This past week, two Turnaround Letter recommended companies reported earnings. All companies mentioned presently retain our Buy rating and price targets.
Oaktree Capital Specialty Lending (OCSL) - Fourth quarter net investment income of $.12/share was in-line with consensus estimates and unchanged from a year ago. A small loss in the net realized and unrealized gains reduced overall net income to $.10/share. The company paid a 9.5-cent per share dividend in the quarter, unchanged from a year ago. Net book value per share was unchanged at $6.60 compared to the previous quarter but increased 8.4% from a year ago. It was the first quarter since the 2017 takeover that net book value per share hasn’t increased.
The company continues to take a conservative stance, reducing its leverage, reducing its interest costs, reducing its holdings of unsecured debt investments and trimming its non-core and non-accruing portfolios. Much of these reductions are driven by a lack of worthy investments in the currently saturated lending market - indicating discipline by Oaktree but also a cautionary note. We don’t foresee any meaningful changes in direction under new CEO Armen Panossian, a long-time Oaktree Capital veteran, who moved over to OCSL in September.
Overall, the company’s performance remains on-track. The shares sell at an unwarranted 21% discount to NAV and currently provide an attractive 7.3% yield.
Macy’s (M) - (a more detailed note was posted earlier in the week) - Results were weak compared to a year ago, although earnings were higher than consensus expectations. Most of the sharply lower earnings were driven by weaker revenues as comp store sales fell 3.5%. Weather, tourism and discounting to clear out excess inventory were factors, but with management’s comments about how Bloomingdale’s, BlueMercury and the top 150 Macy’s stores had decent performance, it appears that the other 486 Macy’s stores, particularly those in lower-tier malls, are struggling quite a bit.
Credit card revenues of $183 million (at very high profit margins) were steady. We expect this important source of profits to remain robust but are attentive to the risks.
Macy’s appears well-positioned for the holidays: Inventory apparently is in great shape, and their store upgrades, website/mobile improvements, and other initiatives appear ready to capture holiday revenues and profits. The company makes nearly all of its annual profits in the fourth quarter, so the pressure is on for solid performance. How well they do will anchor investor expectations for the pace and success of their on-going transition.
The company’s challenge remains clear: balance the declining relevance and economics of their presence in lower-tier malls with the murkiness of transitioning to a more relevant merchandising and distribution mix, while maintaining sufficient profitability. Consumers are still buying a remarkable amount of “stuff” every year (as Target’s and Walmart’s recent results clearly illustrate), but what is sold, where it is sold and what profit margin it is sold at have become much more critical to get right. Macy’s is spending aggressively to get it right.
The company’s balance sheet and cash flow are healthy-enough. Macy’s continues to chip away at its debt, with more paydowns coming from 4Q holiday profits.
With the stock trading at 4.3x EBITDA, and offering what appears to be a sustainable 10.3% dividend yield, Macy’s offers real appeal. While our $48 price target is aggressive, we will retain it pending 4Q results.
Other updates:
Gannett (GCI) -(a more detailed note was posted earlier in the week) The company completed its merger with New Media Investment Group on Wednesday. The combined company retains the Gannett name and trades under the GCI ticker symbol but at a lower price to reflect the merger.
We are retaining our Buy rating on the new Gannett shares, with a price target of $9. The combined company should generate considerable cost-savings to boost profits and help provide the cash flow needed to reduce its now-sizeable debt. Our price target assumes that the company generates less than half of the synergies expected by management, and that it trades at a modest 4.5x EV/EBITDA multiple in 2021. If the company meets its own profit targets, the shares could be worth considerably more than $9.
Management appears committed to the new $0.76/share dividend, which appears reasonably sustainable based on our current projections. This produces an appealing 11% yield. We like new Gannett shares.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.