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Turnaround Letter
Out-of-Favor Stocks with Real Value

May 20, 2022

Earlier this week, we moved shares of a consumer staples company from Buy to Sell. We comment on earnings from two recommended stocks and comment on other recommended names. Some thoughts on the ESG trend.

This week’s Friday Update includes our comments on earnings reports from Toshiba (TOSYY) and Vodafone (VOD). Next week, Macy’s (M) reports earnings and Duluth Holdings (DLTH) reports the following week.

Ratings change:
Yesterday, we moved shares of Altria (MO) from Buy to Sell. While the shares remain 21% below our 66 price target, the risk/return trade-off has become unfavorable, driven primarily by the likely re-entry of Philip Morris International into the United States if it completes its pending acquisition of Swedish Match. This new competitive threat adds to our concerns about Altria’s ability to continue to raise prices, the increased decline rate of tobacco volumes and a possible government ban on menthol cigarettes. Altria has little cash flow flexibility already as it pays out most of its cash flow as dividends.

The MO recommendation generated an 27% total return since our initial recommendation at 43.80 in our March 2021 edition of the Cabot Turnaround Letter.

Earnings updates:
Toshiba (TOSYY) – This Japanese industrial conglomerate is recovering from its nuclear power plant construction business (Westinghouse Electric) debacle, which forced it to sell a majority stake in its Kioxia memory chip production operations. We are looking for a divestiture of its minority Kioxia stake, with proceeds paid out to shareholders, as well as operational improvement and better governance. Note: ¥100 = $0.82

Toshiba reported a reasonable quarter that showed stability in its operations. The company announced a special dividend to be paid in June – a positive but side-show surprise. The primary story is that Toshiba remains poorly managed and is under pressure from its shareholders to either sell the company or undertake a legitimate strategic and operational overhaul. These strategic changes will likely take several more quarters at least. Toshiba said it has received buy-out interest from 10 potential investors. The next event is the annual general meeting in June.

Fourth-quarter revenues rose 3% compared to a year ago, while operating income fell 11%. The operating profit margin of 7.3% slipped 1.1% from a year ago. Energy Systems show the sharpest year-over-year improvement which was largely offset by mixed results elsewhere. The Kioxia subsidiary generated a ¥9.9 billion (roughly $81 million) profit, up from ¥3.9 billion a year ago but slipping 63% from the third quarter.

The company provided fiscal 2022 guidance for revenues to slip 1% but EBITDA to rise 11%, with the margin expanding to 8.2%. Toshiba’s balance sheet remains significantly underleveraged. Capital spending will increase 31% next year, to a reasonable 6.7% of revenues, following a 50% increase in 2021.

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 reported stable but unimpressive second-half FY2022 results (the company reports quarterly revenues but only half-year profits). In the second half, cash operating profits of €7.64 billion rose 4% from a year ago but were modestly below the consensus estimate.

Vodafone uses highly nuanced definitions, such that cash operating profits are defined as “Adjusted EBITDAaL” and adjusted free cash flow removes a laundry list of items. While useful, these definitions obscure (more than usual) the actual cash performance of the company.

Organic service revenues rose 2%, yet growth continues to weaken from the earlier pace. Vodafone’s core revenues are its service revenues, which excludes the volatile effects of equipment sales. Most geographies were reasonably positive, but highly problematic Spain saw organic revenues slide by 5.1% as this market features intense competition. Germany was weak at 0.8% growth – representing a problem as it is 30% of the company’s service revenues.

The second half capped another below-potential year for Vodafone, particularly since the year should have compared more favorably to a sloppy 2021. Organic service revenues grew incrementally (+2.6%), adjusted EBITDAaL grew 5%, the EBITDAaL margin expanded about 1.5% (incrementally encouraging), but net debt increased and adjusted free cash flow remains weak.

Guidance for fiscal year 2023 was uninspiring, as it called for flat cash operating profits and a 4% decline in adjusted free cash flow.

In sum, Vodafone is performing at the bare minimum of acceptable results. The company remains a chronic underperformer with a management team that seems to have missed many opportunities to exit laggard markets on reasonable terms. While the leadership offered up the right sound bites about being in active acquisition and divestiture discussions, paying down debt, consolidating the unbalanced U.K. market which features four competitors (with the hope that it moves to a more-stable three competitors like in the U.S.), we investors keep waiting for action.

The company is unlikely to see meaningful improvement under the current leadership and we would like to see more aggressive changes at the top. Strategically, the company is moving so slowly as to appear frozen.

The company appears to have little regard for its shareholders and seems too comfortably ensconced in the high tower of a mega-cap, Euro-telecom conglomerate to make the needed changes. Even its reports obfuscate its results and suggest that they are out of step – investors want clear and full quarterly financial and operating disclosures, not the scant, partial semi-annual or annual data that Vodafone provides.

We have little patience for the company yet hold onto the shares as we are likely not the only investors imminently frustrated with this leadership team. The dividend yield is helpful in that it has offset much of the lackluster, at best, share price performance, but that implies that it is primarily seen by management as a bribe to keep its investor base from an outright revolt.

Friday, May 20, 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 13½ minutes and covers:

  • Ratings and earnings:
    • Comments on our ratings change for Altria (MO) and on the two companies reporting earnings.

  • Comments on other recommended companies:
    • Holcim (HCMLY) – divesting its India operations
    • Wells Fargo (WFC) – Buffett exits his stake
    • Macy’s (M) and Duluth Holdings (DLTH) – not faring well in retail stock selldown
    • TreeHouse Foods (THS) – a possible positive in Walmart’s earnings report.

  • Elsewhere in the market:
    • Tesla (TSLA) booted from ESG index.

  • Final Note

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
Small capGannett CompanyGCIAug 20179.22 3.900.0%Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 11.320.0%Buy (20)
Small capDril-QuipDRQMay 202128.28 30.180.0%Buy (44)
Small capZimVieZIMVApr 202223.00 23.960.0%Buy (32)
Mid capMattelMATMay 201528.43 23.250.0%Buy (38)
Mid capConduentCNDTFeb 201714.96 4.850.0%Buy (9)
Mid capAdient plcADNTOct 201839.77 32.190.0%Buy (55)
Mid capLamb Weston HoldingsLWMay 202061.36 62.421.6%Buy (85)
Mid capXerox HoldingsXRXDec 202021.91 17.245.8%Buy (33)
Mid capIronwood PharmaceuticalsIRWDJan 202112.02 11.460.0%Buy (19)
Mid capViatrisVTRSFeb 202117.43 11.694.1%Buy (26)
Mid capOrganon & Co.OGNJul 202130.19 36.573.1%Buy (46)
Mid capMarathon OilMROSep 202112.01 26.881.2%Buy (30)
Mid capTreeHouse FoodsTHSOct 202139.43 36.750.0%Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 33.642.4%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 16.995.5%Buy (25)
Mid capBrookfield ReBAMRJan 202261.32 46.521.2%Buy (93)
Mid capPolarisPIIFeb 2022105.78 101.000.0%Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 11.680.0%Buy (24.50)
Mid capM/I HomesMHOMay 202244.28 45.760.0%Buy (67)
Large capGeneral ElectricGEJul 2007304.96 75.740.4%Buy (160)
Large capShell plcSHELJan 201569.95 58.553.4%Buy (60)
Large capNokia CorporationNOKMar 20158.02 4.801.9%Buy (12)
Large capMacy’sMJul 201633.61 19.363.3%HOLD
Large capCredit Suisse Group AGCSJun 201714.48 6.753.9%Buy (24)
Large capToshiba CorporationTOSYYNov 201714.49 21.523.0%Buy (28)
Large capHolcim Ltd.HCMLYApr 201810.92 9.624.6%Buy (16)
Large capNewell BrandsNWLJun 201824.78 19.674.7%Buy (39)
Large capVodafone Group plcVODDec 201821.24 14.926.8%Buy (32)
Large capKraft HeinzKHCJun 201928.68 38.564.1%Buy (45)
Large capMolson CoorsTAPJul 201954.96 50.783.0%Buy (69)
Large capBerkshire HathawayBRK.BApr 2020183.18 304.150.0%HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 42.001.9%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 58.010.0%Buy (78)
Large capAltria GroupMOMar 202143.80 51.097.0%Buy (66)
Large capElanco Animal HealthELANApr 202127.85 23.240.0%Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 40.614.7%Buy (70)

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at or to our friendly customer support team at 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.

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.