Can A New CEO Lead The Stock Upward?

One of the characteristics we often like to see in a turnaround situation is a change in top management. Many times the management that led a company into trouble is not going to be able to fix the problems. A turnaround often takes special skills that many CEOs lack. Moreover, a new leadership team can take a fresh look at the company’s business and not be burdened by past
mistakes.

However, it can take time to execute a turnaround, even for a skilled group of executives. This led us to look at the class of new CEOs who took over struggling companies in 2012. As they approach their second anniversary in office, they should be beginning to hit their stride.We identified the companies below that, in addition to new CEOs, have some of the other key characteristics that we like to see in turnaround situations, including strong core businesses, well-known brands and decent balance sheets.

Avon Products' venerable history dates back to 1886.  But the company struggled as it began operating in a third century, and management attempted two different restructurings.  Neither one achieved the desired result, and so in 2012 the board brought in a new CEO, Sheri McCoy.  She was tasked with cleaning up a Chinese bribery scandal as well as kick-starting top-line growth.  To improve cash flow, the dividend was cut and, in late 2012, the company embarked on a $400 million cost savings program.  Then in late 2013, they cut short the implementation of a new $125 million sales software system.  There are no balance sheet issues, the company’s brand is strong, and with the stock trading at a level it first hit in the 1990’s, it could have a lot of gain potential.

Best Buy is the poster child for brick-and-mortar stores seeking a survival plan in the increasingly digital shopping world.  Shortly after his appointment as CEO in 2012, Hubert Joly rolled out his Renew Blue turnaround plan.  Aggressive cost-matching policies along with adding higher margined products such as appliances and services showed promise for much of 2013.  However, Best Buy’s weaker than expected performance in the holiday season spooked investors, leading to a 29% one-day drop in January.  The online battle will be tough, but Best Buy has the scale to
succeed.

Boston Scientific is a leading medical device maker that suffered a series of setbacks, including a troubled acquisition (Guidant in 2006 for $27 billion), manufacturing quality problems with the FDA (also from 2006) and the recall of many of its defibrillator products in 2010.  A new CEO, Michael Mahoney, took control in 2012, and he has based the company’s turnaround effort on organic growth through innovative R&D, accretive acquisitions and overseas expansion, particularly in China, India, Brazil and Russia.  The stock responded well in 2013, but we think it has further to go.

New CEOs: Ticket to Turnaround?

Company

Symbol

Recent Price

2– Year Range

Market Cap. $Bil.

Price to Sales

Debt to Equity

Avon Products

AVP

14.36

24.53–13.70

6.23

0.63

2.41

Best Buy

BBY

26.07

44.66–11.20

9.03

 0.21

0.42

Boston Scientific*

BSX

13.20

4.79–16.05

17.48

2.45

0.65

Citigroup

C

47.25

55.28–24.61

143.47

2.10

1.12

CME Group

CME

73.83

84.71–49.54

24.78

8.47

0.14

Dean Foods

DF

15.24

22.96–10.36

1.45

0.15

1.26

First Solar

FSLR

68.64

74.84–11.43

6.83

2.10

0.05

Quest Diagnostics

DGX

57.80

64.87–50.46

8.34

1.17

0.85

Urban Outfitters

URBN

36.36

44.96– 5.43

5.36

1.72

0.00

* Previous Turnaround Letter Recommendation

Citigroup was at the center of the financial crisis in 2008, and since then it has shed a lot of assets and repaid a $20 billion TARP bailout.  Having tried the unusual step of appointing a hedge fund guy as CEO in 2007, the board reversed course in 2012 and appointed a company veteran, Michael Corbat, to get Citi back on track.  As a career Citigroup employee, he brought a solid knowledge of the company’s far flung operations, and he has overseen the unwinding of many of its troubled assets.  The recent failure to get Fed approval for raising the dividend or increasing stock repurchases caused the interruption of a steady rise in the stock price.  This dip provides an opportunity to buy in as Citi continues its rebound.

CME Group is the world’s largest commodity exchange, a position that resulted from the 2007 merger between the then Chicago Mercantile Exchange and CBOT Holdings.  The change to new CEO Phupinder Gill in 2012 wasn’t particularly contentious, but the company still has its share of challenges.  Nonetheless, with a strong brand and decent barriers to entry, the company should be able to continue its rebound from the 2008 financial crisis.  The stock has made progress, but it remains well below its 2007 high.

Dean Foods, the largest domestic distributor of dairy products, saw its stock lose about 80% of its value from 2007 to 2011 as the company struggled under a heavy load of acquisition-related debt.  After coming on board in 2012, CEO Gregg Tanner sold off assets and used the proceeds to reduce debt as well as fund a stock repurchase program and initiate a dividend.  Management is now focused on the company’s core dairy business.  While any commodity-based operation can be volatile, Dean’s dominant market share gives the stock good upside potential.

First Solar rode out the boom and bust in the solar sector, with its stock going from 175 to 12 in 2011-12.  New CEO James Hughes, who took over in mid-2012, is a firm believer in large, utility-scale photovoltaic systems.  He has focused on cutting costs while at the same time advancing the technology and laying the groundwork for overseas expansion.  The company has a strong balance sheet and operating cash flow.  While the stock has recovered somewhat from its lows, it could have a lot further to rise.

Quest Diagnostics is the largest independent operator of clinical labs in the U.S.  Though revenues grew steadily into 2009, growth then flat lined, and 2013 sales were below 2008’s level.  In mid-2012 Steve Rusckowski took over as CEO, and he has engineered a string of acquisitions that, once the turmoil in healthcare settles down, should position the company for solid gains.  The balance sheet is a bit leveraged, but cash flows are good and should support the company’s dividend and stock repurchases.

Urban Outfitters operates specialty retail stores, including its namesake stores as well as Anthropologie and Free People.  After a challenging four quarters into early 2012, the company’s co-founder, Richard Hayne, was called back in when the previous CEO resigned.  Hayne put his 30-years experience with the company to work, and the stock has begun to recover.  Since he owns more than 19 million shares, Hayne has a powerful incentive to keep the rebound on track.  A debt free balance sheet gives him plenty of flexibility.

Disclosure Note:  Accounts managed by an affiliate of the Publisher own securities relating to certain of the companies in this article.

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Turnaround Letter Stock Pick Named Top Performer of 2017

 

stock market advicex

 

What Last Year's Top Stock Pickers Are Buying in 2018

 

This Forbes write-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."