This week’s Friday Update includes our ratings change for Baker Hughes (BKR) from Buy to Sell, our comments on earnings from Holcim (HCMLY), and additional comments on earnings from Kaman (KAMN) and Vistra Energy (VST).
On Wednesday, we moved shares of Baker Hughes (BKR) from Buy to Sell. The shares have surged above our previously-raised 31 price target (originally 23). Using optimistic yet realistic assumptions, we are hard-pressed to justify a BKR share price meaningfully above the current price. And, given the highly cyclical nature of commodity-driven companies, and the general lack of secular growth prospects, we see an unfavorable balance of upside potential versus downside risk.
Predicting commodity prices is a low-success-rate endeavor. It does appear, however, that the recent spike to $130+/barrel oil sets the high end of a reasonable price range. New supply, a slowing global economy as interest rates rise, and other balancing pressures are likely to keep oil and domestic natural gas somewhat below their recent peaks. This will, in turn, likely keep demand for Baker Hughes’ products and services somewhat constrained.
In addition, we are not inclined to retain Baker shares on the hopes that capacity constraints will foster meaningfully higher pricing by the company or its two major competitors Schlumberger and Halliburton.
The BKR recommendation produced an approximately 135% total return since our initial recommendation at 14.53 in our September 2020 edition of the Cabot Turnaround Letter.
Earnings updates:
Holcim (HCMLY)
This Swiss company is the world’s largest producer of cement and related products. After its troubled 2015 merger and a payments scandal, Holcim hired Jan Janisch, a highly-capable leader whose turnaround efforts are showing solid results, particularly by expanding the company’s profit margins and cash flow. A possible overhang on the shares is the carbon-intensity of cement production, but the company’s efforts in reducing its carbon footprint are impressive. (CHF is Swiss francs, CHF1.00 = US$1.06).
Holcim reported good fourth-quarter results. Like-for-like revenues (the European term for organic sales excluding currency changes) rose 8.6% to CHF 7.0 billion, and recurring EBIT rose 1.3% to CHF 1.1 billion. Both were modestly higher than consensus estimates. Overall, a good quarter despite higher energy costs in this energy-intensive industry, as Holcim was generally able to pass through much of its cost inflation.
Holcim had a strong year of growth in revenues and profits, although the comparison was to a pandemic-weakened 2020. Like-for-like revenues rose 11% while recurring EBITDA after leases (comparable to American EBITDA) rose 16%, as pricing and volumes were strong across the board. Free cash flow exceeded CHF3 billion – a company benchmark – at CHF 3.3 billion.
Guidance for 2022 includes like-for-like net sales growth of above 6% and positive like-for-like recurring EBIT growth. While the sales guidance is encouraging, the guide for “positive” profit growth is uninspiring at best and implies noticeable margin pressure due to a lack of pricing power to offset rising energy and other costs. We think that management is being conservative with their profit guidance.
Holcim continues to expand into higher value-added building materials. It announced or completed three major acquisitions in 2021, bringing their Solutions & Products revenues to 13%, on the way to the targeted 30% by 2025. Using rough numbers based on the Firestone acquisition, Holcim would need to spend about CHF 12 billion on deals to meet this target. The company has the financial capacity to spend this.
The Holcim story has clearly changed from cash flow to value accretion. Rather than boost and distribute huge amounts of free cash flow, as our original thesis anticipated, Holcim will spend, one way or another, most of its free cash flow on deals. While the management raised the dividend 10% (generating a 4%+ dividend yield), indicating that they aren’t entirely tone deaf to shareholders, we are disappointed in the new direction.
However, for now, we are staying with the story. Despite the shift in the thesis, Holcim is well managed and operating at its most efficient and effective level in many years. Its refocusing of its cement business through selective acquisitions and large divestitures is boosting that business’ value. And its acquisitions seem well considered and should raise the company’s value more than the deal prices.
We’re skeptical of “green-washing” – the practice of many companies of looking climate-friendly while actually doing little – but Holcim seems to be making legitimate progress even as the elevated spending doesn’t seem to be weighing too much on margins. In the long run, the company will be better positioned to meet inevitable future climate regulations and win large projects than its peers, providing it a competitive advantage in this highly carbon-intensive business.
And, the shares remain depressed, as investors wait for clearer results from its acquisition program, some proof of durability in its margins and resolution to the possible legal liabilities from the alleged Syrian terrorist financing in 2013-2014.
We will remain patient on HCMLY shares.
Kaman (KAMN)
We commented a few weeks ago on Kaman’s mixed fourth-quarter and near-term outlook. While the turnaround is in the very early stages, its new and capable CEO, who joined from outside the company, is moving Kaman in the right direction. We like the new focus on “highly-engineered solutions” as the management calls it, the newly defined product segmentation, and the emphasis on margins, free cash flow conversion and return on invested capital. The revenue outlook is officially modest but the recovery in commercial jet building and other customer bases is encouraging. Re-arming of Western countries may help their fuzes business near-term.
Kaman is actively looking for acquisitions, but as they seem to be highly disciplined on target valuation they have found few fairly priced deals. We like this discipline. Over time, it is likely that Kaman will divest some of its lower-margin businesses.
Vistra Energy (VST)
Vistra Energy is a remarkably complicated company beneath a relatively straightforward big-picture story. For now, our comments will stay at the big-picture level, so we have little to add to our initial comments on their earnings report from a few weeks ago.
The overall gradual upward value-creation trajectory remains in place. Vistra generates enormous cash flow and remains committed to its plan to return at least $7.5 billion to shareholders through 2026 via share buybacks and dividends, and maintain its strong balance sheet. The company reduced its share count by 7% since last November, and raised its dividend by 13%.
While the operational and financial complexity generates risk, we believe the return potential remains highly attractive relative to that risk.
Friday, March 18, 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 10½ minutes and covers:
- Ratings change:
- Baker Hughes (BKR) – move from Buy to Sell
- Brief commentary on earnings reports
- Holcom (HCMLY), Kaman (KAMN) and Vistra Energy (VST)
- Comments on other recommended companies:
- Newell Brands (NWL) – Carl Icahn trims position by 25%
- TreeHouse Foods (THS) – not selling entire company, waiting for better value
- Elsewhere in the Market:
- Macro picture is remarkably complicated.
- Our focus on companies we can intelligently analyze, and our valuations, provide an anchor in amazingly complex waters.
- Final note:
- Stepping away from the market for the afternoon and weekend.
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 3/17/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 4.69 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 13.33 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 35.65 | 0.0% | Buy (44) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 23.49 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 4.65 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 37.94 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 53.49 | 1.8% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 19.59 | 5.1% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 12.57 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 10.64 | 4.5% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 22.31 | 3.0% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 34.34 | 3.3% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 23.07 | 1.2% | Buy (24) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 33.13 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 42.14 | 1.9% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 17.93 | 5.2% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 55.88 | 0.0% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 106.39 | 0.0% | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 14.21 | 0.0% | Buy (24.50) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 95.53 | 0.3% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 51.87 | 3.7% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.32 | 6.9% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 27.35 | 2.3% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 8.01 | 3.2% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 19.42 | 3.3% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 9.86 | 4.5% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 22.70 | 4.1% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.81 | 6.1% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 37.75 | 4.2% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 52.39 | 2.9% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 344.97 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 51.48 | 1.6% | Buy (64) |
| Large cap | Baker Hughes Company | BKR | Sep 2020 | 14.53 | 34.98 | 2.1% | SELL |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 48.86 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 51.69 | 7.0% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 26.61 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 47.48 | 4.0% | Buy (70) |
Please feel free to share your ideas and suggestions for the podcast 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 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.