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.
Car and truck maker General Motors (NYSE: GM) reported 1Q18 revenues and profits that were ahead of consensus expectations. Weakness compared to a year ago appears related to a ramp-up in advance of their new pickup truck launch. GM Financial and GM’s China operations had strong results.
Ford Motor (NYSE: F) reported mixed results for the fourth quarter and full year 2017, reiterating its pre-announced results and guidance from the Detroit auto show earlier this month. Their turnaround under new CEO Hackett is in the early stages and remains on track. We don't anticipate meaningful financial progress for 2018 although the changes underway at Ford should become more visible.
Subsequent to the release, Ford announced that Ford Credit's current CFO, Marion Harris, will become a senior officer at Ford Mobility as that group ramps up its staffing and funding. Also, Ford Mobility acquired Autonomic and Transloc, two technology firms that will help accelerate Ford's mobility efforts. We like the urgency and attention that this group is now receiving.
The update from Ford Motor (NYSE: F) in advance of next week's earnings report indicates that the company has a solid plan and financial strength (both earnings and balance sheet) to make its transition to higher profits and newer technologies. We believe the transition will be successful but will take time. Key variables are whether investors have patience to see it through, and will there be an auto industry down cycle that interrupts the transition.
Automobile parts retailer Advance Auto Parts (NYSE:AAP) reported much stronger than consensus 3Q17 earnings. Management spoke optimistically about the operating changes underway and about their revenue growth prospects for 2018.
At best, the broad stock market’s 15.8% drop since its peak only three months ago on September 20 has been disconcerting. The deeper 23% plunge in small cap stocks, as measured by the Russell 2000 index: startling. For the weakest 9% of S&P500 stocks – often those with some type of unfavorable macro exposure – their average loss of 40% in such a brief time has been simply jaw-dropping.
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."