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.
AMC Entertainment (AMC) - AMC reported a surprisingly strong quarter (given the weak movie release schedule in the quarter), with revenues increasing 2.4% from a year ago, with Adjusted EBITDA rising 12%. The company produced $199 million of free cash flow. Revenues grew more than 6 percentage points faster than the overall industry. While attendance fell 1.6%, ticket prices increased by 3.3% and food & beverage purchases per patron rose by 2.4%.
The challenge for AMC is to generate enough cash flow to winnow their large debt load. Stronger conversion of revenues and EBITDA to operating cash flow is important, as overall revenue growth is likely to be lackluster over the long run. Lower capital spending is ahead, as their seat upgrade program is nearing its completion. These upgrades appear to be boosting attendance, particularly in Europe. AMC’s Saudi Arabia initiatives offer intriguing potential: after only 10 weeks since its open, the company’s Riyadh theater is its highest grossing theater worldwide on a per-seat basis. AMC will open as many as 15 theaters in the Middle East this year.
Given its tight cash flow, AMC Entertainment cut its dividend by 85%, to $.03/quarter, to redirect cash to debt repayments and share repurchases. The company authorized a $200 million share repurchase. AMC’s senior executives took a 15% immediate pay reduction for the next three years, in exchange for a one-time deep out-of-the-money share grant. We believe the dividend cut makes sense, and we find that the pay cut/share grant indicates that the leadership is willing to back their conviction in the stock’s prospects.
AMC is slowly moving in the right direction, but the weak stock price reflects its still-thin free cash flow and revenue headwinds.
Gannett (GCI) - Due to the recent merger, we believe the reported and unadjusted results are not reflective of the newly combined company. We therefore focus on pro forma results, as if Gannett/New Media had been combined for the entire period, to gauge their performance. We also look at “same store” revenues, which adjust for other acquisitions, divestitures and currency effects. Gannett has no analyst coverage as reported by CapIQ, one of the major estimate aggregators.
Fourth quarter same store revenues fell about 10% from a year ago, a modest acceleration from the 9% decline pace for the full year. Print advertising and circulation revenues both showed comparable declines. The company described how much of the weakness was due to distractions from the merger, and spoke encouragingly of initiatives and trends in place to improve the revenue picture.
Revenue is the key to the Gannett story, and the biggest risk. If they are able to stanch the declines, earnings and cash flow will be vast, driving the stock sharply higher. If not, the company will be in a very difficult position at best.
The company appears to be on-track with its cost-efficiency program, as we would expect. It paid down about $40 million in deal-related debt since the merger.
Gannett shares trade at only 3.7x EBITDA, which is very cheap if the turnaround unfolds as expected. Also, the company has $1.8 billion in debt that costs 11.5%. Management has repeatedly committed to the $0.19/share quarterly dividend, which will likely commence in the second quarter, but it probably makes more sense to buy back their stock. If the dividend were zero, that cash would repurchase 18% of the shares at the current price.
Noted investor Leon Cooperman asked a few questions on the conference call - essentially getting management to confirm that “the dividend is secure” and that their free cash flow projections remain unchanged from their comments in January.
Given the sharp sell-off last week, with Gannett shares falling 29% (in a awful week for the market) and the shares’ low 3.7x run-rate EBITDA valuation the shares would be a remarkable bargain if management’s view proves correct.
Macy’s (M) - Macy’s same store sales data was pre-announced earlier in February. Earnings per share of $2.12 was much higher than their implied guidance for $1.78-$1.98. The gross margin fell .70% from a year ago and SG&A costs as a percent of revenues increased by .10%. Credit card revenues provided stability and were essentially unchanged from a year ago. Adjusted EBITDA fell 17% from a year ago.
One near-term concern is the potential fall-out on mall traffic and tourism traffic (especially in NYC) from the likely emergence of the coronavirus in the United States. Excluding any coronavirus effects (which would further detract from results), first quarter will likely see a weak comparison to a year ago due to disruptions from the corporate restructuring and campus consolidations which are part of its Polaris strategy. The company is expecting a better second half as the benefits of Polaris kick in while some of the costs and disruptions fade.
We believe there is a good chance that the Polaris plan will be effective in maintaining Macy’s relevance and reducing its debt. We have more confidence in the cost-cutting and other efficiency measures given the secular revenue headwinds.
Macy’s valuation, particularly with the potential improvements ahead, remains highly attractive.
Rolls-Royce Holdings (RYCEY) - Shares rose 6% in a very weak market on Friday as the company reported adjusted operating profits of £810 million, about 25% higher than a year ago. This results excluded a large £1.4 billion charge related to its Trent 1000 engine, a product that has plagued the company. Future costs for the Trent 1000 engine appear to be diminishing, driving the market’s optimism toward the shares. Revenues increased by 7%. Management expressed confidence in their ability to hit their £1 billion free cash flow target in 2020, as revenues look to be stable while profits in its aerospace, power and defense are likely to increase.
Washington Prime Group (WPG) - As expected, Washington Prime Group cut its dividend, with the new rate of $.125/quarter, or half the previous rate. This drove the shares to post a fractional gain in a sharply weaker overall stock market, as investors had anticipated a larger cut. Also, the cut provides some cash flow relief to Washington Prime. In mid-day trading today, the shares are weak.
Fourth quarter funds from operations (FFO) of $0.31/share, adjusted for debt-related gains, fell 18% from a year ago. Washington Prime continues to invest in mall redevelopment projects while working to maintain the revenues at its existing malls.The company remains in compliance with all of its debt covenants and appears likely to continue to do so for all of 2020.
Guidance for 2020 is for modest growth in comparable net operating income for its higher quality malls (Tier One and Open Air) but for a decline of about 3% in FFO, net of any effects from asset gains and other items.
We are now revisiting our Hold rating, as the cut buys the company more time for its turnaround. However, Washington Prime’s cash crunch is not resolved, as its redevelopment projects need to begin to reverse the overall company’s declines.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.