Turnaround situations

I am not usually a fan of companies that are ‘turnaround’ situations. Often, such companies are poorly run or in industries clearly in decline. A turnaround situation is usually best avoided as they tend to be bad companies with a new story to tell investors. However, every so often, there are genuine turnaround situations that present an opportunity. These are worth looking at more closely.

One of the more incredible examples of a company turnaround has been Meta (formerly Facebook). We own the stock in many of our client portfolios, bought at varying prices over the years. The company is much more than Facebook these days as they own a suite of brands including Instagram, WhatsApp, Threads and Reality Labs.

As with many tech companies during covid, Meta was caught up in the boom of the prior year and by 2021, had hired too many staff and were spending way too much money on non-core areas of the business. They even changed the name of the company from Facebook to Meta to better symbolise the future strategic direction of the company, the metaverse. There is a great 1-hour video of Mark Zuckerberg talking about the future of this technology and how transformative it will be for the world and the company he founded back in 2004. In many respects, it is the way a visionary founder needs to think to build a company. But when economic conditions change, more prudent management is needed.

Suddenly, in late 2021, everything changed in investment markets and technology stocks’ share prices were hammered. It appeared Meta’s user and revenue growth was slowing, and the company had overcommitted in many areas of spending including over US$10 billion every year in high-risk research and development in the metaverse via Reality Labs. It appeared that Meta might no longer be the high-growth company everyone thought and may actually be entering a more mature phase. This would mean a much lower valuation. The shares fell from US$372 to under US$90 per share.

For all the problems Meta faced at that time, there were a few things going in their favour. They had a huge reliable revenue stream, a product that was very addictive and massive amounts of data. They knew the levers to pull and were able to learn extremely quickly what to adjust. The turn around began in earnest when they fired over 10,000 people and cut their spending dramatically. It was a sign of prudence and more appropriate management that was needed. In the past 18 months, the company’s turnaround has been nothing short of spectacular. Since implementing the changes, the stock price has rocketed up to an all-time high of US$474. A spectacular return for those brave enough to buy the stock near its lows.

One of the more battered stocks that has piqued my interest in the past few months is Disney. It was hammered during covid, and it has struggled for a few years. But the company has something that few companies have. Franchise power. They own so much of the content, characters and stories that people grew up on. As their slogan goes it’s “The happiest place on earth” but not so much for shareholders recently. However, there is something magical about all the brands they own.

If LVMH is the owner of many of the world’s most irreplaceable luxury brands, then Disney is the equivalent for kids and entertainment. Disney is far more than Mickey Mouse and Donald Duck these days. With brands such as Marvel, Star Wars, Pixar and ESPN to name a few and you’ve got franchise power like no other. Not to mention streaming, theme parks, hotels, and cruise liners.

With the recent return of legendary CEO, Bob Iger at the helm, Disney has started to cut costs and improve its results. The difficult conditions for consumer business won’t last forever and such strong franchise power is rare.

While turnaround situations are not companies I typically prefer, there are certainly times when situations converge to create opportunities that are worth considering. Meta is a polarising company with a lot of work ahead of it in terms of compliance ethics and regulation, but its recent turnaround is a great example of what can be done with the right foundation. Disney is a different type of business, but it has a franchise power and brand recognition that only a few companies in the world possess, such as McDonalds and Coca Cola. It’s certainly worth paying close attention to their progress as they try to turn things around.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.