Hi ,
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.
BP (BP) - Underlying profit of $.76/share fell 26% from a year ago but was about 15% ahead of estimates. Operating profits in all three segments (upstream, downstream, Rosneft) were weaker than a year ago. Like its peers, BP’s profits were hurt by lower energy prices and narrower refining and chemical margins. Upstream production rose by 2.7% in the quarter compared to a year ago. BP continues to generate decent cash flow, which will support its 2.4% dividend increase. Capital spending remains restrained although near-term production is likely to decline largely due to divestitures.
BP is nearing completion of its $10 billion divestiture program and is raising the size to $15 billion. Overall, the company is reducing its cost structure which should lead to stronger free cash flow and debt reduction. In an orderly succession plan, a new CEO took the helm on Wednesday. We believe this will not affect the company’s strategic trajectory.
General Motors (GM) - Revenues fell 20% from a year ago. Adjusted operating profits fell 96% to $0.1 billion, as the labor strike essentially wiped out profits. North America profits of $263 million were $2.8 billion below a year ago. GM International and Cruise posted losses, while GM Financial earned $498 million vs $416 million a year ago. Other than the strike, GM had a decent quarter.
The company is in much better shape than it was several years ago, in terms of its global footprint, margin structure and management. The automotive segment balance sheet carries $17.3 billion in cash against $14.9 billion in debt. GM Financial, while vulnerable to a credit-denting recession (when it arrives), remains healthy with solid and growing profits yet reasonable leverage. The China outlook is murky given the effects of the Coronavirus, trade disputes and underlying economic slowdown there.
Nevertheless, the market seems unwilling to boost GM shares’ above their dismally cheap valuation on concerns that the vehicle is slowly weakening and will eventually hit a recession. Also, despite GM’s robust efforts with electric vehicles, investors appear to be conceding that Tesla will come to dominate this segment, leaving GM and others with smaller market shares and profits. GM shares trade essentially at their 2010 IPO price of $33. We are more optimistic about GM’s future.
Gilead Sciences (GILD) - Fourth quarter revenues rose 1% from a year ago and were 3% ahead of estimates, but adjusted per-share earnings of $1.30 were about 22% below consensus estimates (down 10% from a year ago). Much of the earnings “miss” was due to a sizeable inventory write-down but also some pricing weakness in the hepatitis C vaccine business. The core HIV products continue to sell well. Overall, Gilead’s revenues appear to be stabilizing with a moderately improving profit outlook.
Janus Henderson Group (JHG) - Revenues grew 10% from a year ago and were ahead of consensus. Adjusted net income of $0.65/share also grew 10% from a year ago but fell slightly below the $0.66/share consensus. The adjusted operating margin fell modestly as bonuses and other costs rose compared to a year ago. Janus’ investment products are performing better, due in some part to the change in leadership in several product groups.
We think Janus is much better managed with Dick Weil as sole CEO, which he assumed a little over a year ago. Net asset outflows are still a problem, although total assets under management were aided by the rising stock market. Janus continues to generate strong free cash flow after (well-covered) dividends, which it is using to repurchase shares. Janus’ balance sheet remains sturdy, with $734 million in cash and $316 million in debt.
Macy’s (M) - Detailed earnings will be reported on February 25, but the company gave modestly positive preliminary same store sales and net income guidance this week. Most significantly, Macy’s announced the Polaris Strategy, a 3-year plan to stabilize profits and help restore growth. A key part is a store-base retrenching: closing 125 stores of their weakest stores (about 20% of their 636 base) while upgrading another 100 stores (bringing the total count of upgraded stores to 250).
Also, the company will invest more in its niche concept stores, digital initiatives, private brands and other growth initiatives. Cost-cutting plans include reducing corporate staff by 9%, consolidating their Cincinnati HQ and San Francisco digital ops into their New York City offices, and closing other sites. The company believes these steps should allow revenues and profits to remain about flat over the next three years. At the current share price, mere stability in profits and cash flow would produce significant value to shareholders through cash accumulation.
Meredith Corporation (MDP) - The company reported stronger-than-expected revenues and profits which led to a sharp 15% price jump yesterday, although much of this gain faded today. Revenues of $811 million were down 8% from a year ago primarily due to the decline in political ad spending and from changes to the company’s product portfolio. Adjusted EBITDA fell $38 million, but this was encouraging as it didn’t include $61 million of (100% margin) political advertising revenues from a year ago. Adjusted EBITDA was 11% ahead of a dour consensus estimate.
Meredith integration of the TIME acquisition is complete. The company continues to upgrade its product and content portfolio in its magazine and TV businesses. Overall, the Meredith turnaround is making good progress.
Nokia (NOK) - Adjusted operating profits of €1.13 billion were up about 1% from a year ago and slightly better than consensus estimates. Overall, the report was in-line, which given Nokia’s dismal Q3 report is good enough. Their 2020 outlook was for essentially flat results vs 2019. While strong demand for 5G gear should be inevitable, the timing and pricing is hard to determine, particularly with unknown speed of end-user adoption, technology challenges, tough competition from Ericcson and Huawei, and trade/political barriers. Nokia continues to cut expenses, which is helping boost their cash flow and cash balances. The company said it expects to restart its dividend once its cash balance hits €2 billion, likely in about a year. Overall, Nokia is making very slow but now forward progress. The long-term potential is large, but the range of outcomes is pretty wide with considerable risk.
Oaktree Capital Specialty Lending (OCSL) - Acceptable results but not outstanding. Net asset value/share increased to $6.61, up $.01/share from the prior quarter. The operational turnaround is largely complete. Non-core and under-performing assets have largely been sold, with the current portfolio quality and mix reflecting most of the objectives outlined in 2017 when Oaktree assumed control of the company. The company recently received investment grade ratings, so it can begin to refinance its more expensive bonds. The company is now starting to pay annual incentive fees back to its Oaktree parent, based on profitable exits from its investment holdings, which will produce a modest drag on future earnings.
OCSL shares continue to sell at less than 85% of net asset value, even as peers sell at 110% or more. Much of this could be due to Oaktree’s still-weak annualized return on equity of 6%, well below peers. One contributor to the weak return on equity is Oaktree’s lower financial leverage, which reduces the net income earned, as the company currently is in a defensive posture. We remain patient with this stock.
Peabody Energy (BTU) - (see our note from Wednesday with more details). Shares surged over 25% (have faded some since), as activist investor Elliott Management signed an agreement that puts several Elliott executives on the company’s board of directors. Also, Peabody reported revenues and Adjusted EBITDA that were higher than estimates. The company, however, is struggling with lower coal prices and volumes, so it suspended its dividend and share buyback program. Peabody plans to “live within its means” by cutting capital spending and chipping away at its cost structure as the revenue remains weak. Debt repayment is the top priority, even while it carries $732 million of cash which offset’s more than half of its $1.3 billion in debt.
Also noteworthy:
Credit Suisse (CS) CEO Tidjane Thiam has resigned. Thiam was the architect behind the bank’s recent turnaround, and had the support of several highly credible and large shareholderes including Harris Associates. We are reviewing on rating on this company given the departure.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks, including the stocks mentioned in this note.