Company turnarounds – the stock market’s comeback kids?

Turnaround stories are a dime a dozen these days, with the pandemic having wreaked havoc on a range of sectors. Every company that finds itself in a poor position will have a so-called ‘turnaround plan’, but carrying them out effectively is another thing entirely.

Here’s a look at three companies in various stages of strategy shift.

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It’s sink or swim for Carnival

There are quite a few travel firms bobbing around on life rafts in the wake of the pandemic, but none is more visible than cruise ship operator Carnival.

Chart showing Carnival's share price since 2011

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Past performance isn’t a guide to the future. Source: Refinitiv 05/07/2021

Carnival’s ships were at the centre of the Covid-19 crisis, with horror stories about being trapped on board dominating the headlines.

The group’s registered in Panama, which meant it wasn’t eligible for government help when the pandemic hit. Carnival had to fend for itself as it burnt through cash over the past year.

Carnival is now faced with the difficult job of rebuilding its brand and business from the ground up. The company’s done well to keep its head above water through the past year. The rate it’s burning through cash has slowed, now at $500m per month. Carnival has also raised more than $24bn by taking on new loans, selling off ships and issuing new shares.

However, that’s diluted shareholders’ investment and racked up a massive debt pile.

Between 2019 and 2020 the group added more than $10bn to its net debt position, so it’s no surprise that getting the balance sheet under control is a key focus for the group going forward. The details are murky on how Carnival plans to get there though.

A staggered reintroduction to the seas should see the group operating at full capacity by spring 2022. To the group’s credit, bookings have been rising steadily despite minimal marketing spend. But setbacks to this plan are already cropping up. A Covid-19 infection on one of its competitor’s recent cruises is a harsh reminder that the pandemic is still a huge hurdle to clear.

Carnival might have already hit rock-bottom, but it’s still got a long way to go before it’s in the clear. Without consistent cashflows and certainty about the pandemic, it’s hard to say whether the group can pull-off a full recovery.

Analysts expect free cashflow to turn positive in 2023, and profits aren’t forecast to recover to pre-pandemic levels within the next two years, leaving the firm in a precarious position without much room to manoeuvre. With a price to book ratio that’s roughly in-line with the long-term average, we think the market is banking on a rapid recovery a bit sooner than we’re comfortable with.

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Aviva’s on the cusp of a full recovery

British insurer Aviva has seen its share price rise more than 43% over the past year. But zooming out a bit further, you can see the group’s still well below its 2007 highs.

Chart showing Aviva's share price since 2006

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Past performance isn’t a guide to the future Source: Refinitiv, 05/07/2021.

That’s because the past decade or so saw Aviva spread itself too thin. The group’s operations sprawled across a wide range of geographies, making it difficult to drill down on profitable segments.

2017 marked a turning point for Aviva when it sold off parts of the business. But since then, the group’s been through three different CEOs as it works to continue building back profits.

Lots of short-serving CEOs is rarely a good thing. However, Aviva’s latest CEO, Amanda Blanc, has been clear on her priorities: focus the portfolio, shore up the finances, and improve financial performance.

Amanda Blanc’s first initiative has seen the group focus its efforts on its strongest businesses in the UK, Ireland and Canada. The rest of the segments are being sold or significantly restructured. Once the sales are complete, the group intends to focus on strengthening its balance sheet. It’s aiming for its Solvency II leverage ratio, a key measure of balance sheet strength for insurers, to be below 30% (currently 31%).

It’s easy to see if Aviva is delivering on those two objectives because they have clear benchmarks. Improving performance, however, is less tangible. The group’s narrowed focus on markets where it has a leading position is at the heart of this goal. How it plans to drive growth in these markets is less clear. Increased customer engagement and a focus on digital are key pillars of the strategy. We’ve yet to see whether the group can execute.

Aviva’s at a crucial turning point. Its forward price-to-earnings ratio reflects this and is in line with the long-term average. Most of the hard work reshaping the portfolio has been done. Now we’ll find out if the new strategy will bear fruit. If Aviva can pull it off, it could open the door for increased shareholder returns. The group’s expected to deliver a dividend yield of 5.7%, but yields are variable and far from guaranteed. They are also not a reliable indicator of future income.

There’s also been some activist interest in Aviva lately, with Cevian Capital building toward a 5% stake in the company. If the new shareholders push for money to be given back to investors, rather than investing in the company, it could derail Blanc’s plans.

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Reckitt strives for focus

If Carnival is near rock-bottom and Aviva is on the brink of a total turnaround, consumer goods giant Reckitt Benckiser is somewhere in the middle.

Chart showing Reckitt Benckiser's share price since 2011

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Past performance isn’t a guide to the future. Source: Refinitiv, 05/07/2021.

Like Aviva, the group has been trimming down its portfolio to focus on its core businesses. It wants to improve efficiency and find new growth opportunities.

Reckitt has taken an axe to some of its divisions, including the Scholl brand and its Chinese Infant Child Nutrition business. That’s made room to buy new companies that fit with the portfolio, like US painkiller company Biofreeze, and develop new products.

While we applaud these moves, they came at a price. The Chinese Infant Child Nutrition business sale, for example, will be booked as a loss worth roughly £2.5bn.

However, Reckitt’s been a winner in the pandemic with its Lysol and Dettol brands gaining popularity with a hygiene-conscious public. That’s made the transition a little easier, especially considering the Health and Hygiene business makes up the bulk of the group’s sales. Reckitt’s making the most of this tailwind with a new corporate partnership scheme. It’s been letting businesses like hotels give their rooms the Lysol ‘stamp of approval’ to guarantee cleanliness.

The group’s only expecting to grow revenue in the low single digits this year – overhauls like this take time and money. Reckitt’s forward price to earnings ratio is slightly higher than the long-term average, which shows the market has some confidence. The current trajectory looks promising, but we can’t rule out some bumps along the way, especially with a company this size.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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