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Turnaround Letter
Out-of-Favor Stocks with Real Value

November 13, 2020

This week only four companies reported earnings. As your chief analyst is traveling this week, there is no podcast.


This week only four companies reported earnings: Berkshire Hathaway (BRK.A), Peabody Energy (BTU), Adient (ADNT), and Toshiba (TOSYY). As your chief analyst is traveling this week, we will review Toshiba earnings in our note next week.

This wraps up the bulk of earnings season. Next week, Vodafone (VOD) and Oaktree Specialty Lending (OCSL) report.

This past Monday, we moved ratings for Barrick Gold (GOLD), Peabody Energy (BTU), and Weyerhaeuser (WY) to Sell earlier this week. See the notes below for our comments.

Our podcast will return next Friday, November 20, 2020 as your chief analyst is traveling this week.

Earnings reports by Cabot Turnaround Letter recommended companies:
Adient (ADNT) – After its 2016 spin-off from Johnson Controls turned south, Adient brought in a new leadership team in August 2018, which prompted our interest and Buy recommendation. Despite the difficult pandemic environment, the company has made impressive improvements to its operations and balance sheet.

The company reported encouraging preliminary third quarter results that were ahead of consensus estimates. Full results were pushed back until November 30th due to reporting delays from one of its China unconsolidated joint ventures.

Berkshire Hathaway (BRK.B) – Recommended as a Buy at the end of March 2020, in the depths of the market’s pandemic-driven sell-down, Berkshire Hathaway is an exceptionally well-managed financial and industrial conglomerate.

The company reported third quarter operating profits of $5.5 billion, down 32% from a year ago. Only the Railway, Utility, and Energy segment showed an increase in earnings. The value of its investment portfolio increased by $24.7 billion from the prior quarter – this increase was not included in the operating profit.

Insurance profits fell 58% due to the pandemic-related discounts of the Geico Giveback program, hurricane losses, and other pandemic-related losses. We have little concern over the long-term value of this segment despite the near-term weakness. Elsewhere, the company’s wide range of businesses produced mixed profits, yet overall showed the merits of its diversified portfolio.

Berkshire repurchased $9 billion of its own shares in the quarter ($16 billion year-to-date), and continues to hold $135 billion in float – a measure of insurance investment assets in excess of current needs. Book value per share was $170.90. At recent prices, the shares trade at a 31% premium to book value.

Peabody Energy (BTU) – Peabody is one of the world’s largest publicly traded coal mining companies, with operations in the United States and Australia. Its thermal coal mining segment, which produces coal for electricity generators, is under secular pressure and also laboring under low commodity prices. Its metallurgical coal provides a critical input for steel production yet is also under some cyclical pricing pressure.

The company reported a third quarter loss from continuing operations of $(0.66)/share, much better than consensus estimates of a $(0.92)/share loss. Adjusted EBITDA of $95.4 million was about 56% higher than the consensus estimate. Impressively lower costs helped reduce its losses. The company reported negative cash flow from operations before any spending on mine maintenance.

On Monday, we moved Peabody (BTU) to Sell. Despite improving natural gas prices and rising steel production, Peabody will not be able to generate enough profit soon enough to avoid further erosion of its already-dwindling equity value. The company is struggling to stave off a debt restructuring, as it stated it will not be able to meet its minimum required leverage ratio under its revolving credit agreement. Peabody has already narrowly held off its surety bond providers regarding its mine reclamation claims.

With the earnings report and the price jump on the Covid vaccine news, we took the opportunity to exit our Peabody Energy position with a disappointing 87% loss.

Toshiba Corporation (TOSYY) – This Japanese conglomerate reported earnings on Thursday. We will review its results and provide our analysis next week.

Next week, two companies report earnings: Vodafone (VOD) and Oaktree Specialty Lending (OCSL).

Other ratings changes and commentary on recommended companies:
The FDA panel did not recommend that Biogen’s (BIIB) Alzheimer’s treatment should be approved, sending the shares to just below their pre-news levels of last week. We are evaluating Biogen for retention or sale.

On Monday, we moved Weyerhaueser (WY) to Sell. We discussed in our recent earnings note that the company is highly dependent upon the continued surge in lumber prices to support its profits, as nearly all other segments have shown minimal improvements over the past few years.

At the margin, rising interest rates (from the Covid vaccine news and other drivers) and any flattening of incremental demand for housing would tame the demand for lumber enough to incrementally diminish Weyerhaeuser’s lumber profit outlook.

The advanced age of this Buy recommendation, such that the stock now trades on commodity prices and not a turnaround, per se, influences our decision, as well.

Since our April 2012 recommendation, Weyerhaeuser has produced a 73% return, based on Monday mid-day prices today.

Also on Monday, we moved Barrick Gold (GOLD) to Sell, as we believe the company’s turnaround is well underway, widely-known and increasingly factored into the share price. At the margin, it also appears that the price of gold has less upside potential in the near-term and mid-term due to rising Treasury yields and the now-weaker chances of a sizeable Federal stimulus package, as it appears that a Covid vaccine may eventually be forthcoming based on the news from Pfizer.

Since our February 2019 recommendation, Barrick Gold has produced a 104% return, based on mid-morning Monday prices today.

Final note
Your chief analyst is traveling to San Diego this week. The JetBlue flight was about a third full, and the plane was as clean as I’ve ever seen a commercial jetliner. Their service was exceptional. The airports had a lot of people in them but clearly quieter than pre-pandemic levels. Restaurant activity here seems fairly quiet with most being required to close at 9 or 10pm. Here’s hoping for a safe, reliable and highly effective vaccine soon!