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Turnaround Letter
Out-of-Favor Stocks with Real Value

February 4, 2022

We comment on earnings from our recommended companies, a new buyback at a recommended company, trapdoor tech stocks, the possibility of a massive economy-wide inventory downcycle, and thoughts on energy stocks.

This week’s Friday Update includes our comments on earnings from Vodafone (VOD), Nokia (NOK), Shell (SHEL) and Adient (ADNT).

Next week, Mattel (MAT), Credit Suisse (CS), The Western Union Company (WU) and Newell Brands (NWL) report earnings.

We had no price target or ratings changes this past week. We note that Marathon Oil (MRO) and Shell plc (SHEL) are both trading above our price targets so we are reviewing these stocks albeit with a bit of foot-dragging.

Earnings updates:
Adient (ADNT) – Adient, one of the world’s largest automobile seat makers, struggled due to weak leadership after its 2016 spin-off from Johnson Controls. We became interested in late 2018, after the shares fell sharply, due to the arrival of Doug Del Grosso as CEO. While we were a bit early on this name, Del Grosso’s highly-capable leadership has produced an impressive turnaround so far.

Adient reported mixed fiscal first-quarter 2022 results. Earnings were a loss of $(0.38)/share, compared to a profit of $1.71 a year ago and consensus estimates for a $(0.25) loss. Adjusted EBITDA of $146 million was 55% below a year ago but was 43% above the consensus estimate. Revenues adjusted for acquisitions and divestitures were 13% below a year ago but about 11% above the consensus estimate. Adient reiterated its full-year guidance.

As a component/systems producer, supply chain difficulties are hitting Adient from both sides. Its revenues have been suppressed as car manufacturers slow their production due to a wide range of shortages. Its costs have surged as its plants can’t operate at full efficiency as customer production schedules change quickly, while higher commodity (steel and plastics), labor and freight costs drive up its costs. For perspective, the adjusted EBITDA margin of 4.2% was sharply lower this quarter than 8.2% a year ago.

Management said it is starting to see early signs of normalization and stability – but nothing more optimistic than that.

We continue to look past Adient’s near-term disruptions, even as they are extending into yet another year. Adient is fundamentally executing much better than any time in its relatively brief public history, its holds a solid spot in a critical segment of the auto industry, its leadership is high-caliber, the balance sheet is healthy and the valuation remains attractive.

Nokia (NOK) – Initially recommended in 2015, Nokia has struggled for years to regain its competitiveness. It appears that the new CEO, Pekka Lundmark (March 2020), is capable of finally getting the company back into the game, particularly with the critical change-over to 5G over the next few years.

Nokia reported reasonable results, reiterated their full-year 2022 revenue guidance, raised their long-term revenue and profit assumptions, reinstated their dividend and launched a share buyback program. The Nokia story remains on-track.

Revenues of €6.4 billion fell 5% (adjusted for currency) from a year ago and were essentially in line with the consensus estimate. Adjusted earnings of €0.13/share fell 7% from a year ago but were about 18% above the consensus estimate.

With its technology issues largely resolved, Nokia is transitioning from “fix” to “growth.” The company raised its longer-term assumptions, saying they will grow faster than the market and achieve at least a 14% operating margin (about 1.5 percentage points above the 2021 margin and higher than their prior 11-13% margin target). With depreciation and amortization running about 5% of sales, a 14% operating margin would imply an EBITDA margin of about 19% - much higher than our model which uses a 16.5% margin. Nokia also said it would convert between 55% and 85% of its operating profits to free cash flow.

Nokia’s financial progress is best illustrated by comparing full-year 2021 with 2020. Revenues rose 3% - not tremendously exciting except that it is more clearly moving in the right direction. Most notably, operating profits rose 33%, earnings per share rose 48% and return on invested capital reached 20% compared to less than 12%. The investments in fixing its semiconductor technology mistakes and making its operations more efficient and effective are driving profits meaningfully higher. Cash balances net of debt rose to €4.6 billion from €2.5 billion.

The company reinstated its dividend, at €0.02/share per quarter. This translates into a 1.5% yield. Also, Nokia said it will repurchase €600 million of shares. Combined, the dividend and buyback total about €1 billion, or roughly 3% of Nokia’s market cap. This is reasonable, but we would like to see more aggressive payouts as Nokia’s fortunes improve with the 5G rollout.

Shell plc (SHEL) – Formerly named Royal Dutch Shell (RDS.B), Shell has been on the recommended list for a long time (January 2015). With tighter cost controls, more shareholder-focused management priorities along with sharply higher energy prices, the fundamental outlook is clearly improving.

Shell reported a solid quarter, raised its dividend by 4% and announced a new $8.5 billion share buyback. The shares trade above our $53 price target, and as such are now under review.

In the quarter, adjusted EBITDA (on a CCS basis, or current cost of supply basis, which removes inventory gains and losses) of $16.4 billion was nearly double the year-ago amount, 21% above the third quarter and fractionally above the consensus estimate. Adjusted earnings of $6.4 billion compared to $0.4 billion a year ago, $4.1 billion in the third quarter and were about 22% above the consensus estimate.

Free cash flow excluding divestment proceeds and other adjustments was $3.2 billion, but this was dragged down by inventory build of $3.0 billion. All-in, Shell produced generous cash flow.

Like many energy companies, Shell is much healthier due to higher oil and natural gas prices. For 2021, the company generated over $27 billion of free cash flow, in addition to divestiture proceeds. This has allowed it to pay down its previously unwieldy $75.4 billion debt burden to $52.6 billion, even as it invests in its existing and emerging opportunities.

Shell raised their regular dividend by 4% and announced a new $8.5 billion share buyback program to be completed in the first half of 2022. The company also announced a capital spending program that was more modest than most anticipated. It appears that Shell is responding to investor pressure to restrain its growth aspirations while paying out more cash.

Vodafone (VOD) – Vodafone is a major European wireless telecom, broadband and cable TV service provider. The relatively new CEO Nick Read (October 2018) is focused on increasing the company’s return on capital by strengthening its telecom “connectivity” platform, improving its operating efficiency and spending its capital more efficiently. In 2019, Vodafone acquired Liberty Global’s German and Eastern European assets, and will soon spin off its European cell tower business (named Vantage Towers). Vodafone has a few obscure assets: it is the leading provider of mobile data and payments services in Africa and has a vast network of high-capacity data pipelines that may increase in value as 5G rolls out.

Vodafone provided an acceptable trading (revenues-only) update. Revenue trends overall continue to improve compared to a year ago and two years ago – which indicate that Vodafone’s recovery remains on-track and that its profits should continue to improve when they report full-year results on May 17. The company reiterated their full-year fiscal 2022 Adjusted EBITDA and adjusted free cash flow guidance.

Services revenues grew 2.7% on an organic basis (adjusted for currency changes and acquisitions/divestitures) compared to a year ago. This is slightly faster than the 2.4% pace in the second quarter. On a two-year organic basis, revenues grew 3.1%, also an acceleration from the 2.0% pace in the second quarter. The recovery in Europe continues, although Spain and Italy remain weak. Africa growth was healthy again – we think this segment has considerable unlocked value.

Vodafone recently attracted attention from highly regarded activist Cevian, which we anticipate will accelerate the company’s turnaround.

Friday, February 4, 2022 Subscribers-Only Podcast:
Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 12½ minutes and covers:

  • Brief commentary on earnings reports.
  • Comments on other recommended companies:
    • Vodafone (VOD) – Respected activist investor Cevian now involved.
    • Gannett (GCI) – Announced new $100 million share buyback

  • Elsewhere in the market
    • Trap-door price drops for mega-cap tech stocks
    • Will an end to supply chain hoarding lead to a massive inventory downcycle?

  • Final note:

Cincinnati Bengals in the Super Bowl… really?

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

Market CapRecommendationSymbolRec.
Price at
Price on 2/3/2022Current
Small capGannett CompanyGCIAug 20179.22 5.520.0%Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 14.430.0%Buy (20)
Small capDril-QuipDRQMay 202128.28 24.480.0%Buy (44)
Mid capMattelMATMay 201528.43 21.370.0%Buy (38)
Mid capConduentCNDTFeb 201714.96 4.580.0%Buy (9)
Mid capAdient plcADNTOct 201839.77 42.780.0%Buy (55)
Mid capLamb Weston HoldingsLWMay 202061.36 63.971.5%Buy (85)
Mid capXerox HoldingsXRXDec 202021.91 21.944.6%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.260.0%Buy (19)
Mid capViatrisVTRSFeb 202117.43 15.132.9%Buy (26)
Mid capVistra CorporationVSTJun 202116.68 21.852.7%Buy (25)
Mid capOrganon & Co.OGNJul 202130.19 32.923.4%Buy (46)
Mid capMarathon OilMROSep 202112.01 20.841.2%Buy (18)
Mid capTreeHouse FoodsTHSOct 202139.43 37.020.0%Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 39.612.0%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 18.655.0%Buy (57)
Mid capBrookfield ReBAMRJan 202261.32 59.820.0%Buy (93)
Mid capPolarisPIIFeb 2022105.78 60.820.0%Buy (160)
Large capGeneral ElectricGEJul 2007304.96 98.320.3%Buy (160)
Large capShell plcSHELJan 201569.95 53.913.6%Buy (53)
Large capNokia CorporationNOKMar 20158.02 5.721.6%Buy (12)
Large capMacy’sMJul 201633.61 25.072.4%HOLD
Large capCredit Suisse Group AGCSJun 201714.48 9.592.7%Buy (24)
Large capToshiba CorporationTOSYYNov 201714.49 20.593.1%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 10.954.0%Buy (16)
Large capNewell BrandsNWLJun 201824.78 23.323.9%Buy (39)
Large capVodafone Group plcVODDec 201821.24 18.185.6%Buy (32)
Large capKraft HeinzKHCJun 201928.68 35.844.5%Buy (45)
Large capMolson CoorsTAPJul 201954.96 48.822.8%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 315.230.0%HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 55.171.5%Buy (55)
Large capBaker Hughes CompanyBKRSep 202014.53 26.362.7%Buy (26)
Large capWestern Digital CorporationWDCOct 202038.47 52.290.0%Buy (78)
Large capAltria GroupMOMar 202143.80 50.427.1%Buy (66)
Large capElanco Animal HealthELANApr 202127.85 24.650.0%Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 49.503.9%Buy (70)

Please feel free to share your ideas and suggestions for the podcast with an email to either me at or to our friendly customer support team at Due to the time limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.Market cap is as-of the Initial Recommendation date.
Current status indicates the rating and Price Target in ( ). Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.