Thursday, September 18, 2014

Seeking Alpha: CapitaLand Remains Undervalued Amidst Challenging Property Markets

I previously thought that CapitaLand (OTCPK:CLLDY) looked like an undervalued property developer with balanced exposure to Singapore and China and strong portfolio diversification. The markets appear to have agreed, with CapitaLand's shares rising about 15% over the past six months - outperforming comps and peers like City Developments (OTCPK:CDEVY), Keppel Land (OTCPK:KPPLY), Global Logistics Properties (OTCPK:GBTZY), and Cheung Kong (OTCPK:CHEUY) (which I also liked and is up more than 10% over the past six months).

I believe that CapitaLand's decision to reacquire all of CapitaMalls Asia played a meaningful role in this outperformance, but I don't think that is the only trick up management's sleeve. Although the property markets in Singapore and China are in rougher shape now, I don't believe the company has much value at risk and there are attractive opportunities on the way to re-price below-market leases in its Chinese mall business. The key question is still whether or not management can lift ROEs back into the high single-digits or low double-digits, but I still believe that they can (and will) and that these shares have value to around $6.50/ADR.

I should also note here that CapitaLand is not particularly liquid as ADRs go. Investors should be careful when buying (limit orders are a good idea) or try to buy the much more liquid Singapore-listed shares, as most large brokers now make international trading available to retail investors at affordable commissions.

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CapitaLand Remains Undervalued Amidst Challenging Property Markets

Seeking Alpha: Endo's Bid For Auxilium Makes Sense

Endo International (NASDAQ:ENDP) has been very acquisitive over the past couple of years, using deals to not only leverage its tax-advantaged Irish domicile but bulk up what I believe is an underrated generics business. Tuesday's announcement of an offer to buy Auxilium (NASDAQ:AUXL) makes quite a bit of sense; not only is their potential tax leverage here, but Endo's strong legacy position in urology could improve uptake of Auxilium's key drug Xiaflex and recharge Endo's branded drug business.

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Endo's Bid For Auxilium Makes Sense

Seekng Alpha: Gordmans Stores Has Better Management, Will Results Reflect It?

Six months ago I described Gordmans Stores (NASDAQ:GMAN) as a "falling knife", but since then the shares have acted more like a sharknado. The stock's 45% drop since then can't be explained away by a difficult environment - stocks like Stein Mart (NASDAQ:SMRT), TJX (NYSE:TJX), and Ross Stores (NASDAQ:ROST) haven't been ripping higher, but they haven't been nearly as weak as Gordmans. Despite better inventory management, Gordmans can't seem to get its merchandising/assortments right and the comps and margins are suffering as a result.

Maybe, just maybe, things might be looking up. Gordmans recently named Andy Hall as the new CEO, replacing interim CEO T. Scott King who took over when Jeff Gordman announced his retirement earlier in the year. Hall brings good experience as the former CEO of Stage Stores (NYSE:SSI) and has already laid out some common sense near-term initiatives. Gordmans is still looking at a long road back to growth, and I wouldn't dismiss the competitive threat of the likes of TJX's T.J. Maxx and Marshalls, Kohl's (NYSE:KSS), or Wal-Mart (NYSE:WMT), but the absolute pounding that this stock has seen (down 75% over the past year) has already washed out a lot of expectations.

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Gordmans Stores Has Better Management, Will Results Reflect It?

Seeking Alpha: A Few Flickers From Torchmark

Until September began, my March call that Torchmark (NYSE:TMK) still offered some upside was looking okay, as the stock was doing a little better than other insurance names like Prudential (NYSE:PRU), MetLife (NYSE:MET), and Lincoln National (NYSE:LNC). After the S&P revised its outlook lower, though, the shares have shed a few percentage points on worries that management may have to pull back a bit on buybacks.

I suspect that the S&P action was less relevant from a fundamental perspective and more likely a good excuse for managers to take some gains on an insurance stock that had risen close to 60% over the past two years. What's more, there are a few suggestions in recent earnings reports that growth may be a little harder to come by in the short-to-medium term. While I still like the fundamentals here, and the shares haven't exactly shot through my prior target, this may be a case where investors want to shop around a bit.

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A Few Flickers From Torchmark

Wednesday, September 17, 2014

Seeking Alpha: Is It Time To Bottom-Fish For Vale SA?

If your company produces significant quantities of iron, you've had a tough year in the stock market. If your company only produces iron, it's been a pretty ugly year. Diversification has helped Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP), and Anglo American (OTCPK:AAUKY), but Vale (NYSE:VALE) and Fortescue (OTCQX:FSUGY) have seen their shares weaken significantly (down about 19% over the past twelve months) as iron prices continue to test predictions of just how low prices can fall before finding a floor.

It's dangerous to assume that commodity prices can't continue to fall once they've crossed the threshold where many/most producers operate at a loss (ask investors in met coal or uranium mining companies), but Vale is one of the rare iron ore miners that can still make money at current prices. With low prices starting to lead to production cutbacks and deferred mine expansion plans in various parts of the world, maybe this is a time to consider Vale shares. Brazil's election cycle still represents a risk, as does China's economy and the significant amount of low-cost iron supply available in Australia, but these shares do seem to hold some upside here.

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Is It Time To Bottom-Fish For Vale SA?

Seeking Alpha: Braskem Hamstrung By Brazil's Industrial Malaise

Continuing my run through Brazilian commodity companies that have had disappointing results this year, I come to Braskem (NYSE:BAK) - Brazil's large polyolefin and PVC producer. Like the steel companies Gerdau (NYSE:GGB) and CSN (NYSE:SID), Braskem has underperformed in the face of weakening domestic demand and fears that the Brazilian national election could bring in a government less supportive of the structural barriers that allow them to charge higher prices in Brazil.

I liked Braskem six months ago and I still believe the shares are undervalued. Even amidst an underwhelming domestic market, the general expectation is that Braskem will still see year-on-year EBITDA growth in the high single-digits for 2014 and double-digit growth in 2015. What's more, I think Braskem is looking at a window of opportunity (before major cracker project start-ups in the U.S.) where its naptha-based production can still be quite profitable. There's a not-so-fine line between being patient and being wrong, though, and these shares could still disappoint further.

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Braskem Hamstrung By Brazil's Industrial Malaise

Seeking Alpha: CSN's Highly Leveraged To Recoveries In Brazil's Economy And Global Iron Prices

Take all of the issues with the Brazilian steel industry, weakening domestic demand and increasing import competition in particular, and add on weakness in the iron ore market and a lot of leverage and you have the challenges facing Companhia Siderurgica Nacional (or CSN) (NYSE:SID) today. CSN does have some definite positives working in its favor, including strong share in the higher-value Brazilian galvanized steel market, high domestic prices, and low-cost iron operations, but plunging iron ore prices and a weak domestic steel market have largely overshadowed them.

As operating companies, I like Ternium (NYSE:TX) and Gerdau (NYSE:GGB) better than CSN. Both are more geographically diversified and have yet to reap the full benefits from upgrading their production portfolio and integrating their inputs. That said, recoveries often benefit stressed companies more and CSN could outperform if Brazil's recovery comes sooner (and/or stronger) than expected or iron ore prices recover.

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CSN's Highly Leveraged To Recoveries In Brazil's Economy And Global Iron Prices

Seeking Alpha: Brazil's Malaise Drags Gerdau Down

I thought that Brazilian steel producers like Gerdau (NYSE:GGB) were beaten down badly enough earlier this year that they'd be better stocks for the remainder of the year. That was a big mistake, as the struggles of Brazil's economy have only gotten worse. With new construction activity slowing down and auto production down by double-digits, Chinese imports on the increase, and domestic prices weakening, Gerdau shares have fallen another 15% since that March piece.

Stubbornness can become very expensive in investing, but I do think Gerdau can do better. I don't see that improvement as being too likely this year though, and the company's North American operations aren't big enough to outweigh the weak results in Brazil. There's no reason to own Gerdau if you think 2014 results are more or less the "new normal", but if construction and industrial production recover after Brazil's election, Gerdau could be a prime beneficiary.

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Brazil's Malaise Drags Gerdau Down

Seeking Alpha: Skepticism Weighs Heavily On Ternium

This has been a doubly frustrating year for Ternium (NYSE:TX), as this Latin American steel company has languished alongside other steel producers like ArcelorMittal (NYSE:MT) and Gerdau (NYSE:GGB) while Nucor (NYSE:NUE) and U.S. Steel (NYSE:X) have enjoyed better years. I say doubly frustrating, as although many Latin American industrial companies have done fairly well, worries about the economic situations in Argentina and Brazil have sapped investor enthusiasm.

While I liked the shares six months ago, they have fallen another 10% since then and a sizable second quarter EBITDA miss did not help. I still believe that Ternium is well-placed to benefit from Mexico's growing auto sector and improving spending on construction and energy. Likewise, I believe the eventual exploitation of Argentina's sizable energy reserves will support steel demand there. That all sounds nice, but the "when" is very much in doubt and the prospect of weak steel prices fueled by low iron ore prices and weak Brazilian demand is real. Ternium seems undervalued on what I believe are trough multiples to 12-month EBITDA, but the prospect of further downward revisions cannot be ruled out.

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Skepticism Weighs Heavily On Ternium

Tuesday, September 16, 2014

Seeking Alpha: BB&T Buys Again And Restates Its Case

To its credit, BB&T (NYSE:BBT) continues to do what it needs to do. The company's management is looking to deploy capital that it can't use in its lending operations, and M&A is likely to remain a centerpiece of that strategy. Management is also remaining focused on reducing operating expenses - a key item on the to-do list for a company that otherwise generates a lot of positives from its asset base. Neither the recent Investor Day nor the acquisition of Bank of Kentucky (NASDAQ:BKYF) really change the long-term value to a significant extent, but they're positive incremental developments for a company/stock that remains undervalued.

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BB&T Buys Again And Restates Its Case

Seeking Alpha: Eastman Chemical's Taminco Deals Looks Solid

I had been bullish on Taminco (NYSE:TAM) for a little while, seeing it as an undervalued specialty chemical company with a strong foundation in functional amines, specialty amines, and crop chemicals. Eastman Chemical (NYSE:EMN) apparently shared my feelings, as the company announced an acquisition last Thursday at the $26 fair value I indicated in my last piece.

While there is a 30-day "go shop" period for Taminco, I'm not counting on a rival bidder to emerge (though Taminco is a relatively rare quality asset), and I look for Taminco to further Eastman's decade-long transition toward a specialty chemical focus. The immediate upside for Eastman looks relatively modest (around 5%), but I wouldn't underestimate the added diversity, specialty markets, and synergy potential that Taminco will bring with it.

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Eastman Chemical's Taminco Deal Looks Solid

Seeking Alpha: Siemens Has Changed The Tone, But Can It Deliver?

For quite some time, the story on Siemens (OTCPK:SIEGY) was one of almost perpetual disappointment and questions as to when management would get it together and deliver on the underlying potential of a business that has leadership in multiple attractive markets. With management's strategy update in May, though, it seems like a lot of sell-side analysts have come back on side with Siemens and are looking for good revenue and margin progression as management takes a more realistic view of costs and its true core markets.

I'm still a bit more skeptical. The shares of Siemens have kept up with peers like General Electric (NYSE:GE) and Rockwell Automation (NYSE:ROK) over the past year, while outdistancing those of ABB (NYSE:ABB) and Schneider (OTCPK:SBGSY) as most of the whole sector trails Honeywell (NYSE:HON). I do like Siemens' focus on electrification, automation, and digitalization, but it takes some pretty ambitious assumptions to get near the price targets floated by bullish sell-side analysts. While I'm no Siemens-hater by any stretch, I just don't see the great bargain that others seem to feel is available today.

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Siemens Has Changed The Tone, But Can It Deliver?

Seeking Alpha: Allison Transmission Still Looking At A Multiyear Sales Effort Outside The U.S.

Orders continue to roll in pretty nicely for large commercial trucks, but major suppliers like Cummins (NYSE:CMI), Tenneco (NYSE:TEN), and Allison (NYSE:ALSN) haven't really been showing it in their share prices. Whether it is concerns about weak conditions in Latin America or valuations that got a little overheated earlier in the year, these shares haven't done much since I last wrote about Allison in March.

I thought back in March that valuation might be getting a little stretched, but with this stretch of relative underperformance, I'm getting more positive on Allison. The company will likely see some headwinds created by Ford (NYSE:F) and Volvo (OTCPK:VOLVY), but I like the company's opportunity to leverage its new TC-10 transmission into greater metro Class 8 share. Longer term, the key question remains whether or not the company can coax companies in Europe, Latin America, and Asia to adopt automatic transmissions despite the greater success. I think the process will take some time, but in the meantime Allison offers attractive margins and cash flow leverage, though the valuation is still not an obvious "gimme".

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Allison Transmission Still Looking At A Multiyear Sales Effort Outside The U.S.

Seeking Alpha: IPG Photonics Continues To Grow, While Growing Its Addressable Markets

Fiber laser pioneer IPG Photonics (NASDAQ:IPGP) continues to execute pretty well, though you may not know it from the reaction of the market. I still liked the long-term fundamental story back in March, but thought the valuation was getting a little steep. Since then, the shares have gone almost nowhere (while large laser rival Rofin-Sinar (NASDAQ:RSTI) has declined a few percentage points).

I think the last six months or so may be an example of a pause that refreshes. Fiber lasers continue to gain share in core markets like cutting, welding, and marketing, and IPG Photonics continues to develop products for multi-hundred million dollar applications like UV microprocessing, aluminum and high-strength steel welding, and sapphire glass cutting. IPG Photonics continues to leverage its cost and manufacturing advantages and hasn't seen a particularly deleterious impact from Chinese competition yet. With the shares looking about 10% undervalued, I'm warming up to IPG Photonics as a stock to acquire at these prices.

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IPG Photonics Continues To Grow, While Growing Its Addressable Markets

Seeking Alpha: Applied Optoelectronics Looking To Two Primary Growth Drivers

Ideas tend to breed other ideas - doing my regular and routine due diligence on component and subsystem companies like Finisar (NASDAQ:FNSR), Avago (NASDAQ:AVGO), and JDS Uniphase (NASDAQ:JDSU) has led me to dig deeper into Applied Optoelectronics (NASDAQ:AAOI). This company looks like an interesting play on the 10G/40G data center upgrade cycle, as well as fiber to the home, with a strong core competency in lasers. This is a highly competitive space, though, and I think readers may do well going into it with the assumption that any investment relationship is likely not to be of the long-term variety.

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Applied Optoelectronics Looking To Two Primary Growth Drivers

Monday, September 15, 2014

Seeking Alpha: Is Intercept Pharmaceuticals Building The Next Great Specialty Franchise?

As great as Alexion (NASDAQ:ALXN) has shown itself to be with its orphan drug Soliris for rare kidney ailments, Intercept Pharmaceuticals (NASDAQ:ICPT) may be establishing a similar path in the until-recently overlooked world of liver disease outside of hepatitis C. Intercept's lead compound OCA appears to have broad utility as an anti-inflammatory, anti-fibrotic liver treatment and the efficacy in nonalcoholic steatohepatitis (or NASH) may unlock potential akin to that of new HCV treatments.

It is important to point out, though, that there is a lot of risk in biotech investing and particularly in companies where the expectations are almost solely built around a single product. Making matters worse, there is considerable uncertainty as to the true number of potential patients for many of the diseases Intercept is targeting, to say nothing of uncertainty regarding competition, pricing, and clinical endpoints for clinical trials. Despite these risks, I believe Intercept ought to be trading closer to $420 today and even then I consider the underlying assumptions to be quite conservative.

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Is Intercept Pharmaceuticals Building The Next Great Specialty Franchise?

Saturday, September 13, 2014

Seeking Alpha: Allana Potash Continues To Drift Amidst Ag Malaise

The bloom is definitely off of the ag bull market, as lower crop prices have soured investors on seed, ag equipment, and fertilizer companies. None of that is positive for Allana Potash (OTCPK:OTCPK:ALLRF, (AAA.TO)), nor is the fact that potash pricing remains stuck around $350 per ton. These shares have continued to weaken since the company announced a major tie-up with Israel Chemicals (OTCPK:ISCHY) and since my last piece. While the Global X Fertilizers/Potash ETF (NYSEARCA:SOIL) is down about 2% since my mid-March update on Allana, the company's shares themselves are down another 20% or so.

Granting that investors were disappointed in the terms of alliance with ICL, and granting that there is still more dilution likely on the way (as the company still needs to raise debt, and probably equity, to fund its Danakhil project), I continue to believe these shares are undervalued. By no means is Allana anything other than a high-risk investment, but ICL appears committed to the project, and I believe the current price doesn't give much credit to the value of the project.

While I generally recommend avoiding "F-type" ADRs and buying shares on local exchanges when possible, Allana's ADRs are more liquid than most unsponsored ADRs. Even so, I'd advise owning the Toronto-listed shares when/where that is an option.

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Allana Potash Continues To Drift Amidst Ag Malaise

Seeking Alpha: Vectura Group Following A Familiar Path

Investors who like Nektar Therapeutics (NASDAQ:NKTR) or Alkermes (NASDAQ:ALKS) may want to take a look at Britain's Vectura Group plc (OTC:VEGPF) (VEC.L). Although not a household name, Vectura has established itself as a technology leader in the formulation and manufacture of inhaled drugs and devices to administer these drugs. Vectura boasts a key partnership with Novartis (NYSE:NVS) for potential blockbuster Ultibro as well as Seebri, as well as a diverse pipeline of generic and branded respiratory drugs.

Vectura Group has multiple avenues to growth. The company can continue its policy of being a partner of choice for companies that wish to enter the large (and still under-served) market for therapies for respiratory ailments like COPD and asthma, or the company can choose to start developing and commercializing drugs on its own - transitioning from earning mid-single digit to mid-teens royalties to being a more fully fledged specialty pharmaceutical company. While there are risks associated with the performance of its licensing partners, clinical development risks, and potential risks from a long-term change in strategy, I believe Vectura could be almost 50% undervalued today.

Readers considering these shares should note that the U.S. ADRs are of the "F-type" and not very liquid. The London-listed shares (VEC.L) are considering more liquid and most major brokerages will allow clients to trade on major foreign exchanges like the LSE.

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Vectura Group Following A Familiar Path

Friday, September 12, 2014

Seeking Alpha: F5 Networks Executing Well And Building Out The TAM

A key item on F5's (NASDAQ:FFIV) management to-do list for 2014 was to make convincing progress with software and hardware offerings that continue to expand the company's total addressable market beyond its legacy application delivery controllers (or ADCs). So far, so good, as F5 has seen strong interest in its security offerings while continuing to build out a comprehensive array of offerings for the service provider market. I'm a little more cautious now given the valuation, but five straight beat-and-raise quarters shouldn't be overlooked and the valuation is not extreme or out of line relative to the opportunities.

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F5 Networks Executing Well And Building Out The TAM

Seeking Alpha: Colfax Still Enjoying The Fruits Of Superior Growth Potential

Not unlike Danaher (NYSE:DHR), the very successful conglomerate to which Colfax (NYSE:CFX) is so often compared, the problem with Colfax is not the quality of the businesses, the margin/growth potential, nor the quality of management or long-term opportunity. The issue is valuation. Colfax bulls seem to be so eager to find that next Danaher that they continue to award Colfax very generous multiples even despite multiple quarterly misses in the last two years. Much as I admire Colfax and find the growth opportunity to be compelling, I can't get comfortable with a take-no-prisoners valuation today.

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Colfax Still Enjoying The Fruits Of Superior Growth Potential

Seeking Alpha: Microsemi Puts Cash To Work In M&A And Buybacks

Back on July 25, I predicted that Microsemi (NASDAQ:MSCC) would likely stay active in the M&A arena and less than two months later the company has delivered - announcing the acquisition of Centellax. Microsemi also took the opportunity to introduce a new share buyback program and to confirm its fourth quarter growth guidance. Although none of these announcements meaningfully change the near-term picture for Microsemi, they're the sort of incremental positive moves that I've come to expect from this company and the Centellax deal could follow in the footsteps of past deals like Actel that add meaningful value down the road.

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Microsemi Puts Cash To Work In M&A And Buybacks

Seeking Alpha: Will Gamesa Move From Survive To Thrive?

There has been plenty of skepticism regarding Spanish wind turbine company Gamesa's (OTCPK:GCTAY) ability to continue to compete in the volatile and very competitive global wind turbine market. While Gamesa has had past challenges with product quality, project financing, and its cost structure, management has been doing a good job of executing a turnaround plan based on better margins and a focus on growth markets like India, Brazil, and Mexico. I do think Gamesa can continue to outperform on volumes and margins, but a lot of this is in the share price now and I believe Gamesa management must begin convincing investors that it has a follow-on strategy in place to not just survive in the market but to thrive as a leading player.

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Will Gamesa Move From Survive To Thrive?

Seeking Alpha: Layne Christensen Bumping Along The Bottom

Water infrastructure company Layne Christensen (NASDAQ:LAYN) has been a hurry-up-and-wait story for a while now, and while there have been some encouraging signs of life in parts of the business, there is still a lot work ahead of the company. I do believe the shares look undervalued on a long-term basis, but this company has disappointed a lot of investors over the years and the departure of the CEO, CFO, and chief accounting officer in quick succession make me nervous, as does the company's ongoing leverage to highly competitive, lower-margin businesses.

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Layne Christensen Bumping Along The Bottom

Thursday, September 11, 2014

Seeking Alpha: Arch Capital Getting Attractive As Its Markets Get Less So

Arch Capital (NASDAQ:ACGL) is often lauded as a well-run insurance and reinsurance company and a good stock to own for those seeking more defensive exposure to insurance. Interestingly, while Arch Capital may be labeled as defensive because of management's disciplined underwriting and strong capital management, Arch Capital's shares have underperformed peers like ACE Limited (NYSE:ACE), RenRe (NYSE:RNR), and XL Group (NYSE:XL) by more than 10% on a year-to-date basis.

I didn't like the valuation all that much six months ago, but down another 5% from then I'm starting to warm up to the stock. I like the potential for Arch to be a share-taker in the mortgage insurance industry, and I expect the company's specialty insurance business to be stickier through this tough pricing cycle than others apparently expect. The reinsurance business is a risk and I do worry about an overall downward shift in valuation and sentiment for insurance stocks, but these shares are starting to look tempting.

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Arch Capital Getting Attractive As Its Markets Get Less So

Seeking Alpha: Triangle Petroleum's Presentation, Not Performance, Seems To Be The Issue

Sometimes how you manage the Street matters almost as much to the performance of your stock as how you manage the business. At first glance, Triangle Petroleum's (NYSEMKT:TPLM) fiscal second quarter results should have pleased investors, and the stock was up prior to the company's conference call. Unfortunately, management didn't really address some questions about production with the specificity that investors would prefer and a longer timeline to potentially breaking up the business also seemed to discourage some investors.

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Triangle Petroleum's Presentation, Not Performance, Seems To Be The Issue

Seeking Alpha: 'Good Enough' Is Good Enough From ABB's Capital Markets Day

Investors who were expecting revolutionary changes from ABB (NYSE:ABB) at its Capital Markets Day, as opposed to evolutionary tweaking and fine-tuning, were setting themselves up for disappointment but ABB delivered a pretty positive message overall. Management sounds increasingly confident that the troublesome power business is under control, and also laid out some credible arguments as to why this is a worthwhile business for the long term. Some may be disappointed that ABB seems disinclined to pursue large M&A or a company-changing strategy shift, but I'd call this day a success and the shares look like one of the few bargains in the industrials space.

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'Good Enough' Is Good Enough From ABB's Capital Markets Day

Wednesday, September 10, 2014

Seeking Alpha: HD Supply Outgrowing Its Markets At An Accelerating Rate

I liked HD Supply (NASDAQ:HDS) as a play on recovering construction and infrastructure markets back in March, but I wasn't expecting a nearly 25% move in the shares over the next six months. This was not just a "rising tide lifts all boats" sort of move either - industrial distributor MSC Industrial (NYSE:MSM) and electrical distributor WESCO (NYSE:WCC) are both up over that period as well, but only by about 3% and 5%, while Rexel (OTCPK:RXEEY), Wolseley (OTCQX:WOSYY), and Fastenal (NASDAQ:FAST) are in the red over that stretch. What has helped HD Supply greatly is that management is delivering on its guidance and establishing credibility with its plans to outgrow its underlying markets by a meaningful amount over the next few years.

I still believe that HD Supply is more of a momentum play than a value story. Even with expectations of a construction/infrastructure recovery and internal growth initiatives supporting double-digit growth over the next five years and long-term sales growth of 8%, I can't really get to an attractive discounted cash flow number. I don't expect that to matter much, though, so long as the company can continue to deliver above-market growth and ongoing margin leverage.

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HD Supply Outgrowing Its Markets At An Accelerating Rate

Seeking Alpha: Hoya Corp Managing For Growth *And* Margins

Japan's Hoya Corp. (OTCPK:HOCPY) is what I think a lot of American investors wish more Japanese companies were like. Hoya focuses on markets where it has strong share (instead of operating numerous sub-scale businesses), continually looks to drive out costs and improve margins, and is comparatively eager to consider M&A and the return of capital to shareholders. It also happens to operate solid businesses, with the company's legacy electronics and imaging businesses producing good cash flow and the health care and medical businesses offering better long-term growth.

Where Hoya is more like typical Japanese equities is in valuation. Japanese equities frequently trade with lower implied discount rates, which can make it hard to find attractively-priced companies by DCF methodologies. I liked Hoya six months ago despite some reservations about valuation, and the shares have risen another 12% since then (about 16% for the Tokyo-listed 7741.T shares). Hoya doesn't look undervalued, but the company has an opportunity to make value-building acquisitions today and I'd at least consider keeping this name on a watch list.

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Hoya Corp Managing For Growth *And* Margins

Seeking Alpha: MTN Group Doing Pretty Well Despite Operating Challenges

Up more than 30% over the past year and more than 10% since my last update, I can't really complain about MTN Group (OTCPK:MTNOY). Although the company still has a lot of work to do in South Africa, and maybe more work to do than is commonly appreciated in Nigeria, the company's overall trends in subscribers and margins are looking pretty good. 3G and data remain significant growth drivers, as does mobile money, but MTN Group's valuation seems to largely reflect those opportunities. I'm reluctant to sell a well-run and broad-based play on Africa that could generate double-digit long-term FCF growth, but I can't claim that today's price is a tremendous bargain for new investors.

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MTN Group Doing Pretty Well Despite Operating Challenges

Seeking Alpha: Wabtec Is High-Priced And High-Quality In Equal Measure

Westinghouse Air Brake Technologies (NYSE:WAB), or Wabtec, is the sort of company that chronically only looks cheap in the rear view mirror. Wabtec has strong share in the relatively concentrated U.S. market for technologies and components that go into rail cars, locomotives, and transit cars/locomotives, and is moving to replicate that share overseas. Add in a willingness to acquire its way into new markets and an increasing mix of electronic components, and the basic market opportunity looks appealing.

Now, what do you want to pay for it? Wabtec already trades at more than 13x forward EBITDA and appears to price in mid-to-high teens annual FCF growth for the next decade. There's little argument that Wabtec is a leader in large markets and produces strong returns on capital, despite an aggressive ongoing M&A policy. For investors who can take a "don't worry, be happy" view on valuation and/or make a credible argument that Wabtec's growth rate will exceed that which is already implied in the valuation, Wabtec could still be a name to consider but value-focused investors may find it a harder case to make.

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Wabtec Is High-Priced And High-Quality In Equal Measure

Tuesday, September 9, 2014

Seeking Alpha: Arcos Dorados Hits Bottom, Finds A Shovel

Arcos Dorados (NYSE:ARCO) has been every kind of lousy, falling another 28% since the last time I wrote about the stock. Since that last article, the situation in Venezuela has gotten worse and between Brazil, Argentina, Venezuela, and Mexico, Arcos Dorados has problems in markets that represent around 90% of the business. If that wasn't enough, I believe management's options to improve margins are more limited than I previously appreciated and the company is uncomfortably sandwiched between capex obligations to McDonald's (NYSE:MCD), violations of its debt covenants, and limited cash flow prospects.

Even with a hack-and-slash to growth expectations, shares could be more than 30% undervalued on a long-term cash flow basis but I have to admit less and less confidence in the long-term outlook for Arcos Dorados. Instead, I'm more willing to value the stock on 8x 12-month EBITDA, which works out to just $7/share. Maybe my capitulation here marks some sort of bottom, and I do still believe that the combination of McDonald's brand value and an under-penetrated fast food/quick service sector in Latin America can still produce value, but you have to have an iron-clad risk appetite to hold this name right now.

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Arcos Dorados Hits Bottom, Finds A Shovel

Seeking Alpha: Copa Holdings Seeing Turbulence, But Still A Top-Notch Airline

Through the third week of July, my March call to not worry too much about the problems Copa Holdings (NYSE:CPA) was facing in Venezuela seemed like a good one - the shares were up 25% as the company continued to enjoy 20%-plus earnings growth on strong capacity growth and firm pricing. Unfortunately, Copa's second quarter report sourced investors on the shares as management increased its capacity reduction plans for Venezuela and lowered margin guidance as a result, leading to flat net performance relative to my last article.

I'm not sure why the guidance reduction was such a surprise. Avianca (NYSE:AVH) and Gol Linhas (NYSE:GOL) had been reducing exposure to Venezuela and Copa management indicated in May that they'd follow suit, and it was (or should have been) well-known that Venezuela was an uncommonly profitable market for Copa. Copa's update for July trends was not positive, though, and it is going to take some time to work past the Venezuela impact and reassure the Street that this is still a very profitable airline.

I believe Copa is still a good airline, a good growth story, and a good name to own for international diversification. GOL is probably an easier name to own right now (and undervalued in its own right), but I still see solid opportunity at Copa. Even I take a pretty conservative cut to my earlier numbers, I come up with a fair value of close to $140 and $150-plus is not that hard to support.

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Copa Holdings Seeing Turbulence, But Still A Top-Notch Airline

Seeking Alpha: Belle International Fairly Popular Despite Some Core Weakness

It is certainly true that not all retail is the same and that has been quite clear over the last six months in China's retail sector. Food retailers like Sun Art (OTCPK:SURRY) and China Resources Enterprise (OTCPK:CRHKY) are struggling through weak same-store sales growth, but footwear and sportswear retailers like Belle (OTCPK:BELLY), Daphne (OTCPK:DPNEY), and ANTA Sports (OTCPK:ANPDY) are doing quite a bit better despite unimpressive same-store growth in the footwear business.

I have mixed feelings about Belle shares after this better than 10% move since my last update. I think Belle has a very good business (six of the top ten women's footwear brands in China and a long run of double-digit returns on capital), but management still has a lot of work to do with its online strategy. I'm also a little concerned about valuation, as the market seems to already be pricing in at least 8% annual free cash flow growth across the next decade.

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Belle International Fairly Popular Despite Some Core Weakness

Seeking Alpha: China Resources Enterprise Languishing Over Short-Term Concerns

Another six months are in the books, and little has changed for the better at China Resources Enterprise (OTCPK:CRHKY). The Chinese food retail environment continues to be a tough one, with most of the major players seeing their comps turn negative. I believe CRE remains well-placed to benefit from growth in its beer JV and beverage business, and I continue to expect management to drive better long-term results from the Tesco (OTCPK:TSCDY) joint venture. In the meantime, though, it will be hard for these shares to get ahead while the Chinese food retailing market remains weak and while investors remain concerned over the near-term losses that CRE will absorb from the Tesco JV.

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China Resources Enterprise Languishing Over Short-Term Concerns

Seeking Alpha: BB&T Makes A Solid Acquisition, Needs To Impress At Its Investor Day

Since missing sell-side estimates for the second quarter and guiding to slower loan growth and higher expenses, BB&T (NYSE:BBT) shares have had a rougher go of it. While the SPDR S&P Bank ETF (NYSEARCA:KBE) has climbed more than 1% since BB&T's report, and direct rivals like Wells Fargo (NYSE:WFC), PNC (NYSE:PNC), and Bank of America (NYSE:BAC) are all in the green, BB&T shares have fallen more than 3%.

I believe that BB&T still has a lot to offer investors. The company is continuing to build its franchise, as seen in a recent deal for Citi (NYSE:C) branches in Texas, and will be hosting its first Investor Day in six years on September 11. The branch acquisition is a good use of capital to grow the business and this Investor Day is a chance to convince the Street that the company has a good plan for cost reduction, loan growth, and capital deployment. I believe BB&T shares are about 10% undervalued today, making it one of the better risk/reward/quality trade-offs in the banking sector right now.

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BB&T Makes A Solid Acquisition, Needs To Impress At Its Investor Day

Seeking Alpha: Is Roche At Risk Of Losing Its Way?

By just about any reasonable standard, Roche (OTCQX:RHHBY) is an exceptional pharmaceutical and diagnostics company. Through internal efforts and acquisitions large and small (particularly Genentech), Roche has become one of the largest players in oncology, with particular strength in biologics. That strength has in turn led to double-digit free cash flow growth over the past decade and solid recent share price performance.

As a shareholder, though, I'm starting to get a little concerned by some of the changes at and around Roche. I might be making mountains out of mole hills, but I also remember what a mentor told me when I joined the buy-side in my mid-20's, "Your job now is to be a professional worrier; it's the things you don't worry about and check out that will bite you in the ". With that in mind, while I see a lot of positives at Roche that merit ongoing ownership, the direction of the firm does leave me more willing to consider selling the shares.

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Is Roche At Risk Of Losing Its Way?

Seeking Alpha: Occidental Has A Good Plan, And Some Value Left

Despite relatively good returns on capital and a solid asset base, Occidental Petroleum (NYSE:OXY) hasn't really been at the top of the Street's list of favorites in the oil and gas sector. Now, management is pushing on with an ambitious restructuring plan that will see its once-core California business spun out on its own, a likely sell-down of its assets in the Middle East and North Africa, and a more aggressive drilling program in the Permian. All told, Occidental should be looking at better production growth and stronger returns than most large peers, with an enhanced oil recovery program supporting a decent dividend. A combination valuation methodology supports a fair value above $110, which I think is a decent implied return.

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Occidental Has A Good Plan, And Some Value Left

Monday, September 8, 2014

Seeking Alpha: Is Now The Time For Essex Rental?

The past year has been a pretty good one for the shares of at least some companies leveraged to commercial construction activity. The crane companies (Terex (NYSE:TEX), Manitowoc (NYSE:MTW), and Manitex (NASDAQ:MNTX)) had a rough time in the wake of second quarter results, they're up 27% to 42% over the past year. United Rentals (NYSE:URI) and Hertz (NYSE:HTZ), both of which rent various types of equipment to the construction industry, have also joined in, climbing over 100% and almost 20%, respectively.

Then there is Essex Rental (NASDAQ:ESSX). One of the largest owners and renters of crawler cranes in the United States, these shares are down almost 40% as the company continues to languish with weak utilization of traditional crawlers and uninspiring revenue and EBITDA performance. It seems to be getting better, though, as the company is implementing a new customer-centric strategy, expanding some of its offerings, and seeing improving utilization and order inquiries. Add in pretty positive recent trends in non-residential construction indexes and maybe this marks a potential turnaround point.

Before going further into the details, it is important to note that Essex is tiny (a sub-$100 million market cap) and not very liquid (an average volume of less than 50K shares/day). That increases the risk and makes it less likely that Essex Rental will gain the attention and support of sell-side analysts.

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Is Now The Time For Essex Rental?

Seeking Alpha: Synergy Pharmaceuticals Could Be A Diamond In The Rough

For a biotech that has reported encouraging clinical results and seeks to address a significant market, Synergy Pharmaceuticals (NASDAQ:SGYP) can't get much love. I can appreciate that there's a funding overhang here and that the market doesn't always embrace drugs that look like "me too's", not to mention a general move away from risky smaller names, but I think those concerns miss a lot of positives at this development-stage biotech.

I don't think plecanatide is just a Linzess wannabe, and I believe direct-to-consumer marketing efforts from Sucampo (NASDAQ:SCMP) and Actavis (NYSE:ACT) (and maybe Salix (NASDAQ:SLXP) down the road) will raise awareness of prescription treatments for constipation and IBS. Moreover, I think plecanatide offers some meaningful quality-of-life advantages that may be underappreciated today. It seems to me that the market currently values Synergy as though it will be forced to market plecanatide on its own (an expensive proposition), but I believe some sort of partnering arrangement, if not an outright sale of the company, is more likely and these shares look undervalued today.

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Synergy Pharmaceuticals Could Be A Diamond In The Rough