A Tale of Three Turnaround Stocks

Among BBY, HPQ and JCP, which has a real future?

An outdated big-box electronic products retailer, a mismanaged information technology giant, and a struggling department store.

What do all three have in common?

They all came back from disastrous mismanagement and failing business models to — at least for now — steady-state status and more than just a glimmer of long-term hope.

For Best Buy (BBY), Hewlett-Packard (HPQ) and JCPenney (JCP), the comeback has taken some hard work, a little bit of luck, and a long-term view that holds out the promise of success.

All three deserve credit for how far they’ve come — and at least two of them appear to have the makings of a comeback … with some caveats, of course.

Let’s take a look at these three stocks still showing a pulse and try to determine their future courses.

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Best Buy

  • YTD return: 212% (all numbers refer to share price appreciation)
  • One-year return: 103%

Best Buy A Tale of Three Turnaround StocksThings could not have looked more bleak for Best Buy (BBY) than in October 2012, when its stock price hovered around $15 per share, two newly hired executives announced they would leave the company, and shareholders cast a wary eye on founder Richard Schulze’s “proposed” $24-per-share offer to buy the company.

What’s happened in just under one year is remarkable: CEO Hubert Joly pulled tightly on his new reins; revamped and restaffed his C-suite to include notable e-tail executives like Williams-Sonoma’s (WSM) Sharon McCollum; shut down older, nonperforming superstores; redesigned its smaller Best Buy Mobile locations; and promised prospective shoppers it would match discount prices from competitors.

Voila! Customers went back, BBY’s cost structure fell, and profits followed. In the second quarter (ended Aug. 4) revenues fell just a tad compared to its 2012 second quarter, but still beat estimates. Even better, earnings rose to 77 cents per share compared to 4 cents per share on a year-over-year basis as cost cuts worked their magic.

Joly and company are on a great track, and kudos all around. But how much room is available for additional cost-cutting, and how long can Best Buy continue to match discount pricing? Adding store-within-a-store concepts for Microsoft (MSFT) and Samsung (SSNLF) models will hopefully ring up additional sales, but of course the jury is out on those ventures.

My take on BBY is it will manage to survive long-term on the strength of Joly’s management vision.

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Hewlett-Packard

  • YTD return: 58%
  • One-Year return: 28%

HPQ1 A Tale of Three Turnaround StocksTo say Hewlett-Packard (HPQ) was in a bit of a mess is an understatement; one of the most iconic of the Silicon Valley names couldn’t find the right management team, was floundering in a world in which it’s PC-centric model was — and is — becoming outdated, and appeared to have no way out of the morass.

Enter Meg Whitman, who actually had the nerve to raise HPQ’s dividend at a time when the stock was getting pummeled — down to $12 a share in November 2012. The company took its licks and hits, writing off disastrous acquisitions like Autonomy, Palm and EDS, and watched its bottom line virtually disintegrate, culminating in a $12.6 billion loss for fiscal 2012.

Well, HPQ isn’t quite a new company, but it’s been reinvented (as pointed out by James Brumley) – cost cutting and tight financial controls are still a big theme, and layoffs right into and possibly through 2014 are in the offing.

The results are still a bit of a mixed bag; third quarter (ended July 31) showed revenues down around 7% year-over-year, but the bottom line is vastly better, with $1.39 billion in profit compared to a nearly $9 billion loss. (Keep in mind, though, that much of that loss came as a result of those write-offs.)

What’s disconcerting is the continued quarterly revenue declines — over the past three quarters beginning October 2012, revenues have declined nearly 9%, a trend that will have to change.

Long-term HPQ will still be around; its install base is still massive, giving it plenty of time to find a way through.

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JCPenney

YTD return: -27%
One-year return: -48%

JCPenney185 A Tale of Three Turnaround StocksDing, dong the witch is dead! Pay no attention to those dismal share price numbers, all that matters is that Bill Ackman and his Pershing Square Capital’s 18% stake in JCPenney (JCP) is gone.

It’s a tale of woe: Ackman brought in Apple (AAPL) retailing savant Ron Johnson, who tried to transform the JCP model and instead just totally pissed off its loyal customer base, spent a boatload of money, and left the company virtually for dead. Oh, and as payback Ackman lost nearly  $500 million on that stake.

Perhaps now management, in the form of returning CEO Mike Ullman, can make some headway and undo the damage wrought by Ackman. Where to start? Ullman will need to placate that old customer base and get them back in the stores with what brought them in in the first place — discounts!

He’ll also have to get new customers into the stores, and merchandise will be key. Ullman started working on that by dumping the disappointing Martha Stewart line, although how he is going to transition Johnson’s store-within-a-store model back into the old JCP is beyond me.

But hey, someone out there likes the story: hedge fund managers including Larry Robbins at Glenview Capital and Kyle Bass of Hayman Capital have piled into the stock, helping to spur a recent 8% run over the past month.

Sorry – like Louis Navellier, I’m still not buying this one. I’m not really sure what the pros see in this, but all I see are significant balance sheet and cashflow issues that won’t be resolved any time soon.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long AAPL and MSFT.


Article printed from InvestorPlace Media, http://investorplace.com/2013/09/tale-of-three-turnaround-stocks-bby-hpq-jc/.

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