Sunday, June 12, 2016

Journey's End

My wife, Christina, died early Sunday morning.

She was comfortable, she was not in pain, and she was not alone. In these last few days, the hospice team did a fantastic job of caring for her, and I think the process was as peaceful and soothing as it could have been.

I spent more than half of my life with this woman, but forty-two years is not a fair allocation of years to such a wonderful, talented, brilliant, and kind woman.

She was a geneticist by training, and a paper she wrote based on research done for her PhD thesis was published in Science. Having your first paper published in Science is a little like getting your first tennis racket for Christmas and winning Wimbeldon the following year (maybe that's hyperbole, but allow me a few bragging rights today). She discovered the genetic mutation that causes Type 2 myotonic dystrophy, as well as a type of CCM (cerebral cavernous malformation).

She didn't really like how science is conducted at the academic level, though, particularly as moving ahead in that world often means moving further and further from the lab bench. She transitioned to a role editing science papers for non-English speaking scientists, so she never quite left the field.

Christina was a remarkable partner. Fierce, tough, and stubborn beyond imagination, she was also supportive, loving, and incredibly sweet. She was the type of person who almost never swore (and I don't think she ever swore around anyone other than me), but then she could drop an insanely vulgar, and uproariously funny, joke out of nowhere. It was those contrasts, I think, that made her so much more special to me.

Cancer laid her low. She fought this insidious, relentless disease for at least two years. I say "at least" for while she was diagnosed in September of 2014, we have good reason to believe this disease was "simmering" in the background for many more years than that.

She was incredibly brave. From surgery to radiation to physical therapy to multiple rounds of medication (immunotherapies and targeted therapies), she never complained. She never had to be coaxed into the car to go to the cancer center, and she did her best to take care of herself throughout the process.

In fact, this intensely private person created a public Facebook page specifically to chronicle her life with this disease, and she was completely open and honest about all of the ups and downs, in the hopes that maybe it could help other people in the future.

She never lost hope. She accepted her fate when she was told in April that there was nothing more to be done, but she never gave up. She never stopped reading papers and running through "what if's" or "could we try's?" with me.

I take comfort in the knowledge that there was never going to be any such thing as "enough" time with this remarkable woman. Instead, I'll call myself fortunate to have the time I did with such a person. What's more, I now understand that this process is really the only possible ending for a happy marriage - sooner or later, every great marriage ends in death.

I hope it isn't disrespectful to mention this amid a tribute to her, but my plans for now are to take some time away. While neither of us are Jewish, I think the Jewish practice of a 30-day mourning period has a lot of wisdom in it, and that is what I intend to do. But I will be back. Writing is what I love doing, and she made sure I promised her that I would continue to build my life around those things I love.

Farewell Christina. And thank you so very, very much.

Sunday, June 5, 2016

No Work This (Past) Week

Just thought I'd update those readers who come here to let you know that I didn't really work this past week. And I may well not work much, if at all, this week.

My wife's condition continues to deteriorate and spending time with her is the priority for my time.

Monday, May 30, 2016

Seeking Alpha: Rudolph Technologies Riding Powerful New Chip Trends

The semiconductor industry is a tough place to play, but the semiconductor equipment industry is even worse, as the cycles swing even higher and lower, and as the timing of orders is difficult to predict (and can have huge impacts on the stocks in the meantime). What's more, you're talking about an industry where the key customers are keenly focused on trying to improve their own free cash flow, leading to a "do more with less" philosophy with equipment than can pressure suppliers.

What's the best defense? A good offense, or in this case, compelling technology and products that offer end users real advantages in throughput, production costs, and/or total cost of lifetime ownership. Rudolph Technologies (NYSE:RTEC) is trying to bring new technology to areas like advanced packaging, inspection, and metrology and use it to leverage real growth in new packaging technologies and RF and MEMS production.

While I'm an owner of Ultratech (NASDAQ:UTEK), a Rudolph competitor, I do think Rudolph's valuation is interesting. Product acceptance/adoption, order timelines, underlying demand for chips, and competition are all real issues (and difficult to forecast in their own right), but I believe mid-single digit revenue growth over the long term and peak margins in the mid-to-high 20%'s can justify a fair value in the mid-to-high teens today, with upside into the $20s if things go well.

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Rudolph Technologies Riding Powerful New Chip Trends

Seeking Alpha: Manitex Prioritizing The Right Things During The Downturn

I think it is fair to say that Manitex (NASDAQ:MNTX) was too ambitious and too aggressive when breakneck North American onshore energy expansion fueled an unsustainable demand for cranes. Management significant stretched the balance sheet in the interests of empire-building, expanding into non-core areas like trailers and liquid storage tanks. When the cycle turned, Manitex found itself with a lot of debt, not a lot demand, and questionable synergies between the units.

All of that can certainly explain why the stock has been hammered worse than other lifting equipment companies like Terex (NYSE:TEX), Manitowoc (NYSE:MTW), Manitou, and Palfinger since 2014, but it doesn't necessarily make the shares untouchable now for aggressive investors. Management has pivoted from a growth-by-acquisition model to more of a value-creation model, with a stronger focus now on cost control/reduction, cash flow generation, and sustainable growth in high-potential businesses like knuckle cranes and the ASV product line.

I'm not as bullish on a meaningful rebound in the North American energy market as I once was, but I don't think it will much worse and I think construction (residential, commercial, and civil) can be a driver for this business. I don't see Manitex struggling to pay its interest, and I do believe further debt reduction efforts can unlock some value. My current estimates call for long-term revenue growth in the mid single-digits and peak FCF margins in the mid-to-high single-digits, supporting a fair value of $7.50 that could go higher if/when energy really recovers and/or management shows that it can build its knuckle crane and ASV operations into disruptive players.

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Manitex Prioritizing The Right Things During The Downturn

Seeking Alpha: PRA Group Struggling To Adapt To A New World

A lot has changed for PRA Group (NASDAQ:PRAA) over the last few years. The company has become one of the largest collectors of defaulted credit card receivables at a time when supply has been reduced by the absence of three of the largest sellers of charged-off receivables. The company has also seen a decidedly harsher regulatory environment, as new rules and ample uncertainties have dramatically changed how lenders approach the sale of charged-off receivables and how operators like PRA Group and Encore Capital (NASDAQ:ECPG) can go about collecting them.

The net effect to PRA Group has been a marked decline in reported profits, cash flow, return on equity, and forward growth expectations. Whereas management once boldly projected 20% ROEs into the future, the market is now pricing in a long-term ROE closer to 14% and management's own projections call for a mid-single digit GAAP growth rate without a more conducive operating environment. While I think PRA Group remains undervalued, my expectations have shrunk significantly, and there are outsized execution risks both for getting the U.S. business back on track and getting real value out of the increasingly expensive-looking move into Europe. There may yet be value here, but this is another example of trying to make money the hard way.

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PRA Group Struggling To Adapt To A New World

Seeking Alpha: Accuray Still Stuck In Med-Tech's Twilight Zone

What do you do with a company that isn't growing anywhere near fast enough to be a growth stock, doesn't have the margins or cash flow to be a value stock, but has enough innovation and market potential to still be a disruptive factor in the industry? Unfortunately for Accuray's (NASDAQ:ARAY) shareholders, while the company has definitely been making progress, the pace of that progress keeps it stuck in an underwhelming valuation range, and there are still considerable doubts about whether it can take the sizable step forward it needs to be a long-term viable third player in its market.

I continue to approach Accuray with what I consider to be optimistic skepticism. I think the company has good technology and has really been focusing on addressing the past and current deficiencies of its systems. That said, this is a slow-growing market with a huge entrenched competitor and it is far from clear whether Accuray can establish a big enough market share footprint to drive the margins it needs to create long-term shareholder value. I think a fair value around $7.50 to $8.50 is fair today, with underlying upside if the company can demonstrate its ability to get and hold a double-digit market share before 2020.

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Accuray Still Stuck In Med-Tech's Twilight Zone

Monday, May 23, 2016

Sorry Again!

I want to apologize again for those who come to this page on a regular basis - I've been horrible about posting timely updates. I don't want to make excuses for this, but the "why" basically comes down to the fact that I was in the habit of making updates at night, and now my nights are a lot busier taking care of various errands and chores. But I'm going to try to be better about it.

Seeking Alpha: BRF S.A. Not So Appetizing Yet For Nervous Stomachs

When I last wrote about BRF S.A. (NYSE:BRFS), I warned that investors were likely in for a bout of elevated volatility - a prediction that, when made in reference to almost any Brazilian company, is a little like predicting that jumping into the ocean will make you wet. The shares have indeed jumped around since that last article and the shares have underperformed not only the Bovespa, but other Brazilian food players like Marfrig (OTCPK:MRRTY), JBS (OTCQX:JBSAY), and Minerva (OTCQX:MRVSY).

Whether BRF shares are a good idea now rests in large part on your time horizon. The company is doing a lot of smart things - relaunching a complementary value-priced brand in Brazil, prioritizing higher-margin processed/packaged foods, and using M&A to acquire local production and distribution to capture more value from international sales. Along the way, though, there have been frequent management shake-ups and there is still a lot of volatility in the business model due to commodity inputs, protein prices, currency, and so on.

I do believe that BRF can eventually achieve its goals of becoming more like Hormel (NYSE:HRL) or Nestle (OTCPK:NSRGY) and achieving EBITDA margins in the high teens or even 20%, and I do like the company's efforts to improve ROIC in recent years. That said, getting volume growth going again is a clear must-do and investors can certainly be forgiven for thinking that BRF is too risky and too volatile to mess with today. I believe the fair value for the ADRs is still above $17, but it's going to take a healthier, or at least more stable, environment in Brazil for these shares to do meaningfully better.

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BRF S.A. Not So Appetizing Yet For Nervous Stomachs

Seeking Alpha: Uncertainties And Wait Times Not Helping Neurocrine Biosciences

These aren't easy times for biotech, but that's not exactly news to investors in that sector. Neurocrine Biosciences (NASDAQ:NBIX) has gotten caught up in the sector-wide funk, though the shares have declined less since my last update than the biotech indices.

Neurocrine still looks promising to me. There are significant uncertainties about potential pricing for the company's lead drugs, not to mention the amount of effort that will have to go into building prescription-driving awareness. That said, this is still a company with multiple compounds with $1 billion-plus revenue potential that have largely proven their efficacy and safety in clinical trials. With the shares possibly undervalued by 50% or more, I would suggest this is still a worthwhile stock to consider for aggressive investors willing to put up with the risks and long waits that go with biotech.

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Uncertainties And Wait Times Not Helping Neurocrine Biosciences

Seeking Alpha: When The Dust Settles, Microsemi Should Continue To Stand Out

Microsemi Corp. (NASDAQ:MSCC) hasn't done that well since my last update on the company. While the shares were at least up in that intervening period, they've underperformed the PHLX Semiconductor Index by a little and particular names like Texas Instruments (NASDAQ:TXN), Semtech Corp. (NASDAQ:SMTC), and Silicon Labs (NASDAQ:SLAB) by a whole lot more. To a limited extent, maybe this is just "Microsemi being Microsemi" - I've owned and/or followed this name for a long time, and it always seems to zig when others zag. On the other hand, investors may be legitimately concerned about the level of debt the company has to manage now as well as the uncertainties regarding revenue, margins, and cash flows as the company moves through its initial stages of integrating PMC-Sierra.

My post-earnings model adjustments lead to a lower fair value, which is bad, but I still believe the shares are undervaluing what can be a strong mid-teens FCF growth story for many years to come. With a fair value range from the high $30s to the low $40s, I still think these shares offer enough upside for investors to consider.

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When The Dust Settles, Microsemi Should Continue To Stand Out

Seeking Alpha: Lundbeck Continues To Rebuild Its Reputation

It may be good advice to not look a gift horse in the mouth, but it's also a pretty good idea to not get overly excited about unreliable financial performance drivers. I'm still generally bullish on Denmark's H. Lundbeck A/S (OTCPK:HLUYY, LUN.CO) (or "Lundbeck"), but my enthusiasm is tempered by revenue beats that are coming largely from declining businesses, difficult marketing environments for key drugs, and a pipeline that may be hard-pressed to drive a lot of near-term pop.

I want to make it clear that I'm talking about the difference between tapping the brakes and diving out of the car entirely. I still think Lundbeck is a worthwhile idea as a long-term holding, but I think the sentiment has shifted from unduly (if not absurdly) negative a year or so ago to perhaps a little too positive in the near term. I still believe $38-42 is a reasonable fair value range for the ADRs, with potential upside from high-risk clinical programs where the value is presently heavily discounted, but I'm a little less excited about the near-term outperformance potential from the core drug business.

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Lundbeck Continues To Rebuild Its Reputation

Seeking Alpha: Ultratech Still Predictably Unpredictable, But Orders Are Improving

Ultratech (NASDAQ:UTEK) is never going to be Honeywell (NYSE:HON) or Coca-Cola (NYSE:KO), so if you're looking for a consistent, predictable company without a lot of quarter-to-quarter surprises, please look elsewhere. What Ultratech does offer, though, is leverage to what looks like an improving semiconductor order cycle, as well as leverage to specific drivers like advanced packaging for logic chips, 3D metrology, and perhaps the ongoing move to smaller FinFET nodes.

These shares have done pretty well since my last write-up, with Ultratech's roughly 20% move ahead of the SOX Index (up about 12%), though not as strong as the 25% move at Applied Materials (NASDAQ:AMAT) and Rudolph (NYSE:RTEC). Valuation remains tricky; if the company could regain the 20%-plus operating margins and 15%-plus FCF margins of prior upswings, there would still be upside, but UTEK faces a lot of competition in its key markets, and there are legitimate questions about its ability to execute.

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Ultratech Still Predictably Unpredictable, But Orders Are Improving

Sunday, May 15, 2016

Seeking Alpha: Good Performance Helps Ease Some Of The Tension At Wright Medical

Wall Street hates uncertainty and there are still a lot of unknowns at Wright Medical (NASDAQ:WMGI). The full cost of the company's hip litigation has yet to be determined and there are still outstanding questions regarding the adoption of the Augment biologic product, competition from the likes of Stryker (NYSE:SYK), and management's ability to successfully integrate Tornier and become a strong extremity-focused specialty orthopedics company.

Good performance can help ease some of those concerns, and Wright Medical's first quarter results were good. There's still an above-average level of skepticism regarding smaller med-tech in the market, and that keeps Wright Medical shares priced at a discount. Given the growth prospects for the existing product portfolio and the opportunities to leverage further product development, these shares are worth a look from more aggressive investors.

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Good Performance Helps Ease Some Of The Tension At Wright Medical

Seeking Alpha: Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

In some respects, Commercial Vehicle Group (NASDAQ:CVGI) is seeing results from its protracted turnaround attempts - the company's gross margins have improved, there is a credible plan in place to reduce operating costs further, and management seems to be well aware of the need to carefully manage its manufacturing footprint to preserve margins. On the other hand, 2016 is likely to be a horrible year for Class 8 truck orders (and particularly the linehaul trucks that offer the most content and best margins), and the company's long-standing efforts to diversify into off-highway markets still haven't borne much fruit.

Although I think Commercial Vehicle's shares remain undervalued on the basis of the cash flows that the company can generate, I don't know how anyone could have a lot of confidence regarding the likelihood that it will generate those cash flows - and a significant industry down-cycle is not often the time to take big swings on risky ideas. So while I do suggest that investors looking for risky deep-value turnarounds could/should dig into this story, and I will continue to hold on to my tiny position, this is most definitely an example of trying to generate alpha the hard way (something that, in keeping with my sloth-like torpor, I generally avoid).

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Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

Seeking Alpha: Lexicon Moving Forward, But Nobody Really Seems To Care

Years of disappointment and misleading guidance from prior management put Lexicon Pharmaceuticals (NASDAQ:LXRX) in a deep hole with respect to Street sentiment, but the company's execution is helping it slowly dig its way out. This year (2016) should see the company get its first product approved by the FDA, as well as key pivotal data on the Type 1 diabetes program.

While I'd certainly count myself in the camp of "long-suffering investors", I'm still generally more bullish on Lexicon than the sell-side. I believe sales of the company's lead drug telotristat etiprate can total more than $500 million at peak, supporting a fair value above today's price on its own. There's considerably more room for debate about the potential (and potential value) of Lexicon's Sanofi-partnered (NYSE:SNY) diabetes program, not to mention Lexicon's future R&D development plans, but these shares look like a risky play with an interesting skew to outsized potential gains.

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Lexicon Moving Forward, But Nobody Really Seems To Care

Sunday, May 1, 2016

Seeking Alpha: Semtech Needs To Translate Expected Growth Into Shareholder Value

It is hard to argue that Semtech (NASDAQ:SMTC) has historically served its investors particularly well. The 10-year performance of the stock (up about 25%) lags not only the PHLX Semiconductor Index by a meaningful amount (the SOX is up more than 70% over the past decade) and the Nasdaq, but other chip companies like Microsemi (NASDAQ:MSCC), Integrated Device Technology (NASDAQ:IDTI), and Texas Instruments (NASDAQ:TXN), and the five-year comps are even worse.

What's more, the internal value creation isn't impressive at first blush either, with tangible book value per share down almost 75% since 2007 (a CAGR of around negative 13%). Gross margins have been generally healthy over that time and free cash flow has always been positive, but metrics like operating margin and ROIC are less exciting.

I'm not looking to bury Semtech, as I do think the company's technology for enterprise datacenters, wireless communication, sensors, and power management can grow the business. Moreover, there would seem to be opportunities to improve operating leverage through tighter management of SG&A and R&D expenses.

When it's all said and done, though, I believe the semiconductor industry is transitioning away from a valuation philosophy of "as long as you grow, it's all fine" to one more centered around margins and value creation. With that, I believe it is very important for Semtech to not only show solid revenue growth trends, but also that it can translate that growth into long-term shareholder value.

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Semtech Needs To Translate Expected Growth Into Shareholder Value

Seeking Alpha: Buoyed By Better Sentiment, Can Commercial Metals Keep It Going?

The past couple of years have been rough ones for the steel sector, but stock prices have improved pretty noticeably in recent months on optimism that improving conditions in the market aren't yet another false start for the long-predicted recovery. Relatively speaking, Commercial Metals (NYSE:CMC) has held up all right - the shares haven't been as strong as those of Steel Dynamics (NASDAQ:STLD), but they've done quite a bit better than those of Gerdau (NYSE:GGB) and U.S. Steel (NYSE:X), while also outperforming AK Steel (NYSE:AKS) and Nucor (NYSE:NUE) over the past year.

Can they keep it going? This fiscal year should be the low point of the current cycle and the outlook for non-residential construction is still positive, but there's a lot of capacity out there, the dollar is still pretty strong, and competition from imports (Turkey in particular in the case of Commercial Metals) is still a risk. Although the rally in the shares makes it harder to call them a bargain today, it's worth remembering that cyclical recoveries are a lot like the declines - they tend to go further, faster, than you might initially think.

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Buoyed By Better Sentiment, Can Commercial Metals Keep It Going?

Seeking Alpha: The Tricky Case Of Helen Of Troy

It's been a while since I've written on Helen Of Troy (NASDAQ:HELE). While I've long liked the company's growth-by-acquisition strategy in the consumer goods space, I wasn't a fan of former management and that relegated it to my "I'll never buy it, so why bother?" bucket. Better management has been in place for about two years now, though, and I think the company's underlying strategy is stronger.

The trouble for me, as is so often the case, is with the valuation. I have no problem acknowledging that Helen of Troy should be valued beyond its organic growth capacity (likely low-single digits on revenue, mid-single digits on cash flow), as the company generates free cash flow and rolls that into acquisitions that grow the business and generates more cash flow (which, in turn, can be reinvested back into acquisitions...). Likewise, it doesn't bother me that much that tangible book value is negligible given all of the goodwill and intangibles from the deals.

The problem is that even if I assume significant improved free cash flow margins in the future (in the low teens), it will take around 8% to 10% annual revenue growth to support a fair value at or above $110 and that seems ambitious. Likewise, such a fair value requires a mid-teens forward EBITDA multiple and I just don't think that's particularly attractive given what I expect will be high single-digit annualized EBITDA growth over the next three to five years.

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The Tricky Case Of Helen Of Troy

Seeking Alpha: Grainger Seems To Be A Little Confused

I don't criticize a company like Grainger (NYSE:GWW) (or "W.W. Grainger") lightly. You don't get to be the second-largest MRO distributor in the country by accident, nor are many years of 20% or near-20% ROICs the sort of results that a company just blunders into by accident. What's more, Grainger is very well-diversified across customer and product types, with room to take share and add incremental product categories.

All of that said, I can't get comfortable with the valuation or the strategic direction. It seems to me that Grainger has either not been really thinking through some of its growth initiatives over the past few years or has shown a startlingly low amount of patience with them. Moreover, for Grainger to look cheap in my models there either has to be double-digit annualized FCF growth from here or a lower discount rate that I just frankly wouldn't find acceptable for a cyclically-exposed company in a highly competitive space.

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Grainger Seems To Be A Little Confused

Seeking Alpha: ABB Holding The Line In A Tough Market

ABB (NYSE:ABB) didn't report a great quarter in many respects, but the overall performance of this Swiss automation and power equipment giant was pretty solid against a rough backdrop. Although it looks like the first quarter reports from the industrial sector will deflate some of the more bullish expectations for a sharp recovery during 2016, it also looks as though the doomsday scenario isn't as valid as it was back in January (when many of these stocks hit their lows).

Given the solid rebound off those lows, ABB looks like an okay stock idea. The performance of Honeywell (NYSE:HON), Rockwell (NYSE:ROK), and Emerson (NYSE:EMR) has reduced the attractiveness of those stocks as well, though, and ABB does look like more of a relative bargain.

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ABB Holding The Line In A Tough Market

Monday, April 25, 2016

Seeking Alpha: Roche Still Waiting For The Big Push

Although Roche (OTCQX:RHHBY) hasn't been a terrible stock over the last three years, it's hard not to look at the performance of companies like Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), and Amgen (NASDAQ:AMGN) with some envy. In the case of the first two peers, Roche has been slower to get into the immuno-oncology game, as both Bristol-Myers and Merck have seen good initial successes with their PD-1 antibodies (and, in the case of Bristol-Myers, its CTLA-4 antibody as well). Roche has also had to withstand more than a little concern and skepticism regarding the company's ability to defend its lucrative oncology franchise from impending biosimilar competition and growing worries about pricing.

I do continue to believe, though, that Roche has an attractive future. While the company was somewhat late to the game in immuno-oncology, the company is bringing a lot to bear in terms of numerous combo therapy candidates. The company is also seeing some traction in its non-oncology franchise, with encouraging results in multiple sclerosis and hemophilia. Biosimilar competition and price resistance remain real risk factors, but I believe Roche's pipeline can support long-term free cash flow growth in the high single digits and a fair value in the mid-$30s.

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Roche Still Waiting For The Big Push

Sunday, April 24, 2016

Seeking Alpha: Denso Needs To Diversify To Maximize Its Opportunities

As one of the biggest auto component suppliers in the world, Denso's (OTCPK:DNZOY) (6902.T) basic operating environment isn't all that much different than that at Continental AG (OTCPK:CTTAY), Valeo (OTCPK:VLEEY), Bosch, Delphi (NYSE:DLPH), BorgWarner (NYSE:BWA) and so on. Major trends like electrification, fuel efficiency/emissions, and driver assistance loom large when considering Denso's future growth. On the other hand, Denso's reliance on Toyota (NYSE:TM) is a notable difference, and I'm not sure Denso has shown it has the products/technology to clearly stand out from the crowd - at least in the initial launch windows for many of these technologies.

Given its different product, customer, and technology exposures, I'm expecting less revenue growth from Denso than I am from BorgWarner, Continental, Delphi, and Valeo over the long term, but that's not to say I don't like the company and a long-term revenue CAGR of 5% isn't exactly soft by auto supplier standards. I do expect some margin uplift as Denso moves beyond significant start-up/launch expenses, but improving its gross margin and free cash flow efficiency would be a welcome positive driver. Denso looks undervalued enough to consider, but I can't call it my favorite name in the sector on the basis of underlying company quality.

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Denso Needs To Diversify To Maximize Its Opportunities

Seeking Alpha: Delphi Automotive Poised For Growth, And Wall Street Knows It

Like so many other companies in the auto parts and components space, Delphi Automotive (NYSE:DLPH) hasn't had the best run of performance over the past year. While the sector has rebounded off January lows, Delphi (like Continental AG (OTCPK:CTTAY), Denso (OTCPK:DNZOY), and Valeo (OTCPK:VLEEY)) has gotten dinged on weaker guidance in 2015 and forward-looking concerns about the health of the auto markets in Western Europe, North America, and China.

Like those aforementioned names, Delphi has some appealing leverage to the major growth drivers in the auto space - growing electrification of vehicles, more efficient internal combustion engines, and growing adoption of driver assistance technologies. I believe that these trends can push the company to double-digit long-term cash flow growth, but more of that potential seems to be factored into the price relative to Valeo.

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Delphi Automotive Poised For Growth, And Wall Street Knows It

Seeking Alpha: Continental AG Revving Up For The Next Wave In Autos

If success in a business was always linked to size, Continental AG (OTCPK:CTTAY) would be an easy pick in the auto parts/components space, as this is the third-largest supplier in the world and the second largest in Europe. The auto sector is seeing a lot of change, though, as OEMs have to produce more efficient, less polluting cars to stay in compliance with evolving regulations and the adoption of more electrical and hybrid technologies is likely to lead to disruption across the market.

I believe Continental is well placed to benefit from this transition and to maintain its strong position in the market. It also doesn't hurt the story that the company's tire business is quite profitable and a market share gainer. I think Continental's size does limit its future growth prospects somewhat and the valuation isn't quite as compelling as I'd like to see.

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Continental AG Revving Up For The Next Wave In Autos

Seeking Alpha: Even After A Strong Run, Valeo Not Getting Its Full Due

Valeo (OTCPK:VLEEY) has been a trooper since I last wrote on this large auto parts supplier, with the ADRs up more than 20% and meaningfully outperforming peers like Continental (OTCPK:CTTAY) (up slightly), Denso (OTCPK:DNZOY) (down 10%), and BorgWarner (NYSE:BWA) (down 40%). Better yet, the story seems to be getting better and better, as the company is seeing strong order growth and management has laid out a technological/product platform vision that really seems to fit where OEMs are going with passenger vehicle designs and features.

I'm still bullish on Valeo and I've bumped up some of my modeling assumptions since the last time I talked about the company. I think long-term growth of 6% to 7% is a little aggressive (likely to be more than double the underlying growth rate in unit production) but do-able. Likewise, I'm a little concerned that mid single-digit FCF margins could be ambitious given the company's history, but I think leveraging past R&D investments and standing out from the crowd in terms of product features and market share can support it.

Investors should note that Valeo's ADRs have only so-so liquidity, so the local shares might be a better option for investors willing to go that extra step.

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Even After A Strong Run, Valeo Not Getting Its Full Due

Wednesday, April 20, 2016

The Beginning Of The End

Despite the best efforts of all involved, it looks like my wife's treatments will be coming to an end and hospice will be the next step.

We went to the cancer center yesterday to investigate some problems she's been having (most notably fatigue and trouble breathing). After ruling out a pulmonary embolism and/or pneumonitis, the cause of the breathing issues became obvious - the tumors in her liver (one in particular) has grown to a point where it is taking up the space the lungs need to inflate; she's down to about 50% in one lung and 75% in the other.

The largest tumor is now almost the size of the small lobe of a healthy liver. It's never a good thing when an experience oncologist says something like "I haven't really seen anything like this...".
Because she had an immunotherapy infusion already scheduled for this week and it won't do her harm, we're going to go ahead and do that. If there isn't evidence of improvement in 7 to 10 days, it'll be hospice. There's a theoretical > 0% chance that this second infusion will start making a difference, but that's not the expectation of her doctor (or us).

It's a morbidly fascinating experience to hear the oncologist talk about how she cannot believe my wife is still able to walk and talk as well as she can, let alone that she's not in agony. Apparently most people with her level of disease would be in severe pain. Much as I'm happy for her that she hasn't had that experience, it's tough to see someone fight so hard against an enemy they can't beat.

So, we're probably down to a few weeks or months. I'll still be writing here and there, but likely more erratically than in the past. I have appreciated all the kind words and support I've gotten from readers through this, and I know it has meant a lot to her. Thank you so much for that.

And a little lecture/PSA - please take as good of care of yourself as you can manage. My wife's oncologist believes that she's doing as well as she is (pain-wise and function-wise) because she was in pretty good shape beforehand. She wasn't a healthy living nut or anything, she just ate reasonably, tried to be active, and avoided stupid stuff. Please do the same - it may save you a lot of pain later.

Sunday, April 17, 2016

Seeking Alpha: AES Tiete Very Attractive, But Very Hard To Own

It's a real shame that when AES (NYSE:AES) restructured the ownership of AES Tiete (TIET11.SA) it chose to cancel the ADR program. AES Tiete may not only be one of the most interesting assets within AES, but it is one of the more interesting and differentiated Brazilian electrical utilities. While it is technically possible for individual American investors to own shares traded in Brazil, it is not easy - not only can it be challenging to find a broker, there are language barriers to consider and serious issues of convenience and hassle. To put it another way, I periodically approach brokers about the possibility of opening an account and more than once the response has been along the lines of "which company do you like so much that you want to do all of this?"

All of that said, I think AES Tiete looks to be about 25% undervalued today, with a very clean balance sheet and strong upside to a long-term recovery in Brazilian electricity prices. For those who can buy Brazilian equities, I'd definitely recommend a closer look. For those who can't, maybe it's worth a spot on a watch list on the off chance that AES makes ADRs available once again.

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AES Tiete Very Attractive, But Very Hard To Own

Seeking Alpha: Tractebel Offers Accessible Leverage To Future Growth In Brazil

Even though Brazil's economy is likely still looking at a few more rough quarters, investors are starting to come back to this beaten-up emerging market. Shares of the iShares MSCI Brazil Index (NYSEARCA:EWZ) are up 6% over the last five days, 12% over the last month, and 38% year-to-date. Brazil's utility sector has been invited along for the ride, with CEMIG (NYSE:CIG) and CPFL Energia (NYSE:CPL) modestly exceeding that performance and COPEL (NYSE:ELP) trailing slightly. Tractebel (OTCPK:TBLEY), my subject for this article, hasn't been quite as strong year-to-date (up around 27% as of this writing), but the shares have notably outperformed all of those comps (by 10% to 45%) over the past year.

While I lament that AES Tiete (TIET11.SA) (one of the best performers of the group) is not really accessible to American investors, Tractebel isn't a bad consolation prize. Like Tiete, CESP (OTCPK:CESDY), and CPFL Renovaveis (which has outperformed Tractebel over the last year), Tractebel is a pure generation company and offers investors a way to play recovering economic growth in Brazil and higher future electricity prices. The shares don't look like a big bargain today, and there's likely more money to be made in riskier names more leveraged to an improving economy and lower interest rates, but they're still a little undervalued and maybe worth a closer look from U.S. investors.

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Tractebel Offers Accessible Leverage To Future Growth In Brazil

Seeking Alpha: Despite Improving Conditions, It's Hard To Call Sabesp A Value Stock

In the "one of these things is not like the others" game, Companhia de Saneamento Basico do Estado do Sao Paulo, or SABESP (and/or "Sabesp") (NYSE:SBS) is definitely different than other liquid Brazilian utility stocks like CEMIG (NYSE:CIG), COPEL (NYSE:ELP), and CPFL Energia (NYSE:CPL) - Sabesp is a water and sewage utility, not an electricity generation/distribution company. In fact, Sabesp is one of the largest water and sewer providers in the world, and it is well positioned to grow with Brazil's growing population and expanding infrastructure needs.

The problem with Sabesp is making the numbers work for a bullish investment case. The local shares are up more than 40% over the past year, trouncing not only the electrical utilities but also other water/sanitation companies like Copasa and Sanepar. Some of this outperformance is understandable, as the company's reservoir situation has improved significantly and the company is looking forward to stronger regulated earnings power. That said, if nearly 8% long-term revenue growth projections and mid-teens FCF margins isn't enough to drive a compelling fair value (never mind the risk of a debt load that is about 50% foreign currency-denominated), how much value can be here?

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Despite Improving Conditions, It's Hard To Call Sabesp A Value Stock

Seeking Alpha: CPFL Energia One Of The Best ... And Priced Like It

It's tough out there for Brazilian utility companies, both in real-world market terms and the significantly fuzzier world of investor sentiment, and CPFL Energia's (NYSE:CPL) market performance would seem to lend more support to the notion that when times get tough enough, even the best get pulled down.

CPFL Energia has fared better than CEMIG (NYSE:CIG), COPEL (NYSE:ELP), Light (OTCPK:LGSXY), and Alupar over the past year with a roughly 3% decline in the local shares (and a 15% drop in the ADRs), and has lagged only Energias among the integrated distribution ("disco")/generation-transmission ("genco" and "transco") players in Brazil's electrical utility sector. Even so, it's been a rough stretch in the neighborhood as turbulence in the power industry, weakness in Brazil's economy, and a crisis of confidence in the equity and credit markets have done their damage.

As a company, I really like CPFL Energia. The debt level is high, but then so too is the near-term cash generation to cover it, and I believe there is a wide range of potential growth opportunities for the company. That said, everybody seems to agree that CPFL Energia is a well-run company and you don't often find bargains where there's that level of concordance.

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CPFL Energia One Of The Best ... And Priced Like It

Seeking Alpha: COPEL Will Take Its Licks In 2016, But The Future Is More Promising

There are valid reasons for Brazilian utilities to still be trading well below past valuation levels. Electricity demand continues to fall in the weak economic climate, spot generation prices have plunged, and interbank interest rates in the mid-teens really hurt an industry that relies on debt for a substantial percentage of capital. Add in the risks that go with heavy state ownership, and I can understand why COPEL (NYSE:ELP) has been weak, falling about 14% from my last update on the company.

I believe this integrated generation, transmission, and distribution company is undervalued today. Management has made some bad decisions and let investors down with its execution recently, but the shares seem to assume a level of future pricing that just doesn't make sense to me. While there are near-term risks from weak spot prices and a mid-year rate review, I believe the shares are undervalued below $11/ADR.

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COPEL Will Take Its Licks In 2016, But The Future Is More Promising