This note includes our review of earnings from Mattel (MAT) and Nokia (NOK). Next week starts the deluge, with Vodafone (VOD), Dril-Quip (DRQ), General Electric (GE), Xerox (XRX), Polaris Industries (PII), Holcim (HCMLY), Kraft Heinz (KHC), M/I Homes (MHO), Lamb Weston (LW), Janus Henderson Group (JHG), Shell (SHEL) and Newell Brands (NWL) reporting.
There were no ratings or price target changes this week.
Earnings update
Mattel (MAT) – At our initial recommendation in 2015, Mattel was struggling with its failure to adjust to the realities of how young children spent their playtime. This failure had produced years of revenue decay. In addition, its cost structure became bloated, and its debt levels increased. However, led by its new CEO, Mattel now appears to be finding its way.
Revenues rose 20% from a year ago and were about 13% above estimates. Adjusted earnings of $0.18/share increased from $0.03/share a year ago and were triple the consensus estimate of $0.06. Adjusted EBITDA of $185 million rose 42% from a year ago and was 52% above the consensus estimate. The company reiterated its 2022 and 2023 guidance.
Even though results could easily be viewed as “blow-out good,” Mattel shares fell through midday Friday as several metrics are no longer increasing and as guidance wasn’t raised. Not raising guidance following consensus-beating results implies weaker results the rest of the calendar year. The gross margin fell by 2.6 percentage points, due to input cost inflation, supply chain costs and higher royalties which were only partly offset by higher prices and fixed cost absorption.
Also, free cash flow was more negative than “normal” as inventories jumped by 44% from a year ago. While this quarter includes the typical pre-holiday build-up, the size of the increase plus the possibility of a demand-sapping economic downturn increases the risk that some of this inventory may end up on the discount table.
Adjusted EBITDA isn’t being converted adequately to free cash flow, either. Part of this problem relates to the inventory surge, but the company needs to do a better job of balancing the seasonality of its products so that the stock is more than just a bet on Christmas. Their new ventures, including the Barbie movie which will be released next year and the just-announced SpaceX toy deal, help in this regard.
We still like the Mattel story, their leadership, new products and initiatives, and their profit picture. The balance sheet is approaching investment grade – a monumental achievement that many thought laughable only a few years ago. The shares trade at a respectable 10x current year EBITDA, or only 8.3x next year’s EBITDA – not a great bargain but not time to sell, either.
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 a strong quarter, as revenues increased 3% from a year ago (net of currency) and were about 5% above estimates. Comparable diluted earnings of €0.10/share rose 11% from a year ago and were 11% above estimates. Full-year revenue and operating margin guidance were maintained. Overall, the turnaround remains on track.
While the weak euro weighed on results (the euro and U.S. dollar approached parity during the quarter), the underlying demand picture is healthy. Mobile Networks sales rose 9% while Network Infrastructure sales rose 21%. Demand for 5G equipment appears to be ramping nicely, helped by improved supplies of chips. Sales in the smaller Cloud and Network Services group rose 7%. Nokia Technology sales fell 24%, but this segment houses the company’s portfolio of patents that it leases to other companies, so results can be lumpy, and this was the case in the second quarter. In terms of customer types, telecom companies and corporations/enterprise demand both were healthy/strong at 3% and 8%, respectively. Demand in Europe (nearly 30% of total sales a year ago) fell 13%, partly due to Nokia’s exit from Russia. North American sales rose an impressive 35%.
Profits were healthy in Mobile Networks and Network Infrastructure but were sloppy (and of less importance) elsewhere.
Cash flow was weak, as an increase in inventories and a decline in payables consumed €1.1 billion of cash. We anticipate that cash flow will be strongly positive in the third quarter as these effects fade away. Nokia’s balance sheet is solid with €4.5 billion in cash in excess of its debt balance. The company continues its €600 million buyback program and its €0.02/share quarterly dividend.
The company said that it is exploring a sale of its managed services business. There have been no disclosures on price or timing and a sale may not happen, but we like the thinking to prune out unnecessary operations via sale rather than a shut-down.
Friday, July 22, 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 11½ minutes and covers:
- Earnings
- Mattel (MAT) – Strong results dampened by unchanged guidance
- Nokia (NOK) – Good results as 5G demand and chip supply improve
- Comments on other recommended companies:
- General Electric (GE) – Provide new names for their spin-offs
- Western Digital (WDC) – Weak results from competitor Seagate Technology Holdings weigh on shares
- Elsewhere in the market:
- So many big changes in the world, all at once.
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 7/21/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 2.93 | - | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 10.11 | - | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 23.42 | - | Buy (44) |
| Small cap | ZimVie | ZIMV | Apr 2022 | 23.00 | 17.46 | - | Buy (32) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 24.17 | - | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 4.49 | - | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 31.00 | - | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 75.17 | 1.3% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 16.30 | 6.1% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 11.64 | - | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 9.88 | 4.9% | Buy (26) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 31.76 | 3.5% | Buy (46) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 43.93 | - | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 30.30 | 2.6% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 16.70 | 5.6% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 48.18 | 1.2% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 114.04 | - | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 11.87 | - | Buy (24.50) |
| Mid cap | M/I Homes | MHO | May 2022 | 44.28 | 45.58 | - | Buy (67) |
| Mid cap | Janus Henderson Group | JHG | Jun 2022 | 27.17 | 24.72 | 6.3% | Buy (67) |
| Mid cap | ESAB Corp | ESAB | Jul 2022 | 45.64 | 42.91 | - | Buy (68) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 68.13 | 0.5% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 48.98 | 4.1% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.12 | 1.8% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 18.65 | 3.4% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 5.60 | 4.6% | SELL |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 19.68 | 3.3% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 8.63 | 5.1% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 20.02 | 4.6% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 15.43 | 6.6% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 37.95 | 4.2% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 57.18 | 2.7% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 286.85 | - | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 43.28 | 2.8% | Buy (64) |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 50.43 | - | Buy (78) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 20.60 | - | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 38.46 | 5.0% | Buy (70) |
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.Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at bruce@cabotwealth.com or to our friendly customer support team at support@cabotwealth.com. Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.