February 16, 2024

This week, we review earnings reports from Agnico Eagle Mines (AEM), Goodyear Tire & Rubber (GT) and TreeHouse Foods (THS).

Next week, we anticipate earnings from Elanco Animal Health (ELAN), Macy’s (M), Gannett (GCI), Dril-Quip (DRQ), Vodafone (VOD) and Warner Bros Discovery (WBD).

Please know that some reporting dates are estimated based on the companies’ reporting history, others are confirmed dates. As always, it’s likely that some companies will report on a day different from the one we anticipate.

Reminder:

The Cabot Turnaround Letter will be traveling late next week, and so there will be no update on Friday, February 23. Also, the monthly letter will be pushed back from Wednesday, February 28 to the following Wednesday, March 6. We’ll publish the Catalyst Report on Friday, March 1.

Comments on Earnings

Agnico Eagle Mines (AEM) – Agnico is the third largest gold miner in the world. It is arguably the highest quality miner as it focuses exclusively on strong mines in the legally safe countries of Canada, Mexico, Australia and Finland. After several large acquisitions in recent years, the company is emphasizing integrating and improving these operations and growing production in its existing mines. Management is similarly high-quality. Agnico shares have fallen out of favor and offer an attractive value to contrarian investors.

The company reported an encouraging quarter, featuring strong performance across nearly all metrics. Financial guidance for 2024 and production guidance for 2024-2026 look healthy. Overall, Agnico is performing well. If we have additional comments after we digest the 79-page press release, we’ll include them in our next note.

In the quarter, revenues rose 27% and were 2% above estimates. Adjusted earnings of $0.57/share rose 50% and were 16% above estimates. Adjusted EBITDA of $843 million increased 45% and was 3% above estimates.

Goodyear Tire & Rubber Company (GT) – An investment in Goodyear is an opportunistic purchase of an average company whose shares have fallen sharply out-of-favor. Demand should remain relatively stable and pricing will likely remain robust, more than enough to offset rising input costs. The benefits from Goodyear’s acquisition of Cooper Tire provide additional value. The recent 10% stake by activist Elliott Management adds pressure for the company to revitalize itself.

Goodyear reported strong profit improvement but revenues and implied first-quarter and full-year 2024 guidance that disappointed investors, sending the shares down about 15% in a rough day for the market overall. The turnaround is just now getting started, with a new CEO in place for less than two weeks. The new team reiterated their strategy of at least $2 billion in asset sales, 10% operating margins helped by $1.3 billion in revenue and cost improvements and reduced leverage. By all measures, the CEO looks up to the task.

Investors generally assume that turnarounds are immediate, linear and upward. Analysts make their best guess about revenues and earnings, but in a situation like Goodyear’s, these are truly guesses. We’re reminded of the sharp rebuke by Lee Raymond, CEO of Exxon (at the time), when its reported revenue was below analysts’ estimates. Raymond replied, “We didn’t miss anything – you just guessed wrong!” And, critically, Goodyear isn’t a “revenue growth” story, it is a profit margin and cash flow story. The company merely needs to maintain reasonably stable revenue and market share.

Goodyear’s new leadership is working to unwind decades of mismanagement, upgrade an ill-managed asset base and product offering, and rebuild a demoralized and hollowed out employee roster. This could readily take two years or more. But, even if the company achieves only half of its targeted improvement, the shares are remarkably attractive. Patience is key.

In the quarter, revenues fell 5% and were 5% below estimates. Adjusted earnings of $0.47/share increased from $0.07 and were 31% above estimates. Tire volumes fell 4%. Helping lift operating profits by 62% were lower raw materials costs that more than offset weaker volumes and incrementally weaker pricing and mix (this is a favorable reversal from prior quarters). Cost savings offset higher costs elsewhere. The segment operating margin, which is a scrubbed operating margin, was 7.5%, up from 4.4%.

Free cash flow of $993 million was reasonably strong (the best fourth quarter in four years). Goodyear’s balance sheet carried 12% less net debt than in the third quarter, but was unchanged from a year ago. We have no immediate worries about the company’s liquidity or debt burden.

TreeHouse Foods (THS) – As a major contract producer of private label foods, TreeHouse has struggled with poor execution and elevated debt resulting from its acquisition-driven strategy even as the private label food industry remains healthy. The company remains profitable and generates reasonable free cash flow. Respected activist investor JANA Partners has a large 9.2% stake and is pressuring this undervalued company to get its act together.

TreeHouse reported a weak fourth quarter and its 2024 guidance called for essentially no change from full-year 2023 results. The company continues to struggle with its turnaround and is testing our patience. We’re not impressed by the TreeHouse leadership but for now we remain patient.

Weak fourth-quarter revenues were attributed to a supply chain problem in the broth operations and to a packaging quality matter in cookies/pretzels. While management implied these were one-off problems, we won’t be surprised if they have other one-offs in the future. This issue does nothing to assuage our concern that the company’s operations may be fragile and poorly run.

“Distribution exits” accounted for some revenue loss. To us, this sounds like TreeHouse lost some accounts. We’ll need to wait for the conference call to know for sure.

The adjusted EBITDA margin slipped due to the revenue-related issues, but also to a set of cost issues that on balance appear to be more permanent than temporary. Also, interest income from its very favorable coupon on its Note Receivable is now gone, as the note was repaid. This loss represents another down-tick in profits although it is not included in the otherwise highly scrubbed adjusted EBITDA number.

While the gross debt balance is unchanged from a year ago, TreeHouse has more cash, so the net debt balance fell by about $300 million, or 21%, despite a $100 million share buyback and $100 million acquisition. We would like to see more buybacks and fewer acquisitions but still appreciate the improvement in the company’s financial strength.

In the quarter, revenues fell 5% and were 2% below estimates. Sales excluding acquisitions fell 8%. Adjusted earnings of $0.77/share fell 21% but were 5% above estimates. Adjusted EBITDA of $108 million was 9% below year-ago results but was 2% above estimates.

Friday, February 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 12½ minutes and covers:

• Comments on earnings
• Comments on recommended companies
  
  • Western Digital (WDC) – Delaying filing of 10-Q
  • Volkswagen AG (AG) – Under pressure to divest stake in Chinese joint venture
  • Wells Fargo (WFC) – Released from another consent decree.
• Elsewhere in the markets
  
  • Your mispricing is our opportunity.

Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.

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. Please feel free to share your ideas and suggestions for the podcast and the letter 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 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.

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