August 16, 2024

In today’s note, we discuss the recent earnings reports from Berkshire Hathaway (BRKB), B2Gold (BTG) and Kopin (KOPN), among others. We’re also making a new addition to the portfolio in the form of YETI Holdings (YETI).

We encourage you to look through our summary of the latest quarterly results in this update, which includes a total of five of the companies in our portfolio. In what has been a volatile earnings season to date, there were a mixture of beats, misses and consensus-meeting reports.

A discussion on the importance of the Volatility Index (VIX) and its impact on the current market environment is featured in this week’s podcast, along with the case that a turnaround-oriented strategy is likely to replace trend/momentum-based strategies among traders in the coming weeks.

We also take look at potential early-stage turnarounds in two major players in the biopharma space: Bristol-Myers Squibb (BMY) and Illumina (ILMN). Additionally, we take an updated look at turnaround candidate Starbucks (SBUX) after the huge management change announcement it made this week.

Comments on Earnings

With that, let’s turn our attention to the recent earnings reports for our Cabot Turnaround Letter portfolio stocks.

B2Gold (BTG) posted mixed Q2 results on August 9 in which revenue increased 5% from a year ago, to $493 million, along with per-share earnings of 6 cents that just barely missed estimates. Key metrics like all-in-sustaining costs (AISC) were an attractive $1,267 per gold ounce sold, well under the annual guidance range and about $1,200 an ounce below the current gold price.

For full-year 2024, the company guided for total gold production of about 830,000 ounces at the midpoint, which if realized is around 15% lower than the year-ago total. Full-year earnings are also expected to be down by the same amount; however, the bottom line is expected to improve by 84% in 2025. More importantly, the longer-term fundamental outlook for gold is bullish, so the company has longer-term turnaround prospects. As such, I’ll maintain the BUY rating on BTG placed by my predecessor.

Last week, Berkshire Hathaway (BRKB) reported revenue of $94 billion for Q2 that rose 1% year-on-year, with operating earnings of nearly $12 billion that increased 16%. The conglomerate also repurchased $345 million of its shares during the quarter, bringing the six-month total to $2.9 billion, while its cash pile soared to a record $278 billion as of June, an increase of nearly 50% from Q1. Looking ahead, Wall Street sees the bottom line increasing 30% for full-year 2024. All told, Berkshire looks good, so we’ll maintain a HOLD rating on the stock.

Low-fare passenger airline Frontier Group (ULCC) reported a mixed second quarter last week, with revenue of just under $1 billion barely unchanged from a year ago, while earnings of 14 cents a share beat estimates by four cents. Cost per available seat mile fell 6%, while the company’s aircraft delivery schedule with Airbus was updated to defer 54 aircraft deliveries from 2025-2028 out to 2029-2031.

However, industry-wide trends aren’t as sanguine as they were a year ago when the stock was first recommended in the newsletter. According to one air travel industry analyst, estimated domestic airfares for August are down about 6% from a year ago, which suggests overall travel sector demand has receded from all-time highs. What’s more, if inflation refuses to abate, consumers may pull back on traveling even further.

I’m not willing to tolerate further losses in ULCC, and as part of our ongoing effort at streamlining the portfolio, I’m placing a SELL rating on the stock.

Optics and display device maker Kopin (KOPN) released Q2 earnings last week that featured revenue of $12 million that increased 17% from a year ago, along with a per-share loss of five cents that was in-line with estimates. A highlight of the quarter was a whopping 106% increase in defense products revenue, and management said it expects to continue accelerating the company’s growth with a “strong order book of new and long-standing customers,” and the firm believes it’s “well positioned” to deliver long-term growth for the shareholders with its turnaround initiatives.

Several new contracts with the U.S. Army and Navy to develop optics systems for various defensive weapons, including AI-enabled hardware and software architecture, should help boost the top line going forward. On that score, analysts see revenue increasing 20% this year and 14% in 2025. We’ll maintain our BUY rating on the stock.

Volkswagen (VWAGY) released Q2 earnings earlier this month that featured a 4% revenue increase and a small beat at the operating profit margin level. Company-wide volumes were down by 3% year-on-year, which impacted all segments. On a positive note, however, free cash flow of $3.3 billion beat estimates by 38%.

Volkswagen was initially recommended by my predecessor back in August 2022 at a price just under 20 a share, and since then its share price has nearly been cut in half. With rare exceptions, I’m not a fan of holding OTC stocks, with Volkswagen also being an ADR. The trading volume on the stock also isn’t to my liking, plus the dividend is in danger of being cut. All things considered, I’m moving the stock to a SELL.

RATING CHANGES: Frontier Group (ULCC) and Volkswagen (VWAGY) have been moved from BUY to SELL.

I’m also going to cut First Quantum Minerals (FM:TSX) from the portfolio. The stock is up 6% since first being recommended by my predecessor back in May, but since it’s a Canadian-listed stock, I’d rather it not be in the Cabot Turnaround Letter portfolio. SELL

NEW POSITION: We’re placing YETI Holdings (YETI), which is known for its trendy and iconic food and beverage coolers and line of insulated stainless-steel mugs, on a buy. The high-end outdoor and recreational products maker is working to expand its reach, with a growing number of nationwide retail outlets carrying the most popular YETI products.

In its recent Q2 earnings, the company announced a 16% year-on-year increase in overall product sales and a better-than-anticipated increase in earnings of 70 cents a share. The bottom line is expected to increase 17% for 2024, with 10%-ish annual earnings growth projected for each of the next three years ahead, driven by growth in its drinkware portfolio and supported by gross margin expansion. I’ll have more to say about YETI next week. BUY

Friday, August 16, 2024 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 15 minutes and covers:

• Discussion of the importance of the VIX being under 25 for buying stocks.
• Why turnaround stocks are likely to make a comeback.
• Comments on potential turnarounds in healthcare/biopharma and retail.
• Comments on earnings
• Elsewhere in the markets
  
  • A belated review of some recent earnings reports, including Frontier Group (ULCC) and Kopin (KOPN) earnings, as well as two stocks reporting earnings in July.
• Final note
  
  • Comments on our latest portfolio addition, YETI Holdings (YETI), plus a brief overview of upcoming earnings announcements.

Turnaround Watch List

Illumina (ILMN) is a biotech that manufactures integrated systems for the analysis of genetic variation and biological function. Basically, the company develops DNA sequencing and array-based life science technologies, including whole-genome sequencing kits, which assist genomic sequencing and other research in the fields of chemistry, biology and optics. In fact, the company is the leader in genomic sequencing, with upwards of 90% of all sequencing volumes globally performed on its instruments, and its offerings have helped drive down the cost of sequencing an entire human genome from over $100,000 in 2009 to just $600 in 2021.

Illumina’s Q2 earnings weren’t entirely to Wall Street’s liking, as the firm reported a 6% year-over-year decline in revenues of $1.1 billion, while earnings of 36 cents a share fell well short of consensus estimates. This week, however, Illumina provided an update on its turnaround strategy, which includes a focus on cutting costs, boosting sales growth and streamlining DNA sequencing and analysis. Management thinks these efforts can result in $200 million cost reductions going forward, and it predicts high-single-digit annual revenue growth by 2027 and double-digit EPS growth for 2025-2027.

A major investment bank just upgraded Illumina shares after noting that Illumina “is now taking a more realistic approach to its business.” I view the stock as being an attractive early-stage turnaround stock with above-average appreciation potential.

Another consideration in the biopharma group is Bristol-Myers Squibb (BMY), which is well known for its treatments across several indications, including hematology, oncology, cardiovascular and neuroscience diseases. In its latest earnings, the company posted Q2 revenue of over $12 billion that increased 9% from a year ago, with earnings of $2.07 a share beating estimates by 44 cents.

Although the company has expressed concern over the recent changes under which Medicare has revised prices for its blockbuster drug, the anticoagulant Eliquis, the new prices won’t take effect until 2026. Moreover, the firm’s cardiovascular portfolio has the potential to lead sales growth going forward, with sales of its oral cardiac-specific myosin inhibitor estimated to reach $4 billion by 2030. A 4.9% dividend yield for BMY is an added attraction.

On a related note, coffee retailer Starbucks (SBUX) made a huge splash this week after it announced that CEO and director Laxman Narasimhan has stepped down, with Chipotle’s CEO Brian Niccol taking his place effective September 9. Earlier this month, I highlighted Starbucks in the Catalyst Report as being a prime turnaround candidate based on recent activist investor activity in the company.

However, I didn’t foresee the CEO change coming and this obviously had a material impact on the stock’s price. Obviously, it would have been more ideal to have gotten into SBUX at the lower price, but even after the latest rally, I’m still going to be looking for an entry point into the stock in the coming days. And if I see a more attractive entry, I’ll include it in our portfolio with an update.

Please know that while I don’t yet personally own shares of all Cabot Turnaround Letter recommended stocks, this will materially change in the coming weeks as I become fully integrated as your new chief analyst.

Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at cdroke@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.

Portfolio

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