This week’s Friday Update includes our price target change for Marathon Oil (MRO) and updates on several recommended companies.
And, as a reminder, we will be publishing the April 2022 edition of the Cabot Turnaround Letter next Wednesday.
Marathon Oil (MRO) has crossed our recently raised $24 price target (up from the original $18 target at our initial Buy recommendation in August, 2021), impelling us to either raise our target, change the rating to Hold, or to sell the shares. We are raising our price target to $30.
Assuming about $90 for oil and $3.00 for natural gas, Marathon shares currently trade at an EBITDAX multiple of about 4.4x. This valuation is roughly in line with its historical average and is in line with Street estimates for commodity prices. In this sense, the shares could be seen as fairly valued.
However, oil is currently trading at close to $110/barrel while natural gas is trading around $5.57/mmBTU. At these prices, MRO shares are trading at about 3.4x EBITDAX (or, EBITDA with exploration expenses added back) – clearly putting the shares in the attractive valuation range. Furthermore, historical valuations assume an eventual and generally sooner-rather-than-later fall-off in commodity prices. To the extent that investors believe, and that facts will support it, this current cycle, which follows years of severe underinvestment in energy infrastructure, constrained future investment (driven by investor pressure, government regulations and ESG considerations) and the Ukraine war sanctions on Russia, commodity prices may not fall back much below $100/barrel and $4.00/mmBTU for years. If this were true, MRO shares would offer an exceptional bargain, not least of which would be supported by the immense free cash flow that the company has committed to paying out to investors. For reference, at $110/$5 oil/gas, the shares are valued at a 25% free cash flow yield.
We are not in the business of predicting commodity prices, and fully appreciate that such predictions make for a low-success-rate endeavor. What we like, however, is the attractive valuation on current commodity prices, and the potential upside should commodity prices stay elevated. We of course reserve the right to exit our position if any of these assumptions appear to be unraveling.
Earnings updates:
None
Friday, March 25, 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 11½ minutes and covers:
- Price target change:
- Marathon Oil (MRO) – from 24 to 30
- Comments on other recommended companies:
- Berkshire Hathaway (BRK/B) – acquires Allegheny Corp.
- Credit Suisse (CS) – more boardroom changes and write-offs.
- Toshiba (TOSYY) – management loses in proxy vote.
- Ironwood Pharmaceuticals (IRWD) – Russian oligarch issues?
- Xerox (XRX) – two Icahn-backed board members depart.
- Vistra Energy (VST) – CEO retires, capable CFO/president steps up.
- Elsewhere in the Market:
- Becoming aware of remote risk of dollar losing its reserve currency status.
- Final note:
- Farewell to Ned Johnson, legendary former CEO of Fidelity.
Please know that I personally own shares of all Cabot Turnaround Letter recommended stocks, including the stocks mentioned in this note.
| Market Cap | Recommendation | Symbol | Rec. Issue | Price at Rec. | 3/24/22 | Current Yield | Current Status |
| Small cap | Gannett Company | GCI | Aug 2017 | 9.22 | 4.60 | 0.0% | Buy (9) |
| Small cap | Duluth Holdings | DLTH | Feb 2020 | 8.68 | 12.62 | 0.0% | Buy (20) |
| Small cap | Dril-Quip | DRQ | May 2021 | 28.28 | 35.29 | 0.0% | Buy (44) |
| Mid cap | Mattel | MAT | May 2015 | 28.43 | 23.23 | 0.0% | Buy (38) |
| Mid cap | Conduent | CNDT | Feb 2017 | 14.96 | 4.90 | 0.0% | Buy (9) |
| Mid cap | Adient plc | ADNT | Oct 2018 | 39.77 | 37.17 | 0.0% | Buy (55) |
| Mid cap | Lamb Weston Holdings | LW | May 2020 | 61.36 | 55.76 | 1.8% | Buy (85) |
| Mid cap | Xerox Holdings | XRX | Dec 2020 | 21.91 | 20.15 | 5.0% | Buy (33) |
| Mid cap | Ironwood Pharmaceuticals | IRWD | Jan 2021 | 12.02 | 12.76 | 0.0% | Buy (19) |
| Mid cap | Viatris | VTRS | Feb 2021 | 17.43 | 10.95 | 4.4% | Buy (26) |
| Mid cap | Vistra Corporation | VST | Jun 2021 | 16.68 | 22.05 | 3.1% | Buy (25) |
| Mid cap | Organon & Co. | OGN | Jul 2021 | 30.19 | 35.30 | 3.2% | Buy (46) |
| Mid cap | Marathon Oil | MRO | Sep 2021 | 12.01 | 25.53 | 1.1% | Buy (30) |
| Mid cap | TreeHouse Foods | THS | Oct 2021 | 39.43 | 30.97 | 0.0% | Buy (60) |
| Mid cap | Kaman Corporation | KAMN | Nov 2021 | 37.41 | 44.93 | 1.8% | Buy (57) |
| Mid cap | The Western Union Co. | WU | Dec 2021 | 16.40 | 18.55 | 5.1% | Buy (25) |
| Mid cap | Brookfield Re | BAMR | Jan 2022 | 61.32 | 56.84 | 0.0% | Buy (93) |
| Mid cap | Polaris | PII | Feb 2022 | 105.78 | 106.83 | 0.0% | Buy (160) |
| Mid cap | Goodyear Tire & Rubber | GT | Mar 2022 | 16.01 | 14.00 | 0.0% | Buy (24.50) |
| Large cap | General Electric | GE | Jul 2007 | 304.96 | 94.12 | 0.3% | Buy (160) |
| Large cap | Shell plc | SHEL | Jan 2015 | 69.95 | 55.02 | 3.5% | Buy (60) |
| Large cap | Nokia Corporation | NOK | Mar 2015 | 8.02 | 5.34 | 6.8% | Buy (12) |
| Large cap | Macy’s | M | Jul 2016 | 33.61 | 26.35 | 2.4% | HOLD |
| Large cap | Credit Suisse Group AG | CS | Jun 2017 | 14.48 | 8.12 | 3.2% | Buy (24) |
| Large cap | Toshiba Corporation | TOSYY | Nov 2017 | 14.49 | 19.82 | 3.2% | Buy (28) |
| Large cap | Holcim Ltd. | HCMLY | Apr 2018 | 10.92 | 9.60 | 4.6% | Buy (16) |
| Large cap | Newell Brands | NWL | Jun 2018 | 24.78 | 21.88 | 4.2% | Buy (39) |
| Large cap | Vodafone Group plc | VOD | Dec 2018 | 21.24 | 16.72 | 6.1% | Buy (32) |
| Large cap | Kraft Heinz | KHC | Jun 2019 | 28.68 | 38.63 | 4.1% | Buy (45) |
| Large cap | Molson Coors | TAP | Jul 2019 | 54.96 | 52.92 | 2.9% | Buy (69) |
| Large cap | Berkshire Hathaway | BRK.B | Apr 2020 | 183.18 | 352.37 | 0.0% | HOLD |
| Large cap | Wells Fargo & Company | WFC | Jun 2020 | 27.22 | 51.33 | 1.6% | Buy (64) |
| Large cap | Baker Hughes Company | BKR | Sep 2020 | 14.53 | 38.29 | 1.9% | SELL |
| Large cap | Western Digital Corporation | WDC | Oct 2020 | 38.47 | 50.50 | 0.0% | Buy (78) |
| Large cap | Altria Group | MO | Mar 2021 | 43.80 | 52.50 | 6.9% | Buy (66) |
| Large cap | Elanco Animal Health | ELAN | Apr 2021 | 27.85 | 27.47 | 0.0% | Buy (44) |
| Large cap | Walgreens Boots Alliance | WBA | Aug 2021 | 46.53 | 47.02 | 4.1% | Buy (70) |
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 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 limit we may not be able to cover every topic each week, but we will work to cover as much as possible or respond by email.Market cap is as-of the Initial Recommendation date. Current status indicates the rating and Price Target in ( ). Prices are closing prices as-of date indicated, except for those indicated by a "*", which are price as-of SELL recommendation date.