This month's purchase recommendation is a food company in a rapidly-growing segment, yet with its survival threatened by operational and strategic difficulties. An entirely new leadership team with impressive experience in critical areas is moving aggressively to bolster the business while pursuing new growth opportunities. While its challenges and risks are real, investors seem to be more focused on its past than on what the company is doing now to improve.
A recent debt refinancing should provide considerable financial flexibility, but it involves an intentional, technical default that has rattled shareholders and threatens a potentially costly legal entanglement. As a still quite leveraged company tied to the strength of the housing market, this company's shares carry significant risks, but we think those risks are outweighed by the upside potential in the stock.
Gannett's turnaround is driven by revenue stability, higher EBITDA and steady cash flow production. Progress on achieving revenue stability is a bit slow, but cash flow generation remains healthy. EBITDA progress is a bit slow, as well--2018 guidance suggests more time is needed. Management continues to evolve the business as they learn. Even though challenges remain, there are opportunities for more acquisitions. Gannett's current valuation is a compelling 3.9x EBITDA, and offers an attractive, well-covered 6.3% yield.
NII Holdings’ sole business Nextel Brazil continues to struggle to slow the rapid decline of its older iDEN wireless business while it works to improve its 3G/4G operations. Aggressive cost-cutting is helping but its cash balances continue to decline. The proposed easing of regulatory hurdles would increase its chances of being acquired at a sizeable premium.
Engineering and water services firm Layne Christensen (Nasdaq: LAYN) agreed to be acquired by Granite Construction in an all-stock deal worth $15.36/share at the intraday trading price for Granite shares. This price is a 20% premium to yesterday's closing price for LAYN shareholders. We are moving LAYN shares to a SELL.
This oil & gas stock pick checks many of our turnaround candidate boxes. First, it recently emerged from bankruptcy, which usually brings a discounted price but also a fresh start. Additionally, the company is led by a new CEO. Importantly, the Company has maintained its strong post-exit balance sheet and its immediate plan is to increase its strategic options by boosting free cash flow and financial strength.
Amazon joined Apple in reaching a $1 trillion market capitalization. $1 trillion is about the same as the total value of New York City property and the total value of loans at JP Morgan, the nation’s largest bank in terms of assets. Jeff Bezos’ $160 billion stake would place him (personally) as the #33 largest company in the S&P 500 in terms of market cap, next to Coca-Cola, Disney and Netflix. We aren’t bold enough to predict whether the shares will continue upwards or if they are in a bubble reaching maximum inflation. Setting aside for a moment their investment prospects, let’s admire the truly remarkable milestone that these two companies have reached.
EV/EBITDA: What Is It & Why Are We Using It More?
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
This Forbeswrite-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."