It was a full week of earnings for The Turnaround Letter recommended names. Below we summarize all 17 of the reports from the week. Some companies with more notable reports were discussed in separate notes. All companies mentioned retain our Buy rating and price targets.
McDermott (MDR) – Reported disappointing earnings and outlook, driven by higher costs on the contracts inherited from their Chicago Bridge & Iron (CB&I) acquisition that was completed in May, 2018. While these ongoing issues delay the turnaround, they don’t derail it. With the stock selling at long-time lows, we think the shares are very attractive, although the risks are a bit elevated.
Xerox (XRX) – This company is a cash flow story. Xerox reported strong earnings, margin expansion and cash flow. Adjusted earnings grew 19% from a year ago and beat consensus by 11%. However, revenues fell by 9% due to weakness in emerging markets and in some developed markets and some effects of their reorganization in North America. They maintained full-year earnings, margin and cash flow guidance but cut revenue guidance for the year to -6%, a bit worse than they previously thought. We continue to like the stock, and believe that the leadership under Carl Icahn will create more value for investors.
British Petroleum (BP) – Profits were flat vs last year but better than consensus estimates which anticipated an earnings decline. Overall production rose 4% helping to offset a 7% decline in energy prices. The company is in the middle of its 5-year improvement plan, which likely includes $4-5 billion of divestitures this year.
Molson Coors (TAP) – Revenues and profits were weak. Adjusted earnings fell 19% and were 8% below consensus. The company continues to see weak beer volumes in most geographies. They are replacing their CEO with the current head of U.S. operations, so we expect a more aggressive approach to boosting their marketing and cutting other operating costs. As promised, company raised their dividend substantially: the +39% increases to $.57/share provides for a 4.3% yield. Molson Coors is very early in their turnaround.
General Motors – (GM) – Revenues fell 2%. Adjusted earnings fell 9% but still beat estimates which anticipated a 20% decline. Revenues and margins were particularly strong in North America, driven by healthy demand for higher-priced pickup trucks and SUVs. GM is on track to meet their 2019 guidance and for meeting their transformational cost savings goals.
Gilead Sciences (GILD) – Revenues were flat but a tad ahead of consensus estimates. Per-share profits were down 5%, but also a tad ahead of consensus, as slightly higher adjusted operating margins combined with a much higher tax rate. Overall, the quarter provided limited but mildly positive incremental color on Gilead’s future.
Credit Suisse (CS) – Their multi-year restructuring is largely completed, leaving the company in a better position to produce better results with lower volatility, as it is more reliant on wealth management than volatile trading. Revenues were flat (a positive) while profits grew 45%. Expenses fell 5% as costs related to the turnaround are falling off. Credit Suisse still trades near its lows.
General Electric (GE) – GE reported improved revenues and profits that both beat consensus, indicating that it is making progress with its total overhaul. Also, the company raised its full-year guidance for industrial earnings and cash flow. However, the grounding of the Boeing 737 MAX drained $600 million in cash flow and will drain another $800 million over the rest of the year. We view the departure of the CFO as a positive, as it allows the new CEO to hand-select the right person for this critical role.
Janus Henderson Group (JHG) – The company’s shares fell sharply on disappointing earnings and accelerating outflows of assets. Revenues were down 9% from a year ago and adjusted profits fell 18%. Assets under management fell 3% as market strength helped offset outflows. Janus Henderson is struggling with uninspiring investment performance and the secular shift to ETFs. Concerns over a no-deal Brexit weigh on the stock due to their large British operations. The company repurchased $75 million in shares in the quarter, indicating some confidence in their own future. The balance sheet holds $707 million in cash, partly offset by $318 million in debt. JHG’s dividend yield is now 7.5% and the dividend coverage is 1.7x. Shares trade at a low 4.6x EBITDA. We remain patient given the sharp discount to what we believe is the stock’s warranted value.
Nokia (NOK) – Revenues were 7% higher than a year ago, which was well-ahead of expectations, led by strength across most of its operations. Adjusted profits were 86% ahead of a year ago and 62% higher than consensus expectations. Profit margins expanded by over 9 percentage points, helped by its aggressive cost-cutting program. The company reiterated its full-year 2019 and 2020 guidance. With its internal initiatives making progress and demand for 5G networking gear starting to ramp, Nokia’s turnaround is underway.
Royal Dutch Shell (RDS/B) – Adjusted profits fell 25% from a year ago and missed consensus estimates. Results were weak across nearly all of its segments, but company is on-track for meeting its 2020 targets. Repurchased $2.75 billion in shares, with another $2.75 billion by October. The shares offer an attractive 6.6% yield while the rest of the turnaround unfolds.
Consolidated Communications (CNSL) – The company reported an adjusted loss of $0.03/share, but this was well-ahead of estimates for a loss of $0.07. EBITDA was also slightly ahead of estimates. Revenues fell 4.4% adjusted for the sale of its Virginia properties. Recall that the company eliminated its dividend and is directing its surplus cash to repay debt. Consolidated shares have seen some much-needed strength after the report.
Lafarge Holcim (HCMLY) – Reported like-for-like (organic, excluding acquisitions/ divestitures and currency changes) revenue growth of 1.2% and Recurring EBITDA growth of 7.1%. This was a modest deceleration from first quarter revenue growth of 3.5% and Recurring EBITDA growth of 10.8%. Under new CEO Jan Jenisch, the company remains confident in the global cement and construction industry despite the trade war and European economic weakness, and reiterated their confidence in their full-year 2019 targets, saying that they are more confident than they were at the beginning of the year. The turnaround continues to make decent progress. First half 2019 free cash flow of CHF262 million compared to an outflow of (CHF473 million) a year ago. Net debt has been reduced by 30% from a year ago.
Volkswagen (VWAGY) – Sales were about 7% higher and profits were 30% higher than a year ago, with both results also better than analysts’ consensus estimates. Sales of its SUVs, high-end sports cars and trucks helped offset weakness in its Audi segment. The primary effect of the diesel crisis is that Volkswagen appears to have been shaken out of its complacency, with product development and cost-efficiencies seeing considerable improvements. The company reiterated its guidance for as much as a 5% full-year revenue increase.
Weyerhaeuser (WY) – Revenues were 18% below a year ago but slightly below consensus estimates. Adjusted EBITDA was 46% below a year ago, yet about 9% ahead of the consensus. Weak timber, lumber, and engineered wood prices continue to hold back profits, and the weak housing industry continues to weigh on investor sentiment.
Vodafone (VOD) – Results were generally unchanged from a year ago. Vodafone reiterated their full-year guidance. The bigger news is that the company announced plans to split off their wireless tower operations, which should unlock considerable value.
Newel Brands (NWL) – Newell reported that core revenues fell 1.1%. Normalized profits of $0.45 were down 42% from a year ago but were 25% higher than consensus estimates. The company also raised their guidance for the third quarter. They will be keeping the Rubbermaid Commercial Products business. Newell appointed a permanent CEO Ravi Saligram (OfficeMax), and will be moving its headquarters to Atlanta.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks.