Friday, September 21, 2018

S & W Seed Trying To Restructure, But Liquidity Looms As A Threat

S & W Seed (SANW) is trying to restructure away from an alfalfa market that has proven far more challenging than expected, and as I said in my last update, I like the company’s plan to expand into other crops like sorghum and sunflowers (I’m less bullish on stevia). Unfortunately, as I noted in that last piece, S&W doesn’t have much room to maneuver, as the company’s liquidity is low and access to capital is going to come on less than favorable terms to current shareholders.

I continue to believe that this stock is basically a binary bet, and I don’t tend to like to have those in my portfolio. While I think the company’s efforts to leverage new alfalfa varieties developed with Calyxt (CLXT) have promise, as does the expansion into sorghum and sunflowers, it sounds like the next year is still going to be challenging for the alfalfa business and I’m concerned about the amount of dilution the company will experience in pursuit of a business model that generate meaningful cash flow (or acquisition interest) down the line.

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S & W Seed Trying To Restructure, But Liquidity Looms As A Threat

Medtronic Steps Up With A Bigger Commitment To Robotics

Differentiation is the name of the game in the spine space today, and it seems clear that Medtronic (MDT) believes in the long-term future of robotics as a disrupting and differentiating opportunity. To that end, the company announced that it will be acquiring its partner Mazor (MZOR) in an all-cash deal that will give it full control over the future development of this leading robotics platform.

Even with the expected revenue re-acceleration in 2019 driven by the upcoming Mazor X Stealth (which brings integrated navigation to the robot), I believe Mazor is getting a fair price at over 18x estimated 2019 revenue. For Medtronic, while some investors may criticize the deal as buying the cow when they had already had a good deal in place for the milk, I believe total ownership of the platform and control over the future development path is worth paying for given the need to have a differentiated platform in the spine space today.

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Medtronic Steps Up With A Bigger Commitment To Robotics

Harder Markets Driving James River Group

James River Group (JRVR) is a relatively small specialty insurer, but it punches somewhat above its weight by focuses on attractive areas like excess & surplus and fronting. Although the company saw an uncommon negative reserve development in 2017 due to higher losses from its business with Uber, James River has moved quickly to re-underwrite that business. All told, this has historically been an insurer with strong underwriting discipline, very good expense control, and a willingness to return capital to shareholders.

Between a restructured relationship with Uber and hardening markets in several of its core excess and surplus specialties, I think James River is looking at an attractive market opportunity relative to the overall P&C market. Even though the shares haven’t done much over the past year, they don’t look strikingly cheap today, as I think a mid-$40’s price is quite fair right now.

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Harder Markets Driving James River Group

Global Payments Continues To Hit The Mark With An Increasingly Tech-Driven Platform

Fintech has continued to perform well, with investors understandably attracted to the strong earnings growth that many of these companies are generating. In the case of Global Payments (GPN), management continues to show the benefits of its tech-enabled payments model, with strong revenue growth and improving margins on lower churn. While the shares went nowhere for basically the first half of the year, strong second quarters earnings have pushed the shares up almost 30% on a year-to-date basis and up about 15% since my last update on the company.

At this point, I think the market has Global Payments more or less accurately priced, but it wouldn’t surprise me if the ongoing enthusiasm for fintech took the shares higher, particularly if third quarter earnings come in strong.

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Global Payments Continues To Hit The Mark With An Increasingly Tech-Driven Platform

Better Growth, But Sluggish Margins And Higher Leverage, At Compass

I’ve been a fairly harsh critic toward Compass Diversified Holdings (CODI) in the past, mainly because I think management takes a rich private equity-like cut, but without really delivering PE-level returns (Morningstar shows a 10-year average total annual return of just over 8.5%). While the partnership structure has certain advantages, it also is more complicated (forcing investors to deal with K-1’s) and I just don’t think the returns – whether you measure the market returns plus distributions, underlying distributable cash growth, underlying EBITDA growth, or what have you -- are up to snuff.

Nevertheless, results were a little better than I expected in the second quarter and the company continues to deploy capital at a somewhat aggressive pace. The shares are now a little below my estimate of fair value and there could be more momentum in the underlying businesses than in recent past quarters. While I don’t believe distribution growth is likely in the near term, and I would again note that partnerships are not suitable for everybody (or every account), better underlying business momentum could create some more value.

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Better Growth, But Sluggish Margins And Higher Leverage, At Compass

Thursday, September 20, 2018

First Bancshares Driving A High-Growth Plan Across The Gulf States

Mississippi’s First Bancshares (FBMS) continues to impress me with its growth strategy, and it would seem that the Street agrees, as the shares are up another 18% from when I last wrote about the bank and up close to 40% from my first article about the company on Seeking Alpha. Both of those figures put First Bancshares well ahead of the typical bank, and the company continues to execute a cogent “buy-and-build” plan that is expanding its footprint across the Gulf Coast.

I believe there are more potential gains from here, though I will say again that this is a high-growth/high-risk story within banking. Although loan growth remains healthy and there’s not nearly the same level of CRE lending competition in the Gulf that there is in areas like New York City, this is still a relatively mature part of the cycle and First Bancshares is likely going to see more competition as it pushes into markets like North Florida.

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First Bancshares Driving A High-Growth Plan Across The Gulf States

Innospec Seeing A Hiccup In Margins, But The Core Business Looks On Track

Specialty chemical companies have continued to do alright this year, as volumes and pricing have helped partly offset increasing raw material pressures. Innospec (IOSP) has been a bit of a laggard since May, though, with the company’s second quarter report hurting the share price as investors didn’t like the weaker than expected margins in the business. I had thought Innospec looked a little pricey when I last wrote about the company, but I do see some upside here as I expect the company to benefit from some lagging pricing actions. If Innospec can get the Oilfield business in better shape, there could be more meaningful upside.

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Innospec Seeing A Hiccup In Margins, But The Core Business Looks On Track

Wall Street Believes Winter Is Coming For Steel Dynamics

Metal spreads have continued to improve, but steel prices in the U.S. have come off their highs and analysts are now modeling 2018 as the peak year for Steel Dynamics’ (STLD) EBTIDA for this cycle. Fading prices and fading EBITDA expectations are never a good combo for commodity companies, and although these shares have outperformed peers on a one-year and year-to-date basis, the performance in recent months has been lackluster.

I do believe that Steel Dynamics is undervalued now and I do believe this is a relatively better place to be in the steel sector, but this looks more and more like a difficult place to make money for at least the next few quarters. Protectionist measures and a healthy economy may support a “stronger for longer” steel cycle, but I think it will be hard for these shares to significantly outperformance unless pricing and/or volumes really surprise.

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Wall Street Believes Winter Is Coming For Steel Dynamics

Nucor's Healthy Spreads Aren't Enough As The Cycle Moves Past The Peak

It’s often difficult to make money in commodity sectors when the cycle has reached and passed its peak, and that seems to be holding true for steel. Although spreads continue to improve and earnings expectations for Nucor (NUE) have continued to rise for both 2018 and 2019, the shares really haven’t gone anywhere this year as investors expect meaningful earnings erosion from here and move onto to greener pastures.

I believe it’s better to be in mini-mill and/or specialty steel companies at this point, but I’m still mostly lukewarm on Nucor. I do see some risk of overspending on M&A, as well as some vulnerability to increasing capacity, though I will emphasize again that this is a very well-run company in the sector. I continue to believe that fair value is above $70 per share, but this may be a tough place to make money unless/until there’s a reason to believe this cycle will persist beyond current expectations.

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Nucor's Healthy Spreads Aren't Enough As The Cycle Moves Past The Peak

Can A Better Second Half Drive Some Enthusiasm For ArcelorMittal?

My concerns back in the late spring about it being too late in the cycle to make good returns in steel sector appear to have played out this summer. ArcelorMittal (MT) has declined more than 10% since my last update on the company, despite a stronger-than-expected second quarter and a stronger outlook for the second half. What's more, steel prices have held up, as has demand, and spreads are still attractive. It's not just ArcelorMittal, though, as Voestalpine (OTCPK:VLPNY), U.S. Steel (X), Ternium (TX), Steel Dynamics (STLD), and Nucor (NUE) are down over that period as well, and Acerinox (OTCPK:ANIOY) is barely up.

ArcelorMittal looks very cheap on the basis of near-term EBITDA, and even looking a few years ahead to declining prices and profits suggests that today's valuation is weak relative to historical norms. At this point, I'm not really sure what's going to bring investors back to this name, as steel prices aren't likely to improve much (if at all) from here, and investors tend to bail when pricing momentum fades. So, while I do think ArcelorMittal looks unfairly cheap, the markets don't care about fair, and investors considering these shares need to be aware of the risk that this is a value trap.

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Can A Better Second Half Drive Some Enthusiasm For ArcelorMittal?

With Margin Leverage Emerging, Can Carpenter Technology Get Going?

Carpenter Technology (CRS) has been a frustrating story to watch, as a good recovery in oil/gas and strong demand growth in aerospace and medical don’t seem to be resonating all that strongly with the market. I wasn’t quite so bullish on Carpenter in May as I was earlier in the year, but I’m surprised the shares haven’t really budged since then. While they have outperformed Allegheny (ATI), Haynes (HAYN), and Universal Stainless (USAP), I don’t think the market is really very bullish on the prospects for Carpenter to continue to garner parts qualifications from aerospace customers and fill that under-utilized Athens plant.

I remain more bullish than the Street on this one, as I do believe ramping aerospace demand and ongoing recovery-driven demand in oil and gas will support volume. I’m also bullish on the company’s opportunities in additive manufacturing (especially in medical), though I see some risk to the Transport segment as heavy truck builds slow. If I’m right about the upcoming ramp, particularly in higher-value specialty products, gross margins could move into the 20%’s in this upcoming fiscal year, and I believe a mid-$60’s fair value is still in play.

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With Margin Leverage Emerging, Can Carpenter Technology Get Going?

Danaher's Pall Investor Meeting Underscores Several Business Strengths

In isolation, Danaher’s (DHR) investor day focusing on the Pall operations doesn’t really change anything about the story. What I believe is more important, though, is what the presentation reveals about the company’s much-lauded Danaher Business System (or DBS) and its ability to drive value from M&A.

With Danaher successfully integrating and improving companies across the range of revenue growth and R&D intensity, I believe Danaher has a compelling case for how and why it can continue to buy companies (particularly in life sciences and diagnostics) at seemingly high valuations and still generate value from the process and capital invested.

Danaher’s life science opportunities are significant, and I see no reason to believe that the company is looking at any significant near-term issues in the water or product ID businesses. Management was actually more optimistic than I expected on conditions in the semiconductor sector, and the company is leveraging its pricing power and supply chain flexibility to minimize the disturbances from tariffs.

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Danaher's Pall Investor Meeting Underscores Several Business Strengths

Gerdau Facing A Still-Challenging Brazil, But U.S. Margins Improving

These are still challenging days to be a steel producer in Brazil. Pushing through price increases takes some effort and patience, and demand is still being hamstrung by soft infrastructure spending and tenuous consumer confidence. Even so, Gerdau (GGB) is back to nearly 20% EBITDA margins in its home country, while efforts to improve margins in the U.S. also seem to be producing some benefits.

Gerdau shares have fallen about 16% since I last wrote on the company (when I thought they looked a little pricey), with a weaker Brazilian real exacerbating a 6% decline in the local shares. I can't say that the shares are supremely undervalued today, and I think I'd rather take my chances with Ternium (TX) in Latin American steel, but the shares do appear to have upside from here and that upside could expand if and when confidence returns to Brazil and as the company makes more progress with U.S. margins.

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Gerdau Facing A Still-Challenging Brazil, But U.S. Margins Improving

Fly Leasing Still Holding Below Fair Value

Although Fly Leasing (FLY) is up a little from when I last wrote about the company, the performance over the last year still hasn’t been very compelling next to AerCap (AER) or Air Lease (AL), and the shares continue to underperform the S&P 500 over that span. At this point, there’s not much that management can do other than execute the plan in place and prove to the Street that the planes it will be acquiring from AirAsia will generate attractive returns. Fly Leasing deserves to trade at a discount to book value, but I believe a 30% discount is too large, and I think a fairer price is in the high teens today.

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Fly Leasing Still Holding Below Fair Value

Steady AerCap Continues To Offer Value

Aircraft leasing company AerCap Holdings (NYSE:AER) has done relatively well this year, with the shares slightly ahead of the S&P 500 on a year-to-date basis and slightly behind on a trailing 12-month comparison. The company has also continued to outperform its peers, with the shares outperforming Air Lease (NYSE:AL), Fly Leasing (NYSE:FLY) and Aircastle (NYSE:AYR) over the past year. Air traffic growth remains healthy on a global basis, oil prices are not yet at problematic levels for airlines, and rate increases give investment grade-rated AerCap an ongoing opportunity to take advantage of its better access to capital.

I continue to believe AerCap shares are undervalued, though the environment over the next couple of quarters may not be as conducive to outperformance. A shift away from significant asset sales is going to weigh on reported earnings, and a shift back toward portfolio growth is going to redirect capital away from share buybacks for a time. Even with that turbulence, though, I believe these shares are undervalued below the low-to-mid $60s.

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Steady AerCap Continues To Offer Value

Akoustis Technologies Is A Puzzling Pre-Commercial Tech Story

It may not always be the case that if something seems to good to be true it probably isn’t, but healthy skepticism can be an investor’s best friend. To that end, Akoustis (AKTS) is both intriguing and confounding. While the idea of disruptive technology in the RF filter space is certainly appealing, particularly with an enterprise value of less than $200 million, I think you have to ask why a company with promising technology and no revenue would go public through a reverse merger instead of following the more typical venture-IPO route.

I don’t know whether the worst accusations against Akoustis are true, but I do know that a lot of what they’re attempting to do flies in the face of how business normally works, and I know competition in advanced filters is extremely fierce. It’s true that Akoustis is targeting markets that can support meaningful revenue, but with what I regard as unproven technology, unproven execution capabilities, significant barriers to adoption, and thin financial resources, this is at best a very risky proposition.

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Akoustis Technologies Is A Puzzling Pre-Commercial Tech Story

Playing M&A Bingo With BB&T

When an historically acquisitive bank signals that they’re reading to start considering M&A again, I don’t think it’s much of a stretch to start speculating on the sort of target(s) the company might have in mind. In the case of BB&T (BBT), while management has certainly laid out a case for worthwhile organic growth by focusing on its core strengths in business and consumer lending, the company has also laid out a clear set of criteria for future M&A, and I believe management would like to make a significant deal (or two) to vault the company over the $250 billion asset level.

Deal or not, I believe BB&T shares are modestly undervalued today. While there are certainly other options in BB&T’s size range worth considering (including PNC (PNC)), I believe mid-single-digit growth can support an attractive return at today’s price.

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Playing M&A Bingo With BB&T

MetLife Continues To Languish In An Out-Of-Favor Sector

Maybe the nicest thing I can say about MetLife (MET) is that it has suffered no worse than its sector, with the shares down 4% over the past year and more or less in line with Lincoln (LNC) and Prudential (PRU), while Unum (UNM) has fallen more than 20%. The issues for investors remain more or less the same – worries about spread pressure, worries about credit quality risk in fixed income, worries about the growth potential of mature markets, and probably most importantly, worries about the status of reserves in long-term care insurance books.

I continue to believe MetLife is undervalued, but it’s hard to identify a catalyst for a turnaround in sentiment. A successful/benign completion of its actuarial review of its LTC business would certainly help, but I think investors are firmly in the “we’ll believe it when we see it” camp when it comes to the potential of the LTC business, as well as the company’s cost-cutting targets and growth initiatives. I continue to see fair value in the low-to-mid $50s, which when combined with the dividend, suggests a pretty good return for this unpopular name.

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MetLife Continues To Languish In An Out-Of-Favor Sector

Efficiency Initiatives, M&A, And Cycle Have Boosted Columbus McKinnon

Columbus McKinnon (CMCO) is off the beaten path, and at around $1.3 billion in enterprise value it is certainly a smaller industrial, but this company is a leading player in material handling products like hoists, industrial cranes, controls, and actuators. Not only has the company gotten a noticeable boost in recent years from acquisitions and cyclical recoveries across a range of industrial end-markets, but the company has also done an excellent job of executing on the (relatively) new CEO’s vision for a leaner, more dynamic Columbus McKinnon.

Although the shares have outperformed the industrial sector this year (and significantly outperformed over the past two years!), this may not be the end of the opportunity. I’m a little nervous about projecting high single-digit to low double-digit FCF margins for a business like this, but it’s hard to argue with the margin improvements that the company has already made, as well as the opportunities in product simplification and R&D re-investment.

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Efficiency Initiatives, M&A, And Cycle Have Boosted Columbus McKinnon

Smiths Group Back To The Drawing Board With Value-Creation

Although Smiths Group (OTCPK:SMGZY) (SMIN.L) enjoyed a good spring/early summer, the shares have given up a lot of those gains as concerns continue to swirl around the Medical business, particularly now that the negotiations with ICU Medical (ICUI) have fallen apart. Not helping matters are concerns as to whether the John Crane business can continue to do all of the heavy lifting for the business and whether management is truly serious about generating value through active portfolio management.

The inability to sell Medical is a disappointment, and there’s really no denying that unwinding conglomerates is now in vogue. With Smiths inability to generate meaningful organic growth in many years, investors want more action even though the company has generated more respectable returns on capital. Given these pressures, Smiths upcoming earnings are going to be an important event for investors – moreso in terms of what management has to say about its vision for portfolio transformation over the next year or two.

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Smiths Group Back To The Drawing Board With Value-Creation

Quality And Conservatism At People's United Comes At A Cost

There’s a lot to like about People’s United Financial (PBCT). A leading bank in New England (#4 in deposit share), People’s United services a client base with well above-average household income and has maintained excellent full-cycle credit quality versus its peers. The bank has also had solid success in expanding its lending franchise into the New York and Boston metro markets and has produced some good long-term C&I loan growth numbers. I’d also note that the bank pays a fairly attractive dividend and operates with a conservative financial structure.

There are also things that aren’t so good about People’s United, though, including the company’s persistent below-peer profitability and more limited growth prospects. Loan growth is looking more challenging in 2018 and the bank’s asset sensitivity may not be worth as much if we’re closer to the end of the rate cycle. People’s United has long underperformed regional banks as a group, and while I do see some value here, this is a tougher call given the more diminished growth prospects that I see.

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Quality And Conservatism At People's United Comes At A Cost

Exceptional Growth And Aggressive Evolution Still Drive Palo Alto Networks

Palo Alto (PANW) is a case-in-point as to why I don’t like to sell stocks just because they look expensive. Good companies, particularly those with a knack for disruptive innovation, have a way of driving ongoing growth above and beyond what seems reasonable to expect. In the case of Palo Alto, ongoing excellence in execution and a strong security market have led to another 17% move in the shares since my last update on the company. Nice as that is, and it handily beats the return of the NASDAQ over that time, it’s well short of what Fortinet (FTNT) and Check Point (CHKP) have delivered, and Fortinet and CyberArk (CYBR) have likewise outperformed Palo Alto on a trailing one-year basis.

Just as selling a strong growth stock because it looks “expensive” can be a regrettable mistake, so too can rushing to make up for lost time and over-correcting. I like the outperformance Palo Alto has been showing, I’m intrigued by the potential of Application Framework, and I think new CEO Nikesh Arora certainly has the right experience to transition Palo Alto into a new hybrid cloud world of security. But I also want to keep some semblance of sanity when it comes to valuation; even though Palo Alto’s potential growth rate for fiscal 2019 would argue for an even higher multiple than it currently sports.

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Exceptional Growth And Aggressive Evolution Still Drive Palo Alto Networks

Adecoagro Downsizes Its Dairy Aspirations And Seems More Focused On Value

Adecoagro (AGRO) has struggled over the past year, with the shares down more than 25%. Plunging sugar prices, a weaker Brazilian currency, and concerns about the Brazilian economy are certainly major factors in that performance, but they aren’t the only concerns in play with Adecoagro. These shares have done almost nothing for investors over the past five years (which is at least better than Cosan (CZZ)), as investors have questioned management’s focus on true shareholder value creation.

Recent developments may be a step in the right direction. Not only did management outline a path toward dividends at a recent sell-side conference, but the company is also being more clear about its intentions to grow FCF and be a better steward of shareholder capital, including a significantly scaled-down offer for SanCor assets in Argentina. While there is still ample skepticism regarding this company, the share price seems to reflect a pretty dire long-term scenario.

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Adecoagro Downsizes Its Dairy Aspirations And Seems More Focused On Value

More Clarity On Honeywell's Spinoffs And A Boost To Guidance

There's an ongoing tug of war in the industrial sector between analysts and investors who believe the end is nigh and that the cycle is going to start showing real signs of slowing next year, and the people who actually run those companies who believe business conditions remain strong. While many short-cycle industrials have picked up a little momentum lately, longer-cycle Honeywell (HON) has remained a strong performer throughout, with the shares arguably replacing 3M (MMM) as the must-own in the space.

In relatively short order, Honeywell will become a smaller, more profitable, and faster growing company as it completes the spinoffs of Garrett Motion (GTX) and Resideo Technologies. Spinning these two businesses should, in turn, lead to higher multiples for Honeywell as it will improve the company's margins, returns, and growth prospects. As all of that is going on, Honeywell continues to enjoy healthy demand across many of its businesses, with certain categories (aerospace, UOP, and automation in particular) looking like they have more to give. I've been a steady fan of Honeywell for a while, but given where the shares now sit in terms of valuation, I can't be quite as enthusiastic as before.

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More Clarity On Honeywell's Spinoffs And A Boost To Guidance

The Cycle Weighing A Bit On 3M

Shorter-cycle names have done a little better in recent months, but overall it’s been a challenging year for the stocks of companies like 3M (MMM), Illinois Tool Works (ITW), and Colfax (CFX) compared to Emerson (EMR), Honeywell (HON), and Eaton (ETN). The late summer/early fall is a popular time for sell-side conferences and investor days, and with that another chance to look at these names heading into the last three months of the year. In the case of 3M, it looks like the company’s shorter-cycle exposure is weighing a bit more on results, with management nudging down growth expectations while also experiencing higher cost inflation.

All told, 3M remains a well-run company at a somewhat challenging point in the cycle and with a tough valuation. 3M has a lot to offer as a flight-to-quality name and the company’s strong tradition of innovation and reinvestment supports a longer-term investment case, but unless management offers an uncommonly bullish outlook at its November investor meeting, investors are likely looking at middling near-term performance prospects.

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The Cycle Weighing A Bit On 3M

Steady As She Goes For AllianceBernstein

A key part of the AllianceBernstein Holding LP (AB) story, and one that I've been saying for a while has been undervalued by the market, is the extent to which the company can unlock the benefits of prior investments in distribution platforms to generate better margins on rising AUMs. That story continues to work out, helping drive these units about 25% higher over the past year and 10% higher since my last update, all while paying an attractive tax-advantaged distribution.

I continue to believe that AllianceBernstein is a worthwhile holding to consider for investors who want a return story that skews toward the income side (and for whom an LP makes sense). The improvements in the company's equity funds is driving better asset growth and the company's overall strategy to drive more retail AUM still has room to run. Meanwhile, the expense benefits of shifting back-office operations out of New York City won't really show for several years, and can drive another leg of margin improvement. With a fair value in the low-to-mid $30s, I believe these shares continue to hold appeal for those willing and able to own an LP.

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Steady As She Goes For AllianceBernstein

Cemex Still Undervalued - And Somewhat Underwhelming

Although Cemex (CX) shares have done pretty well since my last update, rising more than 15% and outperforming peers like Vulcan (VMC), LafargeHolcim (OTCPK:HCMLY), Buzzi (OTCPK:BZZUY), and Cementos Pacasmayos (CPAC), the absolute returns over the past couple of years still haven’t been all that impressive, and the company continues to see only modest growth in EBITDA. Now the company is launching another program of value-creation focused on asset sales, deleveraging, and cost cuts that should produce some incremental, but not transformational, value for shareholders.

The volume situation is frustrating, but I still see value in this company as it continues to reduce debt and starts to return capital to shareholders (likely next year). Asset sales could add a little value and there’s still a credible story here for volume acceleration in the U.S. and Mexico over the next couple of years. Below $8.50 to $9, I’d still say there’s more room for these shares to head higher.

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Cemex Still Undervalued - And Somewhat Underwhelming

Hubbell Looking To Self-Help And A Cyclical Boost

Later-cycle plays have gotten more attention as this year has gone on, and with that electrical product and lighting specialist Hubbell (HUBB) has closed some of its multiyear performance gap relative to industrials, with the stock actually outperforming the Industrial Select Sector SPDR ETF (XLI) over the past year as well as handily outpacing Acuity (AYI) as well. Add in the Aclara acquisition, ongoing restructuring efforts, and an apparent willingness to address the lighting business more directly, and I can see why these shares have done well in recent months.

As far as valuation goes, Hubbell is more of a lukewarm prospect to me now. I like the potential of what facility consolidation, automation, and supply chain improvements could bring, but margins have been weak for a while despite an ongoing effort to restructure. Likewise, while I like the diversification that Aclara brings, lighting remains a tough market. The perception of Hubbell as a late-cycle play should aid sentiment, and the shares do have some upside on an EV/EBITDA basis, but the overall long-term return potential looks more or less in line with most other industrial names.

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Hubbell Looking To Self-Help And A Cyclical Boost

Sunday, September 16, 2018

Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider

Buying good companies on stumbles is a time-tested strategy, but one that stills carries risk – it’s not always easy to separate a stumble from a prolonged tumble down the stairs. In the case of Microchip (MCHP), while issues related to its recent Microsemi purchase loom larger in the short term, I’m a little more concerned about the potential impact of extended lead times and weakening demand in important end-markets.

I believe Microchip has proven itself to be a well-run chip company, and I like the company’s diverse capabilities across microcontrollers (or MCUs) and analog, as well as the new opportunities brought in with the Microsemi deal (including FPGAs, timing products, data center products, and so on). Although this may not be the ideal time to buy given sentiment toward the semiconductor space, the long-term value proposition makes this a name worth considering for more value-driven investors.

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Microchip Looks Undervalued, But There Are Short-Term Challenges To Consider

Dover's Analyst Day Offers Some Encouraging Signs

Dover (DOV) hasn't been my favorite industrial name, largely because of what I believe to be inefficient operations and bloated expenses (leading to less impressive returns on capital) and arguably a less than ideal collection of business. With a new CEO coming into the company from outside (previously the CEO of CNH Industrial (CNHI)), I'd hoped that the company might become more dynamic in addressing its cost issues and perhaps consider more portfolio restructuring activities. While the September 11 analyst day doesn't suggest any dramatic changes are coming, I like the overall direction and philosophy the new CEO is taking with Dover.

Valuation is a little more challenging now. The shares have outperformed industrial peers since the second quarter, in part I believe on improved guidance and healthy orders, but also in anticipation of the analyst day announcements. Although the shares look pretty fully valued on the basis of near-term numbers, successfully executing on cost cuts/margin enhancement efforts and deploying capital toward buybacks could significantly increase EPS in 2020 and beyond relative to current expectations.

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Dover's Analyst Day Offers Some Encouraging Signs

Pacific Biosciences Inching Closer To A Key Event

The summer has been good to Pacific Biosciences (PACB) (or "PacBio"), as the shares have risen from $2.50 in late May to a recent high of just over $5 a share. I attribute some of this positive momentum to a strong market overall for more speculative med-tech stocks, but also to the approaching launch of PacBio's ZMW 8M cell - a major step forward for the productivity of the company's systems that should drive a significant step-up in the utility and popularity of the system, particularly for more advanced applications like structural variant analysis.

PacBio's just announced financing is unlikely to get the company through to cash flow breakeven, but it takes liquidity off the table as a risk through the launch of the ZMW 8M - long enough, I believe, to see the start of a meaningful inflection in demand that could allow for a "top off" financing on better terms ahead of cash flow breakeven (which I estimate in 2022). Valuation is complicated by the sluggish recent pace of revenue growth, but if PacBio can scale up towards $125 million in revenue in 2019 and $160 million in 2020, forward revenue multiples north of 6x could (if not should) come into play and drive further gains, but executing on the ZMW 8M opportunity is absolutely critical.

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Pacific Biosciences Inching Closer To A Key Event

Inphi Shares Pricing In Significant Growth In Data Center And Optical

There is a long list of companies in the chip and networking space leveraged to meaningful growth in optical deployments (long-haul and metro) and expanding adoption of higher-speed networking technologies in the data center. Inphi (IPHI) is uncommonly focused on this market; while adoption of 200G and 400G technologies is important to Mellanox (MLNX), Broadcom (AVGO), Finisar (FNSR), MACOM (MTSI), MaxLinear (MXL), and Semtech (SMTC) to varying degrees, Inphi is intensely focused on DSPs, drivers, TIAs, and PHYs used by equipment companies like Cisco (CSCO), Huawei, as well as hyperscale data center customers like Microsoft (MSFT) and Amazon (AMZN), and lacks the diversification of rivals like Broadcom.

There have been more than a few bumps in the road for Inphi, as data center deployments haven’t always matched up with bullish projections, and the company has been vulnerable to volatile spending patterns in markets like Chinese optical deployments. What’s more, the shares aren’t exactly cheap, as they already factor in meaningful revenue acceleration over the next three years and significant margin expansion. While Inphi does have strong technology and engineering capabilities, and I believe there is likely an M&A “backstop” to valuation, the markets Inphi participates in are intensely competitive.

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Inphi Shares Pricing In Significant Growth In Data Center And Optical

Marvell Not Getting Enough Credit For The Progress It Has Made

Marvell Technology (MRVL) isn’t quite in the clear just yet. While management has led what I believe to be an impressive turnaround since Matt Murphy became CEO in the summer of 2016, and the decision to exit mobile baseband (which occurred before the new CEO came on board) was a good one, the shares have nevertheless lagged the SOX over the past two years, with the gap having widened recently on growing concerns about the health of the recently-acquired Cavium business.

At its core, I think Marvell has a decent, if not good, business – the storage controller business is a solid cash flow generator and the company’s Ethernet business should be able to expand from its low-to-mid-range enterprise core into more attractive data center opportunities. While Cavium’s recent performance has certainly been disappointing, I think it’s premature to write off this business and the growth opportunities in areas like multi-core processors, Ethernet and fibre channel adapters, ARM processors, and security processors and adapters. I’m certainly not as bullish as the sell-side seems to be, but I think expectations are low and solid execution can drive better margins and a fair value into the low-$20s in the short term and into the mid-to-high $20s a little further down the road.

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Marvell Not Getting Enough Credit For The Progress It Has Made

Renesas Seals The Deal With Integrated Device Technology

It didn’t take long for the rumors of Renesas Electronics’ (OTCPK:RNECY) (6723.T) interest in Integrated Device Technology (IDTI) to bear fruit, with the two companies announcing late Monday night that Renesas had agreed to acquire IDTI for $49/share in cash. The deal structure is a fairly straightforward cash transaction, with Renesas anticipating a deal close in 2019 pending regulatory approvals.

Although Renesas is paying a little more than I expected, management’s target for post-merger revenue synergies was higher than I had modeled. Even with a modest discount to those projections (though Renesas has exceeded expectations with its Intersil integration), this looks like an accretive, worthwhile deal for Renesas that will augment its auto business, add valuable analog/mixed-signal capabilities, and better diversify Renesas’s auto-heavy business mix. Although Renesas shares have been hammered this year as the company goes through a tough inventory adjustment cycle, the long-term value looks interesting at these levels.

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Renesas Seals The Deal With Integrated Device Technology

Increased Focus On Better Margins Driving More Value At Lattice Semiconductor

Lattice Semiconductor (LSCC) has been doing alright. Up about 20% since my last update and up close to 40% over the last year, Lattice has not only outperformed the SOX by a good margin but also a number of high-quality chip names like Silicon Labs (SLAB) and FPGA competitor Xilinx (XLNX). Some of this outperformance is due, I believe, to management simply stabilizing the business in the wake of the collapse of the Canyon Bridge deal, the deterioration of the Silicon Image business, and challenges in the mobile/consumer business. More recently, though, management has taken more definitive steps toward enhancing the margin profile of this business, and as margins are a prime (if not principal) driver of semiconductor stock valuation, this enhanced margin focus has upgraded the value proposition at Lattice.

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Increased Focus On Better Margins Driving More Value At Lattice Semiconductor

Semtech Outperforming As The Pieces Come Together

With stronger than expected results in industrial, handsets, data center, and optical, the pieces of Semtech’s (SMTC) growth story have come together a lot quicker than I’d expected. Add in some operating margin leverage and the shares are up about 15% in just the last three months (and up close to 60% over the last year), handily outperforming the SOX index and peers/rivals like Maxim (MXIM), MACOM (MTSI), Inphi (IPHI), and ON Semiconductor (ON) over those time periods.

I didn’t expect this level of outperformance so soon from Semtech, but I can see why the Street is bullish on the prospects for the second half of the year, given the company’s leverage to data center and optical, as well as improving trends for handsets and the ongoing growth opportunity in Long Range Access (or LoRa). I’m not completely comfortable paying more than 5x forward revenue for Semtech today, those margins are improving and this is shaping up as a relatively rare double-digit revenue growth story with M&A support.

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Semtech Outperforming As The Pieces Come Together

Broadcom Beats, But Rebuilding Confidence Takes Time

Short of repudiating the CA (CA) acquisition and announcing a huge buyback, there’s really not much Broadcom (AVGO) could have done with its fiscal third quarter results that would restore enthusiasm for the shares back to its pre-deal announcement levels. And frankly, I’m not sure that would have done it either, as the shares had been trending down since late November anyway.

There are still a lot of positives to the Broadcom story, including a very strong market position in switch silicon, underrated (still) capabilities in heavy-duty AI ASICs, and cash-generating businesses in areas like networking ASICs and enterprise storage. Add in a possibly improving Wireless business and an undemanding valuation, and I believe Broadcom shares still have a lot of appeal. Set against that appeal are the concerns about Broadcom going too far out of its area of expertise with the CA deal and a wider slowdown in the chip space.

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Broadcom Beats, But Rebuilding Confidence Takes Time

Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

If fiscal third quarter results are a fair indication, it looks like my concerns about a slowdown in business at Hurco (HURC) ahead of a major fall tradeshow were misplaced. Although Hurco did see some sequential slowdown in orders, that’s not uncommon in the summer and the business overall seems to be in good shape, while industrial customers continue to look to add production capacity.

Experienced investors know that the good times for Hurco, DMG Mori (OTCPK:MRSKY), Milacron (MCRN) and other industrial equipment manufacturers won’t last forever, but this latest earnings cycle has offered more positive commentary compared to earlier this year and many manufacturers are bumping into capacity constraints. While global trade tensions are a threat, and I wouldn’t go too far out on a limb to chase Hurco, I don’t think the cycle is over just yet.

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Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

Nigeria Once Again Turning The Screws On MTN Group

It wasn’t as if South Africa-based, pan-Africa mobile services provider MTN Group (OTCPK:MTNOY) didn’t already have enough challenges, what with the company fighting for market share and margins with Vodacom (OTCPK:VDMCY) in a weak South African economy, facing renewed sanctions on Iran, and having some challenges in other operating areas. Now the situation has gotten considerably uglier with the government of Nigeria looking to take $10 billion from MTN for what it claims are underpayment of taxes and violations of currency controls.

At this point it is harder and harder to argue for patience with MTN Group. While new management may be able to drive better long-term performance, and the long-term potential of the African market (as a whole) is significant, the issues with Nigeria and Iran are significant and won’t go away quickly. MTN Group is likely trading below, if not well below, a reasonable estimate of fair value, but the risks to the Nigeria business are substantial and that creates significant overall uncertainty as to valuation and long-term potential.

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Nigeria Once Again Turning The Screws On MTN Group

K2M Shores Up A Weak Spot For Stryker

One of the best med-tech names out there, Stryker (SYK) doesn’t have many weaknesses, but the company’s spine business has been one notable exception. With a portfolio that has been lacking in innovation or differentiation, Stryker has seen its market share in spine drift lower against the likes of NuVasive (NUVA) and Globus (GMED) in recent years. Acquiring K2M (KTWO) is a strong step in shoring up the weakness of Stryker’s spine business, and while some investors may question Stryker’s decision to “double down” in a tough business, the long-term benefits of the move could be larger than they first appear.

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K2M Shores Up A Weak Spot For Stryker

Renesas And IDT - It May Or May Not Be True, But It Makes Some Sense

Once a hotbed of M&A activity, deal activity in the semiconductor sector has cooled off considerably this year as buyers are digesting their meals and potential acquirers are trying to make sense of the current market, given lengthening lead times in many product categories, rising trade tensions, and some concerns about deal approval criteria. Even so, I’ve continued to maintain that Integrated Device Technology (IDTI) is a “when, not if” seller and Japan’s Renesas (OTCPK:RNECY) is a “when, not if buyer,” and while I hadn’t previously tied these two together, there’s a rumor now that Renesas is close to a deal to acquire this high-quality mid-cap growth semiconductor company.

Although I wouldn’t call Renesas a prime strategic acquirer of IDT, I can see how the company’s capabilities in auto sensors, power management, and wireless power would hold a lot of appeal, not to mention the strong growth outlook for IDT in other markets like memory interfaces, industrial sensors, and wireless charging. Assuming a normal level of post-deal cost savings, I believe Renesas could pay something in the low-to-mid $40s for IDT and still reap worthwhile (double-digit) long-term returns on the deal.

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Renesas And IDT - It May Or May Not Be True, But It Makes Some Sense

Friday, August 31, 2018

Ciena Converting Skeptics And Finding Its Groove

Ciena (CIEN) has been a patience-testing call at times, as the market has been unwilling to trust this optical equipment provider given a not-so-great history and reputation for its sector. While there are still too many subscale players in optical transport, Ciena is doing well on Tier 1 metro spending, growth overseas in markets like India and Japan, and data center growth. Margins are still a bit of a sensitive subject, but I think management has made a good case for why margins should rebound over time.

With the big post-earnings jump (up more than 10%), it's harder to call Ciena a bargain, though I don't think the upside is tapped out yet. I'm a little concerned that Ciena could disappoint on gross margins in the next quarter and shake some of this newly-won confidence, but this is definitely a name I'd look at again if it were to slide back into the mid-$20s.

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Ciena Converting Skeptics And Finding Its Groove

Infineon Facing Near-Term Ordering Risks, But Attractive Long-Term Growth Opportunities

These are interesting times for the semiconductor industry. End-market demand is still pretty healthy, and with many suppliers at or near capacity, lead times have lengthened and double-ordering has become more commonplace. That's a threat to companies like Infineon (OTCQX:IFNNY) (IFXGn.XE), ON Semiconductor (ON), and STMicroelectronics (STM), as the industry has struggled in the past to exit gracefully from periods of extended lead times and deal with what is often an over-capacity situation in the immediate aftermath.

I do believe the near-term outlook for Infineon has some risks to it (and I would say the same for ON, STM, and Renesas (OTCPK:RNECY)), but I like the company's long-term growth opportunities in areas like auto, factory automation, renewables, and appliances, as it leverages its very strong position in power and looks to grow share in microcontrollers (or MCUs).

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Infineon Facing Near-Term Ordering Risks, But Attractive Long-Term Growth Opportunities

Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Focused and disciplined, Employers Holdings (EIG) isn’t likely to ever be a fiery growth stock, but then I think you could argue that aggressive growth in insurance doesn’t often work out so well. Instead, Employers has delivered consistent shareholder value growth since going public by staying focused on its core market opportunity of underwriting workers’ comp insurance for small businesses in industries with low-to-medium hazard risk.

I’m less than comfortable making a big leap into a pure workers’ comp play today, though. The industry has benefited from an extended period of lower losses due in part to the benefits of the ACA and rates have come under pressure in recent years as a result of lower losses and strong returns. Worsening loss trends are a threat, as is a slowdown in employment growth, and more insurers are trying to target the smaller business markets that Employers has targeted. While I do think the shares are modestly undervalued today, another dip toward $40 would certainly get my attention.

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Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Disruptive Innovation And Generally Good Execution Driving Globus Medical

Although there was a little hiccup in June, Globus Medical (GMED) has continued to outperform in a hot med-tech market, as investors have been fired up by the company’s disruptive innovation (particularly in robotics) and prospects to leverage meaningful share gains and pull-through in the coming years. At the same time, the company’s “core” spine business has continued to gain share in what may finally be a recovering U.S. market for spine procedures.

Up close to 80% over the past year, valuation remains my biggest concern with the shares. Ongoing beat-and-raise quarters should be able to support the stock (if not drive it higher), but the stock does appear to be carrying multiples in excess of what the business can support, and I believe that ups the risk.

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Disruptive Innovation And Generally Good Execution Driving Globus Medical

Sandy Spring Offers Quality And Value, But Mind The Funding Risk

By and large, there aren't a lot of great bargains in the banking sector today, and most of those that look to be bargains to me are having some "hair" on the story right now. I suppose bears can point to some near-term issues and challenges with Sandy Spring Bancorp (SASR), but on the whole I believe this metro DC bank is a high-quality proven operator with a good mix of quality and growth, and a decent value story as a nice little kicker.

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Sandy Spring Offers Quality And Value, But Mind The Funding Risk

Wednesday, August 29, 2018

Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Relative to the skepticism that prevailed two or three years ago, Carlsberg (OTCPK:CABGY) (CARLb.KO) has executed well – not only against its self-improvement plan, but against a pretty challenging market environment. Management has exceeded its cost-cutting/savings goals, successfully introduced new products, and shown that it can drive revenue and profit growth from “premiumization” in mature markets, while building its business in emerging markets.

Carlsberg shares have outperformed most of its peer group over the past two years, handily surpassing ABInBev (BUD), Molson Coors (TAP), and Heineken (OTCQX:HEINY), though not matching the stellar performance of CR Beer. Valuation is mixed, with the shares not looking so appealing on discounted cash flow, but offering more upside on EV/EBITDA, and management still faces considerable challenges with a mature footprint and rising competition in some of the most attractive emerging markets.

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Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Improving Rates And Capital Deployment Should Better Support Ship Finance's Dividend

Through the severe ups and downs of the shipping industry, Ship Finance (SFL) has managed to roll with the punches better than most. Although the annualized total return over the past decade including dividends isn’t so impressive next to the S&P 500, the company has done considerably better than the “average” shipping company (more than a couple of which went bankrupt) and has consistently paid a dividend despite significant disruptions at major client companies.

Ship Finance has also evolved with the time, and I believe the company is in fairly solid shape today. Not only is the company placed to benefit from rising rates in containerships and dry bulk, the company has been actively deploying capital into cash flow-generating assets and could likely deploy several hundred million dollars more into productive assets. Although I don’t think the shares offer all that much appreciation potential, I believe the dividend will be increasingly better-supported by cash flow in the coming years and I think the yield offers a decent return relative to the risk.

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Improving Rates And Capital Deployment Should Better Support Ship Finance's Dividend

Nektar Therapeutics Offers A High-Potential But Controversial Pipeline

It has been a while since I updated my thoughts on Nektar Therapeutics (NKTR), and a lot has happened with this biotech over the past year, including a huge development deal with Bristol-Myers (BMY), mixed trial data at ASCO, and ongoing progress with additional compounds in the oncology pipeline. On top of all that, Nektar has a pain asset with potentially impressive upside, an exciting early-stage anti-inflammatory asset, and a significant amount of cash.

Nektar shares sold off hard after the disappointing ASCO results, but have since recovered 40%. At this price, I don’t necessarily think Nektar is seriously undervalued relative to the development risk. That’s a key caveat, though, as better clinical data on the NKTR-214 (or ‘214) melanoma program at the November SITC could restore some bullishness here and there is a lot of potential value in ‘214, NKTR-358, NKTR-262, and NKTR-255 that could be unlocked with future clinical successes.

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Nektar Therapeutics Offers A High-Potential But Controversial Pipeline

An Unexpected Leadership Transition Likely Won't Faze Roper

It’s hard to find much to pick at with Roper (ROP). Sure, the ROIC/CROCI could be a little higher, but this tech and software-driven multi-industrial has “out-Danaher’ed” Danaher (DHR) over the past 15 years with a 20% annualized return driven by well above-average revenue growth, operating margins, FCF growth, and FCF margins. What’s more, the company’s transition toward niche-based, asset-light, SaaS-driven recurring revenue puts the company in a sweet spot with respect to many of its more cyclical peers.

Roper investors got a negative surprise on Friday, though, as the company announced that Neil Hunn would be assuming the CEO position effective on September 1, with Brian Jellison stepping down. While this transition is coming about three years sooner than expected, Hunn has been groomed for this position for some time. Rising valuations and ample capital left to deploy will test Hunn early in his tenure, but my basic viewpoint today is that Jellison established a model that can continue to generate strong results without him.

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An Unexpected Leadership Transition Likely Won't Faze Roper

Approval, Labeling, Pricing, And Competitor Data All Give Alnylam Pharmaceuticals A Wild Ride

It’s been an interesting period of time to be an Alnylam (ALNY) shareholder, as the company got its first FDA approval (Onpattro), but with a narrower label than hoped and a somewhat confusing price structure. On top of that, a key potential competitor that wasn’t even seen as much of a player just a year ago has come out with data that, while strong, doesn’t exactly lock the door on Alnylam.

I’m finding that relatively conservative expectations have helped me out with Alnylam; the company’s announced net pricing was 1.5% lower than my estimate, and I never had modeled any revenue for Onpattro from more cardiomyopathy-oriented hATTR patients. While data from Pfizer’s (PFE) tafamidis does set a high bar for Alnylam’s ALN-TTRsc02 (or “sc02”), here too I haven’t been expecting Alnylam to run away with the market. All told, I’m still feeling relatively comfortable continuing to own these shares and with a $150 fair value estimate.

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Approval, Labeling, Pricing, And Competitor Data All Give Alnylam Pharmaceuticals A Wild Ride

Can Acerniox Deliver A Stronger Second Half?

One of the strongest bullish arguments for Acerinox (OTCPK:ANIOY) has been that the company’s strong leverage to the U.S. market (40% of production capacity) would significantly improve its pricing outlook and shield it from at least some of the risks of import competition in markets like Europe. Although that has been the case, and Acerinox has outperformed other stainless steel names like Outokumpu (OTCPK:OUTKY) and Aperam (OTC:APEMY), as well as other European steel names like voestalpine (OTCPK:VLPNY) and ArcelorMittal (MT) (which is really more of a global steel company), the shares are still down a bit from my last update and flat for the year as my worries about playing a mature steel cycle have apparently come to pass.

As is the case with voestalpine, it’s hard to recommend Acerinox shares now even though they do look meaningfully undervalued. European steel prices should recover in the second half of the year, but “should” is not a guarantee, and it’s tough to see what’s going to drive a significantly better outlook for these companies. While I do thing the value argument here is legitimate, and peak EBITDA could still be some distance away, investors need to at least consider the risk that Acerinox turns into a value trap.

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Can Acerniox Deliver A Stronger Second Half?

Wright Medical Does A Deal Both Opportunistic And Defensive

For a company that many investors are certain that the CEO is going to sell at some point in the not-so-distant future, Wright Medical (WMGI) continues to show that it is very focused on building its business. To that end, the company announced Monday morning that it would be acquiring privately-held ortho implant company Cartiva for $435 million in cash. Although Wright is paying a high price for Cartiva, the valuation isn’t unreasonable relative to the growth and Wright is adding an uncommonly profitable product with meaningful growth potential.

Given the price Wright Medical is paying, executing on this transaction is essential. While the acquisitiveness of Wright could, perhaps, prompt some investors to question the real underlying health of the company’s portfolio, I think Cartiva was a rare opportunity for Wright Medical to meaningfully augment its growth potential.

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Wright Medical Does A Deal Both Opportunistic And Defensive

Monday, August 27, 2018

Value And Operational Quality Aren't Enough To Get Voestalpine Moving Up

It’s been something of a boilerplate warning for me when I’ve written about steel stocks this year, but one of my biggest concerns with the companies in this sector has been whether there’s anything left in terms of themes or catalysts to drive these stocks higher. In the case of voestalpine (OTCPK:VLPNY) (VOE.VI), the shares have been disappointingly weak since my last update (down about 14%, underperforming the sector by about 10%), as worries about tariffs, end-market exposures, and cycle/price risk outweigh what have been pretty good operating results.

I do believe voestalpine shares are trading meaningfully below fair value, but what’s going to change that? Valuation itself is very rarely a catalyst, and I don’t know that there’s much desire in Washington, D.C. to ease up on tariffs ahead of midterm elections. Accordingly, while I do think that voestalpine is a very good steel company trading at too low of a price, there is a real risk that this is a value trap at a time when the sector is likely plateauing.

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Value And Operational Quality Aren't Enough To Get Voestalpine Moving Up

Core-Mark Races Out Of Wall Street's Doghouse


So much for Core-Mark (CORE) needing time to rebuild confidence in its business, or at least insofar as the Street goes. Core-Mark reported a solid, and certainly stronger than expected, second quarter, and not only have the shares rocketed back up, but the sell-side crowd is back to doing keg stands and conga lines to celebrate the company, and scratching around for excuses to boost price targets even though their actual estimates haven’t gone up so much.

Although I thought things were looking better for Core-Mark in May, I absolutely didn’t expect the shares to double in just three months. Management has certainly made better (and faster) progress in address cost issues in two of its West Coast locations and that seems to have restored a lot of faith in the overall business plan. What’s more, pressures on the cigarette business have normalized and the non-cigarette business continues to grow nicely. I liked Core-Mark more than the Street seemed to back in May, and I’m impressed with second quarter results, but I do think the sharp upward move in the shares more than adequately reflects the improvements in the business.

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Core-Mark Races Out Of Wall Street's Doghouse

Saturday, August 25, 2018

PagSeguro Disrupting A Large, Previously Untapped Market

Fintech has been good to investors recently, with the markets prizing highly leverageable “toll-taker” models that can earn small, high-profit bits of revenue off of repeated transactions. One of the classic examples of this model is the merchant acquirer (think companies like Global Payments (GPN)), and PagSeguro (PAGS) is bringing a new and disruptive acquiring model to the small business market in Brazil.

No brief article can completely capture or summarize the risks of a company, so please do your own careful due diligence. In addition to the risk that comes with competing with the likes of Cielo (OTCPK:CIOXY), Itau Unibanco’s (NYSE:ITUB) acquiring operations, newer entrants like SumUp, MercadoLibre’s (MELI) Mercado Pago, and now PayPal (PYPL), there are significant regulatory risks, operating/execution risks, and macroeconomic risks.

All of that said, this is an interesting growth story, as PagSeguro has already carved out good initial market share in the “micro-merchant” niche and stands to benefit not only from ongoing merchant acquisition, but increasing transaction volume and value. Fintech valuation has often tended to exist in its own world, but PagSeguro’s growth potential could make it worth a look from aggressive investors who can accept the above-average risks.

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PagSeguro Disrupting A Large, Previously Untapped Market