Thursday, June 14, 2018

Excellent Results Supporting A Steep Valuation At Halma

I really like the businesses at Halma (OTCPK:HLMAF) (HLMA.L), but when I last wrote on the company in January, I thought there wasn't much room for the already-steep multiples (on both an absolute and relative) to expand much further. For a little while that call worked, with the shares losing about 10% of their value between late January and late March, but a positive late March update and renewed enthusiasm for companies exposed to the oil/gas recovery and commercial buildings sparked a big rally that has left the shares about 10% higher than they were back in late January.

I am still a big fan of Halma's business mix and management's strategy to augment its core strengths with selective M&A and greater internal investments in digital capabilities (including IoT and analytics). It's also very easy to like a company that is logging double-digit organic revenue growth and even stronger order growth. The "but" remains valuation; the shares are trading at multiples more than 50% above the company's long-term averages and close to 33% above a peer group of quality growth companies. Given the level of expectations built into the price, I'd rather err on the side of missing more of the run than risk jumping in ahead of even a partial reversion to the mean.

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Excellent Results Supporting A Steep Valuation At Halma

Fortive Following A Familiar Pattern

If you're well-acquainted with Danaher (DHR) and Roper (ROP), Fortive's (FTV) strategy is going to look pretty familiar in at least some respects. Like both Danaher and Roper, Fortive's management doesn't want to be the classic sort of industrial conglomerate and is instead pivoting towards more technology-driven markets, and particularly those with higher service/recurring revenue components. It's no surprise, of course, that Fortive would be similar to Danaher (from which it was spun out), and the company has yet to really follow Roper's SaaS focus, but in any case, Fortive management is not afraid to pay big multiples for businesses that it believes will generate attractive long-term margin profiles.

As far as the shares go, I'm not inclined to chase them here. The stock already seems to factor in healthy future cash flow growth, and I'm not willing to count on significant further expansion in short-term multiples for the industry.

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Fortive Following A Familiar Pattern

Dassault Looks Well-Placed For The Next Era Of Manufacturing, But Valuation Is Problematic

French PLM software leader Dassault Systemes (OTCPK:DASTY) is part of the reason I’m much too gray for somebody in their 40s – while I love the business that the company is in, and its leverage to the ongoing “digitalization” of the manufacturing sector, the valuation is pretty brutal for someone who considers themselves a GARP investor. Although I think investors who put more emphasis on the “Guh” part will be happy with the growth that Dassault delivers in the coming years, the valuation is just too much of a sticking point for me right now… even though it really won’t surprise me if I’m reading this three years from now and thinking, “man… I should have just bought it anyway”.

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Dassault Looks Well-Placed For The Next Era Of Manufacturing, But Valuation Is Problematic

Taking A Cue From Siemens, Rockwell Automation Partners With PTC

With Monday’s announcement of a strategic partnership between Rockwell (ROK) and PTC (PTC), two well-respected and perpetually-expensive players in industrial automation are coming a little closer together. Although this tie-up certainly won’t bring all of the benefits of an acquisition to Rockwell, integrating PTC’s strong IoT offerings with its own FactoryTalk offerings should meaningfully boost the data-gathering and analytical capabilities and advance Rockwell’s Connected Enterprise concept. Rockwell shares still don’t look cheap, but then they rarely do, and if management is right about the increasing role software will play in factory/process automation, this is an important long-term investment.

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Taking A Cue From Siemens, Rockwell Automation Partners With PTC

Alnylam Pharmaceuticals Continues To Develop Options Outside Of Amyloidosis

With a $10 billion market cap, it’s hard to call Alnylam (ALNY) overlooked, but I do believe the shares of this maturing biotech are undervalued as the company approaches a window that should see multiple new product approvals through 2020. Most recently, Alnylam has offered up some data that suggest growing opportunities outside its core amyloidosis programs.

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Alnylam Pharmaceuticals Continues To Develop Options Outside Of Amyloidosis

Broadcom Shares On Pause, But The Business Isn't

I expected some turbulence at Broadcom (AVGO) when I last wrote about the company, and that has indeed been the case, but the shares have held up reasonably well. While the SOX index is pretty much flat since the time of my last article on Broadcom, the company's shares are up close to 5% - more or less keeping pace with the Nasdaq (although the trailing one-year comparisons are much worse). Although the market has been concerned about the company's wireless business, with weak unit volumes at Apple (AAPL) and some share loss to Qorvo (QRVO), the company's wired business is still in fine shape and will likely accelerate as 2018 moves on. I continue to believe that Broadcom is among the better bargains in a sector where most of the cheaper-looking names are "scratch and dent" merchandise with some operational issues.

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Broadcom Shares On Pause, But The Business Isn't

Smiths Group Shows Its Serious About Potential Portfolio Changes

As it turns out, I was half-right - the shares have risen almost 20% since then, with the market taking notice (I believe) of the opportunities in the recovering energy sector, the expanded opportunities in detection, and the prospect for significant portfolio adjustments.

That latter point is highlighted by the acknowledgement from Smiths that it is exploring the possibility of some sort of business combination with ICU Medical (ICUI) for its medical business. While it's very early in the process, I believe Smiths' interest in making a transaction of this sort with its medical business shows that it is serious about active portfolio management and focusing on those areas where it can generate real long-term value.

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Smiths Group Shows Its Serious About Potential Portfolio Changes

Harsco Back On Offense

Harsco’s (HSC) management deserves a lot of credit for the turnaround efforts that have brought the company’s metal waste processing and reclamation business back into solid profitability, and the market has given them a lot of the credit. Now management is confident enough in the business to begin expanding it again, and the company’s acquisition of Altek moves the company into the aluminum waste processing business – a logical expansion into a large adjacent market. While the company did indeed pay up for this opportunity, the returns as the company rolls out a new platform technology should make this a good deal for shareholders down the road.

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Harsco Back On Offense

Are Somewhat Sluggish Order Comps A Risk For Hurco?

These are good days for machine tool companies, as orders have recovered nicely both in North America and in Europe driven by expanding production and the placement of aging equipment. Hurco (HURC) benefiting from this growth as well, but I'm a little concerned that the company's growth seems to be lagging industry growth in key markets like the U.S. and Germany. It's not a reason to sell yet, and the company's margins are developing pretty well, but it merits watching as I don't believe the shares are dramatically undervalued today.

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Are Somewhat Sluggish Order Comps A Risk For Hurco?

Good Weather And Better Management Have Shrunk SLC Agricola's Discount To Fair Value

Farming is a tough business, but it is a little easier in South America where favorable climate, soil conditions, and operating costs generally allow for attractive production costs for companies like Adecoagro (AGRO), Cresud (CRESY), and SLC Agricola (OTCPK:SLCJY). Even so, it has historically been difficult for SLC Agricola to generate good returns from its farming operations, as management often prioritized growth over profit and return maximization, and the stock often traded at a wide discount to its underlying fair value.

Quite a lot has changed over the past couple of years. Not only has awful weather that hurt results in 2016 switched to great weather in 2017 and early 2018 (at least in SLC Agricola’s growing areas), but management’s reprioritization around margins and returns has led to improved profits and cash flow generation. The market has noticed, with the ADRs up almost 90% in the last year and around 180% over the last two years. That has shrunk the valuation gap almost completely, and I’d call these shares fairly valued at this point.

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Good Weather And Better Management Have Shrunk SLC Agricola's Discount To Fair Value

Saturday, June 9, 2018

Is American Eagle Flying A Little Too High Again?

When I last wrote about American Eagle (AEO), I noted the odd cyclicality of this apparel retailer - particularly the stock's "habit" of bottoming out every three years and then rallying. The shares have stuck with that pattern, rallying off summer 2017 lows and gaining more than 65% since the time of that last piece. Of course, there have been fundamental factors at play too, with American Eagle posting improved store comps and ongoing growth in its e-commerce business, as well as some signs of margin leverage.

It's harder for me now to make a bullish call on American Eagle. Core physical store-level comps are improving off a low base, but margin leverage is still challenging, and I'm not confident that the company can generate the sort of long-term revenue and margin momentum needed to make a compelling valuation argument on discounted cash flow. On the other hand, there seems to be momentum with the business now and the shares are not necessarily that pricey in the context of the company's ROIC.

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Is American Eagle Flying A Little Too High Again?

Alps Electric Looking To Recover After Swallowing A Sour Apple

As one of the companies that saw a significant hit to earnings and expectations from disappointing sales of Apple’s (AAPL) iPhone X, Alps Electric (OTCPK:APELY) is in good company, but that’s hardly much comfort to investors. With weak camera actuators sales (tied to the X) leading to much lower guidance for the next fiscal year, Alps shares have lost about 10% of their value since my last update, though they are still up about 25% from my initial write-up and have done okay compared to a grab-bag of other Apple suppliers including Cirrus (CRUS), Dialog (OTCPK:DLGNF), and Skyworks (SWKS).

Alps needs a rebound in camera actuators to drive some near-term excitement, and recent reports have been somewhat encouraging. It also helps that Alps management took what I believe to be a big swing at its FY’19 guidance, leaving the door open for beat-and-raise quarters as the year moves on. What’s more, the long-term opportunity in auto components remains attractive. I’ve trimmed back my long-term revenue and FCF margins assumptions a bit, but the shares look interesting now for investors who can afford to wait for momentum to return to the financial results.

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Alps Electric Looking To Recover After Swallowing A Sour Apple

Can The ING Tortoise Grow Into A Hare?

Comparing the performance of ING Groep (ING) to watching paint dry over the last six months is unfair … to paint. At least when you watch paint dry, you’ll have something to show for it sooner or later. But with ING Groep, weak growth and overall inhospitable market towards bank stocks have combined for a nearly 20% drop since my mid-December update. Although there are plenty of poor banking performances over that time (including fellow Benelux banks ABN Amro (OTCPK:ABNRY) and KBC (OTCPK:KBCSY)), ING’s performance has been pretty weak as investors are no longer so willing to pay a premium for a bank with lackluster growth prospects and trouble meeting its return targets.

I’m still relatively bullish on ING Groep, given that I believe it is a high-quality bank that is well-managed with respect to risk and investing in some markets that can spur better growth. I don’t expect scintillating performance, but I think that if ING Groep can get long-term earnings growth into the mid-single-digits (with a 10% to 12% ROE range in line with management’s target), there is worthwhile upside in addition to a respectable dividend.

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Can The ING Tortoise Grow Into A Hare?

DBS Group's Digital Strategy Makes Dollars And Sense

What a difference less than a year makes. DBS Group’s (OTCPK:DBSDY) ADRs are up almost 50% over the last year, as investors calmed down after the energy/commodity panic of 2016 and took courage from improving loan growth, interest rate, and credit quality trends across the Asian bank sector in 2017. Even after a big run, though, the shares may have more to give. DBS Group shares look undervalued on the basis of near-term ROE prospects and if digitalization initiatives pay off in the form of increased customer acquisition/activity and lower operating costs, the long-term growth potential could be meaningfully better than what it appeared to be just a year or two ago.

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DBS Group's Digital Strategy Makes Dollars And Sense

Volume And Complexity Creating Opportunities For FormFactor

As a company leveraged to both chip production volume and the increasing complexity of chip design and packaging, FormFactor (FORM) sits in a pretty good spot within the semiconductor equipment industry. Not only is demand for FormFactor’s probe cards tied to chip production volume, but the increasing sophistication of chip designs has increased testing demands and, I believe, expanded FormFactor’s competitive moat as solutions once deemed “good enough” no longer are.

FormFactor has been weak over the past year, hurt in large part by delays in Intel’s (INTC) ramp of 10nm chips. Then again, FormFactor has added a major new customer and the shares have already recovered some lost ground on the prospects for ongoing strength in memory and improving results in the second half of 2018. With the shares still offering some upside here, this looks like a name worth further due diligence.

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Volume And Complexity Creating Opportunities For FormFactor

Sluggish Rates And Book Value Growth Limit Renaissance Re's Appeal

I wasn’t overly excited about the prospects for the shares of Renaissance Re (RNR) (“RenRe”) back in the fall of 2017, as I was concerned that renewal rate increases would disappoint even after a bad catastrophe year and that RenRe would be facing a combination of weak book value and ROE performance. RenRe shares have indeed underperformed since then, falling almost 10% since that last article (though outperforming Arch Capital (ACGL) and Lancashire Holdings (OTCPK:LCSHF) (another reinsurance/specialty insurance company with meaningful property exposure)) and slightly more over the past year.

Weak rates have indeed remained the story, and with that weak momentum in book value growth (actual contraction for three straight quarters) and barely double-digit near-term ROE prospects. While RenRe remains a great reinsurance company, with upside in the casualty/specialty business and its third-party capital management vehicles, it’s likely going to take a little longer to unlock that value and investors have to contend with the risk that over-capitalized markets will be the “new normal” for a longer time, keeping a lid on RenRe’s rate growth prospects and returns.

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Sluggish Rates And Book Value Growth Limit Renaissance Re's Appeal

Fly Leasing Looks Undervalued, But Value Creation Will Take Time

Aircraft leasing companies have done okay over the last few years (excluding Aircastle (AYR)) relative to the S&P 500, but there’s still a certain frustrating “watching paint dry” feeling with many of these stocks as they still often seem not to get their full due in terms of valuation. While AerCap (AER) and Air Lease (AL) have done a little better in that regard, Fly Leasing’s (FLY) weaker returns on assets, equity, and capital, remains a constraining factor to valuation.

The acquisition of AirAsia’s aircraft portfolio should allow Fly Leasing to start generating better results, with the influx of aircraft and revenue boosting operating efficiency and the nature of the portfolio and leases supporting a better return on equity. Successfully executing on the AirAsia transaction could support a fair value in the high teens, but a more modest set of expectations would still support a fair value 15% higher than today’s price.

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Fly Leasing Looks Undervalued, But Value Creation Will Take Time

Self-Help And Stronger End-Markets A Powerful Combo For Materion

Most specialty alloy companies have enjoyed a good run over the past year, and Materion (MTRN) has certainly been among them with a 40%-plus move since my last update on the company. Not only has aerospace demand come to life, but Materion has also seen stronger momentum from its industrial and consumer electronics customers. Making things even better, the company’s cost-reduction/efficiency moves seem to already be paying dividends, and the company’s efforts to expand its new product contributions appear to be ahead of schedule.

Materion has done better than I’d expected it would last summer, but the valuation gives me some pause. I’m not surprised that the shares look pricy in DCF terms, but the EBITDA-based valuation is a little more limiting to my enthusiasm. Materion trades at around 12x forward EBITDA and I’d be reluctant to pay much more than that (frankly, I’d be reluctant to pay that much). Strong end-markets and ongoing margin improvement can still drive higher estimates, but the multiples already look pretty fair.

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Self-Help And Stronger End-Markets A Powerful Combo For Materion

Credicorp Leading The Recovery With Strong Growth And Credit

Peru’s Credicorp (BAP) has been something of a middling performer since my last update. The shares are up about 10% since early September (excluding dividends), but then the S&P 500 is up a little more than that and you could have earned similar returns from other Andean banks like Banco de Chile (BCH) and Banco Santander-Chile (BSAC), so I don’t feel like Credicorp has really lived up to what I’d have hoped. Then again, given the weakness in the Peruvian banking sector in the second half of 2017, it’s not a terrible result either.

As things stand today, Credicorp is in that gray area of “like the company, kinda uncertain on the stock.” I think a low double-digit total return is possible from here, and I do expect double-digit long-term earnings growth, but the P/TBV is right about where I think it should be and there’s still some work for management to do building up its retail lending business and making its dividend/capital return policy more transparent.

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Credicorp Leading The Recovery With Strong Growth And Credit

Palo Alto Networks Back In The Market's Good Graces, And Outperformance Is Getting Harder

I really can't complain about how Palo Alto Networks (PANW) has been performing since my last piece on the company in late September. At the time, a sales force reorganization and probably just some of the regular "hiccups" that go with any business led at least some sell-side analysts to try get ahead of the curve and call that the beginning of the end for traditional network security vendors like Palo Alto. Since then, the shares have risen about 40% - less than Fortinet (FTNT) and CyberArk (CYBR), but good enough to pull the jerseys of Check Point (CHKP) and FireEye (FEYE) up over their heads and give them a good pummeling - while year-over-year product revenue growth has re-accelerated from 1% (in FQ3'17) and 11% (in FQ4'17) to over 30% in this last quarter.

I'm less bullish on Palo Alto shares now, but only because of the growth expectations that the Street is now taking for granted. I like the company's two recent acquisitions and its ongoing efforts to expand its capabilities in areas like endpoint security and public cloud. Likewise, I think Palo Alto has the right "corporate DNA" to continue evolving, whereas Check Point more and more looks like a living fossil. Although I wouldn't chase the shares up here, this is definitely a name I'd reconsider on a pullback.

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Palo Alto Networks Back In The Market's Good Graces, And Outperformance Is Getting Harder

Sunday, June 3, 2018

Geely Auto Has Found A New Gear

I don't write about it as often as I'd like to, but Geely Auto (OTCPK:GELYY) (0175.HK) has long been one of my favorite companies and stocks. Although there is a long list of potential reasons to avoid the name, I've been bullish on the company's prospects to drive significant unit volume growth (as well as revenue and profit growth) on the back of new product launches and leveraging a development partnership with Volvo (OTCPK:VLVLY) (which is owned by Geely's parent company).

Since my last write-up, the ADR shares have risen another 50%, outperforming others like Brilliance China (OTCPK:BCAUY), BYD (OTCPK:BYDDY), SAIC, and Great Wall (OTCPK:GWLLF), as the company's rapid share growth has propelled it to sixth place among auto brands in China (and #2 in domestic brands). Valuation today is a little less cut-and-dried than I would like. While Geely's newest launches are performing well, and the company has a number of new vehicles hitting the market this year, the shares are no longer undervalued on a cash flow basis. While EV/EBITDA does still offer some upside, I'd approach Geely with a bit more caution these days.

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Geely Auto Has Found A New Gear

Tenneco Hoping That Doubling, Then Halving, Makes 1+1=2+

Like Dana (DAN), Tenneco (TEN) looks like a vehicle supplier that's been pounded down pretty hard, and with the shares down about 25% over the past year, maybe a little too hard. There are some legitimate concerns about margin weakness and the prospect of weaker unit volumes in both the passenger and commercial vehicle businesses, not to mention the company's mixed future in the hybrid/EV world and the risks that will come with integrating Federal Mogul and then splitting the business.

Even so, I think the valuation seems to overstate those risks. It's hard for me to advocate strongly for Tenneco given its not-so-impressive FCF generation over the years, but given the possibility that the merger and split will finally unlock some of the value in Ride Performance and arguably the overly pessimistic market opinion of the Clean Air business, this is a name worth some due diligence.

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Tenneco Hoping That Doubling, Then Halving, Makes 1+1=2+

Is Dana's Curious Valuation A Buying Opportunity?

Novice investors ask, "is it cheap?", but veteran investors know that the right question is often "why is it cheap?", and that certainly is a valid question to ask about Dana (DAN). Plenty of auto and commercial vehicle suppliers have ugly year-to-date charts, and while Dana's negative 30% performance is bad, it's not dramatically worse than Tenneco's (TEN), Commercial Vehicle's (CVGI), or Meritor's (MTOR).

Dana has exposure to weakening trends in light and commercial vehicles, and some risk from electrification, and yet the valuation is kind of a head-scratcher. Unless sell-side expectations are significantly off-base (and the market's valuation seems to be a strong vote that they are), these shares should trade somewhere in the high $20s to low $30s. It's certainly true that Dana doesn't have a great history with margins or overall performance, but it seems like the Street is pricing in some low expectations, and value-oriented and contrarian investors may want to take a look.

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Is Dana's Curious Valuation A Buying Opportunity?

A Good Quarter Makes The Value Call On Multi-Color A Little Easier

It's been a tough year for Multi-Color (LABL) ("MCC"), as the shares of this leading label-maker have been trending steadily lower (down 20%) as the company has come up short on organic growth and margins. The fiscal fourth quarter was a nice reversal of the financial trend, though, and the shares responded strongly to the better results and modestly bullish guidance for the next year. While
I expect Multi-Color to continue to post relatively turbulent quarter-to-quarter performance, the shares remain undervalued if the company can manage to continue to generate low single-digit organic growth supplemented with small tuck-ins and generate ongoing margin improvements sufficient to get FCF margins into the high single-digits.

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A Good Quarter Makes The Value Call On Multi-Color A Little Easier

The Wall Of Worry Looks A Little Higher At Cummins

Every company has risks and challenges and Cummins (CMI) is no exception, even if some of those risks are pretty familiar (end-market cycles, the risk of vertical integration). While the prospect of electric trucks is a newer challenge, as is a recent product quality/warranty issue, there's really never been a time I can recall when there wasn't some threat hanging over the shares.

While I think some of the risks and worries are overstated, I don't necessarily find these shares cheap today. I could see paying up into the mid-$150s for the shares, but that's not really all that much upside given where we are in the cycle. What's more, it seems like Cummins gets a little more benefit of the doubt than other component companies - some of the same sell-side analysts who believe that electrification will crush Allison Transmission (ALSN) are more sanguine on Cummins' future in an EV world.

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The Wall Of Worry Looks A Little Higher At Cummins

BorgWarner Looks Well-Positioned And Undervalued

BorgWarner (BWA) has proved to be another interesting company and stock to watch in the auto/commercial vehicle components sector. Although BorgWarner is uncommonly well-positioned to benefit from both stricter standards for internal combustion engines (or “ICE”) and the conversion toward hybrid and electric vehicles (or EVs), this often seems to be a stock where the market is looking for an excuse to not like it.

I thought BorgWarner was a little pricey back in October of 2017, and I don’t feel like I’ve missed out on much – the shares are down a bit over that period, while other auto parts companies like Lear (LEA) and Magna (MGA) have produced double-digit returns.

With healthy content growth pushing revenue growth well ahead of underlying build rates and reasonably good wins for upcoming hybrid/EV business, I’m more interested in the valuation and the stock now. I do have some worries about more challenging comps later in the year, and BorgWarner doesn’t have as much leverage to future hybrid/EV adoption as some, but I think this is a stock worth considering today.

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BorgWarner Looks Well-Positioned And Undervalued

Allison Transmission Driving Unfamiliar Roads With Dim Headlights

Allison Transmission (ALSN) has been a fascinating stock to follow over the last year or so, perhaps not so much for the stock price action or the nature of the product, but in how the sell-side is trying to process and project the threats to the company’s strong, high-margin business in automatic transmissions for commercial vehicles. A small cadre of analysts is dutifully predicting future doom for Allison as electric vehicles become more viable for commercial applications, and in the meantime, they just waive off quarters where Allison beats their EBITDA estimates by 20% or more.

To be sure, the electrification of commercial vehicles is a very serious threat to Allison’s business as it stands today, and given that management hasn’t offered much detail on what they have cooking in R&D, it’s hard to have much confidence that they will succeed in innovating their way into the future of electric vehicles (and with attractive margins).

Fortunately for me, I don’t have to deal with an institutional sales force and pretend I have all the answers, so I’ll flatly admit that valuing Allison today is quite difficult and involves a lot more guesswork than normal. While I’d be interested in the shares when they to drop into the high-to-mid $30s, I wouldn’t chase them in the $40s given the risks that Class 8 demand could fade combined with the long-term EV uncertainties.

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Allison Transmission Driving Unfamiliar Roads With Dim Headlights

Wabtec Biggest-Ever Deal Should Be Transformative

Wabtec (WAB) has always been unusually acquisitive, but in merging with/acquiring General Electric’s (GE) Transportation business, Wabtec is bagging the biggest target available to the company. While big M&A carries big risk, Wabtec knows how to integrate deals and GE is an uncommonly opportunity-rich deal for Wabtec, as it brings the global leader in locomotives and a very strong player in services and digital/electronics to one of the leaders in components and equipment for trains. In addition to rich revenue cross-selling opportunities and expense synergies, I believe Wabtec is doing this deal at an attractive point in the cycle.

Modeling Wabtec’s post-deal financials requires more than a little guesswork, but I believe there is a solid chance that this company will be an enterprise with $10 billion in revenue and low-to-mid teen FCF margins in 2022, with mid single-digit revenue growth beyond that point. If those estimates are the right ballpark, Wabtec shares look undervalued below the triple digits.

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Wabtec Biggest-Ever Deal Should Be Transformative

OMAB's Stronger Operations Offset By Macro Worries, Creating A Potential Long-Term Value Opportunity

When I last wrote about Grupo Aeroportuario del Centre Norte (OMAB) ("OMAB") in October of 2017 I saw some value, but I also saw some macro risks for this Mexican airport operator and decided to stay on the sidelines a bit longer. With the shares down 6% since then (better than GAP (PAC) and ASUR (ASR) over that period, though), I don't feel like I've missed out on all that much. On the other hand, OMAB's performance in the first quarter was stronger than expected, and I'm starting to think the valuation is pretty compelling for investors who can live with the political, economic, and other macro risks.

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OMAB's Stronger Operations Offset By Macro Worries, Creating A Potential Long-Term Value Opportunity

Copa Dinged By Some Macro And Competitive Worries, But Still Operationally In Good Shape

Although a well-run company, Copa Holdings (CPA) is the sort of stock that's more likely than not to give investors multiple second chances. Between exposure to a host of Latin American economies, oil prices, and the often irrationally competitive airline industry, even a well-run airline like Copa is going to have its challenges. And so, it seems to be now, as the shares have slid about 15% from the time of my last article and underperformed over the past year or so due to worries about increasing low-cost competition, increasing oil prices, and issues related to Venezuela.

Copa is never going to be a "safe stock", but the combination of growing demand, growing capacity and pricing, and good cost control seem like one that should work well. With that, I think this is a name to consider for investors who can stomach the elevated risk and volatility.

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Copa Dinged By Some Macro And Competitive Worries, But Still Operationally In Good Shape

Weaker Than Expected Pricing Spoiled Lancashire's 2018 Story


Significantly leveraged to higher insurance prices and much more heavily leveraged to reinsurance than fellow Lloyd's insurers like Beazley (OTC:BZLYF) and Hiscox (OTC:HCXLF), Lancashire Holdings (OTCPK:LCSHF) (LRE.L) has been an underperformer this year. A weak January renewal period (and management's subsequent guidance) largely dashed hopes that last year's catastrophes would support meaningfully higher rates, and Lancashire is keeping its underwriting ambitions more modest given the less attractive returns that have appeared in the market.

Although Lancashire does still look undervalued and a time-tested underwriter with strong capital discipline and an above-average track record, the mid-year renewals are not likely to lead to a new rush of enthusiasm for the stock. The long-term annualized return potential looks worthwhile, but this is a name that is going to require some patience, and there's no shortage of well-run insurance companies trading at what look like attractive multiples.

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Weaker Than Expected Pricing Spoiled Lancashire's 2018 Story

Weak Core Wireless Results And Strategic Uncertainty Undermine SK Telecom's Value

SK Telecom (SKM), South Korea's largest mobile/wireless service provider at almost 50% share, has remained a frustrating but useful lesson in the perils of chasing "value" without context. While SK Telecom shares have long seemed undervalued, the company's weakening wireless business has been a growing concern, as is the possibility that more and more non-telco investments may be coming. At this point, given the significant uncertainties across the business, I'm just not interested in SK Telecom - there does seem to be value here, but I have a very real fear that management will squander it and/or that investors will see relatively little of it.

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Weak Core Wireless Results And Strategic Uncertainty Undermine SK Telecom's Value

Manitex Adds A Strategic Partner

When writing about Manitex (MNTX), a small American manufacturer of boom truck cranes, knuckle-boom cranes, and other lifting equipment, I’ve often mentioned Tadano (6395.T) (OTC:TDNOF) as a peer/comparable, although Tadano and Manitex have relatively little direct overlap (some in rough terrain cranes and truck-mounted cranes). Now, these two companies will be even more closely tied together, as they announced a tie-up on Friday, May 25, that will see Tadano take a nearly 15% equity stake in the company.

Although the terms of the deal suggest to me that it’s slightly dilutive in the near term, Tadano’s investment should allow Manitex to retire a meaningful portion of its debt (perhaps around a third), reducing its operating risk and saving some interest expense, as well as help the company operationally. It could also, perhaps, be prelude to an eventual acquisition by Tadano. Although Manitex shares are no longer exceptionally cheap, there is still some upside here, particularly if Manitex can make faster progress growing its PM Group knuckle-boom crane business.

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Manitex Adds A Strategic Partner

Lenovo Looks Undervalued, But It Has To Rebuild Credibility A Quarter At A Time

Lenovo (OTCPK:LNVGY) is still struggling to find traction and restore its reputation. The shares down roughly 5% year-to-date, but down closer to 15% over the past year as investors and analysts remain disappointed and frustrated with the ongoing losses in the mobile business (and, to a lesser extent, the server business). Although a stronger than expected fiscal fourth quarter was a welcome bit of good news, Lenovo has to show that it can rebuild profitability in the PC business, drive the server business into the black, and at least stem the losses in mobile before the potential value of the company becomes a more relevant part of the conversation.

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Lenovo Looks Undervalued, But It Has To Rebuild Credibility A Quarter At A Time

Aviva Redeploying Capital, But The Stock Still Trades At A Discount

Aviva PLC (OTCPK:AVVIY) (AV.L) shares haven't gotten much love from the market since my last update on this top-10 global life insurance company. It hasn't been a great stretch for the group as a whole (Prudential PLC (PUK) and Legal & General (OTCPK:LGGNY) have slightly outperformed Aviva, but still underperformed the U.S. S&P 500, while Standard Life (OTCPK:SLFPY) has been even weaker), but investors remain concerned about the company's exposure to the slow-growth, capital-intensive British annuity business, as well as its overall ability to generate attractive growth and return capital to shareholders.

Some of that skepticism makes sense… to a point. The company's decision to grow its UK bulk annuity business is a curious one, and Aviva is a weakling in Asia compared to Prudential PLC, but it takes less than 5% long-term earnings growth to support a fair value about 10% above today's and a long-term annualized return in the high single digits. Given the company's improved back-book management, its growth potential in markets like Poland and Turkey, and its clean capital position, the discount to fair value seems a little, well, unfair.

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Aviva Redeploying Capital, But The Stock Still Trades At A Discount

Saturday, May 26, 2018

First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

Although very active since my last update on the company in September of 2017, the shares of First Bancshares (FBMS) have been a relatively average performer over that span of time, with a return close to that of regional banks in general and in the middle of a comp group including ServisFirst (SFBS), Renasant (RNST), MidSouth (MSL), and National Commerce (NCOM). While the company has executed on two M&A deals entirely consistent with the growth plan I expected here, operating performance has been a little lumpy.

I continue to believe that First Bancshares offers an above-average level of earnings growth potential, return potential, and risk. Integrating its acquisitions should drive meaningful operating leverage in 2019 and beyond, and loan growth should likewise drive good earnings momentum. With plenty of acquisition opportunities left in its core operating footprint (and/or target footprint), I expect additional M&A in the years to come.

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First Bancshares Running Its Playbook And Significant Earnings Growth Should Follow

Chemical Financial Investing For Future Growth

Chemical Financial's (CHFC) performance has been somewhat mixed since my last write-up on the company (in mid-September 2017). Although the company has reported some healthy quarters relative to expectations and the banking sector, in general, has benefited from the tax bill passed in 2017, investors have been surprised by the company's willingness to increase spending to build the business. With that, the shares are up close to 20%, which isn't bad, but isn't quite as strong as regional banks in general and other Michigan banks like Comerica (CMA) and Independent Bank (IBCP), though better than Mercantile (MBWM) and Flagstar (FBC).

Although Chemical Financial isn't exceptionally cheap, I believe there is still worthwhile upside here for long-term investors. Management's efforts to hire more commercial bankers should benefit loan growth in 2H'18 and beyond, and I believe the company is making investments to support a larger banking franchise long term (including additional M&A). I'd like to see more progress on improving the deposit mix, but that's not something any bank can fix in just a couple of quarters.

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Chemical Financial Investing For Future Growth

Ciena's Business Should Ramp From Here

Recommending purchasing Ciena (CIEN) when it trades into the low $20s and then lightening up in the mid-to-high $20s has worked relatively well for a little while now, but I’m starting to wonder if Ciena may be about to take that next step where the mid-$20s become the “new low $20s” and where the Street has more confidence in the growth outlook for the company’s converged packet business, as well as more confidence that margins will recover in the coming quarters.

Although there’s a lot left to prove, Ciena has taken some good initial steps towards demonstrating that it has an attractive business outside of Verizon (VZ) and AT&T (T), including data center, tier-2 communications, cable, and non-US customers.

I don’t think these shares are dramatically undervalued, but I think a double-digit annualized return is possible from here (even if just barely double digit). I would note, though, that I’m not giving the company full credit for management’s mid-term growth and margin targets; if the near-term performance justifies more faith in that vision/projection, there would be additional upside.

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Ciena's Business Should Ramp From Here

Is The Value At Compass Diversified Holdings Worth The Hassle?

The older I get, the more I find myself in the position of Danny Glover's character Roger Murtaugh from Lethal Weapon, famous for repeatedly saying, "I'm getting too old for this ." Although Murtaugh went ahead and did those things anyway, I do believe there's a relevant takeaway for investing - sometimes, a stock just isn't worth the hassle, and I'm starting to wonder if that's the case with Compass Diversified Holdings (CODI).

While Compass does indeed have a diverse group of businesses and has a long track record of paying out tax-advantaged distributions, the underlying growth of the businesses has never been all that spectacular, and the distribution payments haven't grown since 2012. I understand the appeal of the tax-advantaged income that Compass produces and maybe even the skew toward smaller businesses, but considering the management fees, the tax hassles, and the lackluster track record the portfolio companies, I'm no longer as confident that the discount to fair value is "unreasonable" as opposed to just being fair compensation for the potential headaches.

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Is The Value At Compass Diversified Holdings Worth The Hassle?

Splitting Up The Business May Finally Unlock The Value Of Prudential's High-Quality Asian Operations

Despite a transformative de-merger announcement, Prudential PLC (PUK) (PRU.L) hasn’t been a great performer since my last write-up on the company in January. The U.S. ADRs are down about 5%, lagging the British local shares and rivals like Aviva plc (OTCPK:AVVIY) and AIA (OTCPK:AAGIY), though outperforming MetLife (MET) and Lincoln National (LNC) over that period.

I continue to believe this is an undervalued insurer, and perhaps the separation of the UK & Europe business from the much faster-growing Asian businesses (as well as the African and U.S. businesses) will prove to be a case where the parts are worth more separately than together. While there are some valid worries about the U.S. variable annuity business, the Asian business continues to generate strong growth, and I believe these shares are around 15% undervalued.

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Splitting Up The Business May Finally Unlock The Value Of Prudential's High-Quality Asian Operations

A Strong U.S. Market Can Support A Higher Price For Acerinox

Acerinox (OTCPK:ANIOY) hasn’t done as well as I’d expected since my January write-up, but it has been a relatively good house in a bad neighborhood, as stainless steel peers like Aperam (OTC:APEMY) and Outokumpu (OTCPK:OUTKY) have been considerably weaker, as have many other steel companies like ArcelorMittal (MT), Nucor (NUE), voestalpine (OTCPK:VLPNY) as investors worry about whether the cycle is peaking.

I regard Acerinox as a “rental”, not a long-term buy, with the company strongly leveraged to higher stainless prices in the U.S. (where it has around 35% to 40% share) but also vulnerable to lower prices in Europe and protectionist policies that could hurt its facilities in South Africa and Malaysia. Although I think there is still 10% to 15% potential from here, and possibly more if the cycle has longer legs, the long-term return potential is not all that appealing and investors often bail on these stocks when pricing momentum fades.

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A Strong U.S. Market Can Support A Higher Price For Acerinox

AerCap Continues To Execute, But Not Getting Much Credit For It

AerCap (AER) is a very good company, but these shares can be a little frustrating to hold, as the market doesn’t always seem to want to give them the sort of multiples that the performance would otherwise suggest is reasonable. Looking past that short-term turbulence, though, the shares have done well over the last five and 10 years, as management has shown that it can responsibly manage its fleet, create value at multiple points in the business, and share the proceeds with shareholders (in the form of buybacks).

Although I think earnings growth could be more challenging in the next couple of years, I like the valuation and I think these shares are attractive into the low-to-mid $60s. Between profitable leasing and value-creating portfolio management, AerCap looks well-placed to continue to benefit from global growth in air travel and the economic realities of the industry where AerCap often has better access to credit than many of its customers.

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AerCap Continues To Execute, But Not Getting Much Credit For It

Will Cemex Ever Get All Its Ducks In A Row?

If you want a good working example of a value trap, Cemex (CX) could be it. While management deserves a lot of praise for the ongoing deleveraging (not to mention guiding the company back from the brink years ago), its inability to meet its own guidance and deliver consistent performance has remained a real sticking point. What’s worse, there are valid concerns about the quality of the company’s infrastructure in some of its key markets.

I’m tired of sticking my neck out for Cemex, but the shares still seem to be pricing in a pretty bleak future. About 1% annualized FCF growth would be enough to support today’s price and even the most bearish analysts don’t think that’s likely. Cemex shares could offer worthwhile returns, then, but it is still an open question as to when management will produce the results that will drive those returns.

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Will Cemex Ever Get All Its Ducks In A Row?

OceanFirst Financial Offers Value During A Transition Year

New Jersey's OceanFirst Financial (OCFC) has done okay since I last wrote about the company in January, with the shares more or less tracking with smaller Northeast community banks (or slightly outperforming) and offering a little outperformance relative to larger regional/super-regional banks like Bank of America (BAC), PNC Financial (PNC), and Toronto-Dominion (TD). Organic loan growth has weakened recently as management has chosen to be more disciplined on price, but accretion benefits have been stronger than expected and the company's deposit performance has been good.

OceanFirst is not wildly undervalued, but I think this is a good combination of a below-the-radar growing bank with disciplined management and a good business plan/profile. I believe OceanFirst has more options to pursue M&A in the relatively near term, and I believe the shares should trade in the low-to-mid $30s.

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OceanFirst Financial Offers Value During A Transition Year

Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

By and large, bank investors tend to crave and reward consistency, predictability, and conservatism, so it is not that unusual to see the market punish, at least temporarily, surprising moves. To that end, Fifth Third’s (FITB) acquisition of MB Financial (MBFI) seems like a well-reasoned, if expensive, deal that augments Fifth Third’s operations in positive ways. And yet, even though good (just good, not “great”) execution on this deal seems likely to drive more accretion than a buyback would have, investors still sold the shares on the news (with the stock regaining some of that the next day).

I’ve had my reservations about the stock because of valuation, but the shares have been quite strong until the deal announcement – beating peers/rivals like KeyCorp (KEY), Huntington (HBAN), U.S. Bancorp (USB), PNC Financial (PNC), and JPMorgan (JPM) over the past year. Although I still don’t see the value in these shares that many investors apparently do, I think the MB Financial deal is an understandable deviation in the company’s strategy and a solid move on balance.

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Fifth Third Changes The Plan, But The MB Financial Deal Looks Sound (Albeit Pricey)

Valeo In A Lull, But Bringing In The Orders

I continue to be both frustrated and intrigued by Valeo (OTCPK:VLEEY) (VLOF.PA). When I last wrote about this large auto parts supplier, I wrote that there was a credible risk of near-term disappointment in revenue and margins and that has come to pass. The local shares are down about 6% from the time of that last article, lagging peers like Continental AG (OTCPK:CTTAY), Autoliv (ALV), BorgWarner (BWA), Schaeffler (OTC:SFFLY), and Faurecia (OTCPK:FURCY), though the performance since my first write-up in 2014 has been solid.

While the near-term weakness is certainly a drag, the company's strong order flow is quite encouraging, and particularly so in the hybrid/EV joint venture with Siemens (OTCPK:SIEGY). Valeo shares could struggle a bit for another couple of quarters, but I like the valuation here and the long-term opportunity to leverage future growth in hybrid and electric vehicles.

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Valeo In A Lull, But Bringing In The Orders

ams AG's Business Wins Offset Some Of The Near-Term Apple Turbulence

Growth semiconductor stories aren't where you go if you can't handle some drama and volatility, and ams (OTCPK:AMSSY)(AMS.S) has certainly provided that. Although the shares have basically matched the SOX since my last write-up in mid-January (and outperformed Finisar (FNSR) and Himax (HIMX)), it hasn't been a smooth ride as investors have had to digest some encouraging wins as well as a big cut to guidance on reduced expectations for Apple's (AAPL) high-end phone production.

I continue to believe that ams is a good way to play the growth of 3D sensing, not just in consumer devices but also in auto and industrial applications. There will be no shortage of competition, and ams' relationship will likely add volatility (and likely some margin challenges), but I think the long-term potential is worth it.

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ams AG's Business Wins Offset Some Of The Near-Term Apple Turbulence

Gruma's Margins Are Improving, But Forex Is Taking A Toll

Mexico-based tortilla giant Gruma (OTC:GPAGF) (GRUMAB.MX) hasn’t made the progress I’d hoped for back in January. Although the company is showing some of the margin leverage I was hoping for, forex-related pressure on revenue and inconsistent results in Europe have weighed on results. With that, the illiquid ADRs are down about 15%, with a similar decline in the Mexico-listed shares. Although I do still see upside in these shares, and I believe it’s a well-run food company with leverage to improve margins in the U.S. and Mexico, as well as growth opportunities in markets like Europe, the ADRs are quite illiquid and I can certainly understand investors who decide it’s not worth the hassle.

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Gruma's Margins Are Improving, But Forex Is Taking A Toll

K2M Disrupting The Market, Growing, And Still Undervalued

Innovation can still produce results even in a sluggish U.S. spine market, as seen with the ongoing growth at companies like K2M (KTWO) and Globus (GMED). In the case of K2M, the story is still about the company's disruptive product development in degenerative and complex spine, supported by a strong platform in 3D-printed implants. With that, the shares have done okay since my last update - rising close to 10%, which is not as good as Globus, but pretty good next to other med-techs in the spine space like Stryker (SYK) and NuVasive (NUVA).

I continue to believe that K2M shares are undervalued. The company's liquidity and cash flow situation is not ideal, but spending money on product development and competitive rep hires to support those product launches makes sense, and I believe the company will get to double-digit FCF margins within five years. With that, I'd consider buying into the mid-$20s.

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K2M Disrupting The Market, Growing, And Still Undervalued

NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

Investors remain reluctant to give NuVasive (NUVA) much benefit of the doubt, and based upon the company's recent performance, I can't say I blame them. Although I wrote back in January that I thought it would take time for the company to rebuild investor confidence, I'm still surprised to see the nearly 10% drop in the share price over that period, while Globus Medical (GMED) has shot up nearly 20% and K2M (KTWO) has risen close to 10%.

There are a lot of issues with NuVasive right now, including a fairly spotty history of earnings quality, worries about competitors poaching away reps, and signs that NuVasive's new products aren't producing the same growth leverage as before. What's more, as NuVasive has grown to become a bigger player in the spine market, it's harder and harder for the company to separate itself from the challenges in the market.

Valuation is tricky. On a cash flow basis, the expected return isn't as high as I'd like to see given the risks. On the other hand, med-tech doesn't often trade on cash flow and the shares do look undervalued, perhaps significantly so, on an EV/revenue basis. There's some appeal here as a turnaround story, but NuVasive will be granted little quarter or patience by the Street if results don't start meaningfully improving.

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NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

MetLife's (MET) performance over the past year hasn't been all that good, but it has at least been better than that of many of its peers. Although MetLife has done a lot to clean up and improve its business, the company still has a track record of inconsistent results (often punctuated by large charges) and headwinds like lower returns on equity from its run-off business and spread compression in its U.S. retirement business.

I think expectations for MetLife are low and that the shares could be positioned to outperform as a result. The company's earnings growth outlook is rather modest, and that is a concern, but I do believe book value growth should improve from here and exceed core earnings growth. If and as that happens, the multiple should expand and MetLife should get more of its due, but investors should appreciate that this name is highly likely to be more tortoise than hare.

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MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

Fidelity National Information Services Offsetting Growth With Margins

Fidelity National Information Services (FIS) has been a so-so performer since my last update on the company in August of 2017. Although the shares are up around 10% since then, slightly better than the S&P 500, the shares have lagged Fiserv (FISV) and Jack Henry (JKHY). I believe this underperformance is due at least in part to FIS's slow pace of organic growth and the challenges the company faces in accelerating that growth to a meaningful degree.

Providing banking and payments technology to banks and other financial institutions remains a good business on balance, and FIS has opportunities to drive further margin leverage and/or pursue value-additive M&A. Even so, the total return potential here looks somewhat lackluster, suggesting the shares are an okay hold but not an especially exciting buy candidate.

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Fidelity National Information Services Offsetting Growth With Margins

Global Payments Executing On Its Vision And Delivering Margin Leverage

It may sound uncomfortably similar to "it's different this time", but Global Payments (GPN) is a prime example of how good companies always seem to manage to find a way to do better than expected. In the case of Global Payments, it has taken the integrated payment and omni-channel concepts and run with them, combining/folding payment functionality into broader offerings of specialized software and services that not only make the customer relationships stickier but more profitable as well.

Global Payments sports high multiples and high expectations, and I wouldn't ignore the competitive threats posed by existing head-to-head rivals (not to mention potential future threats from companies like Amazon (AMZN), Square (SQ), and PayPal (PYPL)), but I believe Global Payments' integrated and omni-channel offerings, as well as its strong global position, make it a formidable player in the market. A high single-digit revenue growth rate from here can support a fair value in the $120s, but I would expect this stock to sell off pretty sharply if the earnings momentum were to falter.

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Global Payments Executing On Its Vision And Delivering Margin Leverage

AllianceBernstein Reaping The Benefits Of Past Decisions

I'm pleased with how AllianceBernstein Holding L.P. (AB) continues to perform. The units are up around 10% from when I last wrote about this company, the yield remains quite attractive, and better still the company is reporting improved revenue and profitability as decisions made years ago by prior management start to pay off for the company.

AllianceBernstein isn't, and never will be, suitable for everybody. AXA (OTCQX:AXAHY) owns a majority stake of the business and regular unitholders have virtually no say in the operation of the business. Moreover, the distributions from partnerships like this can have more complicated tax treatment than regular dividends. Even so, I believe AllianceBernstein is well-placed to continue bringing in assets under management and leveraging its existing infrastructure to generate higher margins and higher distributions for unitholders.

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AllianceBernstein Reaping The Benefits Of Past Decisions

Aptose Approaching The Clinic With 2 Very Interesting Assets

It has been a long road, but Aptose (APTO) is closing in on getting its two lead drugs into clinical trials. The company still has to resolve a manufacturing-related clinical hold for APTO-253 and finish its pre-IND work on CG’806, but Aptose should have both compounds in human testing in 2019 with initial results from at least APTO-253 before the end of 2019.

Aptose remains an exercise in weighing significant market potential against significant risks and a long road to travel before commercialization. Both APTO-253 and CG-806 have produced intriguing, arguably exciting, pre-clinical data suggesting that they could both be real players in hematology, but the entire point of the clinical trial process is to weed out those drugs that look good in pre-clinical testing but cannot deliver the goods in real-world testing. I believe Aptose shares are undervalued, but investors need to understand and appreciate the significant risks involved and the near-certainty of meaningful future dilution.

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Aptose Approaching The Clinic With 2 Very Interesting Assets

S&W Seed Following A Better Plan, But Execution Remains A Key Unknown

Small-cap seed company S&W Seed Company (SANW) has certainly weathered some ups and downs in recent years, not all of which were or are in management's control. While the company has taken cogent steps to build out and improve its alfalfa business, policies in key markets like Saudi Arabia have undermined the company's progress. At the same time, though, the company has suffered from a sometimes-incoherent and scattered set of corporate priorities.

New management has been clear about what it wants to do, and most of the new plan sounds good to me. It's going to take time for these plans to bear fruit, though, and the company doesn't have much of a safety net left to withstand significant disappointments or delays. While there's certainly upside from here if management can get the business stabilized and growing again, the risks are high, and the company's ability to execute under new management is still unproven.

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S&W Seed Following A Better Plan, But Execution Remains A Key Unknown

Wednesday, May 16, 2018

Strong Orders Drive A Rally For HollySys

China’s HollySys (HOLI) has continued to outperform its peers in 2018, though HollySys too had been drifting lower since early March. With strong orders in the automation business in the March quarter, though, it looks like investors feel a little more confident in the prospects of HollySys continuing to penetrate new markets in its core China market.

Consistent execution has long been a challenge for HollySys management, and the situation is not helped by volatile ordering patterns from its primary rail customer. That said, the company has been expanding its automation product offering and continues to gain business in new market verticals. While the shares don’t look like a particular bargain relative to the underlying risks, high single-digit revenue growth should support double-digit returns for shareholders.

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Strong Orders Drive A Rally For HollySys

Carpenter Is Seeing Good Demand Growth, But Operating Leverage Remains A Work In Progress

While it has been frustrating at times, specialty alloy company Carpenter (CRS) has been making progress. The shares are up 11% from when I last wrote about the company, beating the S&P 500 over that time and matching Allegheny (ATI), but lagging Haynes (HAYN) and Universal Stainless (USAP). Along the way, the company has been posting some good revenue growth, though margin leverage has been more of a laggard than I'd hoped.

Carpenter shares do still look undervalued, though the 20% or so gap in valuation I previously saw has now shrunk to around 10%, and I'm a little concerned that my out-year margin assumptions are a bit too aggressive. Still, demand is taking off in the aerospace market, the company is still doing well in the medical and transport market, and oil/gas demand continues to recover. What's more, there seems to be a real sense of urgency on the part of customers to get the company's Athens facility qualified, something that should lead to meaningfully higher utilization and significant margin leverage.

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Carpenter Is Seeing Good Demand Growth, But Operating Leverage Remains A Work In Progress