This past week: October 28th - November 1st, 15 Turnaround Letter recommended companies reported earnings.
Earnings summaries (in alphabetical order). All companies mentioned presently retain our Buy rating and price targets:
Blue Apron (APRN) - Revenues, net loss and EBITDA were slightly below estimates, but all showed meaningful improvement from a year ago. Relative to the second quarter, results look weak but Blue Apron’s strong seasonality makes the comparison less meaningful. Revenues fell 34% year-over-year, as the company has slashed its marketing expenses to winnow out low-value customers and to help reduce its cash burn. In the quarter, Blue Apron made progress on both. Its customers were higher-value: orders per customer increased 10% and average order value increased just over 1%. Cash outflow of about $9 million was less than half the outflow of a year ago. Importantly, Blue Apron is keeping its core customers despite slashing marketing costs almost in half from a year ago. Blue Apron’s gross margin appears nearly maxxed-out, albeit at a much-higher level than in prior years, so with its operating costs other than marketing costs relatively stable, further revenue growth is needed to expand profit dollars.
Revenue growth is the next step in Blue Apron’s strategy, to be driven by more and better-focused marketing spending and more-relevant products. The company said it was confident that year-over-year revenue growth would start in mid-2020. Under new CEO Linda Kozlowski, Blue Apron is trying many new and creative initiatives that show decent revenue-producing promise.
Helpfully, the company refinanced its debt, which extended the maturity date by six months, to August 2021, but on modestly more expensive terms. The company’s turnaround is making slow but steady progress under its much-improved leadership team.
BorgWarner (BWA) - Compared to consensus estimates, BorgWarner reported strong revenues (4% better) and adjusted per share earnings (13% better). Compared to a year ago results, revenues and earnings were basically flat as the company was able to navigate the increasingly-difficult automotive market much better than analysts had expected. One good indicator of this: BorgWarner’s revenues excluding the effects of mergers and currency changes (organic revenues) rose 4.5% while the company’s market declined 0.4%. The company modestly raised its full-year earnings, operating margin and free cash flow guidance despite reducing their outlook for the automotive market to - 4.0% to - 4.5% for the year. Eliminating a long-running overhang, BorgWarner has sold its Morse TEC unit which holds its asbestos liabilities, removing $772 million of liabilities from its already-sturdy balance sheet. Overall, the company continues to execute, make valuable inroads into the electric vehicle market, and produce large amounts of free cash flow after paying its dividends.
BP (BP) - Earnings of $2.25 billion were 41% below year-ago results, but higher than consensus estimates, even though the consensus has declined in recent weeks. Operating earnings of $4.5 billion fell 33% from a year ago, driven by a 46% decline in upstream profits, along with moderate weakness in downstream profits and Rosneft. Part of the upstream drop in profits was weaker production (-2.5%) due to hurricanes and maintenance. Cash flow remains strong and its buyback program appears on-track, supported by its on-track divestiture program. As the balance sheet remains a touch above BP’s leverage targets, the anticipated dividend increase may be pushed back a few quarters.
Consolidated Communications (CNSL) - Surprisingly strong adjusted earnings of $0.06/share, compared to an expected loss of $(0.04)/share and a loss of $(0.09)/share a year ago, sent CNSL shares surging 17% on Thursday, narrowing the sharp year-to-date share decline driven by their debt repayment plan that included eliminating their dividend. Overall the business is showing revenue and earnings stability at reasonable levels and is making progress toward their debt reduction goals. Their capital spending to upgrade their fiber network is bringing in more customers and raising average revenues per user (ARPU), and the expansion of their sales force is also producing more customers. Consolidated reiterated their full-year EBITDA guidance and pointed to a reduction in capital spending next year. Based on its current progress, the company alluded to a resumption of the dividend in mid-2021, about 18 months away.
Credit Suisse (CS) - The bank reported modestly improved results excluding the CHF327 million gain on the sale of its InvestLab investment services platform. Revenues grew 2% while pre-tax income grew 21%. The transition to a more stable wealth management business continues, as wealth-management-related revenues comprise 64% of total revenues. As it progresses, Credit Suisse is fighting numerous headwinds, including the spy scandal, negative interest rates and intense competition, along with Brexit and the U.S.-China trade issues. Its capital level is healthy, with its common equity ratio (common equity tier 1, or CET1) at 12.4%, although down modestly from 12.5% last quarter due to share repurchases and dividends. Credit Suisse shares trade at 77% of tangible book value [The CS stock is an ADR, with a 1:1 ratio to underlying common, and the CHF trades at about parity with the US$].
General Electric (GE) - GE’s adjusted net income of $0.15/share was about 25% higher than consensus estimates, and 36% higher than a year ago. GE shares rose 11% on the day. As GE’s chief executive Lawrence Culp’s words properly describe the results, “another quarter of progress in the transformation of GE.” The company has a long way to go but is clearly making improvements. The company raised its full-year Industrial segment free cash flow outlook by $1 billion, to a new guide of "$0 - $2 billion”. Industrial segment profits, net of divestitures and other transactions, increased 19% from a year ago. GE’s reasonable $1 billion charge related to their annual test to determine future long-term care losses alleviates considerable concern that it could have been much larger. GE still needs to slash GE Capital’s unwieldy $121 billion balance sheet, improve the money-losing Power business and keep producing profits in its Aviation unit. The $20 billion anticipated proceeds from the BioPharma sale, and other initiatives, will clearly help. It appears that the company is in capable hands. We remain optimistic about GE’s future.
General Motors (GM) - Adjusted earnings of $1.72/share fell 8% compared to a year ago but were about 26% above consensus estimates. But for the $1.3 billion cost of the strike, GM’s profits would have been a record. The company is clearly executing well under its highly capable leadership. Revenues were about 1% lower than a year ago.
In North America, GM’s core market, the company is driving in the right direction. Its new pickup trucks are gaining market share and its new crossover vehicles are selling well. Overall North American unit sales increased 3.5% from a year ago - impressive given the industry’s weakness. Its market share in the region increased by 0.6 percentage points from a year ago. Including the $1.3 billion third quarter costs of the strike, GM generated $3 billion in operating profits in North America, +7% compared to a year ago. The 10.8% margin was impressive.
GM International, with unit sales down 14.5% from a year ago, is struggling with problems in China where it lost market share in a sharp downturn in the new vehicle market.
Automotive free cash flow increased significantly compared to a year ago. GM Financial profits of $672 million were nearly 50% higher than a year ago. GM Financial is producing about 20% of overall GM’s operating profits, a much lower reliance than at Ford whose finance unit produces more than 100% of overall Ford’s operating profits. Also, GM Financial has reduced its borrowings over the past year, while its book value has increased, a smart move in our view given the extended credit cycle.
GM’s electric vehicle and other advanced tech initiatives are making decent progress.
GM will provide 2020 guidance after their 4th quarter results, although they implied that next year has considerable industry headwinds. One GM-specific factor is that the strike is pinching their ability to produce enough of its high-margin trucks. Perhaps offsetting these in 2020 is their relentless cost-cutting, new product introductions and other initiatives. GM overall continues to show that a well-run auto company can produce impressive results. This remains under-appreciated by investors.
Janus Henderson (JHG) - Earnings of $0.64/share were up 5% compared to the consensus estimate but down 7% compared to a year-ago. Revenues were flat compared to a year ago. Assets under management, the key driver to revenues, was about 6% below a year ago, at $356 billion. Janus continues to see net redemptions of assets, but the third quarter outflow was the smallest in a year at $3.5 billion. Partly contributing to lower outflows is better investment performance in core products, although INTECH and its alternatives remain weak. Operating profit margins fell to 37.0%, compared to 38.5% a year ago. Despite this weakness, well-known industry-wide headwinds for active managers and the upcoming Brexit, Janus continues to reduce its share count, keep its debt level low, and hold considerably more cash ($1.4 billion) than debt ($0.3 billion). The $0.36/share quarterly dividend remain well-covered. With the company back in the hands of capable CEO Dick Weil, JHG shares remain a bargain.
Kraft Heinz Company (KHC) - Stronger-than-expected profits boosted KHC shares 13% on Thursday. While revenues were slightly below consensus, adjusted earnings of $0.69/share were 28% higher than the consensus estimate, while adjusted EBITDA was 6% higher than consensus. The company is producing smaller losses and declines compared to the first half of the year, partly due to better pricing and cost-cutting, partly due to favorable input cost inflation over which it likely has little control. Debt of $30.7 billion was about $500 million lower than at year-end. However, revenues continued to decline (-1.1% after adjustments for divestitures and currency) as volumes and mix remain in negative territory. Adjusted net income fell 9% from a year ago, and adjusted EBITDA fell 8%, so despite the “beat” relative to consensus Kraft Heinz clearly has major work ahead of it. On the conference call, the company deflected discussions about its dividend, pending their strategic review and plan which will be released early next year. Under new CEO Miguel Patricio, the turnaround has barely started, and Patricio is mostly finding root causes of problems (there are many) rather than executing on a specific plan, but the start is nevertheless encouraging.
Mattel (MAT) - Mattel reported surprisingly strong revenue growth (+3%) which was also 3% ahead of consensus estimates. Earnings of $0.26/share was 44% higher than a year ago and 37% ahead of consensus. Adjusted EBITDA of $248 million grew 7% year over year and was 10% ahead of estimates. Sales growth was impressive in most categories. Key brands Barbie and Hot Wheels showed healthy constant-currency growth (12% and 27%, respectively), although the Fisher Price/Thomas & Friends revenues fell 3%. Margins expanded, partly as their cost-cutting program has produced $826 million in savings, well-ahead of their $650 million target, with more to come. Better working capital management is releasing otherwise tied-up cash. Mattel raised their full-year 2019 EBITDA guidance range by $25 million - 50 million, to $400 million - $425 million. The company estimates that it will produce positive cash flow from operations for the first time in three years. Mattel also announced that it has resolved a prior accounting issue along with the departure of its CFO. Under new CEO Ynon Kreiz, Mattel’s turnaround is finally gaining traction. Mattel shares closed +14% on the release date.
Molson Coors (TAP) - Adjusted earnings of $1.48/share, slightly below consensus estimates and down 20% from a year ago. Underlying EBITDA of $703 million was slightly ahead of estimates and fell by 7% from a year ago. Revenues fell 3.2%. On a constant-currency basis, “Brand” volumes fell 2.4%, while “Financial” volumes (which include contract brewing, royalties and wholesaler inventory adjustments) fell 5.5%. Pricing for Brand volumes increased by 3.0%.
As we had hoped, and as an important part of Molson Coors’ turnaround, the company is more directly addressing its strategic issues. Newly-appointed CEO Gavin Hattersley is moving quickly: scaling up investments in their core brands, expanding their scope to “beverages” not just beers (and is tweaking the company’s name to reflect this), bringing Molson Coors’ operations into the digital age, and sensibly consolidating its Canadian and US management teams into a single North American operation. We anticipate that the company may make more “bolt-on” acquisitions. Molson Coors maintained their 2019 guidance but provided guidance for a weaker 2020, with EBITDA down about 5% and Underlying Free Cash Flow down 21% (disappointing to see such a large decline, although most of the decline is from an ending of improvements in working capital). It increased its cost savings goal for the next three years by $150 million, to a new goal of $600 million. We think the changes make eminent sense. Importantly, Molson Coors is maintaining their debt paydown and dividend priorities. The turnaround is getting more interesting at Molson Coors.
Newell Brands (NWL) - Better-than-expected revenues (+3% ahead of consensus estimates) and earnings (+33% ahead of consensus), combined with a guidance raise, drove an 8% gain in NWL shares in mid-day Friday trading. Core sales fell 2.5% from a year ago while normalized profit margins fell to 12.7% from 13.2% as incremental marketing spending and the lower sales volume weighed on profits a tad. Operating cash flows were $233 million, up sharply from $171 million a year ago as the company reduces its working capital.
In August, Newell announced that it would retain its Rubbermaid Commercial products unit, and in this release it announced that it would also retain its Mapa/Spontex and Quickie businesses, so its divestiture program, as planned, is over.
Overall, the company is starting to make some progress with its turnaround, although it has considerable work ahead. New CEO (October 2) Ravi Saligram has an impressive background and will likely begin making additional aggressive improvements.
Royal Dutch/Shell (RDS.B) - The company reported adjusted earnings of $4.8 billion, down 15% from a year ago. Lower upstream profits, due to lower oil, natural gas and natural gas liquids prices, partly offset by 2% higher production excluding divestitures, weighed on results. Downstream profits, which include oil refining and marketing as well as chemicals operations, increased 51%. The Integrated Gas unit, which includes the LNG business, increased its profits by 23%.
While the results were better than consensus estimates, the company rattled the market with its comments that it might delay its plan to repurchase $25 billion in shares by the end of 2020. Shell has plenty of cash to cover its dividends - its comments appear focused entirely on the repurchase program. Nevertheless, they launched the next $2.75 billion repurchase round, with $13 billion remaining over the next five quarters to reach their target date, so the management may just be giving themselves some flexibility in case conditions weak substantially.
Volkswagen (VWAGY) - Results were somewhat impressive, as revenues grew 11.3% from a year ago in a difficult automotive market. Favorable currency provided some support as deliveries only grew 1.1%, although mix was very favorable. Operating profits of €4.8 billion were 37% higher than a year ago, producing an operating margin of 7.8%. Net cash flow of €3 billion was similarly impressive, especially compared to €144 million a year ago. Lower inventories and receivables combined with higher payables to boost cash flow by about €2 billion. Dampening their outlook, VW did not raise guidance for the year, rather it suggested that results would be toward the lower end of its guidance range. The company pointed to the difficult industry conditions which also includes higher regulatory costs and higher capital spending. Overall, VW appears to have not only recovered from the emissions scandal but actually improved because of it. However, they will need to show continued progress in their turnaround to reach our price target.
Xerox (XRX) - Xerox reported strong 3Q19 results. While revenues were down 7% from a year, they were in-line with consensus estimates. Most importantly for the Xerox story, earnings of $1.08/share increased 27% and were 24% higher than consensus estimates. The company raised its full-year 2019 adjusted EPS guidance by about 5% and free cash flow guidance range by between 5% and 10%. One modest disappointment: Adjusted EBITDA of $371 million was down about 2% from a year ago. The Xerox thesis is based largely on the company continuing to generate strong free cash flows, bolstered by its cost-cutting initiatives. Xerox is delivering on its strategy, motivated in part by the 10.6% stake held by activist Carl Icahn.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.