Sunday, September 20, 2015

Seeking Alpha: As Getinge Embarks On Much-Needed Restructuring, A Lot Is Already In The Price

Turnarounds can be great opportunities for outsized returns, but that typically only holds true when the company in question is undervalued going into the turnaround process and/or the company exceeds its transformation goals. While Sweden's Getinge (OTCPK:GNGBY) could create additional value by exceeding its recently outlined restructuring goals, it is hard to call the shares undervalued absent that outperformance.

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As Getinge Embarks On Much-Needed Restructuring, A Lot Is Already In The Price

Thursday, September 17, 2015

Seeking Alpha: Chr Hansen Is A Rare Story In The Food Sector

On the whole, established companies in the food and beverage space don't typically grow their revenue at more than a low-to-mid single digit clip over the long term. But then, those companies aren't Denmark's CHR Hansen (OTCPK:CHYHY) and aren't leveraged to strong underlying trends in consumer preferences, as well as R&D-driven edges in customer costs and efficiency.

Not unlike Novozymes (OTCPK:NVZMY), CHR Hansen has almost everything I like to see in a company except for an attractive valuation. I do believe that the company has meaningful opportunities to leverage growth opportunities in dairy consumption, probiotics, natural colors, and agriculture, but the stock's valuation already reflects what I believe are generous assumptions regarding growth and the quality of the company.

I'd certainly monitor CHR Hansen in the hope of buying on a market freak-out (whether company-specific or across the market), but the shares today seem priced more for those who are comfortable buying growth almost irrespective of value.

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Chr Hansen Is A Rare Story In The Food Sector

A Year of Cancer

This post has next-to-nothing to do with investing, so only read further if you're interested in more "personal" stuff. I originally posted this on Seeking Alpha, so you can read it there instead if you prefer.

Today is a year to the day that my wife was first diagnosed with cancer. It was a very sobering day; especially as I knew enough about this type of cancer to know how poor her chances were and are (perhaps luckily for her, she *didn't* know what she was getting into, and that probably helped preserve her optimism).

Since the time of diagnosis, there has been surgery, radiation, and three forms of chemo. Surgery addressed the immediate problem (a tumor that had grown from the size of an almond to a hockey puck in about five or six weeks), but most of the interventions have done little to help. The second round of chemo shrank the tumors, but that only lasted for about six months (bang in line with the median response). Now she's looking at the last proven therapeutic option for her type of cancer (or at least the last with a response rate that actually supports any hope).

A lot has changed. My productivity has plunged. I've gone from routinely writing about 1,000 articles a year to a pace where I may only halfway there this year. Funny how work really is a "habit".
A lot has also changed about how I look at healthcare and biotech/pharma. I wish there was more that the FDA could do to squash the frauds, crackpots, and scum who try to promote their phony fake cures for cancer and try to propagate myths about how "deadly" chemo is and how the healthcare system is simply trying to scam them.

I'm also grateful that there are doctors who choose to go into oncology - in effect choosing a field where they know they will lose a large number of patients instead of a specialty that offers far more certain positive outcomes on a regular basis.

Last and not least, I've learned how much months matter. Whether or not a drug that extends life by 6 months is "worth" $100,000 or more is a subject for another time, but those months matter a lot more when you're living through them one at a time. It's ridiculous that anybody in his or her early 40's should feel grateful to get another six months, but that's how it is.

On a related subject, it's interesting how much timing matters. If my wife had been diagnosed with this disease five years ago, none of her chemo options would have been available outside of clinical trials. In stark terms, she'd mostly likely be dead by now were that the case. Because of its complexity, I don't believe I'll live to see a point where cancer is like or HIV (serious, but very treatable/manageable) but given how much has changed just in the last five or 10 years, there's nevertheless hope that further improvements will come.

And when it comes down to it, hope gets you through a lot. I've learned that over the last year.

Tuesday, September 15, 2015

Seeking Alpha: Novozymes And The High Cost Of Greatness

When I first started the process of refreshing and updating my research on Danish enzyme specialist Novozymes (OTCPK:NVZMY), I was really hoping that the end result would be an undervalued and appealing investment opportunity. This is a company that I like a lot and a stock that I want to like. Now, readers can carp about whether wanting to like a company pollutes the research/analysis process, but I see no reason to hide the fact that I think Novozymes is a well-run company with a strong leadership position in a sizable but growing industry.

Valuation is the issue. I realize that investors should expect to pay up for quality, and Novozymes's nearly 50% market share in the industry and strong history of ROIC generation are certainly marks of quality, but I'm not comfortable with the sort of growth/certainty that appears to be factored into the valuation today. Investors less sensitive to valuation may find more to like here (particularly after the 20% decline from the 52-week high), as this is the sort of situation where price is really my only major hang-up.

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Novozymes And The High Cost Of Greatness

Sunday, September 13, 2015

Seeking Alpha: Hurco In A Tougher Patch, But Using Its Balance Sheet To Build

From SKF (OTCPK:SKFRY) to Kennametal (NYSE:KMT) to Fastenal (NASDAQ:FAST), there has been no shortage of data points confirming that the present environment for industrial tools and components is pretty lackluster. With that backdrop, there was no particular reason to think that Hurco (NASDAQ:HURC) was going to have a great quarter, but I would argue that this small machine tool company is doing better than the valuation would otherwise suggest.

Hurco's management has also chosen to make use of its strong balance sheet, acquiring two other machine tool companies that broaden its addressable market and should give HURC expanded sales and margin opportunities down the road. I realize some investors won't buy a cyclical company in the midst of the below-the-line part of the cycle, but I believe mid-single-digit long-term revenue growth and further margin leverage can support a fair value in the mid-$40s today, suggesting significant undervaluation that more than rewards the above-average risks.

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Hurco In A Tougher Patch, But Using Its Balance Sheet To Build

Thursday, September 10, 2015

Seeking Alpha: 'Steady As She Goes' Unlikely To Change The Sentiment On ABB

While some company boards seem to go to great lengths to accommodate institutional investors with their corporate strategies, others are more willing to endure skepticism and outright criticism in the pursuit of what they believe to be the right strategy. Time will tell if ABB (NYSE:ABB) is right to ignore calls to break up the company and/or dramatically remake this large power and automation equipment company, but today's Capital Markets Day makes it pretty clear that the board is not seeking to significantly change the direction of this company.

I view ABB's commitment to its strategy as a good news/bad news sort of dilemma for investors. In the short term, "same as it ever was" is not going to change the tone on this company. A tone influenced to no small degree by the significant weakness in the automation market, the as of yet unconfirmed recovery in power, and the company's less than stellar record of investing in innovation. Longer term, though, I continue to believe that the company's positions in power and automation are more valuable than the skeptics acknowledge and that low-to-mid single-digit growth is enough to support a fair value in the mid-$20s for the ADRs.

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'Steady As She Goes' Unlikely To Change The Sentiment On ABB

Wednesday, September 9, 2015

Seeking Alpha: Multi-Color Remains Focused On A 'Rinse And Repeat' Business Model

I wouldn't say that label manufacturer Multi-Color (NASDAQ:LABL) is exactly toiling away in obscurity, as it has some big name institutional owners and sports a pretty healthy multiple, but this isn't the kind of business that typically attracts a lot of investor attention. That's fine as far as I'm concerned; labels aren't going away anytime soon, and Multi-Color still has a significant opportunity to consolidate the industry, improve its asset efficiency/utilization, and upgrade its product mix.

I believe that the Street has these shares more or less fairly valued today. I do believe that ongoing consolidation could offer some upside to my mid-single digit long-term revenue growth estimate, while better margins could likewise drive better free cash flow generation, but I already factor in what I think is a meaningful trajectory for self improvement. The company's issues with financial controls are a risk factor, particularly given the extent to which the company leans on M&A, but management does seem to be addressing this problem.

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Multi-Color Remains Focused On A 'Rinse And Repeat' Business Model

Friday, September 4, 2015

Seeking Alpha: The Next 12 Quarters Should Say A Lot About Accuray

I don't typically like to talk about companies in "make or break" terms, but the next four quarters may be Accuray's (NASDAQ:ARAY) last, best hope for establishing itself as a legitimate growth story in radiation oncology. The company now has a fully-fledged product line-up and the marketing resources to get its name in front of radonc centers. Factoring in a (relatively) new trade-in program and the prospect for significant system renewals, the company really needs to hit its mark with quarterly orders to make a compelling case that it is a viable third player against Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY).

Moving the model out a year boosts my DCF-based fair value estimate a bit above $9 while my revenue-based fair value stays around $12. That's meaningful undervaluation, but this is a company with an uninspiring record when it comes to disrupting the market and generating consistent order growth. I do believe that Accuray now offers reliable, capable, and differentiated systems that are appropriate for both multi-vault academic centers and smaller single/dual-vault community hospitals, but the next twelve months are a key proving ground for the company's sales effort and marketing message.

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The Next 12 Quarters Should Say A Lot About Accuray

Seeking Alpha: Headwaters Outperforming Its Markets, With Flexibility To Do More

It looks as though 2015 is going to go into the books as another year where initial expectations for residential construction proved overly ambitious. That hasn't held back Headwaters (NYSE:HW) too much, though, as the shares have continued to perform pretty well. Since my last update in February, the company's shares have tacked on another 25% against a roughly 7% decline in the S&P 500. That performance also stacks up well against other infrastructure/construction plays, as Cemex's (NYSE:CX) shares have lost about 20% of their value over that time while Plum Creek (NYSE:PCL) has lost about 12% and Louisiana-Pacific (NYSE:LPX) has just squeaked out a small gain (all of which excludes dividends).

I don't think Headwaters is about to get any major boost from a construction tailwind, but I think the company remains well placed to exploit what growth there is in construction and remodeling by taking share with its roofing and stone-siding businesses and leveraging its market-leading siding accessories business. I also see further opportunities for the company to benefit from fly ash substitution in the cement business, and HW has more flexibility now to pursue incremental acquisitions.

Valuation has been a tricky issue for me with Headwaters in the past, and that's still the case today. I don't really see how the company's likely free cash flow streams can support the price, and it likewise seems that you have to go along with a pretty healthy EBITDA multiple to get that metric to work. I don't dismiss the possibility/potential of ongoing outperformance supporting higher targets, but it's hard to call these shares egregiously mispriced.

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Headwaters Outperforming Its Markets, With Flexibility To Do More

Seeking Alpha: Universal Stainless & Alloy Products Reduced To Slag By Weak Margins

This has been a bad year for many specialty alloy companies, but my February call on Universal Stainless & Alloy Products (NASDAQ:USAP) was especially bad. The shares of this specialty steel company have fallen almost 50% from February of this year, outpacing the steep declines at Allegheny Technologies (NYSE:ATI) and Outokumpu, as weak volumes and an imbalance between surcharges and inventory costs have undermined performance.

The sharp fall in nickel prices (the iPath Bloomberg Nickel ETN (NYSEARCA:JJN) is down about 40% over the same period) has undermined USAP's performance and I definitely underestimated the extent to which ongoing economic issues in China, Brazil, and other countries were going to pressure base metal prices this year. There is still a valid argument that USAP can expect stronger revenue growth and margins in the coming years from the aerospace cycle and a shift to higher-value alloys, but the company's erratic FCF generation and returns on capital, coupled with the competitive nature of the specialty steel industry and the cyclicality of its end markets, make that a speculative call at best.

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Universal Stainless & Alloy Products Reduced To Slag By Weak Margins

Seeking Alpha: Today's Performance And Valuation Understate Carpenter's Potential

Seven months ago, I had some concerns about the near-term outlook for Carpenter Technology (NYSE:CRS), as I thought near-term weakness in oil/gas demand and recent trend of uninspiring quarterly performance would outweigh a generally positive view of improving aerospace market fundamentals. The shares are about 3% lower today than when I last wrote about Carpenter - basically matching the S&P 500 and significantly outperforming Allegheny Technologies (NYSE:ATI), Alcoa (NYSE:AA), and Universal Stainless & Alloy (NASDAQ:USAP).

The near-term outlook is still dicey. Expectations for fiscal 2016 earnings have come down a few times, but the outlook for fiscal 2017 seems to be getting better (at least from a sell-side perspective). The next few quarters are likely to see revenue contraction due to weakness in energy and industrial demand, but I believe Carpenter can still leverage its specialty alloy expertise to generate long-term revenue growth in the mid-single digits. Given the prospects for growth in aerospace and an eventual recovery in energy, coupled with some scarcity value, I think the company is looking more interesting for investors who can afford to be early to the story.

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Today's Performance And Valuation Understate Carpenter's Potential

Seeking Alpha: Should Investors Push Their Luck With Lundbeck?

H. Lundbeck (OTCPK:HLUYY) (LUN.CO) has not been my most popular call, partly due to the company's own issues with launching drugs like Brintellix and Abilify Maintena against well-established rivals, but also partly due to its relative obscurity in the U.S. Nevertheless, the shares are up about 25% since my last piece (in a pretty terrible market), and up more than 50% from my initial piece - and that's not too shabby relative to other drug companies over that time.

I'm starting to think, though, that it may be time to call it a day and take some profits. I do believe new CEO Kare Schultz can do a lot of good things for this company, and I do also believe that Brintellix, Abilify Maintena, and Rexulti still have the opportunity to outperform. I also believe that the company's Alzheimer's platform is comparatively undervalued and could surprise to the good. That said, the shares are now above my "as is" fair value, and I don't feel too comfortable owning any company largely on the basis of upside potential in Alzheimer's (a notoriously difficult disease for drug development).

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Should Investors Push Their Luck With Lundbeck?

Sunday, August 16, 2015

Seeking Alpha: In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Back in February, I had concerns that Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") shares were running a little ahead of themselves on hopes that the company was past the competitive pressures of new store entries into key markets. The shares have fallen 18% since then, as the company's respectable same-store sales growth has continued to come in a little lower than sell-side expectations and concerns about the economy and competition won't go away.

I believe there is a credible argument to be made that Natural Grocers shares are undervalued, but there is a lot of risk attached to the calculation. The company will very likely continue to generate negative free cash flow for three to four years, and the big improvements in free cash flow are well down the line. Add to that the intense competition in the natural/organic food space (arguably getting worse), and this is not exactly a can't-miss prospect.

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In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Seeking Alpha: Plum Creek Timber Biding Its Time

Maybe the nicest thing I can say about Plum Creek Timber (NYSE:PCL) since my last update is that investors in this timberland REIT fared better than those invested in Weyerhaeuser (NYSE:WY), Potlatch (NASDAQ:PCH) or lumber/wood product producers like West Fraser (WFT.T) or Canfor (CFP.T). The basic underlying problem will be familiar to many investors - housing starts aren't recovering to the extent expected around the beginning of the year, Asian demand has been weaker than expected, and prices for Northwestern and Southern logs haven't improved as much as hoped.

If you've been interested in Plum Creek for some time, nothing has really changed. The bull thesis on Plum Creek centers around the idea that management can drive more value by intensive management of the timberland resources (better planting and harvesting decisions), sell higher-value properties, and leverage an eventual housing recovery. Bears can argue that Plum Creek doesn't have enough leverage to value-added manufacturing, that higher-value sales will disappoint, and that the slower/shallower housing recovery will limit price recovery.

I continue to believe that Plum Creek is likely undervalued on a long-term net asset value basis (which assumes "fair" prices well below prior peaks), but not so much so that this is a must-buy. I think this remains a credible stock for investors interested in income, but this is not the sort of situation where management excellence can neutralize an underwhelming operating environment.

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Plum Creek Timber Biding Its Time

Seeking Alpha: A Long-Awaited Success For Lexicon Pharmaceuticals

Back in April of this year, I thought that the Street was focusing too much on the failure of Lexicon Pharmaceuticals (NASDAQ:LXRX) to find a partner for its diabetes drug sotaglifozin and the risks of its go-it-alone strategy focusing on development of the drug for Type 1 diabetes. In contrast, I thought there was an unappreciated opportunity in the company's Phase III asset for carcinoid patients refractory to somatostatin analogs (or SSAs) like octreotide, as Phase II results were encouraging and a global market opportunity of $1 billion could be in play.

On Monday morning Lexicon investors got the news they were hoping to see. Although the company didn't offer all that many specifics, management did announce that the Phase III TELESTAR study did see the drug (telotristat etiprate) achieve a statistically significant benefit for the primary endpoint. The data that the company did release suggest solid efficacy relative to placebo, with the magnitude of benefit improving over time and a generally good safety/tolerability profile.

With this result, there is an outside chance that the company could have its first drug approval in hand before the end of the 2016. This clinical update adds about $4 to my fair value estimate, though risks remain in securing approval and commercializing the drug in the U.S.; partner Ipsen (OTCPK:IPSEY) will handle marketing outside of the U.S. and Japan.

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A Long-Awaited Success For Lexicon Pharmaceuticals

Seeking Alpha: Structurally Light On Growth, Baxter Has A Lot Of Work Ahead

In healthcare, as in most segments of the market, growth fixes or at least papers over a lot of problems. Nobody really cares if the latest hot tech company is producing lousy margins and has no clear path to meaningful free cash flow - as long as the revenue growth is eye-popping, that's good enough for a high multiple until the day of reckoning comes into view.

For Baxter (NYSE:BAX), the split/spin-off of Baxalta (NYSE:BXLT) leaves behind a company with solid market share in stable markets, but management is going to have to roll up their sleeves and put in some work to find growth opportunities and drive better margins. There is certainly room for Baxter to do better in infusion pumps and renal care, and biosurgery can be a decent business in the coming years, but the market is already expecting a lot of improvements here in the years to come.

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Structurally Light On Growth, Baxter Has A Lot Of Work Ahead

Seeking Alpha: BRF's Strong Exports Offset A Tough Brazilian Market

There are times when boring businesses have their advantages, and this is one of those times in Brazil. BRF SA (NYSE:BRFS) local shares have outperformed the Bovespa by about 35% over the past year as this core consumer business has held up better than many during Brazil's difficult economic times. The weakness of the Brazilian real has hurt the performance of the ADRs (down about 18% over the past year), but I continue to believe that BRF is on its way toward establishing itself as a global packaged food company with a focus on emerging market consumption growth.

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BRF's Strong Exports Offset A Tough Brazilian Market

Wednesday, August 5, 2015

A New Round Of Bad News

Today's visit to the cancer center brought with it more bad news. She will soon transition to a new therapy regimen. Although this regimen is a legitimate breakthrough, it still only ultimately helps about 25-30% of people who get it.

She's not in pain, and her bloodwork is good. But the scans do show the cancer starting to grow and spread again.

I'm not sure what I'll be doing work-wise. I suspect that it will be "consistently inconsistent".

Monday, August 3, 2015

Seeking Alpha: Oshkosh Getting Squashed

I was nervous about Oshkosh (NYSE:OSK) back in January, as I thought there wasn't enough upside in my base-case assumptions to offset the significant risk and uncertainty. As it turns out, construction and energy demand have been even weaker than expected at the start of the year, and there are signs and warnings from companies like Eaton (NYSE:ETN) and Parker-Hannifin (NYSE:PH) that overall mobile equipment demand is not looking very good.

Down almost 20% from the time of that January piece, the investment case for Oshkosh is still broadly what it was before - buy Oshkosh if you expect a sharper recovery in oil/gas and solid growth in construction equipment demand, coupled with Oshkosh winning a major defense vehicle award. While my fair value hasn't gone down too much (I had generally more bearish than average expectations earlier this year), I still have elevated concerns about this business and I think there are safer risk/reward trade-offs out there. All of that said, there's definitely room for self-improvement here and a defense vehicle win could conceivably add as much as $10 per share.

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Oshkosh Getting Squashed