In the past two weeks, twenty Turnaround Letter recommended companies reported earnings, while three announced mergers. Nearly all of our names have reported.
Merger news:
Gannett (GCI) – the company reached an agreement to merge with New Media Group (NEWM). Gannett shareholders will receive $6.25/share in cash and 0.5427 shares of NEWM, or approximately $10.66/share. Gannett shares have gained about 15% year-to-date from merger rumors and the now-confirmed deal. The strategic logic of the deal is sound, although we were expecting a higher price. New Media Group anticipates run-rate cost synergies of between $275 million and $300 million annually, a remarkably high 12% of Gannett’s cash operating expenses. We will be updating our rating and price target.
Midstates Petroleum (MPO) - Midstates’ merger with Amplify was completed last week. Midstates shareholders retain their shares, while Amplify shareholders receive 0.933 MPO shares for each Amplify share. The company is now named Amplify Energy and trades under the AMPY symbol. We will be updating our rating and price target.
Viacom (VIA.B) – Viacom announced that it has reached an agreement to re-combine with CBS in an all-stock deal. The new company will be led by respected Viacom CEO Bob Bakish, and will be better-positioned to compete in the consolidating media industry. It could also make the combined company a more attractive acquisition target. ViacomCBS will have a market cap of around $30 billion, relatively tiny compared to Disney ($245 billion), Netflix ($136 billion) and Comcast ($193 billion). We will be updating our rating and price target.
Earnings summaries (in alphabetical order). All companies mentioned presently retain our Buy rating and price targets.
Adient (ADNT) – Adient’s shares jumped sharply on fiscal third quarter revenues, adjusted EBITDA and earnings that were ahead of consensus estimates, although results were weaker than a year ago. Revenues fell 6%, adjusted EBITDA fell 36% and adjusted per-share earnings fell 74%. The company produced $168 million in positive free cash flow. Adient reaffirmed their 4th quarter revenue guidance and that 2nd half adjusted EBITDA and margins will be better than the first half. The turnaround is underway although heavy headwinds remain. Adient’s balance sheet has $1 billion in cash, with $3.8 billion in debt, and is generating more free cash flow YTD than a year ago.
Allscripts (MDRX) – Revenues increased 1% from a year ago (in-line with consensus estimates) and adjusted EBITDA fell 1% (in-line with consensus estimates), while adjusted per-share earnings of $0.17 beat the consensus by 1 cent. Bookings increased 31% from a year ago. The company expects the stronger bookings to produce more inspiring revenue and profit growth in the second half of the year, and it reaffirmed its full-year 2019 guidance. Allscripts’ balance sheet remains reasonably healthy with gross debt/EBITDA at 2.8x. An overhang was removed with Allscripts’ agreement to pay a $145 million fine to the Dept of Justice for illegal practices that occurred at Practice Fusion prior to the company’s 2018 acquisition. The company continues to struggle with converting its profits into cash flow, although it stated that it might produce an 80%-100% conversion of net income to free cash flow in the latter part of the year and into next year. This would be a meaningful positive for the stock.
AMC Entertainment (AMC) – Revenues of $1.5 billion increased 4% from a year ago and were 3% ahead of consensus estimates. A strong slate of movies, including Avengers: Endgame, drove higher attendance. Slightly lower average ticket price was offset by higher food and beverage spending per attendee. Adjusted EBITDA of $238 million increased 7% from a year ago (when adjusted for the effect of the new lease accounting rules), and was about 6% ahead of consensus although it is not clear to what extent the consensus included the accounting rule change. AMC also announced a relatively modest $50 million profit improvement plan. The company’s operating cash flow improved and it reduced its 2019 capital spending guidance modestly. AMC’s “Stubs A-List” program now has 900,000 subscribers, an impressive achievement. The company will experiment with new initiatives like broadcasting live sporting events and implementing prime-time surcharges. Overall the results were encouraging.
Barrick Gold (GOLD) – Overall results were favorable as revenues, earnings and cash flow showed considerable improvements from a year ago and were generally in-line or ahead of consensus estimates. The company is making progress with its efforts to upgrade Barrick’s mine base and profit structure. While higher gold prices aren’t part of our investment thesis for Barrick, we are pleased to see the $1,500/ounce price and expect this to convert into higher profits.
Blue Apron (APRN) – The company reported positive EBITDA again, as promised by management. Adjusted EBITDA of $4.5 million was well-ahead of estimates and increased from a ($17.5) million loss a year ago. Revenues, however, fell 34% from a year ago and were below estimates for $138 million. The customer count fell 37% as Blue Apron is focusing on its most loyal customers while it rebuilds its growth strategy under new CEO Linda Kozlowski. The company reduced its full-year EBITDA guidance: it previously had said it would produce a positive EBITDA, whereas now it expects EBITDA to range from break-even to a $7 million loss.
Brookdale Senior Living (BKD) – Revenues and per-share adjusted net income were essentially in-line with consensus estimates. While revenues were slightly lower than a year ago, they were slightly higher when adjusted for divestitures. Rent increases offset a 1.1% decline in occupancy rates. Facilities operating expenses increased due to higher wages and marketing and advertising spending. The company reiterated its full-year guidance. While the company is making incremental progress with its turnaround, the pace is very slow. We think the company needs to be more aggressive, particularly with separating its operating business from the underlying real estate. We note that activist firm Land & Buildings continues to press the company for leadership and strategic changes, and has released a valuation by the respected Green Street Advisors firm stating their belief that the company would be worth $13.60/share if it were split up. We anticipate a proxy battle at the upcoming 2019 shareholder meeting, likely in October.
Chesapeake Energy (CHK) – Cash flow per share, cash operating profits and total oil and gas production were largely in-line with estimates. Oil and gas production fell 6% from a year ago while costs of production per barrel rose 29%. All-in cash operating profits per barrel rose 26%. Oil production (now 25% of total production) will increase significantly next year, while natural gas production will fall, in-line with its strategic shift. Chesapeake expects to be break-even on a cash operating profits basis by 2020, but still losing cash after exploration spending. Exploration spending in 2020 was guided to be unchanged from 2019 spending, an encouraging sign given their plans to increase total production. Weak natural gas prices, combined with its highly leveraged balance sheet (the WildHorse acquisition actually improved its financial strength by adding cash flow), will continue to hobble Chesapeake’s turnaround prospects. Buying some time, the company has pushed out its debt maturities, with only $600 million coming due prior to 2022.
Conduent (CNDT) – Conduent’s shares fell sharply on multiple items of bad news. The company’s adjusted per-share earnings missed estimates by 24% (and fell by 55% compared to a year ago), while adjusted EBITDA missed estimates by 10% (and fell by 7% compared to a year ago). The weakness was concentrated in its Commercial segment, as the Government and Transportation segments were stable or positive. Its new contract signings fell by 57% driven by lower contract renewals – particularly by the loss of the California Medicaid contract. Conduent reduced its outlook for the year. Also, the board suspended its search for a new CEO amidst a broad-based operational and strategic review, which it clearly requires. The company may not be entirely in disarray but it is close. Activist Carl Icahn holds a 17.1% stake in Conduent – we expect him to be aggressive in cleaning up the mess at Conduent.
Gannett (GCI) – Gannett’s revenues fell 9.7% from a year ago as it continues to battle weaker print advertising and circulation trends. Adjusted EBITDA fell 11% from a year ago. Revenues were about 4% below consensus expectations while adjusted EBITDA was about 7% ahead of consensus expectations. The company reiterated its full year 2019 guidance, although this news is overshadowed by its just-announced deal to combine with New Media Group.
Globalstar (GSAT) – Revenues fell 8% from a year ago and missing estimates by about 10%, while adjusted EBITDA fell 21% on higher expenses, missing estimates by about 8%. The company currently is completing negotiations to refinance its capital structure, which should result in more financial flexibility at the expense of some dilutive equity and warrant issuances. Globalstar will discuss its earnings report and outlook after it completes these negotiations. The company has improved its board of directors and we note the 8% ownership by activist investors Mudrick Capital.
Jeld-Wen (JELD) – Revenues of $1.1 billion fell about 5% and were about 4% below consensus estimates. Core revenues (excluding currency and divestitures) fell 3%. Adjusted EBITDA of $128 million was about 5% below a year ago and 3% below consensus estimates. Improvements in North America were more than offset by deterioration in Europe and Australasia. In the quarter, Jeld-Wen had less negative free cash flow compared to a year ago. The company reduced its full year revenue guidance by 3% and its adjusted EBITDA guidance by about 6%. Jeld-Wen’s turnaround is making progress, albeit slowly as it faces economic headwinds.
Kraft Heinz (KHC) – Kraft Heinz reported first half 2019 results. Sales fell 5% compared to a year ago, although excluding the effects of currency exchange rate changes and divestitures its revenues fell only 1.5%. Retail consumption and market share improved but weaker pricing and lower inventories at grocers hurt organic revenue growth. Adjusted EBITDA of $3.0 billion fell 19%. The company also wrote down its assets by an additional $1.2 billion although we regard this as a reflection of reality rather than any new information. Kraft Heinz’ difficult and multi-year turnaround is in the top of the first inning. New CEO Miguel Patricio has suspended any further divestitures while he gets up to speed on the details of Kraft Heinz’ financial and operating condition. The company withdrew its prior full year adjusted EBITDA guidance, implying that the year’s results will not be inspiring.
Macy’s (M) – Macy’s reported disappointing results, reflecting the well-known secular headwinds affecting all mall-based retailers, slowing international tourism, weather, and the fashion risks that retailers endure. While revenues were flat year-over-year and in-line with consensus estimates (comp sales increased fractionally), profits fell sharply as Macy’s cut prices to sell excess inventory associated with these problems. As a result, per-share earnings were 60% below the year-ago results and missed consensus estimates by 38%. Adjusted EBITDA fell by 20% from last year. Macy’s reduced its full year per share earnings guidance by about 6%, as the second quarter represents only about 10% of annual earnings compared to the highly profitable fourth quarter. Higher tariffs would further weaken the company’s results. Macy’s high 9% dividend yield remains well-covered, with our estimate of 2019 free cash flow of $820 million compared to the $468 million in dividend payments.
Mosaic (MOS) – Revenues and earnings missed estimates by wide margins as results were hurt by weak demand for fertilizers due to heavy rains in the Midwest. Most affected were phosphate profits, which turned negative, while its potassium and Brazil results were good. The company has permanently closed its Plant City potassium facility and idling its Colonsay (Canada) potash facility to adjust. Free cash flow remained healthy at $212 million. Investors remain concerned by the near-term weakness as well as China’s suspension of all imports of U.S. agricultural goods. While the company cut its full-year forecast, we think its longer-term outlook remains strong.
Oaktree Capital Specialty Lending (OCSL) – Net investment income per share of $0.12 was 15% above the year-ago result and in-line with consensus estimates. The company reported that its net asset value (NAV) was $6.60/share, about 11% above a year ago despite paying $3.80/share in interim dividends. Oaktree continues to exit non-core investments (now only 21% of the portfolio compared to 63% at the 2017 takeover), and is maintaining a highly defensive investment posture.
Rolls-Royce Holdings (RYCEY) – First half revenues (excluding currencies and acquisitions/ divestitures) increased 7% from a year ago, while operating profit on the same basis increased 33% to £203 million. Rolls-Royce continues to struggle with service costs of its Trent 1000 engine. Free cash flow was an outflow of (£391) million, as the company built inventory in anticipation of a no-deal Brexit – however, it expects to generate much better second half free cash flow as it unwinds its excess inventories. The company said it remains on track to meet its fiscal year core guidance, and reiterated its outlook for at least £700 million in 2019 free cash flow and £1 billion in 2020 free cash flow. Credit rating agency Moody’s downgraded Rolls-Royce Holdings credit rating to Baa1 over concerns about meeting its free cash flow guidance, but raised its long term outlook to “stable” from “negative”.
SeaWorld Entertainment (SEAS) – While revenues slightly missed estimates, per-share earnings and adjusted EBITDA were 14% above consensus. Total revenues increased about 4% from a year ago and adjusted EBITDA increased by 23%. SeaWorld continues to improve its revenue growth by attracting more attendees and raising attendees’ in-park spending on food and other items. Ticket prices have increased modestly but the smarter pricing is encouraging more attendance. Year-to-date, adjusted EBITDA is 34% above the year-ago results. The company said it was on-track to reach its 2020 targets and is optimistic about its future. SeaWorld also announced that Scott Ross is now its new board chairman – he is a principal in private equity firm Hill Path that owns 35% of SeaWorld. The addition of Charles Koppelman (former head of EMI Records) to the board was announced.
Toshiba (TOSYY) – Fiscal first quarter revenues fell 3% compared to a year ago. Segment operating profits rebounded from a depressed ¥730 million to ¥7.8 billion (about $74 million), but fell short of analysts’ expectations for ¥11.6 billion. The company reiterated its full year guidance for ¥140 billion in operating income. Revenue growth remains difficult in Toshiba’s remaining businesses, which include batteries and medical equipment, among others. However, its cost-cutting initiatives are gaining traction. Toshiba retains a 40% stake in Toshiba Memory, which is being renamed Kioxia Holdings and may file for an initial public offering this year.
Viacom (VIA.B) – Viacom revenues increased 4% from a year ago and were slightly ahead of consensus estimates. Adjusted net income of $1.20/share increased 2% from a year ago and was about 12% ahead of consensus estimates. The media segment reported the first increase (+6%) in domestic advertising revenues in 20 quarters, a notable achievement. Several media initiatives, including its PlutoTV acquisition, also are showing promising improvements. Paramount Studios reported $85 million in adjusted operating income as its turnaround is making significant progress. Viacom’s debt is being whittled away (down 11% year over year) while its free cash flow is increasing – both of which helped its negotiating position for the re-combination with CBS.
Disclosure Note: One or more employees of the Publisher own shares of all Turnaround Letter recommended stocks.