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Turnaround Letter
Out-of-Favor Stocks with Real Value

November 20, 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 three companies reported earnings: Macy’s (M), Oaktree Specialty Lending (OCSL) and Vodafone (VOD). We also review Toshiba’s (TOSYY) earnings that were reported last week.

There were no changes in ratings or price targets this week.

Friday, November 20, 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 14 minutes and covers:

  • Brief updates on:

      • Four companies that reported earnings
      • Gannett (GCI) – refinanced $500 million of its expensive 11.5% debt
      • Trinity Industries (TRN) – encouraging investor day presentation
      • Wells Fargo (WFC) – Berkshire Hathaway sells half of its stake
      • General Motors (GM) – is getting back into the car insurance business after exiting it during the financial crisis a decade ago. Also, CEO Mary Barra spoke about GM’s growing commitment to electric vehicles

  • Elsewhere in the market:
    • Comments in The Economist™ on value investing

  • Final Note
    • San Diego, USS Midway and what we learned at the Mexico border wall

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:
Macy’s (M) – Already struggling with the secular shift away from mall-based stores, Macy’s was hit hard by the pandemic, which forced it to close its stores for much of the year and has continued to subdue store traffic.

While sharply weaker than a year ago, Macy’s third-quarter results were higher than expected. Revenues of $4.0 billion were 23% lower than a year ago, while the adjusted per-share loss of $(0.19) was markedly worse than the $0.07 profit last year. Revenues were about 3% higher than consensus estimates while the earnings were vastly better than the consensus, which projected an $(0.82) loss. Adjusted EBITDA of $159 million was surprisingly strong, particularly when compared to analysts’ estimates for a $(105) million loss.

Helping results was the 27% increase in digital sales, which now represent 38% of total sales, suggesting that consumers still find Macy’s assortment appealing. Also, credit card revenues rose by 7% compared to a year ago and provided an sizeable source of cash flow.

Macy’s is doing an exceptional job of navigating the pandemic. Gross margin at 35.6% was only modestly lower than the 40.0% margin a year ago, while operating costs fell 22%. Inventories look to be in great shape: last year the inventories were built by about $2 billion in the third quarter in anticipation of the holidays, but this year the inventory build was basically zero.

The company was cautious with its outlook, guiding to a mid-20% decline in same-store sales in the fourth quarter as well as to higher delivery costs to support its e-commerce sales. It appears that the consensus estimates for the fourth quarter are too pessimistic and will likely be increasing. A major risk is that rising COVID-19 case counts will keep people away from stores either voluntarily or by mandate.

Macy’s had survived years of secular grinding and now appears to be able to survive the pandemic. However, its profit potential has been permanently damaged while its balance sheet carries about $550 million in incremental debt, adding to its already elevated leverage. We are staying with our Buy rating, however, given the company’s ability to remain afloat despite intense investor skepticism, with its outlook improving from here.

Oaktree Specialty Lending (OCSL) – Highly regarded investment manager Oaktree Capital was voted in by shareholders to turn around this company in 2017. The company is now exceptionally well managed yet remains undervalued.

Third-quarter results were strong, as book value per share rose 7% to $6.49 and is now almost back to year-end 2019 levels. Per-share net investment income of $0.17 was well above the second quarter and year-ago earnings of $0.12.

Portfolio asset quality remains solid, particularly as non-accruals fell by half to 0.1%. The debt level remains modest while liquidity is strong. Its non-core portfolio is down to 9% of the total portfolio compared to 63% at the 2017 takeover. The company continues to reinvest its cash flow at a high average yield (10.6% this quarter). Its funding cost of 2.7% is sharply lower than the 4.85% at year-end. Oaktree raised the quarterly dividend by 5% to $0.11/share, following a raise in the second quarter. The merger with OCSI remains on track for a 1Q2021 closing.

Toshiba (TOSYY) – This Japanese industrial conglomerate is recovering from its nuclear power plant construction business (Westinghouse Electric) debacle, which forced it to sell a majority stake in its memory chip production operations.

First-half 2020 sales fell 20%, but core operating profits rose 37% from a year ago excluding sizeable COVID costs that would have nearly eliminated the profits. Free cash flow returned to positive territory from an outflow a year ago, although only at a modest ¥7 billion yen (about $67 million) rate. New equipment orders increased by 6% from a year ago. Toshiba raised its full-year dividend to ¥40 (¥10 at mid-year and ¥30 at year-end), double the year-ago rate.

Overall, the turnaround continues to make progress.

Vodafone (VOD) – Vodafone is a major European telecom, broadband and cable TV service provider based in England. It is two years into its five-year turnaround program. The turnaround is driven by boosting its return on capital through strengthening its telecom “connectivity” platform, improving its operating efficiency and spending its capital more efficiently. This should lead to rising revenues, wider margins and better cash flow, and thus a higher share price. The turnaround is led by relatively new CEO Nick Read (hired October 2018), who previously was the CFO.

In addition to incremental improvements, two major steps in its turnaround include its 2019 acquisition of Liberty Global’s assets in Germany and Eastern Europe, and its pending divestiture of its European cell tower business (in 2021). The company has a few obscure assets: it is the leading provider of mobile data and payments services in Africa and has a vast network of high-capacity data pipelines that may increase in value as 5G rolls out. From a cyclical perspective, Vodafone should benefit from rising business activity once the pandemic subsides.

First-half results were encouraging, as the company produced more resilient revenues and higher profits than widely anticipated. Group Service revenues fell a modest 1%, which excludes volatile equipment sales (generally about 15% of revenues). This steadiness was despite modest erosion from lower roaming fees as business travel remains subdued.

Adjusted EBITDA of €7.0 billion slipped 2% compared to a year ago, somewhat impressive given the weakness in high-margin roaming fees. Better operational discipline helped preserve profits. Free cash flow, before spending on wireless spectrum and restructuring costs, rose 15%, which also was encouraging. Net debt remains reasonable at about 3x adjusted EBITDA although it ticked up in the quarter as the company, all in, consumed cash, partly because of its high dividend payout. Vodafone kept their dividend steady at €0.045/share for the half-year.

The company reiterated their guidance for full-year adjusted EBITDA of about €14.5 billion and free cash flow of about €5 billion, which is stronger than most investors anticipated.

Note: VOD trades as an ADR, with 1 ADR = 10 ordinary shares. The current exchange rate is £1.00 = $1.33. So, the annual €0.09/year dividend converts into $1.20, or 7.3% on the current $16.34 VOD price.

No earnings reports next week. The following week: Adient (ADNT), Duluth Holdings (DLTH) and Signet Jewelers (SIG).