All companies mentioned retain our Buy rating and price targets.
Adient (ADNT) - Adient’s shares surged 32% in mid-day trading today. Along with a strong earnings report, the company announced that it will be selling its 30% stake in Chinese joint venture Yanfeng Global Automotive Seating back to Yanfeng for $379 million, along with local intellectual property for another $20 million. Adient and Yanfeng have extended the joint venture to December 2038, so it will remain a valuable source of business for Adient. This is a huge positive, as it not only releases cash to help reduce Adient’s debt, but it also reduces Adient’s exposure to volatile Chinese car demand and helps clarify its overly complex financial statements.
While fourth quarter revenues of $3.9 billion were slightly weak, adjusted per share earnings of $.96 were nearly triple the $.34 estimate, while Adjusted EBITDA of $297 million was 45% higher than consensus estimates. Profits grew in all three regions, driven by more efficient operations, even while volumes fell. Free cash flow of $148 million was a reversal of the $272 million outflow a year ago. Adient’s gross debt balance was unchanged from a year ago, and remains elevated at 4.2x expected Adjusted EBITDA. We anticipate significant reductions over the rest of 2020.
Adient updated its fiscal 2020 guidance, raising their Adjusted EBITDA guidance by 6% and reduced their capital spending guidance by 5%. The company’s turnaround is making impressive progress.
Biogen (BIIB) - Fourth quarter revenues of $3.7 billion grow 4% from a year ago, better than consensus estimates for no growth. Adjusted EPS of $8.34 grew 19% year over year, and was 3% ahead of estimates. Sales of multiple sclerosis treatment Tecfidera rose 5%, which was more robust than dour analysts that see the drug as having fading prospects.
Biogen continues to produce generous free cash, which it is using to repurchase its shares. In the quarter, the company repurchased $2.1 billion worth of shares, funded almost entirely by the quarter’s free cash flow. Compared to a year ago, Biogen’s share count has declined 11%. The board recently authorized another $5 billion in repurchases. Biogen holds $4.5 billion in cash, matching its $4.5 billion in debt.
While Biogen continues to defend its current treatment franchises and build new ones, it is plowing ahead to get approval for aducanumab, the highly promising but widely-doubted treatment for Alzheimer’s Disease. This treatment remains a wildcard: if the skeptics are proven correct, the disappointment would likely send Biogen shares tumbling back to the low $200 range (down 20%). Yet, if the treatment is approved by the FDA, it would be an absolute blockbuster monopoly for Biogen.
Guidance for full-year 2020 is for Biogen to show modest revenue and adjusted per-share declines from 2019.
Freeport-McMoran (FCX) - reported 4Q revenues and earnings that were modestly ahead of consensus estimates. However, the shares have declined about 15% over the past week, due to a few items. First, Freeport lowered its 2020 production guidance for gold by about 6%, although it maintained its copper production guidance. Also, it raised its overall cost guidance and significantly raised capital spending guidance for its mines and a new smelter. Another driver is the 10% decline in copper prices, partly due to the spread of the coronavirus that could reduce global growth and thus demand for copper. Recall that Freeport shares rose 27% last year on higher copper prices, partly related to the Phase 1 trade deal, and some optimism on Freeport’s longer-term prospects.
A major driver of Freeport’s cash flows and its share price is the transition of its giant Grasberg mine in Indonesia from open pit mining to a new underground mine, and a transfer of half of that mine’s ownership to Indonesia in 2023. The development of the underground mine will be expensive and complicated. The sooner it completes the mine, the sooner the company can generate and keep most of the annual cash flows. Positive and negative news about this mine, progress on its other major initiatives (Lone Star mine, various innovation/efficiency projects), Freeport’s overall cost structure, and the market price of copper and gold, will generate interim volatility in Freeport’s shares.
General Electric (GE) - Stronger than expected revenues and profits led to a 10% gain in GE shares on Wednesday. Revenues fell 1%, but organic Industrial segment revenues (which exclude currency and acquisitions/divestitures) increased 4.6%. Adjusted earnings per share of $.21 were 50% higher than a year ago and 17% ahead of expectations.
The Industrial segment continues to improve. Fourth quarter adjusted profit margins of 11.3% were much higher than the year-ago 7.2%, driven by major cost reductions and the increase in revenues. Operating profits were a healthy $2.8 billion, 58% better than a year ago. Results for the Aviation and Power segments led the gains, although the Power segment remains weak. Industrial free cash flow of $3.9 billion was well-ahead of estimates but fell 16% from a year ago, however, as the 737 MAX reduced cash inflows and other flows were weaker.
GE Capital turned a profit (although a very small $6 million). Its balance sheet and debt balance continue to shrink while cash holdings are increasing, such that cash nearly offsets GE Capital’s borrowings.
GE provided encouraging cash flow guidance for 2020, although the earnings guidance of $.50-.60/share was below the current consensus of $.67/share. Both GE’s earnings and cash flow have many moving parts with potentially sizeable impact. However, the overall direction has been positive for a year. GE is in much better shape than it was a year ago, and the turnaround remains on-track.
Royal Dutch/Shell (RDS.B) - Per-share earnings fell 46% from a year ago, and were 9% below consensus estimates. All segments were weaker compared to a year ago, as Downstream (-75%), Integrated Gas (-40%) and Upstream (-39%) reflected lower oil and natural gas prices and weaker refining and petrochemical margins. Cash flow from operations, excluding working capital, showed impressive resilience, down only 5%. Overall execution appears fine, with most of the slowdown due to market factors outside the company’s control.
The company appears unlikely to meet its goal of $25 billion in share repurchases, particularly as it is prioritizing reducing its $79 billion of debt. Shell’s 2020 operating outlook, while contingent on commodity prices, calls for $28 billion - $33 billion in organic free cash flow and an increase in return on average capital to about 10% from the 6.9% return in 2019. We believe that meeting these targets will be a challenge until commodity prices and refining margins recover. While waiting, investors are paid a 7.0% dividend yield which we believe is sustainable.
Weyerhaeuser (WY) - Revenues fell 5% from a year ago, roughly in-line with consensus estimates. Adjusted per share earnings of $.03 were disappointing, down 70% from a year ago and were 40% below estimates. Adjusted EBITDA, a measure of cash operating profits, fell 25% from a year ago and were about 5% below estimates.
While the company is executing on its efficiency and capital allocation plans, which include reducing costs, selling non-core assets and repurchasing shares ($1 billion in 2019), Weyerhaeuser is struggling with weak commodity prices and volumes. Their first quarter outlook calls for some improvement over the fourth quarter. Over time, the company’s assets should continue to increase in value and the company pays a healthy 4.5% dividend to investors while waiting for a commodity price recovery.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.