March 26, 2024

“Wishing All of You the Best of Good Buys”

Dear Fellow Investors,

It is with mixed emotions that I am writing my last Cabot Value Investor issue. My nearly four years as part of the Cabot team have been exceptionally rewarding. I have had the opportunity to work with an exceptional research team – who bring talent, dedication and investment results that readily match and likely exceed most Wall Street sell-side and buy-side analysts. Our Cabot analysts, despite their very different investing styles, have helped me become a better investor.

I’ve also been lucky enough to work with Cabot’s very capable customer support, operating and marketing teams, which have relieved me of any worries about these very important components of any successful company.

Among the top rewards has been having you as subscribers. I’ve enjoyed your enduring support even as some recommendations turned out to be clunkers, and your emailed questions have helped make my experience as an analyst and writer – often a solitary task – more of a conversation among friends.

And, none of this would have been possible without the talented leadership of Cabot president and CEO Ed Coburn. He lives and breathes the investment newsletter business with a genuine enthusiasm for quality and growth, balanced by patience and discipline. Perhaps my highest compliment is that I would readily invest in an ownership stake in Cabot.

So now, on to my next adventure. After pursuing decades of investing money and providing investment advice for others, I am thrilled to be focused exclusively on investing for my family. This is the epitome of eating one’s own cooking. While there is a clear risk of indigestion, my hope is for a more palatable outcome.

Taking charge of the Cabot Value Investor will be Chris Preston. You may recognize him as our Editor-in-Chief, host of our quarterly Prime conference calls and monthly webinars, co-host of our popular Street Check podcast, and the Chief Analyst of Cabot Stock of the Week. Chris is a hidden gem with an ever-increasing ability to select timely and profitable stocks. I can think of no other person better suited to help you invest your value-oriented and hard-earned capital.

So, onward from here. To borrow perhaps the best sign-off in broadcasting history, used by Paul Kangas at the end of the Nightly Business Report … “wishing all of you the best of good buys.”

Share prices in the table and discussion below reflect Monday, March 25 closing prices. Please note that prices in the discussion below are based on mid-day March 25 prices.

Note to new subscribers: You can find additional color on past earnings reports and other news on recommended companies in prior editions and weekly updates of the Cabot Value Investor on the Cabot website.

Send questions and comments to chris@CabotWealth.com.

This Week’s Portfolio Changes
Agnico Eagle Mines (AEM) – New BUY with a 75 price target.
Barrick Gold (GOLD) – New SELL.

Last Week’s Portfolio Changes
Gates Industrial (GTES) – Raising price target from 16 to 20.

Growth/Income Portfolio

Cisco Systems (CSCO) is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable and generates vast cash flow. Its announced deal for Splunk will drain most of its cash hoard but we see this as being replenished relatively quickly.

There was no significant company-specific news in the past week.

CSCO shares rose 1% in the past week and have 33% upside to our 66 price target. Based on 2024 estimates, unadjusted for the Splunk acquisition, the valuation is reasonably attractive at 9.5x EV/EBITDA and 13.2x earnings per share. BUY

Comcast Corporation (CMCSA) – Comcast is one of the world’s largest media and entertainment companies. Its properties include Comcast cable television, NBCUniversal (movie studios, theme parks, NBC, Telemundo and Peacock), and Sky media. The Roberts family holds a near-controlling stake in Comcast. Comcast shares have tumbled due to worries about cyclical and secular declines in advertising revenues and a secular decline in cable subscriptions as consumers shift toward streaming services, as well as rising programming costs and incremental competitive pressure as phone companies upgrade their fiber networks.

However, Comcast is a well-run, solidly profitable and stable company that will likely continue to successfully fend off intense competition while increasing its revenues and profits, as it has for decades. The company generates immense free cash flow which is more than enough to support its reasonable debt level, generous dividend and sizeable share buybacks.

There was no significant company-specific news in the past week.

Comcast shares slipped 1% in the past week and have 8% upside to our 46 price target. HOLD

Philip Morris International (PM) – Based in Connecticut, Philip Morris owns the global non-U.S. rights to sell Marlboro cigarettes, the world’s best-selling cigarette brand. Cigarettes comprise about 65% of PMI’s revenues. The balance of its revenues is produced by smoke-free tobacco products. The cigarette franchise produces steady revenues and profits while its smoke-free products are profitable and growing quickly. The upcoming full launch of IQOS products in the United States, a wider launch of the IQOS ILUMA product and the recent $14 billion acquisition of Swedish Match should help drive new growth.

The company is highly profitable, generates strong free cash flow and carries only modestly elevated debt (at about 3.2x EBITDA) which it will whittle lower over the next few years. The share valuation at about 13.5x EBITDA and 15.6x per-share earnings is too low in our view. Primary risks include an acceleration of volume declines and/or deteriorating pricing, higher excise taxes, new regulatory or legal issues, slowing adoption of its new products, and higher marketing costs. A strong U.S. dollar will weigh on reported results. While unlikely, Philip Morris could acquire Altria, thus reuniting the global Marlboro franchise.

There was no significant company-specific news in the past week.

PMI’s shares fell 4% in the past week and have 32% upside to our 120 price target. The shares offer an attractive 5.7% dividend yield. BUY

Buy Low Opportunities Portfolio

New Buy: Agnico Eagle Mines (AEM) – We are swapping out Barrick Gold for Agnico Eagle Mines, given the rising risk of expropriation at one or more of Barrick’s mines.

Agnico Eagle Mines Ltd is the world’s third-largest and likely the highest-quality and lowest-risk gold mining company. Its strategy of “proven geological potential in premier jurisdictions” appropriately describes its exclusive focus on quality mines in the legally safe countries of Canada, Mexico, Australia and Finland. In the past few years, Agnico has made several in-region acquisitions including Kirkland Lake in 2022 for $11 billion and Yamana Gold’s Canadian assets for $2.6 billion. The plan for the next five years is to fully integrate and improve these operations and grow production in its existing mines.

Like shares of gold miner Barrick Gold (GOLD), Agnico’s shares remain out of favor as investors worry about the durability of elevated gold prices and the general risks related to production volumes and costs. We see in Agnico a well-managed company that meets/exceeds its production and cost guidance yet has shares that are noticeably undervalued.

As the owner of some of the industry’s highest-quality mines, Agnico has production volumes that look steady for years to come. While some of its ten major mines will see tapering output, nearly all of the others will have steady increases, driven by continued investment and exploration. Agnico’s gold reserves are high quality and increased 11% last year, supporting its outlook for at least stable production volumes. In 2023, the company’s production came in at the high end of its guidance range.

Agnico continues to be an efficient operator, with all-in sustaining¹ (or ASIC) of about $1,200/ounce, which is roughly 12% below the industry average. Helping its economics are the quality of its mines, the close geographic proximity of its Ontario and Quebec mines and the surplus capacity in its Detour Lake facility that will allow for higher throughput with minimal incremental costs. For 2023, the company’s costs came in at the mid-point of its guidance range. For 2024, costs were guided to increase only about 4%. Capital spending for 2024 of between $1.6 to $1.7 billion, stepped up from around $1 billion before its recent acquisitions, will be a modest 3% above 2023 levels and is likely to remain relatively flattish for the next several years.

Agnico’s financial condition is strong. Its debt net of cash is a modest $1.5 billion and is supported by net income of over $1 billion, EBITDA (cash operating profits) of about $3.3 billion and free cash flow that will likely match net income. With gold prices at around $2,100 or higher, Agnico’s free cash flow would likely surge. The company has said it would use this cash to further reduce its debt, advance various internal projects and return capital to investors through share buybacks.

Agnico’s management matches the quality of its assets. Sean Boyd, the chairman, was the key architect of the company’s impressive development during his tenure as CEO from 1998 to 2022. He is widely regarded as one of the industry’s top leaders. The current CEO, Ammar Al-Joundi, is a company veteran and its former CFO. His background as a mechanical engineer is a key positive in our view.

The company’s shares trade at a discounted 8.3x estimated 2024 EBITDA compared to a normalized 10x multiple. This requires investors to pay a 24% premium relative to Barrick’s 6.7x multiple. However, Agnico’s shares may earn this premium given Barrick’s inconsistent financial and operating results and higher expropriation risk.

We are setting a $75 price target for Agnico shares, matching the price target that we use for our AEM recommendation in the Cabot Turnaround Letter. The current $0.40/share quarterly dividend provides a reasonable 2.9% yield. Agnico has paid a dividend for 40 consecutive years. BUY

1. All-in sustaining costs, or AISC, is an industry metric that includes operating and overhead costs, as well as capital spending required to maintain production volumes, on a per-ounce of production basis.

New Sell: Barrick Gold (GOLD). Last week, we noted our heightened concern about Barrick’s risks from expropriation. This week, we are moving the shares to a SELL due primarily to this risk. Rising political instability in the Sahel region of Africa increases the risk that Barrick could lose assets to expropriation. Our immediate concern is Barrick’s massive Loulo-Gounkoto mine, located in far western Mali. This mine produces 13% of Barrick’s annual output and is one of its highest-margin operations. Its expropriation by locals would likely inflict meaningful profit and share price impairments on Barrick. The company continues to struggle to meet its own production and other guidance, which supports our willingness to part ways with Barrick shares.

Comments on factors influencing gold prices:

Over the past week, commodity gold ticked up 1% to $2,163/ounce after crossing above $2,200 last week. Gold is holding its $2,000+ pricing despite what is increasingly becoming a higher-for-longer U.S. interest rate environment.

Gold’s new, higher range may be driven by enduring domestic and international government fiscal deficits as well as from enduring inflation. Also, reasonably reliable official data indicates that central banks, particularly China’s, are stepping up their gold purchases. Individual buyers worried about the durability of their local currency may also be contributing to gold’s strength.

There may be a correlation trade among hedge funds that links gold and Bitcoin. Bitcoin is surging as demand has been remarkably strong for newly approved Bitcoin ETFs. Curiously, most previous institutional hold-outs, including BlackRock, have become supporters of Bitcoin.

Our view on gold prices is based on what we believe is a structural upshift in inflation. These changes include war, government spending, crime, oil prices and past-the-peak fading of the benefits of global free trade, in addition to a tight labor market. There is a reasonably good chance that inflation will remain above a 3% pace indefinitely. This would imply permanent 4-6% interest rates.

The 10-year Treasury yield slipped to 4.25%. The U.S. Dollar Index (the dollar and gold usually move in opposite directions) ticked fractionally higher to 104.23.

Investors and commentators offer a wide range of outlooks for the economy, interest rates and inflation. We have our views but hold these as more of a general framework than a high-conviction posture. Investing in gold-related equities is a long-term decision – investors shouldn’t allow near-term weakness to deter their resolve.

Barrick shares were flat in the past week. SELL

Aviva, plc (AVVIY), based in London, is a major European company specializing in life insurance, savings and investment management products. Amanda Blanc, hired as CEO in July 2020, is revitalizing Aviva’s core U.K., Ireland and Canada operations following her divestiture of other global businesses. The company now has excess capital which it is returning to shareholders as likely hefty dividends following a sizeable share repurchase program. While activist investor Cevian Capital has closed out its previous 5.2% stake, highly regarded value investor Dodge & Cox now holds a 5.0% stake, providing a valuable imprimatur and as well as ongoing pressure on the company to maintain shareholder-friendly actions.

On Thursday, March 7, Aviva reported full-year results, with adjusted operating profits of £1.5 billion rising 9%. Operating earnings of £0.40/share rose 1% and were 11% above estimates. Net insurance revenues rose 8.5%. Claims costs rose 7% but were smaller as a percent of revenues. Corporate costs fell 1%. The return on equity was 14.7%. Aviva’s full-year dividend was set at £0.334/share, in line with our estimate. Cash flow and capital look healthy. All in, Aviva continues to produce solid results.

The company set a 2026 operating profit target of £2 billion, about 36% above the 2023 results. For 2024, the company said it would raise the dividend by about 5%. Also, share buybacks will continue with a new £300 million program now underway. Aviva’s share count fell 2% last year – this new buyback program would reduce it by another 2%.

Aviva’s strategic and operational turnaround is largely complete and we are waiting for a higher valuation multiple. From here, the leadership is working to produce steady and repeatable if dull revenue, profit, capital and dividend growth, along with repurchasing a steady 2% or so of its shares each year. Over time, this consistency should help the shares grind higher to our $14 price target, currently only about 16% away.

There was no significant company-specific news in the past week.

Aviva shares rose 2% in the past week and have 11% upside to our 14 price target. Based on management’s guidance for the 2024 full-year dividend, the shares offer a generous and sustainable 7.0% yield. On a combined basis, the dividends and buybacks offer a 10% “shareholder yield” to investors. BUY

Citigroup (C) – Citi is one of the world’s largest banks, with over $2.4 trillion in assets. The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout. The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser. Investors have lost hope in Citigroup, creating an impressive bargain.

There was no significant company-specific news in the past week.

Citi shares rose 4% in the past week and have 40% upside to our 85 price target. The stock remains attractive as it trades at about 71% of tangible book value of $86.19. The dividend offers investors a 3.5% yield. BUY

CNH Industrial (CNHI) – This company is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment and is the #2 ag equipment producer in North America (behind Deere). Its shares have slid from their peak and now trade essentially unchanged over the past 20 years. While investors see an average cyclical company at the cusp of a downturn, with a complicated history and share structure, we see a high-quality and financially strong company that is improving its business prospects and is simplifying itself yet whose shares are trading at a highly discounted price. See our November 30 Alert and the December 5 Monthly letter for more color on our thesis.

There was no significant company-specific news in the past week.

CNH’s shares rose 1% in the past week and have 20% upside to our 15 price target. The 3.2% dividend yield offers a reasonable interim cash return. BUY

Gates Industrial Corp, plc (GTES) – Gates is a specialized producer of industrial drive belts and tubing. While this niche might sound unimpressive, Gates has become a leading global manufacturer by producing premium and innovative products. Its customers depend on heavy-duty vehicles, robots, production and warehouse machines and other equipment to operate without fail, so the belts and hydraulic tubing that power these must be exceptionally reliable. Few buyers would balk at a reasonable price premium on a small-priced part from Gates if it means their million-dollar equipment keeps running. Even in automobiles, which comprise roughly 43% of its revenues, Gates’ belts are nearly industry-standard for their reliability and value. Helping provide revenue stability, over 60% of its sales are for replacements. Gates is well-positioned to prosper in an electric vehicle world, as its average content per EV, which require water pumps and other thermal management components for the battery and inverters, is likely to be considerably higher than its average content per gas-powered vehicle.

The company produces wide EBITDA margins, has a reasonable debt balance and generates considerable free cash flow. The management is high-quality. In 2014, private equity firm Blackstone acquired Gates and significantly improved its product line-up and quality, operating efficiency, culture and financial performance. Gates completed its IPO in 2018. Following several sell-downs, Blackstone has a 27% stake today.

There was no significant company-specific news in the past week.

Gates shares rose 3% in the past week and have 13% upside to our new 20 price target. BUY

NOV, Inc (NOV) – This high-quality, mid-cap company, formerly named National Oilwell Varco, builds drilling rigs and produces a wide range of gear, aftermarket parts and related services for efficiently drilling and completing wells, producing oil and natural gas, constructing wind towers and kitting drillships. About 64% of its revenues are generated outside of the United States. Its emphasis on proprietary technologies makes it a leader in both hardware, software and digital innovations, while strong economies of scale in manufacturing and distribution as well as research and development further boost its competitive edge. The company’s large installed base helps stabilize its revenues through recurring sales of replacement parts and related services.

We see the consensus view as overly pessimistic, given the company’s strong position in an industry with improving conditions, backed by capable company leadership and a conservative balance sheet.

There was no significant company-specific news in the past week.

The price of West Texas Intermediate (WTI) crude oil ticked higher to $81.66/barrel. Demand remains robust while supplies continue to be reasonably plentiful. Several OPEC+ producers led by Saudi Arabia agreed to extend their production cuts through June.

For the moment, the two major hot wars – in Ukraine and in the Middle East – appear to have stopped getting worse. This has eased pressure on oil prices. However, outcomes in wars are unpredictable. Another major step-up in aggression, particularly in the Middle East, could push oil prices higher. If Iran becomes directly involved, oil prices could surge to at least $150/barrel.

The price of Henry Hub natural gas rose 7% this past week to $1.81/mmBtu (million BTU), below its rough floor at around $2. As the traders’ saying goes, “the cure for low commodity prices is low commodity prices.” As such, producers will likely curtail production, but this is a slow and unsteady process that is unlikely to raise natural gas prices significantly until at least the end of summer. For NOV, the commodity price weakness will incrementally reduce demand for its equipment.

NOV shares rose 4% in the past week and have 29% upside to our 25 price target. The dividend produces a reasonable 1.0% dividend yield. BUY

Worthington Enterprises (WOR) – Following the split-up of Worthington Industries late last year, “Enterprises” focuses on producing specialized building products (42% of sales) and consumer products (48%). The value of these operations was previously obscured by the market’s perception that the original Worthington Industries was primarily a steel processor. While the market sees an average company with a mix of only partly related products, we see a high-quality company with strong positions in valuable and profitable niches, backed by capable management and a solid balance sheet.

On March 25, Worthington reported fiscal third-quarter adjusted earnings of $0.80/share that were flattish (-1%) compared to a year ago but 16% above the consensus estimate of $0.69/share. This was the company’s first quarterly report following the split-up. The company initiated a recurring $0.16/share quarter dividend, which offers a 1% yield.

Revenues slipped 9% due to a 19% decline in Building Products revenues as customers de-stocked their inventories. The two other segments, Consumer Products and Sustainable Energy Solutions, saw favorable revenue growth.

Perhaps most encouraging was that profit margins expanded considerably. The gross margin increased to 23.1% from 22.8%, and the adjusted EBITDA margin widened to 21.1% from 20.0%, even as revenues slipped. This improvement is highly encouraging as it suggests that Worthington is more profitable than investors give it credit for.

The balance sheet is fortress-like, with only $71 million in net debt, helped by $40 million in free cash flow and a $150 million cash distribution related to the split-up.

Worthington’s headline results were highly encouraging, but commentary on the conference call suggests that the company faces some headwinds. It will take more favorable results and commentary in future quarters to fully convince investors that the company merits a higher valuation. We remain on board with the Worthington story.

WOR shares slipped 1% in the past week and have 17% upside to our 73 price target. The dividend produces a reasonable 1.0% dividend yield. BUY

Current price is yesterday’s mid-day price

Strong Buy – This stock offers an unusually favorable risk/reward trade-off, often one that has been rated as a Buy yet the market has sold aggressively for temporary reasons. We recommend adding to existing positions.
Buy – This stock is worth buying.
Hold – The shares are worth keeping but the risk/return trade-off is not favorable enough for more buying nor unfavorable enough to warrant selling.
Sell – This stock is approaching or has reached our price target, its value has become permanently impaired or changes in its risk or other traits warrant a sale.

Note for stock table: For stocks rated Sell, the current price is the sell date price.

Current price is yesterday’s mid-day price.
CSCO: Earnings estimates are for calendar years.

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