Earnings reports for Turnaround Letter recommended companies for this past week are summarized below (in alphabetical order). All companies mentioned retain our Buy rating and price targets unless otherwise specified.
Blue Apron (APRN) reported weak fourth quarter results: sales fell 33% from a year ago and Adjusted EBITDA fell 7% to a loss of $(8.3 million). While meal kits as a product class are here to stay, to succeed in the aggressively competitive market (against other stand-alone meal kit companies and well-funded grocery-based competitors, Amazon, and others) Blue Apron needs to significantly increase its marketing spending from its currently depressed levels. Unfortunately, its operations can’t produce the needed funds - it appears to have reached the limits of its ability to improve on its own, yet free cash flow remains negative. The company said it will be ramping up spending and posting a $22-26 million loss in the first quarter, so the clock is ticking as they can’t lose that much for any more than 2-3 quarters.
The leadership has approved plans to find additional resources through either a dilutive equity raise, a company sale or some other combination. We believe there are several potential buyers, especially given the company’s strong brand name, capable operating processes and innovative products. However, given its weak negotiating position, any deal would likely not be financially appealing to current shareholders.
While a sale could bring a higher price given the sharp sell-off over the past two days, to recommend APRN as a Buy would mean we think that a purchase, at a much higher price, is a high-probably outcome. We have no way of knowing, other than through pure speculation, when/what price/if a sale would occur. On Thursday, Feb 20, we moved our rating on APRN to SELL.
Brookdale Senior Living (BKD) - Brookdale shares surged 21% on Wednesday as the company’s results show continued progress with its restructuring, asset sales and expense control. Same-community revenues per available room (RevPAR) increased again this quarter, by 2.1% compared to a year ago. Pricing drove the growth, with revenue per occupied room (RevPOR) rising 2.5%. Occupancy declined 0.2 percentage points to 85.0%.
Same-community costs rose 3.7% - while this was faster than revenue growth it was a more subdued increase than in the third quarter as Brookdale improved its ability to rein-in higher labor costs. Efforts to boost employee retention has helped reduce turnover.
Adjusted EBITDA of $100.1 million was down 13% from a year ago but in-line with consensus.
Brookdale’s guidance for 2020 is for a 3-4% increase in same community RevPAR, Adjusted EBITDA to increase for the first time since the 2014 Emeritus acquisition, and an improvement in free cash flow to just below breakeven (not including the $100 million cash inflow from their Healthpeak deal). This guidance appears aggressive, but is helped by improving industry supply/demand conditions. Non-development capital spending will decline in 2020,
In the quarter, Brookdale sold their stake in a joint venture and met/completed its portfolio divestiture and reconfiguration goals as laid out in 2018.
Overall, the Brookdale outlook is slowly improving.
Conduent (CNDT) - With its new CEO Cliff Skelton (August 2019), backed by 18% owner Carl Icahn, positive change is coming to beleagured Conduent. The new leadership (including several key executives) recently completed a full-scale analysis of the company’s many problems and is beginning to implement meaningful and much-needed changes. However, although fourth quarter earnings and guidance were in-line with previous expectations, the actual results were weak, the near-term outlook is humbling (particularly lower guidance for free cash flow and for no divestitures), and the turnaround will take at least two years. CNDT shares fell sharply.
Revenues excluding divestitures fell 7% from a year ago, and Adjusted EBITDA of $130 million fell 13%. The 11.8% margin declined from 12.7% last year. Diluted earnings adjusted for charges was $.18/share, down 31% from a year ago.
Management guided for full-year 2020 revenues to decline by 6-8%, and Adjusted EBITDA to decline to $450 million, or by about 9%. Conduent’s balance sheet remains reasonably healthy, bolstered by its cash balance of $496 million. The first major debt maturity is in December 2022. The company expects to continue to generate free cash flow, buying them time to rebuild their core operations. Management indicated that the first quarter of 2020 looks strong but we discount these comments given recent performance.
Recall that Conduent is the consulting and transaction processing services business spun off from Xerox in 2017. Its key problems include weak pricing, client losses and low new-client signings, along with staffing departures and costs related to the Texas litigation settlement (although they made their final $118 million payment last month). The new leadership appears capable and carries what appears to be a full mandate to overhaul all aspects of the company.
CEO Skelton described how prior turnaround efforts focused on adding new hardware and software and consolidating various tech platforms. His approach is more tactical and field-level: fixing obvious “pain points” where clients are dis-satisfied, changing leadership in poorly-run business lines, tweaking offerings to improve their value, and expanding incrementally into new capabilities to add more value to clients.
As owners of CNDT shares ourselves, we are very disappointed in Conduent’s unraveling, reflected in the sharp and steady decline in its share price. However, CNDT now trades at about 4.2x EV/EBITDA, a valuation that factors in little or no recovery. While the near-term outlook isn’t pretty, and the company has an immense amount of work ahead of it to improve its results and convince investors that those improvements are sustainable, the turnaround potential for the stock is attractive.
Consolidated Communications (CNSL) - After jolting investors last year with its surprise dividend suspension, the company is making progress in stabilizing revenues and profits, paying down its debt, and upgrading its telecom infrastructure. CNSL shares rose 26% in trading on Thursday.
Fourth quarter revenues fell 4%, while Adjusted EBITDA fell 1%. Net income (not adjusted) was a loss of $(.08)/share, improved from a loss of $(0.20)/share a year ago. Operating expenses were trimmed by $25 million in the quarter, while $27 million in debt was retired. Free cash flow for the quarter was $43 million, up from $36 million a year ago before dividends. The company is redirecting its foregone dividends toward improving its balance sheet.
The company guided to flat Adjusted EBITDA and reduced capital spending in 2020, which should result in a roughly 20-25% increase in free cash flow. If this is achieved, Consolidated could pay down enough debt to refinance its remaining debt, then possibly resume paying a dividend in 2021 or 2022. Current debt net of cash is $2.3 billion, or about 4.3x Adjusted EBITDA, closing in on the company’s goal of 4x. Revenue growth would likely come from the upgraded fiber and related infrastructure - fueled by growth in commercial and carrier data transportation revenues. Consumer high-speed broadband revenues also appear to be a promising source of growth.
Despite several difficult years for CNSL shareholders, the current low valuation and improving fundamentals make the stock appealing here.
Jeld-Wen Holding (JELD) - Although revenues remained relatively stable, weak regional revenues in Australasia and operating disruptions in North America pulled down fourth quarter profits. Per-share earnings of $.24 fell 25% from a year ago and was 14% short of estimates and Adjusted EBITDA of $89 million fell 16% from a year ago and was about 10% shy of estimates.
Revenues declined a modest 2.1%, with weaker volumes and mix partly offset by stronger pricing.
In North America, while core revenues (ex-acquisitions) increased by 1%, helped by higher prices, profits fell by 12%. Two problems weighed on profits. First, the company is still working to offset higher shipping, material and other costs incurred to correct mistakes in managing their windows production and inventory that initially occurred earlier in the year. It appears that they will fully work through these issues sometime in 2020. Second, while the housing market is recovering nicely, Jeld-Wen lags the market by 6-9 months, resulting in a mild drag (rather than growth) in fourth quarter volumes.
In Australasia, revenues fell 19% and profits fell by 31%. The company attributed the declines to a more restrictive home lending environment by area banks. Also, it would seem that the wildfires, flooding and rough weather carried some blame for the weaker new construction market.
Jeld-Wen’s European business saw a 15% increase in profits even as revenues fell 4% (almost entirely due to weaker local currencies compared to the U.S. dollar).
The company appears to be making good progress with its working capital, manufacturing upgrading, footprint reduction and other operational improvements, with considerably more coming in 2020. Despite the profit decline, free cash flow increased by 65% in 2019 over 2018.
Management’s guidance for 2020 calls for a modest 1%-4% increase in revenues yet a 14% increase in Adjusted EBITDA. Better volumes and pricing in North America is expected to offset continued weakness in Australasia, with the productivity initiatives helping boost profitability. Free cash flow in 2020 was guided to be similar to 2019, as higher capital spending should offset higher operating cash flow.
Door competitor Steves & Sons launched another lawsuit even as Jeld-Wen appeals an earlier suit. We think Jeld-Wen will prevail, but the litigation risk continues to be an overhang.
While external issues and a (hopefully) temporary operational mis-step hurt profits, the actual and potential core profitability look to be much higher than they were a year ago. We remain optimistic about the turnaround.
Mosaic (MOS) - Weak phosphates and potash prices dragged Mosaic into a loss for the quarter, reporting a $(0.29)/share adjusted loss compared to a $0.77/share profit a year ago. Revenues fell 18% and Adjusted EBITDA fell 67%. Compared to a year ago, revenues fell $445 million, while Adjusted EBITDA fell $401 million, implying $41 million in improvement in operating efficiencies. Mosaic is somewhat generous in their adjustments to EBITDA, reducing the quality of the year over year comparison.
Weaker demand from China (working down in-country inventories), Australia (drought and fires) and North America (excess inventory following delayed planting season and other issues) helped push down commodity prices. Mosaic’s Brazil acquisition, Mosaic Fertilizantes, is performing well: it has realized cost-savings in excess of their $250 million target and the expenses from new tailings safety regulations have largely been offset.
Mosaic is making internal adjustments to its mining portfolio and operations to adapt to the weaker global commodity market. Management commented that pricing conditions have improved recently, although conditions remain difficult at best. The company will be providing more disclosures to help investors understand its economics. The stock at around $18.50 reflects a fairly dour outlook and will be driven by underlying commodity prices. We encourage shareholders to keep their shares in this very out-of-favor stock, which is levered to what we believe will be a recovery in the fertilizer market in the next few years.
Toshiba (TOSYY) - While third quarter revenues of $1.1 billion fell 14% from a year ago, operating profits increased from essentially break-even to $95 million, producing a 1.4% margin. The results were well-below consensus estimates for $240 million in operating profit, but the company held to their full-year guidance of about $1.3 billion. Most of its segments reflect better results as the restructuring program is taking effect.
Trinity Industries (TRN) - Revenues of $851 million were up 16% from a year ago, while adjusted earnings per share of $0.35 were 35% higher than a year ago. Both results were better than consensus estimates. In its first full year since spinning off its non-core operations to focus on the railcar business, Trinity continues to execute on its strategy of using its steady cash flows to expand its lease fleet, upgrade its operations and return capital to shareholders through dividends and repurchases. Trinity repurchased 13.7 million shares in all of 2019, reducing the share count by about 12.5%.
For 2020, the company anticipates stronger earnings per share, of $1.15 - $1.35 (compared to $1.26 in 2019). However, more than all of the increase is due to share repurchases and a favorable change in lease accounting. Excluding these effects, earnings would be about $1.03/share, down 18%. Weaker railcar industry conditions would be the primary driver of the outlook, although the company plans to partly offset this by down-sizing its railcar production operations, implementing further efficiency improvements across all of its operations, generating more service revenues and continuing to raise its lease fleet leverage toward its 60-65% loan-to-value target.
We are willing to look through this slowdown as the company should continue to generate healthy free cash flow and become a more valuable business. One metric indicating this improvement is Trinity’s target of generating a pre-tax return on equity of 11-13% over the next two years, up from 9% in 2019. Following what appears to be part of an orderly succession plan, Trinity is now led by a new CEO, Jean Savage. She is a former board member, a highly capable executive who previously led a major division at Caterpillar and who brings considerable railcar industry experience. The leadership transition should accelerate changes at Trinity and improve its execution.
ViacomCBS (VIAC) - Reported disappointing results for its first (partial) period as a combined company. Revenues (on a combined basis as if the merger was in place for the full year) fell 3% while Adjusted OIBDA (a measure of cash operating profits similar to EBITDA) fell 32%. Revenues reflected weak political advertising in the US and weaker conditions internationally, as well as a slower theatrical release schedule and modest declines in cable subscriptions. Expenses increased as the company invested in new programming and formats.
ViacomCBS’ targets and guidance for 2020 indicate improvement over 2019, with revenues increasing 4-5%, OIBDA increasing by about 8% and free cash flow increasing by at least 50% to $1.8 billion. Yet as these were below investors (and our) expectations, the shares fell sharply on the news. While the competitive issues and changes in user preferences (away from cable subscriptions) are real, to us this dour guidance appears to be a reset that includes all likely bad news, setting the company up to exceed this guidance.
The past year was tumultuous for both companies, as the leadership drama unfolded and no doubt created considerable disruption and distraction. With the merger now completed, we should start to see meaningful cost improvements and execution, and potentially revenue growth from an array of innovative new programming and other products, under the unified and proven leadership of Bob Bakish. One example: the annual savings target was raised to $750 million by 2022, which represents about 2.7% of revenues and 12% of likely OIBDA. While some amount of these savings will be invested, even if half fell to the bottom line it would provide a sizeable boost.
Despite a difficult day for VIAC investors (including us), the company’s future is much brighter than the market is giving it credit for.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.