Continuing with our theme of turnarounds outside the United States, this month we look at Japan. One of the more fascinating markets over the past 40 years, the Japanese stock market, as measured by the Nikkei 225 index, nearly quadrupled leading up to its bubble-like peak in 1989 (a decade before the U.S. tech stock bubble). Its subsequent 75% collapse was followed by more than a decade of flat performance. In the past five years, the index has doubled, yet it remains at only half its 1989 level even as the S&P500 index has increased tenfold.
Only two days after joining the Dow Jones Industrial Average, Walgreens Boots Alliance fell 10%, as Amazon is entering the pharmacy business with its PillPack acquisition. This might not have been the effect that the S&P Index Committee had in mind when it chose Walgreens to better measure the economy and the stock market. Indices are seen as representing “the market” but they are baskets of individual stocks with all the risks these stocks bring.
We are raising our price target (Buy limit) on shares of technology services company Conduent (NYSE: CNDT) to 24 from our previous target of 20. The leadership is removing the Xerox bloat, gradually replacing it with a reinvigorated and focused operation. The company has more work ahead to reach its goals, yet the path seems reasonably achievable. While Conduent still has considerable execution risks along with competitive, technology and other risks that could impede or sidetrack its turnaround, we think its future looks bright.
We continue to rate CNDT shares a BUY and increase our Buy limit to 24.
IBM’s stock underperformance since IBM’s current CEO took the helm in 2012 has been stark, with the shares declining 23% while the S&P500 Index has more than doubled. One big problem: revenue growth rate is zero, at best. Without revenue growth, what’s left to entice investors? The real driver of value at IBM – free cash flow that is used to repurchase shares. Can IBM borrow its way to shareholder prosperity as its cash flows shrink? What to do with IBM shares? Wait for a better pitch in the form of a catalyst or much lower valuation.
Xerox Corporation (NYSE: XRX) announced that it has terminated its proposed combination with Fujifilm. In addition, half of Xerox’ ten-person board is being replaced including now-former CEO Jeff Jacobson. The new chairman is expected to be Keith Cozza, currently the head of Carl Icahn’s company Icahn Enterprises. We agree that the deal was too murky and undervalued Xerox.
Shares of transactions processor Evertec (NYSE: EVTC) have jumped 9.5% since they reported estimate-beating 1Q18 results and raised their full-year 2018 EPS guidance by 19%. Economic conditions in Puerto Rico are improving and the company is executing well.
With cash balances greater than their debt, these companies have the financial flexibility to weather the challenges without great concern about principal or interest payments. And once the storm clouds clear, shareholders could see a sizable profit.
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."