Thursday, April 19, 2018

Supply Issues Creating A Windfall For Alcoa

While I liked Alcoa (AA) three months ago, and thought that the company could benefit from some supply curtailments, I didn’t expect the significant market disruptions that have pushed spot aluminum prices on the LME to over $2,528/mt (versus less than $2,100 in December). Now, though, the market is dealing with section 232 limitations, problems with the Alunorte facility, and U.S. sanctions against Russian producers, pushing the markets into more substantial supply deficits.

Although Alcoa has had a good run over these last three months, and I don’t view it as a long-term holding, there may still be some worthwhile upside left at these levels.

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Supply Issues Creating A Windfall For Alcoa

U.S. Bancorp Still Getting Its House Back In Order

This has been a rough stretch for U.S. Bancorp (USB) and Wells Fargo (WFC), historically two well-loved large banks. In the case of U.S. Bancorp, I believe the ongoing underperformance in the shares represents an opportunity for long-term investors, but as I said in my previous article, it will take a few quarters for the reported results to improve. In the meantime, U.S. Bancorp continues to "muddle through" with good credit quality but iffy operating leverage.

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U.S. Bancorp Still Getting Its House Back In Order

Competition Making Growth A Little Harder For Fulton Financial

Above-average asset sensitivity and healthy credit trends continue to support Fulton Financial (FULT), but the growth angle is still looking more challenging. While the company works to get out from under consent decrees and consolidate its charters (allowing for branch consolidation and re-branding), it is seeing increasing competition in the market for both loans and deposits. Fulton has above-average earnings growth prospects, but those prospects continue to be well-reflected by the share price and I don't see a particular bargain here at this time.

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Competition Making Growth A Little Harder For Fulton Financial

Celldex Nearly Back To Square One

Once again Celldex (CLDX) shareholders have had to come to terms with a major disappointment. Following the spring 2016 announcement that the company's lead drug Rintega had failed in Phase III, Celldex announced earlier this week that its pivotal METRIC study of glembatumumab (or "glemba") failed to show clinical benefit in the treatment of triple-negative breast cancer.

With these failures, as well as the lackluster results seen in other glemba studies and in studies of varlilumab (or "varli"), I believe Celldex is almost back to square one as a biotech, with a handful of unproven Phase I assets. Given the significant development timelines Celldex is looking at, as well as the high likelihood of future dilutive financing, it looks like a difficult road ahead for these shares. While today's price arguably does understate the potential of Celldex's remaining pipeline, only the most aggressive investors should really even consider dumpster-diving for this name.

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Celldex Nearly Back To Square One

Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

My biggest issue with investing in Adecoagro (AGRO) has always been its vulnerability to commodity price swings, and those swings have been hammering the company and the stock over the last year. At the same time, management has continued to invest in projects that it believes will deliver meaningful long-term growth – the latest being the acquisition of Argentina’s largest dairy processor. 

Adecoagro has shown that it can run its diverse operations well, but efficient operations in sugar, ethanol, and farming can only go so far in the face of commodity price pressure. With that, the shares do still look undervalued, but the company’s exposure to commodity price risk may be too large for some investors.

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Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

Comerica Reaping The Benefits Of Its Unusual Business Mix

Investors continue to appreciate Comerica’s (CMA) strong leverage to this phase of the banking cycle, as the shares have continued to outperform peers even through this recent correction. Although loan growth remains lackluster, Comerica’s strong asset sensitivity remains a key driver, as does the company’s improving cost efficiency. There are certainly some cheaper names out there, but Comerica’s pre-provision income growth is likely to remain quite strong relative to its peers, and I can understand why growth-oriented would continue to want to own this name.

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Comerica Reaping The Benefits Of Its Unusual Business Mix

Wednesday, April 18, 2018

Mellanox Improving Its Execution Just As Another Cycle Seems To Be Ramping Up

Although I suspect that Mellanox (MLNX) management would be loath to admit it, the involvement of Starboard has seemed to light a fire under them with respect to margin improvement and increased candor about the business. The margin improvements are particularly notable, as they have a disproportionate impact on valuation, and it increasingly looks like these improvements are coinciding with another up-cycle in the business. All of that is good news for shareholders, though these shares have had a good run of late relative to the semiconductor sector, and I wouldn't call the valuation strikingly cheap.

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Mellanox Improving Its Execution Just As Another Cycle Seems To Be Ramping Up

AGT Food And Ingredients Still Crawling Through The Doldrums

One of the key challenges in analyzing cyclical companies is the difficulty of modeling those cyclical peaks and valleys, particularly as companies like AGT Food and Ingredients (OTCPK:AGXXF) (AGT.TO) have a tendency to overshoot in both directions. I said in my last piece that I was holding off on buying into what looked like an undervalued pulse processor in lieu of waiting for some signs of stability in the business. It’s a quarter later and I’m still waiting.

I do expect that lower pulse production in Canada and a reversal of recent exceptional harvests in India will eventually snap the cycle back in the other direction, but timing these reversals is mostly down to guesswork and asking questions like “well, how much worse can it really get?” can be an invitation to trouble.

All the same, I like AGT’s ongoing focus on value-added operations and I do believe the cycle will eventually reverse, allowing AGT to generate mid single-digit revenue growth and low single-digit FCFs. Buying here in the teens will likely work out okay, but investors considering these shares have to have an above-average risk and volatility tolerance.

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AGT Food And Ingredients Still Crawling Through The Doldrums

Tuesday, April 17, 2018

PAX Global Technology Getting Minimal Benefit Of The Doubt

Since my last write-up on PAX Global (OTCPK:PXGYF) (0327.HK) in January of this year, the shares have more or less marked time, though there was a nice run heading into fourth quarter earnings in March that ultimately faded away. Relatively speaking, though, that's not such a bad performance in what has been a tough payments technology space - while Square (SQ) has done very well so far this year, Ingenico (OTCPK:INGIY) has had a tough run (down 20%) and VeriFone (PAY), too, was drifting lower before receiving a buyout bid.

The shares remain a challenging call. While PAX is doing quite well in Brazil and surprisingly well in Europe, I do have concerns that there are long-term fundamental shifts in the market working against PAX, exacerbating its lack of a value-added service business. Likewise, the company's home market (China) remains quite difficult, and management has trading gross margin for market share across multiple geographies. If PAX management can stabilize the business and report a few clean quarters, though, I believe there's enough underlying fundamental value here to merit a closer look from more aggressive investors.

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PAX Global Technology Getting Minimal Benefit Of The Doubt

Healthy Spreads And Efficiency Driving M&T Bank

While M&T Bank (MTB) closed its Hudson City deal about two and a half years ago, the bank has continued to reshape its loan book and drive higher returns on equity. At the same time, while M&T isn’t particularly asset-sensitive, the bank’s mix of higher-yielding loans and lower-cost funding are driving attractive net interest spreads while cost discipline is pushing the efficiency ratio lower and helping boost pre-provision income.

There are a lot of positives for M&T, including those attractive spreads and ongoing expense leverage. What I don’t find so positive at this point is the value proposition – even with mid-to-high single-digit long-term earnings growth and returns on tangible equity likely to approach 20% in the near future, the shares trade at a pretty healthy valuation already.

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Healthy Spreads And Efficiency Driving M&T Bank

First Horizon's Footprint And Business Mix Should Drive Long-Term Growth

With good strategic positioning across the Southeast U.S., deal synergies, a respectable specialized lending business, and an asset-sensitive balance sheet, First Horizon (FHN) looks well-placed to deliver good growth so long as the economic cycle stays positive. That makes a softer than expected first quarter a little easier to digest, though investors should keep an eye on the competitive factors pushing up deposit betas and the still-sluggish overall environment for loan demand.

First Horizon looks priced for high single-digit to low double-digit annualized returns, which isn't bad, but I like to pay $0.90 (or less) for a dollar of value and bank stocks are no exception. To that end, there are cheaper bank stocks that I'd favor today, but First Horizon deserves a spot on a watch list and certainly doesn't seem like a bad hold now.

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First Horizon's Footprint And Business Mix Should Drive Long-Term Growth

Bank Of The Ozarks Pushing Hard For Growth

It's been a while since I've written about Bank of the Ozarks (OZRK) for Seeking Alpha, in part because there's a limit to how many different ways you can say "it's a well-run, high-growth bank, but the multiple is rich". In any case, the shares are a little under 20% from my last update (when I thought it was too pricey for me), and I've frankly done better with my positions in JPMorgan (JPM) and BB&T (BBT) over that same time.

I continue to find it difficult to get completely comfortable with the valuation on this bank, and I'm a little concerned about the aggressive pace of C&D lending at this point in the real estate cycle. Management's skill in navigating past cycles has certainly earned them the benefit of the doubt with me, and I like the long-term potential of not only replicating the specialty lending model across the country but also diversifying the loan book and building up core deposits.

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Bank Of The Ozarks Pushing Hard For Growth

Monday, April 16, 2018

MSC Industrial Still Looks A Little Underwhelming

Patience hasn't proved all that rewarding with MSC Industrial (MSM), as the shares have not only lagged peers like Grainger (GWW) and Fastenal (FAST) and suppliers like Kennametal (KMT) but are basically flat for the past year. The debate continues as to whether MSC Industrial's issues are predominantly driven by cyclical factors, or whether increased online competition and the expansion of Amazon (AMZN) into industrial distribution has permanently altered price transparency and the competitive balance.

I admit that I find it troubling that MSC reported only mid-single-digit organic growth despite Gardner's Metalworking Index hitting its highest level in seven years. A return to positive pricing was nice to see, as was the operating leverage, but this remains a "show me" story where valuation is not all that compelling.

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MSC Industrial Still Looks A Little Underwhelming

Citigroup's Valuation Masks Some Incremental Progress And Improvement

Citigroup (C), has been a middle-of-the-road performer for the last year, with peers like U.S. Bancorp (USB), Wells Fargo (WFC), and Goldman Sachs (GS) underperforming and JPMorgan (JPM), PNC Financial (PNC), and Bank of America (BAC) outperforming, and so too over the last three months as the sector has sold off. Investors continue to remain skeptical about Citigroup’s ability to hit its long-term targets and reverse a long trend of lackluster, disappointing performance.

Citigroup has earned those doubts, but I continue to believe the market is overdoing it. Even low single-digit long-term growth would support a higher price, and that is despite some actual ongoing signs of improvement. While Citi is a long way away from being my favorite bank on a quality basis, I think the relative valuation is still quite interesting.

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Citigroup's Valuation Masks Some Incremental Progress And Improvement

PNC Financial's Sluggish Quarter Looks Like Par For The Course

A weak quarter or two doesn’t really matter in the long term, other than perhaps as an opportunity to pick up shares at a more reasonable valuation. With PNC Financial’s (PNC) valuation sliding back to a more attractive level, this weak patch in the results could be such an opportunity. Although loan and revenue growth is looking softer than expected across the sector so far, PNC has multiple long-term strategies underway to grow its commercial lending, expand its consumer business, and join the top tier of banks.

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PNC Financial's Sluggish Quarter Looks Like Par For The Course

Smiths Group Looks Poised For Better Results

Over time Smiths Group (OTCPK:SMGZY) (SMIN.L) has built up a well-earned reputation for always coming up a little short. Although this U.K. conglomerate's historical performance wasn't bad in terms of margins or ROIC, the cash flow generation was weak and it was the sort of story where there was always something a little off. Likewise, while Smiths shares performed okay relative to other U.K. conglomerates, the gap with American industrial conglomerates like 3M (NYSE:MMM), Illinois Tool Works (NYSE:ITW), and Parker-Hannifin (PH) has been sizable.

Quite a bit has changed recently, as new management has returned to a philosophy of active portfolio management and R&D/innovation-driven growth. Although the results aren't showing up just yet in terms of organic revenue growth or margin expansion, I believe Smiths is on the cusp of better results that should make this a solid market-outperformer for the next couple of years.

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Smiths Group Looks Poised For Better Results

Medpace Holdings Facing Some Challenges To A Model That Has Worked Well

Medpace (MEDP) had some challenges in its first year as a publicly-traded company, as this full-service contract research organization (or CRO) saw revenue growth and margins weaken through 2017. Compounding those issues is a greater effort on the part of Medpace's larger rivals to target its core business - smaller biotechs that have historically been ill-served by the larger players in the CRO market.

Valuation is an interesting dilemma right now. It would seem that Medpace could generate high-single-digit to low-double-digit annual returns to shareholders even if it can't reaccelerate growth beyond peer/industry norms and has to absorb some additional margin pressure. While I don't expect it to be a quick (or certain) process, if management were to succeed with its efforts to reignite revenue growth there would be enough incremental return to make this a more interesting idea.

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Medpace Holdings Facing Some Challenges To A Model That Has Worked Well

Cross-Selling Can Drive Meaningful Growth For Medidata Solutions

There's really no "steady state" for growth tech companies, and while Medidata Solutions (MDSO) has built a strong business with its cloud-based platform for the management of clinical development programs, management cannot afford to rest on its laurels. That's particularly true given that revenue growth decelerated through 2017 and both subscription revenue and backlog growth came in a little slower than expected.

With around 50% share and more than 80% of the top pharma companies in hand as clients, Medidata's growth is likely to come more from expanding its share of wallet with customers and selling them on the value of its offerings beyond its core RAVE electronic data capture (or EDC) platform. Given the increasing complexity and cost of clinical development, I believe Medidata has a better than fair chance of doing that, but rising competition is a threat. Even so, while I wouldn't care Medidata conventionally cheap, the valuation is reasonable enough to merit a closer look.

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Cross-Selling Can Drive Meaningful Growth For Medidata Solutions

Execution At Kemper Still Offers Upside

A lot has changed at Kemper (KMPR) since CEO Joe Lacher was brought in to turn around this lackluster multi-line P&C and life insurance company late in 2015. While the company is by no means an industry leader in terms of its profitability, management has already delivered progress on improved underwriting quality and is in the midst of an acquisition that should meaningfully improve its position in the fast-growing non-standard auto insurance market.

Valuing Kemper is a little challenging, in part because the company’s ability to successfully integrate its acquisition and continue to improve underwriting quality are significant swing factors in the valuation. Today’s premium to book value of 1.4x looks fair in isolation, but this could readily be a $75 stock in a couple of years if management continues to execute well.

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Execution At Kemper Still Offers Upside

Inogen May Only Be Getting Started

A mid-cap med-tech company with 20%-plus revenue growth, profitable operations, positive free cash flow, and a large addressable market is going to get noticed, and so it has been for Inogen (INGN) - the shares have risen more than 70% in the past year and trounced the likes of ResMed (RMD) and Invacare (NYSE:IVC), not to mention the S&P 500, over the last three years as this company has grabbed more and more share of the growing portable oxygen market.

Although the fundamental growth story is strong, it's hard to see the appeal outside of growth and momentum as the company trades well above what I consider a reasonable cash flow-based valuation and at over 9x forward revenue. That said, if you are a valuation-insensitive growth investor looking for a momentum story, maybe this is a name to check out.

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Inogen May Only Be Getting Started

AxoGen Offers An Exciting Story At Nosebleed Prices

When the stocks of real companies go up more than 250% in a year, it’s a safe bet that there are at least two factors in play – the company has a great growth story and institutions have caught wind of it. And so it would seem with AxoGen (AXGN), where the company’s products for peripheral nerve repair are legitimately exciting, but where the growth expectations are already quite robust.

AxoGen shares seem to be pricing in a scenario where the company holds close to one-third of its addressable market in 2027 with FCF margins in the mid-20%s. That’s achievable, but it doesn’t leave much room for stumbles or disappointments. I can’t make a value case for AxoGen, but I know there are investors who care more about story and growth, and maybe there’s still some appeal here for that group.

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AxoGen Offers An Exciting Story At Nosebleed Prices

Renesas Going Through A Rocky Patch, But The Future Prospects Look Undervalued

"Buy the pullback" is one of the oft-used pieces of advice that is easier said than done but can nevertheless be profitable for patient investors. The semiconductor sector has certainly cooled, and Renesas Electronics (OTCPK:RNECY) is likely to see some weak reported results in the near-term, but this looks like a story that has some legs over the longer term.

Renesas is certainly looking at more competition in its core auto semiconductor market, but I wouldn't ignore the strong position it has built for itself in microcontrollers and SoCs, nor the opportunity to benefit from significant growth in semiconductor content in the auto sector. With mid-single-digit long-term revenue growth and low-to-mid teens operating margins, the stock looks undervalued enough today to merit a closer look.

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Renesas Going Through A Rocky Patch, But The Future Prospects Look Undervalued

US Foods Offers Double-Digit Potential As It Looks To Boost Growth And Margins

US Foods (USFD) is another good example of a business that may seem superficially simple (distributing products to food service customers like restaurants), but that involves quite a bit of detailed blocking-and-tackling details. And it is the extent to which competitors handle those details well that typically separates the long-term winners.

US Foods has done pretty well relative to the S&P 500 and its closest peer/rival Sysco (SYY) over the past year, but I believe there's a credible basis for expecting double-digit annual appreciation from here. US Foods has a large addressable market in which it can still grow (both organically and through M&A), as well as several margin-improvement opportunities. While I think today's price is a pretty fair balance between risk and reward, a pullback would make for a compelling entry point.

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US Foods Offers Double-Digit Potential As It Looks To Boost Growth And Margins

Expectations Seem Low For Swiss Re, But Not Without Cause

Swiss Re (OTCPK:SSREY), the second-largest reinsurance company in the world, has not had a very good run. Not only have the shares lagged the S&P 500 over the last one-, two-, five-, and ten-year periods, but also many of those performances compare poorly to sector peers/rivals like Munich Re (OTCPK:MURGY), Hannover Re (OTCPK:HVRRY), SCOR (OTCPK:SCRYY), and smaller players like Everest Re (NYSE:RE). Comparatively weaker ROEs do explain at least some of the underperformance, but the more important question is whether Swiss Re looks placed to do better in the coming years.

Swiss Re should be poised to benefit from rate improvements, but it remains to be seen whether management can achieve the necessary margin improvements in its casualty reinsurance and primary insurance operations. Modest expectations are an advantage in that respect, as only modest improvements in long-term ROEs can drive mid-single-digit income growth and double-digit annual shareholder returns.

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Expectations Seem Low For Swiss Re, But Not Without Cause

To Be More Than A Yield Play, Zurich Insurance Needs More Self-Improvement

With a dividend yield close to 6% and a healthy capital/solvency position, Zurich Insurance (OTCQX:ZURVY) (OTCQX:ZFSVF) (ZURN.S) is by no means a bad insurance company. With high expense ratios, high loss ratios, and weak trailing premium growth, though, it is likewise hard to say that Zurich is a particularly good insurance company. The extent to which Zurich Insurance's management can execute on cost-cutting and underwriting targets will shape the company's earnings growth potential, as "more of the same" is not going to be enough to move the shares significantly higher.

I would say that I'm cautiously optimistic on Zurich's potential from here. Shifting the business mix and delivering improved underwriting results will take time, but there is a pathway to mid-teens ROE and stronger total annual investment returns from here.

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To Be More Than A Yield Play, Zurich Insurance Needs More Self-Improvement

Sunday, April 1, 2018

voestalpine's Positive Attributes Should Become Clearer In The Coming Years

Austrian steel company voestalpine (OTCPK:VLPNY, OTC:VLPNF, VOES.VI) may be the bane of copy editors for its penchant for using only lower-case letters, but it has proven itself to be a different sort of steel company - one that reinvests continually and pursues a high-tech, high-quality strategy that emphasizes profit per ton over volume of tons sold. That philosophy, and a history of above-average ROIC generation, has allowed voestalpine to outperform many of its peers over the longer term, including the likes of Acerinox (OTCPK:ANIOY), ArcelorMittal (NYSE:MT), Nucor (NYSE:NUE), and ThyssenKrupp (OTCPK:TYEKF), though Steel Dynamics (NASDAQ:STLD) has outdone them all by a wide margin.

Steel stocks in general, and European steel stocks in particular, haven’t done so well this year, and voestalpine is down about 12% (worst among that group). I believe this is creating an interesting opportunity; although the steel cycle may be at or past its peak momentum, I believe the company’s differentiated strategy will lead to better results, and better cash flow, down the road.

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voestalpine's Positive Attributes Should Become Clearer In The Coming Years

Large Opportunities And High Expectations Battling It Out At Intersect ENT

The history of Intersect ENT (XENT) should look very familiar to long-term investors in the med-tech sector. This company came to the market all shiny and new in 2014 with an interesting, differentiated product for an underserved market (chronic sinusitis) that offered $1 billion-plus revenue potential. The stock more than doubled in its first year, but then the pace of revenue growth couldn't match what was laid out in the initial sell-side models and the shares lost almost two-thirds of their value.

Since the shares hit a late 2016 low, though, the company has been executing well. Although penetration/usage rates are slower than what was hoped for back in 2014, the pace of growth still isn't bad and the company is about to launch a new product that could add over $1 billion to its addressable market. A forward EV/revenue multiple of around 9x tells you the sort of growth expectations that are in place, but the underlying valuation isn't so unreasonable compared to the long-term opportunity.

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Large Opportunities And High Expectations Battling It Out At Intersect ENT

Zalando Building Up The Infrastructure To Be More Than Just Another Online Retailer

There’s a lot about Zalando (OTCPK:ZLNDY) that will look familiar to experienced investors – namely that tension between disruptive long-term growth and the fair price to pay today for that growth potential. Zalando has definitely made a mark in fashion e-commerce in Germany, and there is ample room to expand throughout Europe and into higher-margin services, but Amazon (NASDAQ:AMZN) looms large as a threat and more value-conscious investors may fret about how long it will take the company to earn attractive returns on the considerable sums it is putting into market and infrastructure development.

With the shares already seemingly discounting close to high teens long-term revenue growth and mid-single-digit FCF margins, I would say that expectations are already high and that this won’t appeal to many value-driven investors. On the other hand, the company continues to deliver strong growth metrics and the valuation isn’t absurd relative to what high-growth companies often get.

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Zalando Building Up The Infrastructure To Be More Than Just Another Online Retailer

Ternium Brings Strong Execution To A Strong Market

A better-than-expected steel market over the past 12-18 months has added a welcome tailwind to a story I already liked at Ternium (NYSE:TX). Although cost creep and higher working capital needs have created some near-term concerns, Ternium management has continued to do a good job managing overall profitability, while also intelligently re-investing for growth. That, in turn, has led to okay share price performance over the last year - the 22% rise in the shares, outperforming the S&P and Nucor (NYSE:NUE), but coming up a little short next to Steel Dynamics (NASDAQ:STLD), ArcelorMittal (NYSE:MT), and Gerdau (NYSE:GGB).

I don’t expect the steel market to improve as much from this point, but I still see opportunities for better results from Ternium. The CSA acquisition and internal greenfield opportunities offer volume growth opportunities, and a revised ownership agreement for Usiminas (OTC:USNMY) should allow for ongoing exposure to Brazil’s recovery. With a fair value in the mid-to-high $30s, there still appears to be value in Ternium shares even as the NAFTA renegotiation process drags on.

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Ternium Brings Strong Execution To A Strong Market

Tokai Carbon's Melt-Up May Not Be Over

Looking for "pick and shovel" plays, companies that supply and support companies that are seeing significant growth/upturns, is a time-tested strategy that continues to work. That brings me to Tokai Carbon (OTCPK:TKCBY) (5301.T), a company that is a significant player in carbon black, graphite electrodes, and fine carbon, but far from a household name. While the company has a good, and improving, business in its core carbon black operations, a supply squeeze in graphite electrodes that may persist for multiple years is adding sizzle to the story.

These shares have already tripled over the last year, so the eye-popping gains are already off the table. Even so, it looks like there's still double-digit potential left on the basis of continued pricing power in electrodes and improvements in other areas of the business - enough potential, at least, to make the shares worth a closer look.

Investors should note, though, that the ADRs are not especially liquid. In addition, as a Japanese company, foreign exchange risk is a factor that investors have to incorporate into their expectations.

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Tokai Carbon's Melt-Up May Not Be Over

A Cleaner Balance Sheet And Good Leverage Should Help Farmers Capital Bank Grow

Although you wouldn’t necessarily know it from the relative performance of other banks in its weight class, Farmers Capital (NASDAQ:FFKT) has taken some meaningful self-improvement steps over the last couple of years. These moves have put the company on a path toward better interest spreads, better efficiency ratios, and better growth prospects, all of which should support higher earnings and returns in the coming years.

The valuation argument isn’t quite as clean as I’d like it to be. The shares do look undervalued on the basis of near-term returns on equity and EPS/EPS growth, not to mention what the shares could fetch in a potential acquisition, but I’d like to see a little more discount relative to my long-term earnings growth expectations. At worst, though, this looks like a decent buy that could reward investors if 2018 results come in a little stronger than expected.

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A Cleaner Balance Sheet And Good Leverage Should Help Farmers Capital Bank Grow

The Market Still Isn't Giving Itochu Full Credit For Its Self-Improvement

Japanese trading company Itochu (OTCPK:ITOCY) has a tough act to follow - its own meaningful improvement over the past five years. The company was more willing than most of its Japanese trading peers to deemphasize commodity/resource businesses, and it moved fairly quickly here, building up non-resource businesses like its food, “machinery”, and finance operations. Those moves have led to better ROE and cash flow margin performance versus its peers, and Itochu shares have done well relative to peers like Mitsui (OTCPK:MITSY), Mitsubishi (OTCPK:MSBHY), Marubeni (OTCPK:MARUY), and Sumitomo (OTCPK:SSUMY) over that time.

Itochu’s execution has not been flawless, though, and investors are right to worry about the risk of another sizable poor investment (like CITIC (OTCPK:CTPCY)), not to mention the risk of lower long-term returns as Itochu has de-risked its business. I believe its underlying business mix, and the investment priorities that have been demonstrated over the last couple of years, argue for a higher price today, but the upcoming announcement of the company’s next three-year plan could be a significant share mover.

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The Market Still Isn't Giving Itochu Full Credit For Its Self-Improvement

Turkcell's Improved Execution And Strategy Going Unrewarded

Being a Turkcell (NYSE:TKC) shareholder has never been easy, but it has been more frustrating of late as weakness in the Turkish lira has depressed the value of the ADRs and muted the benefit of the 20%-plus increase in the value of the local shares. Going beyond currency, though, I believe there is an argument to be made that the market is still failing to give Turkcell credit for the improvements management has made - improvements that have included successful growth in 4.5G post-paid subscribers, growth in the fixed-line broadband business, growth in value-added services, and a more responsible view toward M&A.

I continue to expect high-single-digit revenue growth and mid-teens FCF growth from Turkcell as the company continues to benefit from the pre-paid to post-paid migration, greater use of data, and expanded add-on service offerings. Discounted back at current exchange rates, those cash flows support a fair value of over $12/ADR today, making Turkcell cheap enough to be worth a closer look.

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Turkcell's Improved Execution And Strategy Going Unrewarded

Fortive Accelerating Its Transformation Process

Fortive (NYSE:FTV) management had already made it clear to shareholders that they wanted services and software to be a bigger part of the future, but the pace of that transformation has been a little surprising. Between the recent transaction with Altra (NASDAQ:AIMC) and the prospect of $8 billion in M&A deployment, Fortive is certain to look different in 2020. Although this transformation carries unknowns and risks, including the extent to which the Fortive Business System is “portable” into these new target areas, the success of peers like Roper (NYSE:ROP) argues that it could be a very worthwhile shift.

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Fortive Accelerating Its Transformation Process

Broadcom Not Exactly Back To Square One

The market hasn’t been too accommodating to Broadcom (NASDAQ:AVGO) of late. Once a darling (and still well-regarded by many analysts and investors), the shares have been underperforming on a host of issues including worries about the company’s M&A policies (and its reliance on M&A), competitor actions, and the overall health of the semiconductor space.

I really have no operational concerns about Broadcom, and I think the company’s well-balanced mix will generate above-average growth in both the short term and long term. The prospect for value-adding M&A is more uncertain, though returning cash to shareholders is not a bad back-up plan. Based on mid-to-high single-digit long-term growth potential and margins in the 40%’s, I believe Broadcom shares are meaningfully undervalued now, but it will likely take some time for the dust to settle and for investors to move past worries about limitations on future M&A.

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Broadcom Not Exactly Back To Square One

Monday, March 19, 2018

Waiting For The Next Overreaction With Exact Sciences

Although Exact Sciences (NASDAQ:EXAS) isn’t that old of a company, a couple general rules of thumb seem to have emerged – the company’s non-invasive Cologuard test for colorectal cancer is going to continue to gain share, and shorts are going to continue to look for any cracks in the wall as a way to keep holding on to their bearish thesis. With the company outperforming expectations in 2017 (to the tune of nearly 170% revenue growth and 70%-plus gross margins) and the share price up nearly another 150% over the past twelve months, patient longs have been well-rewarded for sticking with this up-and-coming molecular diagnostics company.

Not surprisingly, given the robust growth, these shares are trading at a pretty rich multiple today. Although more beat-and-raise performances are certainly possible, and the company has only penetrated somewhere around 3% to 4% of its addressable market, I would wait for another bad news event (likely more perceived than real) before making a big commitment to the shares.

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Waiting For The Next Overreaction With Exact Sciences

Lundbeck Pays Up For A New Clinical Trial Asset

I have maintained for some time that one of the biggest issues for H. Lundbeck (OTCPK:HLUYY) (LUN.CO) is the feeble state of its pipeline. While Lu AF35700 is an interesting and promising asset in late-stage testing for treatment-resistant schizophrenia and Lu AF20513 is an intriguing but totally unproven asset in Phase I for Alzheimer’s, there’s not much else in the pipeline apart from some expanded indications for existing drugs. 

With Lundbeck having recently indicated that the board was more receptive to M&A, the company put its money behind that, announcing Friday morning that it had agreed to acquire privately-held Prexton in a deal heavily skewed to milestones down the road. Although this deal doesn’t meaningfully alter the current investment credentials for Lundbeck, it adds an interesting asset and may mark a more active stance toward recharging the company’s pipeline.

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Lundbeck Pays Up For A New Clinical Trial Asset

Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

I have long thought that the managers of ACE, now operating under the name of Chubb (NYSE:CB) after that merger, are some of the best in the business and I continue to believe that that is a strong foundation for a positive investment thesis. That said, the P&C business has been flooded with capital and only recently have there been signs of rate improvement. At the same time, underwriting margins are getting squeezed and I’m worried about the outlook for loss trends.

Like many other insurers, Chubb has seen some share price weakness since January of this year, with the shares off about 10% from the 52-week high and up only a little bit over the last year. While I have some concerns about the impact of higher losses and lower reserve releases, that’s balanced by the reality that good names like Chubb don’t get all that cheap all that often. I do have some “falling knife” worries here, but the share price is getting to a point where long-term investors might want to freshen up their due diligence.

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Rates And Loss Ratios Remain Risks, But Chubb's Valuation Is Getting Interesting

Arch Capital Sliding Back To An Interesting Long-Term Valuation

Although Arch Capital (NASDAQ:ACGL) remains a very well-regarded insurance company, the last year hasn't been so friendly to this company or its peer group. A lot of contributing factors have been at play, including large cat losses in 2017, rising costs, regulatory/competitive changes and so on, pushing the shares down more than 10% and below the performance of peers like Everest Re (NYSE:RE), RenRe (NYSE:RNR), and W.R. Berkley (NYSE:WRB).

When I last wrote about Arch Capital, I said I preferred to wait in the hopes of getting an opportunity to buy the shares in the mid-to-low $80's. That opportunity has arrived, even though analyst estimates have continued to head higher. While these stocks generally don't perform especially well during periods of higher rates (which may seem counter-intuitive given the benefits to their investment income), and pricing power is still limited, I think this may be an opportunity to start a position. Arch Capital looks priced to generate double-digit annual returns from here and this has been one of the best-run insurance companies in the business - a trend I expect to continue, and to continue to benefit shareholders, into the future.

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Arch Capital Sliding Back To An Interesting Long-Term Valuation

Almost Everything Going Right For Shin-Etsu Chemical

When an uncommonly well-run company intersects with stronger than expected underlying end-markets, very good things can happen for the stock. Such has been the case for Shin-Etsu (OTCPK:SHECY), where strong results up and down the line have pushed the shares up another 25% or so from where they were when I last wrote about the company, even after a double-digit pullback from the January high.

I still lean positive on these shares. Although I fully expect the company's growth rate to slow from its recent trajectory, I believe the company's exposure to the strong PVC and wafer cycles as well as exposure to other growing specialty markets, biases the story in a favorable direction. Although the shares have enjoyed a very strong run since 2016, healthy end-markets should still support a high single-digit annual return at this point.

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Almost Everything Going Right For Shin-Etsu Chemical

Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Compared to what Braskem (NYSE:BAK) was 15, 10, or even just five years ago, I think it’s fair to say that management has done a good job of improving the business. Braskem is now much less dependent upon naphtha as a feedstock and the company has made strides in diversifying beyond Brazil. The company’s involvement in the Brazilian “Car Wash” scandal was certainly a major black mark against it, but Braskem has nevertheless established itself as a major global chemical company with room for further growth and improvement.

Braskem is leveraged to an emerging recovery in Brazil as well as ongoing demand growth in markets like Mexico and the U.S., as well as other export markets. There are risks tied to a corruption investigation in Mexico that could threaten its supply of attractively-priced ethane, but the company is moving forward with greenfield growth in the U.S. and the shareholder structure may become simpler in the relatively near future. With a discount tied to uncertainties in Mexico and the ownership situation the shares look only a little undervalued, but absolution in Mexico and a cleaner shareholder structure could support a fair value in the mid-$30s even as polyolefin spreads look as though they’ll decline.

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Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Weyerhaeuser's Improved Execution Should Pay Dividends

For me, Weyerhaeuser (NYSE:WY) is an example of why valuation always matters. Generally well-valued (if not richly-valued) for its high-quality timberlands and wood products operations, Weyerhaeuser has lagged the S&P 500 for total returns for quite some time. Even when you account for the tax benefits of its REIT status and the housing slump, I would argue that shareholders have had to pay a price for Weyerhaeuser’s often-rich valuations, as well as several strategic missteps in the past.

I believe that Weyerhaeuser is now a better-run company and I do see some upside in the shares now. The Wood Products segment may be nearing its peak, but I expect healthy ongoing contributions from the Timberlands segment, and I believe Weyerhaeuser is a leaner, better-run, and more focused company than it has been in a long time. Coupled with a reasonable valuation, there could be some opportunity here for patient investors.

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Weyerhaeuser's Improved Execution Should Pay Dividends

Louisiana-Pacific Making The Best Of The Cycle

When I last wrote about Louisiana-Pacific (NYSE:LPX) (or “LP”) back in October of 2016, I thought the shares still had upside on the basis of ongoing price/margin leverage in OSB, continued growth in housing, and the growth of the company’s siding business. The shares are up about 50% since then, outperforming most of its peers like Norbord (NYSE:OSB), James Hardie (NYSE:JHX), and Weyerhauser (NYSE:WY) over that time (Ply Gem (NYSE:PGEM) has nearly matched LP, while Boise Cascade (NYSE:BCC) has outperformed), as OSB pricing has exceeded expectations on uncommonly responsible competitor behavior and as the company has executed well on its operating improvements and siding growth plans.

It’s harder to see as much upside now. While OSB pricing has held up, and likely will remain above $300 despite oncoming capacity growth, and siding continues to have strong growth potential, I believe a lot of that is in the share price. I don’t think LP shares are overvalued on the basis of cycle-average EBITDA, but I do believe that 2018 could be the near-term peak and the returns could look more “market-like” from this point.

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Louisiana-Pacific Making The Best Of The Cycle

Hurco Off To A Strong Start

Manufacturers continue to expand and upgrade their capital equipment, and that trend is benefiting small-cap machine tool manufacturer Hurco (HURC). As a company that makes things, Hurco is clearly very leveraged to the health of the global manufacturing economy, but particularly in Germany, the U.S., the U.K., France, and Italy. Although industrial production growth has slowed a bit recently, the overall trends remain healthy in the U.S. and Western Europe, and most industrial companies have guided toward a healthy 2018.

A bi-annual tradeshow in September of this year is likely to create some volatility in quarterly results (with orders slowing into the show, as many companies introduce new models/features at the show), but I expect that Hurco will generate double-digit revenue growth and at least come very close to double-digit operating margin. With the current share price still offering double-digit return potential, I don’t think it’s too late for the stock, but I do think the industrial recovery story is pretty mature at this point.

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Hurco Off To A Strong Start

Komatsu Offers More Than An Upswing In Mining

As often happens with companies that serve deeply cyclical end-markets, the timing and magnitude of the swings in Komatsu's (OTCPK:KMTUY) end-markets have defied expectations. While improving construction and mining markets have been part of the Komatsu story for a while now, the strength of the recoveries (especially in mining) has exceeded expectations, as has Komatsu's operating leverage and execution.

With major mining companies only starting to reinvest in equipment and plenty of room to grow in automation-driven investments, I believe Komatsu could still offer some upside from here. The shares aren't cheap on a free cash flow basis, but that's not all that unusual and a forward multiple in line with long-term averages suggests 10% more upside from here with the possibility of further upward revisions.

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Komatsu Offers More Than An Upswing In Mining

Sunday, March 11, 2018

Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Chart Industries (GTLS) shares were hammered during the downturn in energy and process industries but are already up about 4x from the early 2016 bottom as the company has benefited from recovering demand in natural gas processing and recovering demand for industrial gasses. Better still, not only has management expanded and diversified its business with the Hudson deal, management seems more interested in backfilling the service and aftermarket opportunities.

With the shares up so strongly (up 80% in the last 12 months), I'm not too surprised that I don't see a lot of low-hanging value here. There are still meaningful opportunities in LNG and I believe the market often underrates the company's core industrial gas business, but today's valuation looks pretty reasonable for a company that should generate mid-single-digit revenue growth and double-digit FCF growth over the next decade.

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Chart Industries Riding A Recovery But Also Shifting The Business In Meaningful Ways

Maxwell Shareholders Could Finally See Some Rewards For Their Patience

Maxwell Technologies (MXWL) hasn't been the easiest stock to hold over the last few years, as the promise of the company's ultracapacitor and dry battery electrode technology has been offset by significant revenue volatility and numerous false starts in what were supposed to be exciting growth markets. With all of that, the shares have lost about 20% of their value over the last three years and have spent most of the last year between $5.50 and $6 (with excursions down to $4.50 and up to $6.50 along the way).

Maxwell remains a tough stock to value, as there is little more to go on than a handful of design wins and potential end-market developments. That said, I think the company deserves more credit than it gets for "keeping the lights on" and using opportunities like the Chinese hybrid bus market to fund R&D and product development in areas like auto electrification, renewables, mass transit, and grid management that could start to pay off in the next couple of years.

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Maxwell Shareholders Could Finally See Some Rewards For Their Patience

HollySys Growing, But Consistency Remains An Issue

HollySys (HOLI) has built a respectable business in process automation and train signaling in China, but inconsistent execution and order growth remain key challenges for management. Expanding its factory automation business has likewise proven challenging, though there has been more progress on this front and Chinese government policy could be a tailwind.

HollySys shares have done well as revenue has rebounded, but the soft order growth in industrial automation could become more of a headwind. I continue to believe HollySys can generate high single-digit revenue and high single-digit to low double-digit FCF growth, and those growth rates can support a double-digit total return, but future growth is tied to management's ability to grow the business beyond its historical strengths.

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HollySys Growing, But Consistency Remains An Issue

Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

Fiber laser innovator IPG Photonics (IPGP) is a good example of why I'm willing to pay up for good companies (and/or hold stocks that otherwise seem richly-valued) - the really good companies out there always seem to find ways to innovate and expand their addressable markets, as well as generate improved operating leverage. IPG has continued to exceed my expectations on both fronts, and the trailing return metrics over the past one, three, and five years (and beyond) have been exemplary.

I don't mind paying up for good companies, but IPG shares do have a track record of significant pullbacks from time to time - whether due to the company not meeting lofty expectations on a quarterly basis or wider concerns about the health of manufacturing spending. The valuation today seems to be pricing in total expected returns in the high single digits, which isn't bad, but I'd much prefer to buy in when the expected returns are in the double digits.

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Ongoing Share Gains, Innovation, And Leverage Propelling IPG Photonics

Air Transport Not Just An Amazon Story

Air Transport Group (ATSG) shares have done well over the past year, but the shares have been stuck in a $6/share trading range since May, as inconsistent execution has blunted some of the benefits of the company’s transformative relationship with Amazon (AMZN). Despite those inconsistencies, management continues to build the business outside of Amazon, adding more 767 customers and launching a long-term effort to expand its potential operating fleet.

I believe Air Transport still has some upside from here, driven by my expectations for high single-digit revenue growth and improving free cash flow generation. I also believe that significant upside remains in the Amazon relationship, as Amazon seems to be serious about building out its independent logistics operations.

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Air Transport Not Just An Amazon Story

PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

These are good times for PerkinElmer (PKI). The life sciences/pharma tool market is about as strong as it has ever been, and the company's pivot toward diagnostics and services should pay off in the years to come in the form of more revenue stability and better margins. If management can reverse a pretty uninspiring historical trend of underwhelming M&A integration and missing long-term revenue and margin targets, the future could be pretty bright for this company.

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PerkinElmer Riding A Strong Cycle And Making Positive Long-Term Shifts

Sunday, March 4, 2018

Microsemi Finds Its Last Deal

Management at Microsemi (MSCC) is known for commenting that in semiconductor M&A, "You buy until you get bought." There have been rumors off and on about potential bidders circling Microsemi for a little while now, and the executive management's compensation plan was certainly structured to reward a deal. Now Microsemi finally found its buyer - Microchip Technology (MCHP), a seasoned semiconductor M&A veteran that should reap meaningful revenue and cost synergies from the deal.

Given the deal price, I don't think Microsemi investors have a compelling need to stay to the very end; a rival bid is always possible, but the price offered isn't such that I think another bid is highly likely. Pre-market indications are that Microsemi won't trade up to the full bid price just yet, though, so Microsemi investors can at least get paid a little for waiting unless and until they have a better idea.

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Microsemi Finds Its Last Deal

Double-Digit Growth Continues To Propel Old Dominion

Forget its top-level performance in the less-than-truckload (or LTL) sector, Old Dominion (ODFL) is one of the better-run companies I've followed for the past decade-plus. Management sticks to what it does best, doesn't jeopardize the model just to please Wall Street in the short term, and continues to build the business for further growth. The only issue with that top-level performance is that it is no secret and Old Dominion's shares are seldom cheap outside of those cyclical downturns where the outlook for the sector is bleak.

Today is the opposite; demand for freight is expanding and Old Dominion is once again demonstrating that it can win share with service quality during such expansions. The shares are already pricing in double-digit EBITDA growth, and I think outperforming those expectations is going to be difficult. While I'd be very slow to sell Old Dominion if I already owned these shares, it's tough for me to argue for it as a buy at today's valuation.

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Double-Digit Growth Continues To Propel Old Dominion

Yet Again, Investors Have To Readjust Expectations For GenMark

The past 12 months have been rough for GenMark Diagnostics (GNMK), as this molecular diagnostics company has struggled to meet its own timelines and live up to Wall Street expectations. While better-than-expected fourth-quarter results gave investors a little renewed confidence, guidance for 2018 brought that honeymoon to a quick end.

GenMark remains a high-risk, high-reward speculative play in molecular diagnostics. This recent flu epidemic has solidified the place of multiplex systems in clinical practice, but GenMark is facing an increasingly difficult competitive market, and there doesn't seem to be as much excitement in the channel as there once appeared to be. A revenue figure of $200 million in 2022, growing to over $400 million in 2027, with double-digit FCF margins can support a meaningfully higher share price, but the company's cash situation is far from ideal, and it really needs to start posting beat-and-raise quarters soon.

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Yet Again, Investors Have To Readjust Expectations For GenMark

FEMSA Continues To Offer Attractive Value

Shares of FEMSA (FMX), a large Mexican consumer conglomerate, are always going to twitch with concerns about Mexico's economy (including the exchange rate with the U.S.), but management has demonstrated over the years that it knows how to build value for shareholders. Recent endeavors like drugstores and gas stations will take time to mature, but the underlying growth story for the company remains intact.

I continue to believe that $105 to $115 is a good fair value range for the ADRs and that opportunities to buy below $100 should be considered by investors who want some exposure to emerging market (especially Mexican) consumer spending growth. Although 2018 could be a little more challenging due to political issues, I believe high single-digit growth potential continues to support a healthy outlook for double-digit long-term returns.

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FEMSA Continues To Offer Attractive Value

PRA Group Back On Firmer Footing

The recent past hasn't been pretty at PRA Group (PRAA), but with a couple of better quarters in hand, it seems reasonable to think that this collector of charged-off receivables is back on track. I don't believe it is realistic to expect the company to get back to the ROE levels of yesterday - the market has changed, and PRA is a much bigger share of the market now - but double-digit ROEs seem possible again, as well as a return to healthy free cash flow generation.

PRA Group is a tough company to analyze, but I expect to see improving collection efficiency metrics, as well as increasing supply, in the coming years. That supports a fair value in the high $30s to low $40s today and makes this a name worth considering on pullbacks.

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PRA Group Back On Firmer Footing

Wright Medical May Be Hobbled Until The Ankle Business Re-Accelerates

Wright Medical (WMGI) shareholders didn't seem to be thrilled about the merger with Tornier, but looking back, it is the Tornier investors who probably have more to regret about that deal. Although backward-looking hypotheticals only get you just so far, it has been the shoulder business that Wright acquired in the Tornier deal that has been driving the business, while Wright's prior core lower extremity/ankle business has weakened considerably in the last two years.

I don't believe the lower extremity business is damaged beyond repair, but management absolutely has to execute better than it has and start regaining momentum versus rivals like Stryker (SYK) and Integra (IART) if the shares are to perform better. I'm still modeling long-term revenue growth in the high single digits and long-term FCF margins in the 20%s, which supports a mid-$20s fair value, but Wright Medical's weak execution makes this a "show me" stock at this point.

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Wright Medical May Be Hobbled Until The Ankle Business Re-Accelerates

At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

It has gone from bad to worse at BRF SA (BRFS), as frequently happens when a company reaches a "critical mass" of mismanagement and poor decision-making. BRF's big miss with fourth quarter results put the cap on what was already a pretty poor 2017, and though BRF has a new management team and a new plan, major investors seem to want yet more change.

I've always thought it was going to take time and patience (a lot of patience…) for BRF to develop, and I don't believe the company is unfixable. That said, there's a lot of work to be done in both the domestic and international operations and plenty of volatility inherent in a commodity-driven business with significant international emerging market exposure. I believe mid-to-high single-digit revenue growth is still possible and, coupled with mid-to-high single-digit FCF margins, can still support a $10-plus fair value from here, but this is a high-risk call that is going to need a couple of years to really play out.

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At BRF SA, The Flesh Is Still Weak And Investor Spirits Aren't So Willing

Outside Of Energy, SPX Flow Still Waiting For The Turn

At a time when many industrial companies are seeing strong cyclical recoveries, SPX FLOW (FLOW) is still well off the pace of many of its industrial peers. Although markets like energy, air treatment, and chemical processing still have scope to improve from here, the company's food and beverage segment is likely to be a slower grower and SPX FLOW is going to have to start making more progress on share-of-wallet and internal margin improvement efforts.

Up more than a third from when I last wrote about the stock, I'm not as bullish on SPX FLOW now as I think the catch-up opportunity has largely materialized. There are multiple places where management could execute better over time, but I think those opportunities have to be considered in hand with the likely slower growth that SPX FLOW will see compared to many other industrials. I don't dislike the shares, but I don't see the opportunity I once did.

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Outside Of Energy, SPX Flow Still Waiting For The Turn

Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Everest Re (NYSE:RE) has long had a very good reinsurance business - although skewed toward property-catastrophe, the company’s focus on specialty/smaller lines and low overhead costs have helped generate pretty good returns even through recent weakness in pricing. What has been more impressive, though, has been the improvements in the insurance business - a business that management had elected to continue growing aggressively despite a pretty poor history of underwriting losses.

Everest Re management has done a lot to repair investors’ opinion of the insurance operations, and the company has also managed to benefit from M&A-driven dislocations in the market. Now, with insurance prices showing a little strength and higher rates supporting better investment returns, it’s not a bad set-up for the company. Between the too-high highs of last summer and the too-low lows of this past winter, I think Everest Re is more reasonably priced now, but “reasonable” in this case still suggests a total expected annual return in the low double digits.

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Everest Re's Strong Reinsurance, And Improved Insurance, Operations Are Building Value

Is It Too Late For An Early-Cycle Name Like Parker Hannifin?

Investors have an uncanny knack for swinging between worrying about nothing and worrying about everything. In the case of Parker-Hannifin (PH), it would seem that poorly-communicated, near-term margin issues are disappointing investors who favor margin improvement stories within the multi-industrial space, while worries about where Parker-Hannifin sits in the short-/mid-/late-cycle ecosystem are troubling other investors.

Although I do have some concerns about growth with Parker-Hannifin, I think the stock's valuation is interesting on both an absolute and relative basis, particularly given acceleration in orders and high valuations in the peer group. To me, the shares look priced for high-single-digit to low-double-digit total returns, and you could make an argument that a fair value in the $220s or $230s wouldn't be ridiculous.

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Is It Too Late For An Early-Cycle Name Like Parker Hannifin?

For Roper, More Of The Same Looks Like A Good Plan

What do you say about a company that has averaged a total annual return to shareholders of over 20% the last 15 years, has outgrown its multi-industrial peer group on organic revenue, and generates FCF margins in the 20%’s while shifting the model towards more recovering revenue? All I can really say about Roper Technologies (ROP) is that this is definitely a stock to keep in mind when the music stops and the market cools off.

I discussed the challenges of valuing a stock like Roper the last time I wrote about the company (in which time the stock has risen another 30%), and it’s no easier now. Including the company’s near-term M&A plans into the valuation would suggest a mid-to-high single-digit total annual return is still in play, and I would also note that Roper’s valuation relative to other multi-industrials like Danaher (DHR), Honeywell (HON), Illinois Tool Works (ITW), and 3M (MMM) hasn’t really changed all that much compared to a trailing multiyear average.

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For Roper, More Of The Same Looks Like A Good Plan