A key element of any successful turnaround is the presence of a catalyst. Changes such as new management, a refreshed product or marketing strategy, or even renewed focus on a particular business unit can all bring about improved perception on Wall Street.
One catalyst that I look at closely is shareholder activism. Committed outside investors frequently bring a fresh perspective and a renewed focus on success that can serve to catalyze those other changes.
And lately, there’s been a marked increase in activist shareholders at big-name companies across a number of different industries.
With that in mind, I wanted to look more closely at a few of those names to evaluate the possibility of a rebound in shares in the new year.
One company that has been commanding most of the activist investor headlines of late is Macy’s (M).
The company has come into the crosshairs of value-focused activist equity firm Barington Capital, which believes Macy’s shares are “significantly undervalued” relative to its industry peers and “doesn’t reflect the potential of its turnaround plan.” Barington has recently built a stake in Macy’s of undisclosed size in conjunction with the private equity firm, Thor Equities.
Barington has laid out what it sees as the ideal path to a successful turnaround for Macy’s, including the following points:
- A reduction in capital expenditures from the current 4% to around 2% of total sales.
- The commencement of a $2-to-$3 billion stock buyback authorization over the next three years.
- The creation of a real estate subsidiary that would collect rents from the company’s retail ventures.
- Consider the possible sale of its luxury Bloomingdale’s and Bluemercury lines, along with other strategic alternatives.
Macy’s recently reported Q3 earnings, with revenue of $4.7 billion decreasing 3% from a year ago and earnings of four cents a share beating estimates by a penny.
Shortly thereafter, the firm lowered its fourth-quarter sales outlook (to be reported in March) to below its previously anticipated range of $7.8-$8 billion while maintaining earnings guidance.
A positive aspect of the Q3 report was a 2% comparable sales increase for Macy’s First 50 locations (stores with stronger merchandising, better visual presentation, and enhanced customer services) for the quarter, while Bloomingdale’s reported comp sales growth of owned and owned-plus-licensed-plus-marketplace of 1% and 3%, respectively. Bluemercury, meanwhile, reported comparable sales growth of 3%. Credit card revenue also came in above Wall Street’s expectations.
Commenting on the Q3 results, management said they “reflect the positive momentum we are building through our Bold New Chapter strategy,” and value investors see a compelling valuation in Macy’s in the form of the company’s EV/EBITDA multiple of 3.4x, or a 34% discount against the average 5x forward EV/EBITDA multiple of its industry peers.
Income investors, meanwhile, may be allured by Macy’s attractive 4.1% dividend yield, which compares favorably to the retail industry average. All told, it’s an alluring turnaround prospect for investors with a long-term timeframe.
Another well-known activist investor, David Einhorn of Greenlight Capital, has recently initiated a stake in agricultural equipment maker CNH Industrial (CNH). CNH is admittedly more of a cyclical turnaround play, but as the stock is coming off a nearly 50% drop over the last couple of years, I think we can classify it as a potentially worthwhile candidate for value-oriented investors.
Einhorn sees value in CNH due to the fact that the farm equipment spending cycle is currently still in a downturn and retail investors see little value in the sector—exactly the type of backdrop he likes to see from a contrarian perspective.
Additionally, he finds the 3.8% dividend yield to be an attraction and notes the company is repurchasing around 6% of its shares, while there’s also “very little financial leverage” and that “sometime [this] year or in early 2026” ag equipment industry will likely commence a renewed upcycle.
With an attractive forward P/E ratio relative to industry peers, the stock is high on my watchlist.
To learn more about the other companies I’m watching (and buying) now, subscribe to Cabot Turnaround Letter today.
