This note is a Monday edition, following the long Thanksgiving weekend last week. No companies reported earnings last week, and we review Adient’s (ADNT) earnings that were reported today.
RATINGS CHANGES (please see note sent earlier today for more color):
GameStop (GME) – Moving to Sell
Freeport-McMoran (FCX) – Moving to Sell
General Motors (GM) – Raising price target to 49
Adient (ADNT) – Raising price target to 35.
MONDAY, NOVEMBER 30, 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 12 minutes and covers:
- Brief updates on:
- Earnings from Adient (ADNT)
- Moving GameStop (GME) and Freeport-McMoran (FCX) to Sell. Please also see the separate note sent earlier today.
- Raising price targets on General Motors (GM) and Adient (ADNT)
- Volkswagen (VWAGY) – perhaps unloading Lamborghini, Ducati, Bugatti.
- Mosaic (MOS) – favorable ruling against unfairly subsidized fertilizer imports
- ViacomCBS (VIACA) – selling Simon & Schuster for $2.2 billion
- Credit Suisse (CS) – taking a $450 million charge for closure of York Capital
- Baker Hughes (BHI) and Valero (VLO) – shares recovering on higher oil prices.
- Elsewhere in the market:
- Shift in economy to higher-multiple businesses? Earnings headwind from tax increases? Rising signs of speculation?
Please feel free to share your ideas and suggestions for the podcast with an email to either me at firstname.lastname@example.org or to our friendly customer support team at email@example.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.
Earnings reports by Cabot Turnaround Letter recommended companies:
Adient (ADNT) – As one of the world’s largest automobile seat makers, Adient struggled due to weak leadership after its 2016 spin-off from Johnson Controls. We became interested in late 2018, after the shares fell sharply, due to the arrival of Doug Del Grosso as CEO. While we were a bit early on this name, Del Grosso’s highly-capable leadership has produced an impressive turnaround so far, despite the pandemic.
Adient’s fourth-quarter results were strong. Revenues of $3.6 billion fell only 8% compared to a year ago and were in line with consensus estimates. Adjusted per-share earnings of $1.15 were 83% higher than a year ago and were sharply higher than the $0.71/share consensus estimate. Adjusted net income rose 85% and adjusted EBITDA rose 33%, respectively, from a year ago.
The company’s underlying profitability is noticeably higher than a year ago, as profits were sharply higher on lower revenues. Adjusted EBITDA margins for the Americas and EMEA segments were at/over 6.0% compared to about 3.2% a year ago, while Asia adjusted EBITDA of 24.6% was 2 percentage points higher. Overall, the company’s fourth-quarter adjusted EBITDA margin of 8.0% rose from 5.5% a year ago. For the full year, the adjusted EBITDA margin of 5.3% was better than the 4.8% from fiscal 2019 and is moving in the right direction compared to our 6.3% targeted margin level.
Adient’s balance sheet carries $4.3 billion of total debt, or $2.6 billion net of cash. This compares favorably to $2.8 billion of debt net of cash a year ago. Despite the pandemic, Adient is reducing its debts. Fourth quarter free cash flow was $450 million, helped by better working capital management and strong earnings. Earning power looks to continue to improve as the company guided FY2021 adjusted EBITDA to $1.05 billion (midpoint).
ADNT shares have surged past our 28 price target and are now trading at close to 32. The company’s turnaround is making outstanding progress despite a difficult start right after our Buy recommendation. Given Adient’s strong position in the rapidly-recovering auto industry, its divestiture/clean-up of some of its Chinese joint ventures and its impressive leadership, we are raising our price target to 35.
Earnings reports for later this week, on Thursday:
- Duluth Holdings (DLTH)
- Signet Jewelers (SIG).
This month saw a flurry of new CEOs (16), with many in companies that are clearly struggling. Also, some notable mergers/deals were announced, along with several new activist campaigns. Activists have been relatively quiet this year, as extreme market volatility, plus perhaps some reluctance to attack companies dealing with a pandemic, have restrained these investors. However, that reluctance is fading and we anticipate more activist campaigns ahead.
We continue to see more energy industry bankruptcies and a few exits back into being publicly-traded companies. While some that emerge will probably fail again (sometimes called “Chapter 22s”), others may be worthwhile turnaround investments. We focus on those where the board and leadership have been replaced and most of the debt has been expunged.
The Catalyst Report is a proprietary monthly report that is unique on Wall Street. It is an extensive listing of companies that have experienced a recent strategic event, such as new leadership, a spin-off transaction, interest from an activist investor, emergence from bankruptcy, and others. An effective catalyst can jump-start a struggling company toward a more prosperous future.
This list is intended to be comprehensive. While not all catalysts are meaningful, some can bring a much-needed positive change to out-of-favor companies.
One highly-effective way to use this tool is to pair the names with weak stocks. Combining these two traits can generate a short list of high-potential turnaround investment candidates. The spreadsheet indicates these companies with an asterisk (*), some of which are highlighted below. Market caps reflect current market prices.
You can also access our entire Catalyst Report archive in sortable spreadsheet format here.
Monro (MNRO) $1.6 billion market cap – Monro owns and operates a major chain of auto service and tire stores, including the Monro, Mr. Tire, and Tire Warehouse brands. It has relatively steady profits and a low amount of debt. With the departure of the CEO (for Terminix), the company is vulnerable, and activist Ides Capital is pressuring them. The industry is being consolidated by private equity firms, so this company looks interesting.
Viatris (VTRS) $20.1 billion market cap– This new company was created by the merger/spin-off of Pfizer’s Upjohn unit and generic pharmaceutical maker Mylan. There are many moving parts, including cost-cutting, that make this company worth a closer look.
Xerox Holdings Corporation (XRX) $4.5 billion market cap – Our featured Buy recommendation for the December Cabot Turnaround Letter, Xerox is an out-of-favor company that should return to being a cash-rich operation after the pandemic fades. Activist Carl Icahn recently raised his stake to 14.5%
Ironwood Pharmaceuticals (IRWD) $1.9 billion market cap– This Boston-based company focuses on gastro-intestinal diseases. While a chronic under-achiever, Ironwood recently added activist Alex Denner to its board of directors. Denner specializes in biotech and brings an impressive record of producing value for investors, including the sale of Ariad and the spin/sale of Bioverativ, so there is a good chance that change is coming to Ironwood.
PG&E Corporation (PCG) $25.1 billion market cap– Fresh out of bankruptcy due to the crippling liability from wildfires, this California utility brought in a highly capable new CEO, Patricia Poppe. The challenges are immense, from streamlining a bloated business, permanently addressing its wildfire exposure and cleaning up a messy balance sheet to dealing with a wide range of legislative, environmental and other constituents all while providing reliable utility service to its customers. This is worth watching and perhaps an investment.