moderately weak economy.

Free cash flow was healthy at $154 million, lifting the cash balance to $606 million. Debt of $1.8 billion was unchanged.

Jeld-Wen said that pricing will remain steady the rest of the year and into 2021. Mix will likely remain unfavorable as builders are looking for standard rather than custom windows. More cost-efficiency improvements are ahead as well. Guidance for the fourth quarter implied revenue and profit growth would be modestly ahead of consensus.

LaFargeHolcim (HCMLY) – This Switzerland-based company is the world’s largest producer of cement and related products. While building and road construction, and to a lesser extent oil and gas drilling, drives cement demand, each region has its own supply/demand traits due to cement’s limited shipping distance. Also, cement isn’t purely a commodity as each application/region/climate may require its own recipe. 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.

Third quarter revenues fell 10% from a year ago but only 3% after divestitures, and a slight positive net of currency changes. Cement demand in most regions is at or near year-ago levels, while demand for related products remains weak.

Recurring operating profits grew 2% from a year ago (ahead of expectations) and were 10% higher after the effect of divestitures. The recurring operating profit margin increased 2½ percentage points from a year ago. Its SFr 396 million (1 Swiss franc = $1.09) in cost-cutting has exceeded its SFr 300 million target, lower energy costs have led to an additional SFr 124 million in lower costs, and its working capital and capital spending reductions are better than their targets. For the full year, the company raised its free cash flow guidance to SFr 2.75 billion. Its debt leverage continues to decline and net debt/EBITDA is targeted to be below 1.8x at year-end. With its return to financial strength, the company may pursue acquisitions.

This is a solid company whose shares are significantly undervalued at 7x EV/EBITDA and pay a 5% dividend yield.

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 media portfolio is high-quality, and steadily evolving to meet the changing distribution and digital landscape, although it faces secular headwinds and revenue pressure from magazine closures. The shares were initially recommended in January 2020, so they have been hit sharply as advertising revenues have declined.

MDP shares surged 24% on Thursday, as third quarter per share adjusted earnings of $1.04 compared to $0.03 a year ago and were much stronger than consensus estimates which projected a $(0.33) loss.

Revenues fell 4% from a year ago but were about 5% higher than estimates. Weak magazine ad revenue was mostly offset by stronger (largely one-time) political advertising on its television stations. Strong cost-cutting led to Adjusted EBITDA increasing 17% to $143 million, which was about 50% higher than estimates. Meredith produced about $70 million in free cash flow.

Meredith’s debt remains elevated at 5.5x estimated 2020 EBITDA, but if the company continues to produce strong results, we see a reasonable path for this to drop to a very reasonable 3.9x in two years.

The company is aggressively launching new initiatives to remain relevant in the digital world. Its digital properties are seeing sizeable increases in traffic and subscriptions, while new cross-over programming, like its PEOPLE (magazine) news program is seeing strong broadcast viewership. Interestingly, the company launched the Meredith Data Studio, which gathers all of the company’s media data into a single source for sale to advertisers.

Overall, a surprisingly strong quarter for this highly out-of-favor company whose shares trade at a very discounted 7x earnings and 8x EV/EBITDA.

Mosaic (MOS) – This slow-moving and still-struggling turnaround (initially recommended in Sept 2015) remains on the Recommended list as we see the potential for higher commodity prices over the next few quarters and as its CEO continues with the sizeable cost-cutting program. We see little chance of it reaching its original price at recommendation of $40.55, but it still has a reasonable chance of reaching its $27 price target (trades at $17 now) on higher pricing and volumes.

Although per share earnings of $0.23 were 35% above consensus estimates, MOS shares have declined about 8% since the days before the report. The “beat” appears to have come from a much lower tax rate than analysts expected. Otherwise, higher gross profits were offset by higher overhead costs. Importantly, the market had likely anticipated stronger potash and phosphate prices, which turned out to be weak in the quarter. As estimates had risen sharply in prior months, this translated into a disappointing result. One bright spot: the recently-acquired Mosaic Fertilizantes (Brazil) business is doing remarkably well, as record volumes and strong cost-cutting produced a 34% profit boost.

Despite the weak year-over-year comparison, pricing continues to trend up from the December 2019 lows. A year ago, prices were on their way down, but now they are on their way up, partly driven by Mosaic’s filing of a petition with the U.S. government for countervailing duties on imports from Morocco and Russia, which may be illegally subsidizing their exports. Global demand for fertilizers remains healthy, while supply has some potential constraints.

For Mosaic, favorable shipment timing and likely stronger pricing should help the fourth quarter. The company’s balance sheet is reasonable although we would like to see some deleveraging. Overall, this aging recommendation requires more patience but the outlook is improving.

ViacomCBS (VIAC) – ViacomCBS is struggling to overcome the secular shift away from television, where it has historically generated the bulk of its revenues. In addition, the pandemic has created additional headwinds from the decline in sports advertising, closure of movie theaters, and other issues. The now-unified company is led by a talented and shareholder-aware CEO. Revenue stability, cash flow production, and debt paydown are major components of the turnaround.

Viacom reported a reasonably good quarter, with adjusted profits of $0.91/share down 17% from a year ago, but about 14% above consensus estimates. Revenues fell 9% but were slightly higher than estimates. Revenues were weakened by the 33% drop in content licensing. Advertising revenues experienced a 6% decline but are much improved from the 27% year/year drop in the second quarter. Highly encouraging: affiliate revenues rose 10% – these are fees that the company receives from cable TV operators and similar distributors, as well as revenues from its new streaming services. Paramount Studio’s revenues fell to nearly zero due to closures of movie theaters.

Viacom is shifting away from advertising (currently about 36% of revenues) and affiliate fees (currently about 39% of revenues), toward content licensing – essentially renting its vast library of movies, TV shows, and other content to third-party firms like Netflix and others. Viacom is building out its own streaming channel (Paramount+) and other new distribution channels, which are generally showing fast growth. Ultimately, we think the company should be acquired by a major competitor, given its valuable businesses and content library, as well as its bite-sized market cap of about $20 billion.

The company generated $1.4 billion in operating cash flow and $1.3 billion in free cash flow. The cost-cutting program is well-underway and boosting cash flow. However, cash flow ultimately needs to be higher. So far this year, ViacomCBS has reduced its debt net of cash by about $1.5 billion, or 8%. Cash remains robust at $3 billion.

Expectations are low for ViacomCBS. We believe the turnaround will be successful but may take a while.

Berkshire Hathaway (BRK.B) – reports tomorrow, Saturday, November 6.

Next week, three companies report earnings: Peabody Energy (BTU), Adient (ADNT), and Toshiba (TOSYY).