Friday, January 24, 2020

Fifth Third Still Lackluster In A Few Important Respects

Credit where due - Fifth Third's (FITB) integration of MB Financial appears to be going well, and the bank is producing good fee-based income growth, which is an important consideration in an environment where spread revenue growth opportunities are limited. Unfortunately, the company is not really distinguishing itself on loan growth nor pre-provision profit growth, and those were concerns that had me neutral on the stock back in the summer (the shares are down slightly since then, underperforming the sector by around 5%).

Fifth Third is another of those situations where the valuation seems too low now, but I wonder and worry about the likelihood of weak loan growth and pre-provision profit growth limiting the gains. Management's guidance seems relatively encouraging on that score, but I'm worried about reports of ongoing defections from the bank and what they may say about long-term loan growth in the now-key Chicago market.

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Fifth Third Still Lackluster In A Few Important Respects

Fulton Financial Puttering Along, But Doesn't Have Much Growth Or Value Appeal

Back in July I thought that Fulton Financial (FULT) shares were fairly priced and didn’t offer much upside outside of M&A, as the near-term prospects for pre-provision profit growth were pretty lackluster. Since then, the company has made a wealth management acquisition but pre-provision profit performance has indeed been “meh”, and the shares have lagged the broader regional bank sector by about 3%, as well as the Russell 2000 and Russell 3000 by a wider margin (as a smaller company, I’d argue the Russell indices are fairer comps than the S&P 500).

I still don’t have all that much love or enthusiasm for Fulton. Guidance for 2020 sounded a little better than expected, and growth in the commercial loan pipeline is encouraging, but I think loan growth in the Pennsylvania/New Jersey/Maryland operating area could be challenging in 2020, and another rate cut is definitely a possibility. Valuation still looks pretty ordinary, though Fulton has the capital to make accretive acquisitions and there are targets out there.

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Fulton Financial Puttering Along, But Doesn't Have Much Growth Or Value Appeal

Restocking Could Help Universal Stainless & Alloy Products, But Leverage Proves Elusive

It's been a long wait for Universal Stainless & Alloy Products (USAP) to gain much leverage with customers, particularly in the high-value premium alloys that would drive significant margin leverage from their higher ASP and better capacity utilization. Unfortunately, the numbers tell the story - revenue has grown only about 3% CAGR over the past five years and gross and operating margins are both lower. Granted, five years is perhaps an arbitrary period to examine, but the best that can be said about USAP's stock market performance is that Allegheny (ATI) has done worse and Haynes (HAYN) about as poorly in the market over the past five years (while Carpenter (CRS) has done "less bad" more than better).

USAP is still arguably undervalued on multiple valuation approaches, but I just don't see the momentum in the business that I expected to see by now. USAP should benefit from restocking in 2020 (I think we saw some of that in Q4'19) and maybe there are still opportunities to win meaningful business with its premium alloys, but I can't get excited about a company that serves a commodity market without some apparent edge on the cost, production, and product design side.

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Restocking Could Help Universal Stainless & Alloy Products, But Leverage Proves Elusive

A Guidance Hiccup Barely Registers With ASML

Semiconductor equipment stocks have come roaring back on strong logic/foundry orders and anticipation that memory orders will soon come back in force. That hasn’t left many bargains, but this is a momentum-driven sector now. To that end, ASML (ASML) has been quite strong since my last update, rising almost 30% and more or less keeping pace with an assortment of semi equipment names like Advanced Energy (AEIS), Applied Materials (AMAT), and VAT Group (OTCPK:VACNY), while Lam Research (NASDAQ:LRCX) has done even better over that time.

I’ve been pretty straightforward in the past that these momentum situations are not my preferred investment environment and that’s just how it often is with semiconductor equipment names – they sell-off too much in the downturns and shoot back too far when spending recovers. Be that as it may, ASML still has a lot going for it, including a monopoly in the nascent EUV lithography market and upside to over EUR 20 billion in revenue in five years. I will say that ASML’s valuation is reasonable today in the context of its peer group, but the entire group is trading at a premium to normal drivers like near-term margins and revenue growth.

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A Guidance Hiccup Barely Registers With ASML

Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

This has been a challenging quarter for many banks, and Pinnacle Financial Partners (PNFP). While the fourth quarter financial results were less than I was hoping for, there were still a lot of positives in the quarter and I remain bullish on the company’s long-term prospects. Management’s recent announcement that it is launching a de novo growth strategy in Atlanta is just one step on that long-term road, and one that I believe will ultimately go well for the company.

The shares have been lackluster performers since my last update (up slightly and down a bit versus broader bank indices), but I continue to see value below the mid-to-high $60’s.

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Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

PTC Hitting Its Marks As It Transitions To An Industrial Digitalization/Automation Growth Story

CAD and PLM software specialist PTC (PTC) picked an interesting time to convert to a growth company, as weak PMIs across the globe don’t really bode well for sales to industrial and auto companies. Even so, the company has been rebuilding credibility with some solid quarters, and I remain bullish on the potential in leveraging IoT partnerships with Microsoft (MSFT) and Rockwell (ROK), as well as leveraging growing interest in IoT and augmented reality (or AR) as invaluable tools within a range of end-markets.

These shares have shot up almost 30% from my last article, helped by a strong reaction to fiscal first quarter earnings (a clean quarter with some guidance upside). Although the stock isn’t so compelling anymore from a FCF/DCF perspective, I still see some multiple-driven upside and I think annualized recurring revenue (or ARR) growth will be the driving factor in how the stock performs in the near term.

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PTC Hitting Its Marks As It Transitions To An Industrial Digitalization/Automation Growth Story

Sluggish Loan Growth, Spread Pressure, And Limited Op Leverage Making It Hard For Zions To Get Ahead

When I wrote about Zions Bancorpation (ZION) after third quarter earnings, I wrote that Zions was a quality bank that was mismatched the current phase of the cycle and not really cheap enough for a “pay you to wait” play. The shares are down a bit since then, underperforming broader banking indices, but that came mostly with the negative reaction to earnings (which included at least two downgrades).

Although Zions’ valuation is not demanding, I think investors are likely looking at at least three, and maybe four or five, quarters of negative year-over-year pre-provision comps and even management thinks that positive operating leverage might be out of reach in 2020. Valuation and a high-quality (if asset-sensitive) business keep this on the watch list, but I need a bigger discount to fair value or more confidence on near-term earnings momentum to step up.

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Sluggish Loan Growth, Spread Pressure, And Limited Op Leverage Making It Hard For Zions To Get Ahead

Signature Bank Standing Out With Above-Average Growth Potential

Given how investors are prioritizing positive operating leverage with banks, you might think that Signature Bank’s (SBNY) negative operating leverage would be hurting sentiment. What’s really happening is that investors are prizing operating leverage in the absence of evidence of growth – in other words, what is spending more on opex getting its investors? In the case of Signature, the bank is following a clear strategy of building its business, including multiple growth drivers, and with two straight quarters of better than expected pre-provision profit performance, the shares are up about 17% since I last recommended them (beating its peer group by over 12%).

I don’t see quite the same undervaluation as before, but I still see upside and strong bank growth stories are rare enough as it is. Up to around $160, this is still a name I’d consider buying.

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Signature Bank Standing Out With Above-Average Growth Potential

Comerica Struggling To Find Leverage Amid Serious Spread Compression

One of the biggest reasons I was neutral to bearish on Comerica (CMA) last quarter, despite apparent undervaluation, was the sentiment headwind the company was facing from what I expected to be a lengthy string of weak pre-provision profit numbers through 2021. That weakness is not only showing up, but it’s worse than I expected, and management’s guidance for 2020 was not encouraging with respect to spreads, loan growth, or operating leverage.

At some point highly asset-sensitive names like Comerica are going to bottom out, but that’s a sentiment call more than a numbers call and it can be hard to predict when investors will collectively decide that they have good enough visibility on the end of the downturn to start buying for the upturn. I do still believe that Comerica is undervalued, but with pre-provision profits again likely to decline throughout 2020 and management guidance pointing the wrong way, it’s still hard to argue for stepping up and buying now.

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Comerica Struggling To Find Leverage Amid Serious Spread Compression

Eaton Continues To Shift To A Steadier, Higher-Growth, Higher-Margin Model

For a stock that many sell-side analysts have described as “controversial” or “a battleground”, Eaton (ETN) has continued to perform well. I’ve liked this stock for a while now, and it continues to outperform – up another 10% from my last article (beating its peer group by around 6%) and up closer to 30% over the last year (beating its peers by more than 10%). Now with the company announcing the sale of its Hydraulics business, there’s not much argument left that management is attuned to the need to craft a new model that is less cyclical, higher margin, and with stronger long-term growth potential.

Selling the Hydraulics business will boost margins and returns on assets and invested capital, and the share price move after the announcement was almost spot-on with what my margin/return-driven EV/EBITDA model says should have happened. Now the questions for Eaton are more about the health of its underlying end-markets in 2020 and what businesses management may target for further M&A.

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Eaton Continues To Shift To A Steadier, Higher-Growth, Higher-Margin Model

Thursday, January 23, 2020

Sandvik Doing Well Through The Slowdown, But The Price Already Reflects A Recovery

Short-cycle stocks by and large did well in the fourth quarter, with investors buying in ahead of an expected return to growth in the second half of 2020. Sandvik (OTCPK:SDVKY) has gone along for that ride, and has also outperformed the broader industrial group since my last article – rising more than 10% and holding that through a fourth quarter earnings report that still showed signs of weakness.

The confidence expressed by Sandvik’s management on the call that short-cycle markets were bottoming certainly won’t hurt the investment case, but I’d keep an eye on economic indicators in Europe and the U.S. all the same – there’s been more weakness than expected to close 2019 and start 2020. While it hasn’t dented the second-half rebound thesis yet, that recovery is already reflected in the multiples.

Sandvik shares already trade near their one-year (and five-year) high, so it’s not like the impending recovery has been ignored in the valuation. I like Sandvik, and I do still see some upside on an EV/EBITDA basis, but the risk/reward doesn’t seem overly skewed in investors’ favor and this would be a name where I’d still rather wait in the hopes of another sector-wide pullback.

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Sandvik Doing Well Through The Slowdown, But The Price Already Reflects A Recovery

Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Among the banks I like, Regions Financial (RF) has been pretty underwhelming, with the shares lagging their peer group by about 4% since my last update and a few percentage points over the past year as well, as the Street remains unimpressed with the weak loan growth, ongoing credit costs, and limited capital opportunities. None of that is going to be fixed by fourth quarter earnings; Regions didn't post a bad quarter, but guidance for positive operating leverage doesn't seem to have convinced the Street, particularly in light of weak lending performance.

I think Regions management is doing a lot of the right things - focusing on loan returns (versus growth), operating efficiency, and sources of non-spread-based income growth. Still, I don't love this name so much because I love the company or management as I think the valuation is out of whack (with a fair value close to $19%). Valuation unfortunately isn't a catalyst in and of itself, and investors will need patience for this to work, meanwhile more dynamic names like Synovus (SNV) and First Horizon (FHN) still offer upside among Southeast U.S. banks.

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Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Fastenal Will Be Fine, But Watch The Short-Cycle Recovery Story

It’s still very early in the reporting cycle, but these first few reports maybe ought to have investors reconsidering the popular second-half short-cycle rebound assumption. Fastenal (FAST) did okay relative to expectations, but the business has definitely slowed and management gave no indications that they see conditions improving soon. Add in similar reports from MSC Industrial (MSM), Sandvik (OTCPK:SDVKY), and Yaskawa (OTCPK:YASKY) and it’s too early too panic, but maybe the right time to start refreshing that “buy when a pullback happens” list.

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Fastenal Will Be Fine, But Watch The Short-Cycle Recovery Story

Weak Loan Growth Makes PacWest's Spread Compression Even More Painful

All things considered, I’d say that PacWest Bancorp (PACW) held up well in trading after earnings, given that there were few real positives in the quarter and core pre-provision profits missed by a pretty wide margin. Spread compression was already built into expectations, but instead of the second half loan acceleration bulls were hoping for, deceleration is what they got.

I was cautious on PacWest when I last wrote about the stock because I was worried about the choppy near-term outlook (increasing loan competition, increasing spread pressures, and pressures on credit), and the shares have underperformed the broader banking group by about 10% since then. While I do see value in the shares, and the dividend helps lessen the sting, the last few quarters have me on edge regarding the bank’s real competitive advantages and the underlying end-market conditions.

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Weak Loan Growth Makes PacWest's Spread Compression Even More Painful

Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

People’s United Financial (PBCT) isn’t going to win any sprints, but I don’t think that’s why most of its shareholders own the stock. People’s United is a high-quality bank that doesn’t take a lot of chances on lending, but instead chooses to leverage a solid core deposit base in the Northeast U.S. while steadily executing on a roll-up community bank M&A strategy and paying a healthy dividend. I can, and will, quibble about unimpressive long-term tangible book value growth, but steady dividend growth over time is not a bad thing.

The shares haven’t really gone anywhere from when I last wrote about the stock, underperforming the sector, and I’m not all that surprised. People’s United has some counter-cyclical defensive characteristics, but I thought those were already reflected in the share price, and I continue to believe that is the case today.

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Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

First Horizon Continuing To Deliver Good Results Ahead Of A Transformative Merger

With good countercyclical opportunities like the trading business and mortgage warehouse lending, First Horizon (FHN) is doing pretty well at a more challenging point in the banking cycle. Loan growth prospects aren’t looking quite so exciting into 2020, but First Horizon seems to be doing more than holding its own, and the impending merger with IBERIABANK (IBKC) should unlock meaningful operating leverage down the line.

I liked First Horizon last quarter and after the IBERIABANK merger announcement, and the shares have been outperforming. I still like them now, with upside to the $19-$20 range and greater long-term opportunities from the IBERIABANK deal.

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First Horizon Continuing To Deliver Good Results Ahead Of A Transformative Merger

Citizens Has Executed Well In More Challenging Circumstances

Back in June, I thought that Citizens Financial (CFG) had some appealing countercyclical and self-help value, but that it wasn’t quite as attractively valued as Bank of America (BAC), First Horizon (FHN), or JPMorgan (JPM). Since then, the shares have outperformed the average bank stock, but underperformed those three preferred names. Still, with better than expected growth guidance for 2020 and opportunities for both positive leverage and improved capital returns, I think Citizens is going into 2020 in very good shape.

Given those relative performance dynamics, I think Citizens is a little more attractively priced now, as well as undervalued on a fundamental basis. There are still things management needs to work on (including balance sheet optimization), but those plans are underway and I think Citizens should trade in the low-to-mid-$40’s.

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Citizens Has Executed Well In More Challenging Circumstances

Bank OZK Beats, But Investors Are Focusing On Any Sign Of Credit Issues

I’ve been cautious on Bank OZK (OZK) for a while now, and I don’t feel as though I’ve missed much – the shares are down about 10% since my January 2019 article on the stock and up less than 2% since my last article – lagging the broader bank sector by about 10% and 3%, respectively, to say nothing of banks I’ve preferred like First Horizon (FHN). I believe there are multiple issues weighing on Bank OZK – a slowing non-residential construction market, growing competition from nontraditional lenders, adverse asset/liability betas, and concern over credit quality.

I’m more and more interested in the valuation opportunity, though, and the risk-adjusted return potential. Credit losses are certainly an ongoing risk, and given Bank OZK’s willingness to write larger loans, the headline risk is not small. Still, the bank should be able to more than handle some losses, and I think a lot of the rate/NIM risk is already in place. If mid-single-digit core earnings growth is still a valid long-term expectation, I believe these shares are starting to show some real appeal.

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Bank OZK Beats, But Investors Are Focusing On Any Sign Of Credit Issues

Bryn Mawr's Non-Spread Businesses Show Their Value

In a quarter where bank earnings have been hovering around “okay”, Bryn Mawr (BMTC) showed some of the virtues of its business mix, as strong non-spread businesses offset some noticeable weakness in the core lending operations and drove a beat at the pre-provision line. Not only am I bullish on what these non-spread businesses can do for Bryn Mawr down the road, I’m also generally bullish on management’s plan to shift toward a more balanced commercial lending mix and start targeting some opportunities outside of its core suburban Philly operating footprint.

Valuation doesn’t excite me as much; Bryn Mawr is a better-than-average bank for its peer group, and it’s priced accordingly. I don’t have a problem with a fair value in the neighborhood of $40, but that suggests price appreciation that is more “okay to good” than “must buy now”.

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Bryn Mawr's Non-Spread Businesses Show Their Value

Monday, January 20, 2020

Strong Volumes Help Insteel Start The Year Right

I cautioned in my recent piece on Insteel (IIIN) that volatility in end-market demand and import pricing made this a more volatile story and a harder company to model, and that worked out in a positive way in the fiscal first quarter, with Insteel reporting better results on stronger volumes. Management also noted that its transportation end-markets looked healthy and that the pricing cycle may be past the worst.

I thought Insteel was undervalued back in late December, but that the volatility and risk made it a difficult stock to recommend for other investors. I feel better about the volume and margin situations, but I think that view still basically holds - the shares do still offer some upside on an EV/EBITDA basis, and the company could well outperform my expectations, but this remains a tricky stock to model, and a lot of the key factors that will influence revenue and margins are beyond management's control.

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Strong Volumes Help Insteel Start The Year Right

Westamerica Continues To Leverage Its Amazingly Low-Cost Deposit Base

Westamerica Bancorp (WABC) may be one of the strangest banks I follow. While the bank’s tangible book value has increased more than 6% a year over the last decade, loan balances have declined more than 6% on average, and earnings have likewise contracted over time. Although Westamerica’s extremely conservative underwriting and ultra-low-cost deposit base can serve investors well in tougher times (the shares have outperformed the bank sector on a one-year, three-year, and five-year basis), this is definitely an atypical bank and investors need to appreciate that before adding it to their portfolio.

Westamerica has outperformed as the banking cycle has become more challenging, and I don’t see a lot of value here in the high $60’s. A pullback into the low $60’s (or high $50’s) would offer a more compelling story, unless you believe that banks are stumbling toward a major credit crisis, in which case Westamerica’s pristine balance sheet will shine all the brighter.

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Westamerica Continues To Leverage Its Amazingly Low-Cost Deposit Base

Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Despite a more challenging operating environment, those banks with legitimately strong franchises and cogent growth plans (particularly those with a strong IT/digital element) continue to prosper. I liked Bank Of America (BAC) back in May, and not only have the shares outperformed the banking sector as a whole, they’ve outperformed the S&P 500 as well. Likewise, BofA stands out favorably in its mega-bank peer group, though my preferred choices, JPMorgan (JPM) and Citi (C), have done a little better over that time.

While I still love JPMorgan, Bank of America seems to have a little more appeal now on a valuation basis. This isn’t just a valuation call either; although BofA’s loan growth has come back to earth a bit, the bank continues to take share in the consumer banking market and the company’s ongoing tech investments can unlock further operating leverage down the road.

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Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Sunday, January 19, 2020

Still More Chaos At Nektar, But There's Value In The Pipeline

Nektar (NKTR) shares have remained volatile, with new turbulence tied to the rejection and abandonment of pain drug NKTR-181, another restructuring to the Bristol-Myers (BMY) partnership, and ongoing uncertainty about the clinical and commercial profile of its key asset bempegaldesleukin (“bempeg”). While the shares are up more than 10% since my last update, a little worse than the return of the two largest biotech ETFs, the shares had been substantially higher less than a week ago – after the release of slides ahead of the JPMorgan Healthcare Conference and the unsuccessful FDA AdCom meeting on NKTR-181.

I think there are valid questions about management here, and it’s hard to feel good about any investment when you’re not really confident about management, but I believe the potential of bempeg in melanoma supports the valuation and I do still see upside from here, though it’s far from what I’d call a high-confidence pick.

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Still More Chaos At Nektar, But There's Value In The Pipeline

XPO Logistics Shifts Gears Yet Again

Is there really any overarching plan in place at XPO Logistics (XPO)? I ask that because this company has shifted gears so abruptly so many times over the years, that transmission has to be pretty well stripped by now. First the company was going to be a roll-up of asset-light logistics services companies … then it became decidedly more asset heavy. And now management apparently is looking to (or at least willing to consider) auction off everything but the U.S. less-than-truckload business.

I shouldn’t complain – these shares are up 75% from my bullish call back in June (and were up about 50% before the announcement of the strategic review). And you know, if the overarching plan is to create maximal value for shareholders by whatever legal means necessary, that’s not so bad. Either way, with break-up values in excess of $100/share now in play and no real sense of what the long-term strategy is now, I can’t say I’m as bullish on the shares now.

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XPO Logistics Shifts Gears Yet Again

Friday, January 17, 2020

Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

Despite liking management’s portfolio transformation plan, I wasn’t very bullish on Alcoa (AA) in late October, and my primary concerns – that the company is too high up on the cost curve and can do nothing about global overproduction – have come home to roost again, with management forecasting a “balanced” market for alumina in 2020, but an oversupplied aluminum market.

These shares still look undervalued relative to my expectations, but even after a 15% or so drop from that last article, I’m still not keen to own the shares. My basic approach on commodities is that you find the better opportunities in situations where there is a supply bottleneck that will take time to work out and/or where the supplier has a cost advantage. Neither really applies to Alcoa, and while I think further capacity curtailments, closures, and/or sales can improve the long-term viability of the business, I’m just not keen on trying to wring performance out of this name.

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Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

PNC Financial Comes Up A Little Short Where It Counts In Q4

Given what I thought was only “okay” valuation back in October, I’m not too surprised that PNC Financial (PNC) shares have done only slightly better than its peer group over the last three months. It’s a well-run, well-liked bank, but with core earnings only a bit better than expected, valuation is perhaps a more pressing concern right at the moment. I’m still not really enthusiastic about PNC as a new buy idea. It’s a fine bank, and a fine hold, but I don’t see enough growth differentiation here to really support a significantly higher share price.

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PNC Financial Comes Up A Little Short Where It Counts In Q4

Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

The share of Eagle Bancorp (EGBN) have had a relatively mediocre run since my last update in October, with the stock more or less tracking the broader performance of regional bank stocks. Although Eagle’s fourth quarter had some pretty curious moving parts, I believe the bank is still in fundamentally good shape and well-positioned to take advantage of the growing, less cyclical Washington, D.C. economy.

With ample surplus capital and the bank already spending on preparations to exceed the $10B asset threshold, I think an acquisition is at least plausible. Either way, while I don’t think the shares are hugely undervalued, there’s still worthwhile upside here on a risk-adjusted basis and the potential of double-digit annualized returns for shareholders.

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Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

The trouble with excellence is that once you attain a high standard of performance, the improvements that follow don’t seem quite as impressive. Start an exercise program today, and you’ll probably see rapid improvement over the first few months … but after a year or so, those improvements will be slower and harder-earned. That may well be one of the primary issues for U.S. Bancorp (USB) now, as this well-regarded and highly profitable bank struggles to offset spread headwinds and operating leverage challenges.

I still wonder whether investor frustration with the slow progress here may eventually force management toward a more dramatic step like a large acquisition or merger of equals. Management certainly seems more open to the idea than before, but I wouldn’t make that a base-case assumption. In any case, U.S. Bancorp does appear to offer better-than-average upside here, but with sentiment in a “what have you done for me lately?” sort of place, it may take time for this more defensive name to shine.

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Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

Wells Fargo's Results Show The Amount Of Work Left To Be Done

In quarter that has so far seen earnings reports that I’d characterize as okay-to-good, Wells Fargo (WFC) once again stands out for the wrong reasons. Not only was there barely any positive news of significance in the quarterly results, I’m not sure investors will be patient with a turnaround process that is going to take years – particularly with management indicating that it was going to take most of 2020 for the new CEO just to complete his review of the business.

Of course it’s more important for Wells Fargo’s turnaround to be done right as opposed to right now, but as I said, Wall Street is not a forgiving or patient place, and 2020 results are likely to be weak. Low single-digit earnings growth can still support a fair value in the mid-$50’s, but it’s tough to reconcile above-average long-term potential with considerable short-term challenges.

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Wells Fargo's Results Show The Amount Of Work Left To Be Done

Robust Loan Growth Continues To Feed The First Republic Growth Machine

Understanding what a business does well and not messing that up in the pursuit of even more growth is an underappreciated business talent, but First Republic (FRC) has that going for it with its management team. While management often fields questions from investors about building or buying its way into new markets, continuing to drive market share growth within its core high net worth (or HNW) market in California, New York City, and Boston continues to drive exceptional performance for this specialized bank.

The biggest challenge for First Republic may be funding its loan growth, but so long as the market is willing to keep paying a premium for the shares, equity raises make sense. While the HNW market is likely not as bulletproof as the bulls want to believe (let’s see what happens in the next real tech stock washout…), I have no problem assuming that First Republic will generate double-digit loan and core earnings growth for a long time to come (at least on an annualized basis). Valuation isn’t as extreme as relative comparisons may seem (there really aren’t many, if any, truly fair comparables), but if loan growth slows, the multiple will definitely be at risk.

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Robust Loan Growth Continues To Feed The First Republic Growth Machine

Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

Being bullish on Citigroup (C) has never been a particularly popular call for me, but the shares are up 16% since my last piece, the best among the U.S. mega-banks I follow, and up about 42% over the last year – better than JPMorgan (JPM), Bank of America (BAC), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). Yes, Citi-haters, I know the three-year comps and beyond are not nearly so favorable, but I think Citi’s results have supported the idea that there’s a credible plan in place here and the performance gap is closing (even if slowly…).

My bullish call on Citi has never been predicated on the belief that it is the best-run bank in the U.S., nor the one with the best prospects. Rather, my thesis was and is that the valuation doesn’t adequately or accurately reflect the growth potential of the business. Provided a long-term core growth rate of around 2% is still valid, these shares are undervalued below $90.

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Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

Wednesday, January 15, 2020

JPMorgan Adds Another Quarter To Its Remarkable Performance Run

I’m sure the truly dedicated can find something to nitpick in JPMorgan’s (JPM) fourth-quarter results, but I view the quarter as a strong performance even against what has been a pretty remarkable run of quarters across the banking cycle. While the underlying health of the U.S. economy remains a concern (more on the corporate side now than the consumer), as does the ongoing impact of low rates, JPMorgan has shown it can adapt to the environment, and I still see meaningful opportunities for both organic growth and operating leverage.

The only issue now is that the Street is up to speed on this name; the 14% move in the shares since my last update (roughly double the underlying bank sector) has brought the stock to my fair value estimate, even after post-Q4 adjustments. There’s nothing wrong with owning one of the best of the best at fair value, though, and I won’t put it past JPMorgan management to deliver upside to my core long-term 3% underlying growth estimate.

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JPMorgan Adds Another Quarter To Its Remarkable Performance Run

Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

If you’re an American investor, the odds that you’ve ever heard of Bossard (OTC:BHAGF) (BOSN.SW) are quite low. Frankly, considering the size of the company, you could easily be a Swiss investor and never have heard of this company. Be that as it may, this is a high-quality industrial name well worth knowing, as this growing fastener distributor and industrial solutions provider has a solid global growth opportunity.

Bossard shares were down about 10% in Switzerland on its top-line update for the fourth quarter, but the underlying results weren’t meaningfully different than expected. Weakness in both the EU and U.S. industrial markets are clearly areas of concern, but Bossard is highly leveraged to a turnaround in short-cycle industrials. The shares aren’t in my buy zone yet on a DCF basis, but they already have some upside on an EV/EBITDA basis and this is a name to watch if industrial stocks sell off further through this reporting cycle.

Investors should note that there is virtually no liquidity in the ADRs and the Swiss shares themselves aren’t especially liquid, though daily liquidity of over $3 million should be sufficient for most individual investors.

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Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

Tuesday, January 14, 2020

Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

These have been some interesting times for Acerinox (OTCPK:ANIOY) (ACX.MC), as this leading producer of stainless steel has had to navigate a weakening demand environment and volatile input prices. All things considered, I believe Acerinox management is doing pretty well, and I think the acquisition of VDM Metals will prove to be a savvy move down the line.

While I still liked Acerinox back in May, I thought there were other, better options to consider. Since then, Acerinox has done pretty well (local shares up 15%, the ADRs up closer to 20%), but Gerdau (GGB) and Aperam (OTC:APEMY) have done better, while Ternium (TX) has done worse (neither Gerdau nor Ternium compete in stainless). I still believe that Acerinox is undervalued, and while there is risk to the 2020 demand outlook, I like this company for its above-average productivity and efficiency, as well as its wider set of options to improve performance even further.

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Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

I’ve long lamented that no matter what CapitaLand (OTCPK:CLLDY) (CATL.SI) did, it just couldn’t seem to break out above S$4/share. That seems to be changing, though, as investors have not only gotten more bullish on the near-term prospects for Singapore’s property market, but also management’s commitment and ability to drive long-term ROEs toward the double-digits (including gains and revaluations).

I’ve been bullish on CapitaLand for a while, and I still am. With demonstrated successes in Singapore and China to build on, and significant growth opportunities in India, Vietnam, fund management, and managed residences, I believe CapitaLand is well on its way with a plan that will deliver better returns for investors. I believe fair value is at least another 15% higher from here, with upside beyond that if management execution can shrink the risk premium in the shares.

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CapitaLand May Finally Be Breaking Out On A Clearer Path To Strong, Sustainable ROEs

Neurocrine Knocked Back On Ingrezza Concerns And Maybe The Lack Of A Buyout

Expectations can be irrational and still have power – that’s about the only reason I can see for why Neurocrine (NBIX) shares were as weak as they were coming out of the company’s JPMorgan Healthcare Conference presentation. Investors went into this conference with inflated expectations regarding biotech M&A, and it likely didn’t help matters any that Neurocrine management was once again cautious on sales guidance for Ingrezza in Q1’20.

Neurocrine is an interesting position now. The strong commercial success of Ingrezza is allowing the company to augment a so-so internal R&D effort with licensing deals that have brought the company some interesting opportunities in Parkinson’s and epilepsy, and the company’s congenital adrenal hyperplasia drug crinecerfont still appears to be underestimated in my view. With a fair value of over $130, I still see meaningful upside in these shares.

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Neurocrine Knocked Back On Ingrezza Concerns And Maybe The Lack Of A Buyout

Alnylam Pharmaceuticals Beats Again, But The Bar Keeps Moving Higher

Closing the books on a very successful 2019, Alnylam (ALNY) didn’t offer all that much that was new at the JPMorgan Healthcare conference, and that more than anything may well explain why the stock didn’t perform particularly well after the company’s presentation. It looks to me as though a lot of stocks, particularly in biotech, were set up for a “buy into the conference, sell during the presentation” trade, as there hasn’t yet been much in the way of thesis-changing news (let alone the M&A activity some were hoping for) coming out of the meeting.

Turning back to Alnylam, though, there’s still a great deal to like about this biotech. Last year saw several successful trial read-outs, particularly the extensive trials done by The Medicines Co (now owned by Novartis (NVS)) for inclisian, largely de-risk the company’s platform, and other studies have validated the company’s new delivery chemistry – chemistry that should prove key in targeting diseases outside the liver. On top of all that, the company has a well-balanced pipeline with two drugs lined up for possible approval in 2020 and multiple compounds in Phase III and Phase II testing.

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Alnylam Pharmaceuticals Beats Again, But The Bar Keeps Moving Higher

Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

When I wrote about Cemex (CX) the other week, I mentioned Cementos Argos (OTCPK:CMTOY) [CCB.CN] as a name to consider for investors who wanted better leverage to volume growth in Colombia and the U.S. Cementos Argos ("Argos") has the advantage of not being burdened by less productive assets in less appealing regions, though the company has plenty of debt, and the company's "value over volume" strategy in Colombia is uncomfortably similar to a strategy pursued unsuccessfully by Cemex in Mexico. On the other hand, Argos is a leader in a Colombian market that is seeing construction spending just starting to grow again, and is likewise benefiting from a strong strategic position in the U.S.

Valuation is mixed, but there is significant operating leverage in this model, and a modest outperformance on the top line would translate into not-at-all modest leverage in earnings and cash flow. My base-case suggests around 15% to 20% undervaluation, but over 30% if the business can accelerate to COP 10B or better in 2020 (7.5% or better year-over-year growth).

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Cementos Argos Offers High-Risk/High-Reward Leverage To Colombia And The U.S.

MTN Group Still Facing Profitability With No Prosperity

I've been doing this for over a quarter-century now, and MTN Group (OTCPK:MTNOY) may well be the most frustrating stock I've owned and followed over that time. While there have certainly been management missteps in this company's history, even a good management team with a good plan hasn't been much of an elixir for the ailing stock price, as constant regulatory nonsense across its operating area, as well as other macro challenges, has mitigated any of the benefits.

These shares may now be the cheapest they've ever been, but it's hard for me not to conclude with a "… so what?", particularly with some significant upcoming license renewals and ongoing economic and political challenges in South Africa. Maybe I'm getting ready to throw in the towel at the low point, but it's honestly difficult to recommend these shares even despite significant apparent undervaluation - a good management team and a good valuation are often highly valued, but the significant ongoing external issues are an inescapable and unignorable negative part of this story.

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MTN Group Still Facing Profitability With No Prosperity

Commercial Metals Looks Mispriced Given Generally Favorable Market Trends

I'm probably closer to bearish on steel than bullish, but I do see some select opportunities that are worth a look, and Commercial Metals (CMC) seems to be one of them. Unlike the market for flat-rolled steel, I see a better supply/demand balance in CMC's core long markets, particularly given how consolidated the U.S. rebar market is now after the CMC-Gerdau (GGB) deal in 2018. Add in some growth from infrastructure projects, decent non-resi trends, improving fabrication results, and some opportunities for network optimization, and I think CMC has some potential.

I think CMC shares could be more than 10% undervalued now, with long-term annualized return potential in the double digits. Certainly a lot rides on whether above-trend metal spreads can be maintained, but CMC management has made several smart moves and seems underappreciated relative to flat producers facing more structural challenges.

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Commercial Metals Looks Mispriced Given Generally Favorable Market Trends

CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

I wasn’t bullish on CK Asset Holdings (OTCPK:CHKGF) (1113.HK) back in July, largely because I didn’t see a big enough discount to fair value to compensate for the risk of the company’s ongoing strategic shift toward owning/operating more recurring-revenue assets in lieu of property development. CK Asset’s management team was pretty good at property development, but the track record in these new ventures is much shorter and some of the initial investment decisions have been more than a little curious to me.

The shares have since lagged the Hang Seng Index, falling about 7%, but outperforming other property developers like Sun Hung Kai Properties (OTCPK:SUHJY), Swire (OTCPK:SWPFF), and Henderson Land (OTCPK:HLDCY). I certainly didn’t have the Hong Kong protests in mind when I passed on buying these shares, and I’m not about to take credit for being right when such a significant exogenous factor came into the market.

As things stand now, though, I’m more bullish on this company and the shares. The acquisition of Greene King made sense to me, and I think I have a better sense of what management is looking to do in the future with its non-property development operations. There’s still quite a bit of uncertainty here between macro/political factors and CK Asset’s ongoing leverage to property development, but at a 25%-plus discount to my estimate of fair value and a healthy dividend, I like the risk/reward a lot more.

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CK Asset Executing On Its Diversification Strategy And Getting Little Credit For It

Aptiv Leading The Way In Advanced Safety, But There Are Some Road Hazards

Being a pioneer tends to have a pretty binary outcome – they either name schools after you, or you end up feeding the scavengers in the middle of nowhere. I don’t think Aptiv (APTV) is really looking at such a stark set of outcomes, but I do see this company as a pioneer in active safety for passenger vehicles with a rich multiple to match.

I think we’re going to see a cool-down of expectations around autonomous driving in 2020, and with that I think Aptiv’s rich multiple could be at risk. I do like the underlying business, not only for its leverage to active safety, but also its leverage to connectivity/infotainment and vehicle electrical systems. A pullback (more than the 10% already seen) could create an attractive long-term buying opportunity for a company that I think can generate above-average long-term growth, including double-digit FCF growth.

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Aptiv Leading The Way In Advanced Safety, But There Are Some Road Hazards

Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

The markets typically care more about margins than revenue … until they don’t. While Acuity Brands (AYI) once again did well on the margin lines, the market seemed more than just spooked by the severe year-over-year erosion in volume. I’d also assume that the weaker call on non-residential construction, one of the markets expected to be stronger for multi-industrials this year, didn’t exactly help matters.

I don’t love lighting as a business and I think Acuity has a long way to go before its more sophisticated control and IoT businesses kick in meaningful contributions. Even so, I’m surprised the shares trade where they do. I mean, I get that the market doesn’t like lighting stories, but that seems overdone here. It’s tough to buy into a sector that I don’t really like, and I know the undervaluation here could persist (particularly if volume stays so weak), but the valuation is enough to make this a name to keep watching.

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Acuity's Volume Declines Are Worrisome, But The Market Reaction Seems Extreme

Investors Shrug Off A Soft Quarter From Yaskawa Electric

My biggest concern going into the calendar fourth quarter earnings cycle is that investor expectations for a 2020 recovery are set too high and that company guidance this time around may not be enough to support valuations that are already above historical averages. If Yaskawa Electric’s (OTCPK:YASKY) (6506.T) are anything to go by, those worries may be overdone.

Yaskawa had a soft quarter, but investors not only shrugged it off but seemed to embrace evidence that the worst is over … even though management’s guidance leaves a very challenging bar in place for the fiscal fourth quarter. While I still like Yaskawa’s business quite a bit, and I think the company is well-placed to leverage growth in automation across a range of industries (particularly in China), the valuation seems to already reflect that.

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Investors Shrug Off A Soft Quarter From Yaskawa Electric

Thursday, January 9, 2020

Innospec Leveraging New Growth Opportunities And Driving Margin Leverage

While I liked Innospec (IOSP) back in May, I never got the dip into the $70’s that I was hoping for, as the company has done a very good job of executing on some emerging growth opportunities in Fuel Specialties, as well as its long-term plan within Oilfield Services. Even the execution in Performance has been commendable, as the loss of volume to a significant customer and some adverse mix-shift has been offset by surprisingly resilient gross margins.

My biggest concern for Innospec going into 2020 is the risk that weak U.S. onshore drilling and fracking activity could sap the momentum in the Oilfield business. While Fuel Spec likely won’t see the same sort of volume growth it has in recent quarters, the longer-term opportunity in low-sulfur marine fuel (under IMO 2020) looks appealing. Valuation for this almost-uncovered specialty chemical company isn’t ideal, but management has shown the virtues of its diversified business model and it will likely take some weak quarters to open a window of opportunity.

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Innospec Leveraging New Growth Opportunities And Driving Margin Leverage

Sika's Growth Slowed Significantly In Q4, Making Valuation More Of A Concern

I’ve said it before and I’ll probably have to keep saying it until I stop writing – valuation, in and of itself, doesn’t often move stocks. To that end, while I thought Sika (OTCPK:SXYAY) (SIK.S) was expensive back in July, I’m not surprised it’s held up reasonably well (more or less in line with BASF (OTCQX:BASFY) and Arkema (OTCPK:ARKAY), behind RPM (RPM), better than Saint Gobain (OTCPK:CODYY) and inline with the Swiss market). This is, after all, one of the best specialty chemical companies I know, and the company’s presentations at its October capital markets day made a strong case for exceptional performance for at least the next five years.

Sika’s fourth quarter revenue disappointed investors, but was in line with my expectations for the most part. I am concerned that 2020 could be a tougher year for non-residential construction (it will almost certainly be slower), but I’m not betting against Sika’s ability to continue to gain share through innovation while also driving higher margins. The problem is that that’s already in the share price, and I can’t really see how these shares offer above-average potential.

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Sika's Growth Slowed Significantly In Q4, Making Valuation More Of A Concern

Repligen Gives Investors A Pure Play On Bioproduction

Seven of the top 10 best-selling drugs in the world are antibodies, biosimilars are starting to disrupt the pharmaceutical industry, and Big Pharma is investing billions in gene therapy. On top of that, roughly half of the drugs in biopharma pipelines today are biologics (antibodies, cell therapies, gene therapies, etc.). All of that means an exceptionally attractive market opportunity for companies like Repligen (RGEN) that sell what amounts to the picks and shovels of the biologics industry.

I believe Repligen’s strong position in purification and filtration, as well as emerging opportunities in areas like analytics, give the company a good shot at a prolonged streak of 20%-plus revenue growth and 20%+ FCF margins. While the shares do trade at around 15 times forward revenue, I’m not sure they’re as expensive as that snapshot approach to valuation may suggest, particularly with the company gaining share in a large market set to grow at a high-single digit rate for many years to come.

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Repligen Gives Investors A Pure Play On Bioproduction

MSC Industrial Muddling Through A Tough Environment, But Margins Remain A Key Concern

I've not been particularly gentle in my assessments of MSC Industrial (MSM) management over the years, as I think the company has been slow to react to the changing realities of the distribution sector, and when it has reacted, it hasn't done so particularly well (I can't remember which sales strategy we're on now…). It's even more frustrating to see that in the context of underperformance relative to Grainger (GWW) and Fastenal (FAST) and the changes/adaptations those companies have been making.

My chief concern remains the margins, particularly with management acknowledging that its latest strategy, shifting from a focus on spot-buy to deeper managed inventory relationships with customers, will lead to lower gross margins. Less pressing, but still relevant, is whether the U.S. industrial economy will, in fact, see that second-half rebound that the Street has been counting on. For now, I see MSC shares priced to generate a total annualized return in the mid-to-high single digits, including a roughly 4% yield without the special dividend, and it's not a particularly compelling name beyond its higher-than-average dividend.

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MSC Industrial Muddling Through A Tough Environment, But Margins Remain A Key Concern

SFL Still A Little Island Of Relative Calm In An Always-Volatile Shipping Industry

With a prudent management team, good access to capital, and healthy contract coverage, SFL Corporation (SFL) offers investors a bit of an oasis in a usually-turbulent shipping industry where sudden shifts in geopolitics or trade can lead to fast, bruising changes in rates that hammer shipping operators. While there will always be questions about this or that part of SFL’s portfolio, I think management has more than earned the benefit of the doubt and this remains a solid option for investors who prize income and are willing to accept higher risks to get it (SFL is well-run, not risk-free).

SFL shares are up about 15% from when I last wrote about the stock, but the market environment is no less turbulent. My total return expectations really haven’t changed much from then, but the dividend is now a bigger portion of that potential return and in the $14’s, I’d say the stock is more or less fairly valued.

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SFL Still A Little Island Of Relative Calm In An Always-Volatile Shipping Industry

Wednesday, January 8, 2020

PerkinElmer Refocusing On Its Best Growth And Margin Opportunities

In a strong market for life sciences, a market that has seen Sartorius (OTC:SARTF) jump more than 70% over the past year, Bio-Rad (BIO) more than 60% over the past year, and Thermo Fisher (TMO) over 45%, PerkinElmer's (PKI) almost 30% climb doesn't seem quite so special. Part of the issue is an ongoing challenge with the company hitting its growth and margin targets (it seems like it can do one or the other in a given period, but not both), but I believe the lack of leverage to bioproduction is a drawback as well. Although a new CEO and a shifted set of priorities could help the former, it doesn't look as though PerkinElmer management is contemplating a major near-term shift in the business mix.

As is so often the case for me in life sciences today, I like the companies but not the valuations. Mid-teens annualized FCF growth would only support a mid-single-digit annualized return at today's level, so I can't really call this a favorite idea now. The stock has proven to be volatile over the last couple of years, though, so this is a name worth considering for a watch list.

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PerkinElmer Refocusing On Its Best Growth And Margin Opportunities

A More Diverse Advanced Energy Is Looking At Multiple End-Market Drivers

The cyclicality of the semiconductor industry is a challenge for all equipment suppliers. Advanced Energy Industries (AEIS) has tried to offset and mitigate that cyclicality by deploying capital into diversification efforts. These efforts haven’t really worked so well historically; the solar inverter business was a small-scale disaster, and the other acquisitions haven’t really done all that much. Now management is hoping that its biggest-ever deal will change that, with the Artesyn acquisition giving the company exposure to near-term growth trends in 5G and data center and long-term opportunities in med-tech and industrial.

Advanced Energy has done well since my last update, rising close to 40% as the stock has followed other semiconductor suppliers higher since the fall. I was bullish on the stock then, but modeling has gotten a lot more challenging with the addition of Artesyn, and AEIS management guidance suggests a less robust margin/cash flow recovery from the semiconductor business than in past cycles (or Artesyn margins are going to really weak). Unlike many semiconductor equipment stocks, I don’t think the shares look all that expensive, but I want to emphasize the higher level of modeling uncertainty.

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A More Diverse Advanced Energy Is Looking At Multiple End-Market Drivers

VAT Group's Valuation Back In Rarified Air

With logic and foundry orders looking healthy and memory at least looking as though its bottomed, a host of semiconductor equipment stocks have done well over the last year or so, including vacuum valve specialist VAT Group (OTCPK:VACNY) (VACN.SW). While this stock gave investors a few of the 10% pullbacks I said I was hoping for in my last article, the shares have been on a good run since August, with a total gain of over 30%.

At this point I can’t say that I see a lot of value in the shares, though I do think sell-side estimates are too low and the stock could be set up for at least a couple of beat-and-raise quarters that expand the multiples even further. I already have expanding share and expanding market opportunities, as well as new record highs for margins in my model, though, and I just can’t see a lot of appeal here other than as a trading/momentum opportunity.

Readers should note that the stock’s ADR is exceptionally illiquid; the Swiss-listed shares offer much better liquidity.

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VAT Group's Valuation Back In Rarified Air

Stryker Continues To Cut A Swath Through Med-Tech

Like one of the traction cities out of Mortal Engines, Stryker (SYK) continues to roll along, executing well with its core businesses, but also eagerly gobbling up technologies and product portfolios that management believes can aid its long-term growth prospects. While the third quarter wasn’t perfect down the line and the Wright Medical (WMGI) deal isn’t without some risk, Stryker rolls into 2020 with a lot of momentum and healthy prospects across its business.

As perhaps the best med-tech company out there now, Stryker continues to command a premium valuation. While a company with this combination of growth, organic growth, and margin power should be highly valued, I believe market outperformance increasingly relies on multiple expansion that seems less likely to me.

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Stryker Continues To Cut A Swath Through Med-Tech

Zimmer Biomet Showing Long-Awaited Progress In Its Turnaround

Zimmer Biomet (ZBH) (“Zimmer”) has certainly had some issues since the acquisition of Biomet. Between integration challenges, manufacturing problems (including FDA warning letters), and slow underlying market growth, and other challenges to boot, the shares have dramatically lagged rival Stryker (SYK) and the medical device sector as a whole. The story over the past year is quite a bit different, though, as the shares have climbed more than 40%, beating even mighty Stryker, as CEO Bryan Hanson’s turnaround efforts have started to bear fruit.

From where I sit, the real question is the extent to which Zimmer can reignite organic revenue growth and drive better margins. Med-tech valuations tend to be driven by a blend of margins and revenue growth, and the latter is where Zimmer comes up a little short. Although I’m not particularly bullish on drivers like ROSA, Zimmer may yet have enough in the tank to beat revenue growth expectations and see further positive rerating. I’d call these shares more of a hold now, but one with improving underlying quality and upside if it can deliver that improved growth rate.

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Zimmer Biomet Showing Long-Awaited Progress In Its Turnaround

ViewRay Climbing A Steep Hill As It Tries To Disrupt The Radiation Oncology Market

Small-cap rad-onc company ViewRay (VRAY) certainly doesn't lack for ambition, as it is trying to disrupt the $5 billion radiation oncology equipment market with its MRI-guided MRIdian system. While ViewRay brings a lot of positives to the table that should presage meaningful market growth, the reality is that treatment approaches often change much more slowly than investors would otherwise expect and it's not clear to me that cancer centers will see the same advantages in ViewRay's approach.

While I believe ViewRay has a better chance of disrupting the market than Accuray (ARAY) (which I own), there are lots of lessons from the Accuray experience that apply here - particularly radiation oncologists' satisfaction with the status quo and their lack of perceived need to change. Still, with the shares already pricing in very little chance of long-term success, this name could hold interest for more speculatively-minded investors, particularly after a recent capital raise that brought in some interesting strategic investors.

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ViewRay Climbing A Steep Hill As It Tries To Disrupt The Radiation Oncology Market

Improved Execution Has Significantly Boosted Colfax's Credibility

Credit where due - not only has Colfax (CFX) management reduced the cyclicality of the business in a relatively short time, it has also added a credible acyclical healthcare platform and improved the execution of its ESAB welding business. That progress has translated into strong outperformance, with the shares up almost 40% since my last update and leaving Colfax as one of the best-performing industrial/multi-industrial stocks of 2019.

With the move, the undervaluation I saw back in May has been corrected. From here on, the story is about ongoing execution in the Med Tech segment and the speed and magnitude of a short-cycle recovery for welding. With decent long-term revenue growth prospects (3% to 4%) and significant margin/FCF margin improvement potential, this is a name I'd watch through earnings as a potential buy on a pullback, should the welding business disappoint and/or overall sector guidance for the year lead to a broader de-rating.

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Improved Execution Has Significantly Boosted Colfax's Credibility

The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove

More clunker than clinker over the last five years, Cemex (CX) has chopped steadily downward since mid-2017 as the company continues to see weak results in Mexico (compounded by share loss), lackluster results in the U.S., and frankly not much good news anywhere in the business. On top of that, I’m starting to question if management has the right idea regarding its asset sale initiatives – selling assets and deleveraging is a good idea on balance, but I’m worried that management may be selling the flowers and keeping the weeds.

I don’t think the operating environment in Mexico is going to get much worse, but that’s not a compelling bull thesis, nor is “but it’s cheap!” I do think the market is pricing in pretty unimpressive performance, but shouldn’t it? When’s the last time Cemex really impressed anybody with its execution? There could be value here, but if I want to go shopping for bargains leveraged to Mexican infrastructure I’d rather own PINFRA (OTCPK:PUODY) or pay up for a company like Grupo Aeroportuario del Centro Norte (OMAB).

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The Key Mexico Market Is Likely Bottoming, But Cemex Management Has A Lot To Prove