NC, KELYA, PBI: Turnaround Candidates Worth A Look?

NC, KELYA, PBI: Turnaround Candidates Worth A Look?

For a variety of reasons, stock markets tend to overreact on certain issues and overlook some very basic phenomenon. Corporate turnarounds are such cases where markets often tend to discount the work in progress.

However, identifying these early indicators can lead to smart gains for investors. Here are some examples:

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NACCO Industries, Inc. (NYSE: NC) is a holding company for a number of businesses in mining, small appliances and specialty retail. After spinning off its biggest and most profitable business Hyster-Yale Materials Handling Inc (NYSE:HY) in September last year, the stock has largely been range bound.

However, it looks undervalued now amid he latest signs of a turnaround in progress. Helping the turnaround is the company’s exposure to the coal business in the form of North American Coal Corporation. The coal company is doing rather well, unlike the coal industry in general. The business saw revenues growing 60 percent to $132 million while profits grew to $32.8 million last year.

At the same time Hamilton Beach Brands – which accounts for nearly 60 percent of the NACCO Industries, Inc. (NYSE: NC)’s total revenues – saw its business flourishing as a result of a strong holiday season. Both revenues and profits of the small electric appliance business increased during the year.

The drag on the company is the kitchen retail business which swung to a loss during the year but its relatively small size is its saving grace. The company shed nearly $226 million debt in the restructuring and now has only $177.7 million of debt on its book – not bad for equity of $281.4 million.

After the spinoff, the company paid a dividend of 25 cent in the fourth quarter of 2012. Besides retiring debt and paying dividends, the company has also approved an extension of its stock repurchase program through December 2013 – another measure to bolster share price. Two of its largest businesses rely highly on consumer confidence which is on an increase in the U.S. lately.

Job market blues going away

Kelly Services, Inc. (NASDAQ:KELYA) is another turnaround candidate which has already seen some of the benefits of a vibrant job market, which is being factored into the stock price. While the entire staffing pack stands to benefit from the upswing in the job market, Kelly is uniquely placed to make the most of it.

The company has been proactive in repaying its debts in recent years and currently its balance sheet has only $17.9 million in long-term liabilities compared to $741 million of equity. Unlike many other players, Kelly remained profitable in 2011 and 2010.

Nevertheless, not content with its profitability levels, the company’s management undertook a restructuring program in Italy, France and Ireland.  The company has also decided to exit low margin business in India leading to better average bill rates.

While revenues dropped slightly last year, improvements in operations led to better gross and operating margins. As profitability is set to improve in light of these factors, it would not be difficult for the stock to break into a new territory.

Upside down transformations pay

Connecticut based Pitney Bowes Inc. (NYSE:PBI) is a company that invokes imagery of postage meters and mail machines in most investors’ minds – not a very pleasing sign. However, the company is currently undergoing a transformation (and is pretty much through it) – a story that the markets appear to have not noticed.

For the full year, its revenues dropped 7.5 percent to $4.9 billion but there was something worth noticing. The contribution of a new set of software and services has been increasing and contributed more than 50 percent to the total revenue last year.

Margins are much better in these operations as compared to the old business of meters and machines which is why we have seen just a slight drop in overall profitability of the company. The stock offers a staggering 10 percent dividend yield although continuation of this remains clouded due to declining revenue and margins. It’s worth noting that the company bought back about $87 million worth of shares and repaid $50 million in debt during the past year.

Overall, some investment themes are finding favor with the market (which explains the rise of Kelly) while some businesses like postage meters are discounted on face value. As and when the transformation story is shared with the larger set, investors taking an early dip would be rewarded.

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