Bunge Ltd (BG) – As the world’s largest soybean processor, Bunge buys soybeans, wheat, corn and other crops from farmers, then processes and sells them to food and beverage companies. Its vast global network of storage, transportation and milling facilities provide deep insight into global supply and demand conditions. As an intermediary, Bunge is vulnerable to unfavorable commodity and end-market price changes. While profits in 2018 were better than in 2017, the company has not met its own earnings targets due to weak risk management, problems with their Brazilian operations and fallout from the China trade dispute. With credible activist investors circling, the board has replaced four directors with three more retiring soon, a new CEO search is underway, the company is evaluating significant asset sales and is accelerating its $250 million cost-savings program. At 8.9x EBITDA, with a reasonable balance sheet and a 3.7% dividend yield, Bunge shares may be ready to sprout.
Goodyear Tire (GT) – Recently demoted from the S&P500, Goodyear is struggling with high oil prices (a critical raw material) as well as slowing sales in China, a strong dollar and stalled growth in domestic vehicle sales. While the three consecutive years of declining profits have scared off investors, it more reflects a return to normal after unusually high earnings. Much of GT’s revenues are from replacement tires, a remarkably steady market that declined only 3% during the past two recessions. The company is also closing high-cost plants and making other adjustments. Debt is reasonable at 3x EBITDA, with no major maturities until 2023. Its $800 million cash hoard brings added stability. Trading at a low 5.2x EBITDA with a 3.3% yield, Goodyear Tires may be worth a test drive.
Kraft Heinz (KHC) – Hopes were high in mid-2015 when Kraft and Heinz merged with the backing of Berkshire Hathaway and Brazil’s 3G Capital. Profits initially surged from its zero-based budgeting, an approach where all expenses are scrutinized rather than routinely continued from year-to-year. The company’s shares peaked at over 95. However, this budgeting method discourages investing in new products, leaving Kraft Heinz at a real disadvantage against innovative competitors. Last week, Kraft Heinz reported alarmingly poor results as well as an accounting issue, and cut its dividend, sending its already weak shares down another 27%. While the accounting issue appears mild, Kraft Heinz’s strategic issues are real. However, they are fixable. Already the company is looking to sell its Maxwell House coffee brands. Other major changes are likely. In spite of shifting consumer tastes, many of the company’s brands remain powerful. While most investors are fleeing its shares, for patient inventors (which include Warren Buffett, who said he has no plans to sell his stake), Kraft Heinz shares could prove very tasty.
Macy’s (M) – This Turnaround Letter– recommended retailer is in the midst of a turnaround of its chain of department stores. New CEO Jeff Gennette is leading numerous initiatives to reinvigorate growth and relevance through better merchandising, smarter online operations and other new initiatives. To free up cash and improve its focus, the company is shutting many of its weaker stores. Earlier efforts showed promise, but overly optimistic investors were disappointed by a reasonable (+2% comparable sales) but below expectations holiday season. Despite Macy’s shares’ 19% decline so far this year, the turnaround is making progress. Patient investors receive a likely sustainable 6.3% dividend while they try on Macy’s shares.
Newell Brands (NWL) – Turnaround Letter– recommended Newell is undergoing a complete overhaul following its botched $19 billion acquisition of Jarden in 2016. With the board firmly in the control of activist investors Starboard Value and Carl Icahn, Newell is divesting about 35% of its revenue base, repaying debt and repurchasing shares. Remaining operations will be streamlined and reinvigorated. The sluggish pace of change and disappointing 2019 outlook have driven the shares sharply lower. These problems, however, will likely lead to the departure of the long time CEO who engineered the Jarden deal, reaccelerating the turnaround under a sharper leader. The Newell story is by no means over, and potential new investors can participate at these lower prices as well as enjoy a reasonably safe 5.3% yield.
Papa John’s International (PZZA) – Papa John’s is the world’s third largest pizza chain. Following the founder/CEO’s damaging behavior and his subsequent departure, Papa John’s is looking to rebuild its franchise under capable new leadership. Starboard Value, the activist that led the impressive turnaround of Darden Restaurants, now holds three of seven board seats (founder Schnatter holds one non-chairman seat) and is investing up to $250 million in convertible shares for a stake of up to 13.4%. After a period of significant mis-management, leaving its margins significantly lower than peers like Dominoes, there are plenty of opportunities to restore some flavor to Papa John’s battered share price.
Tapestry (TPR) – Formerly known as Coach, this company sells iconic luxury handbags and other branded accessories. Slowing sales in China and Europe, along with the ebbing luster from its Kate Spade brands due to the passing of its namesake founder, have investors worrying that the company’s best days are behind it. Like all fashion brands, newness and relevance are critical to attracting the eye of potential customers, and Tapestry has lagged in those areas over the last few years. However, it now appears to be recognizing its mistakes, responding with new vigor and better product management. With Tapestry’s shares at bargain-basement levels, unchanged from 2005, a sturdy balance sheet with cash nearly matching its debt and a well-respected stable of brands, investors can buy a top-notch company that is temporarily out of fashion.