Friday, April 8, 2022

Anchors Aweigh For Kirby, As Chemical And Refinery Activity Drives More Barging Demand

It has taken a little longer than I expected, but Kirby (NYSE:KEX) is finally seeing operating conditions in its core inland barge business improve to a meaningful extent. A strong economy and limited new barge capacity should make for a much more profitable operating environment for at least the next two or three years, while the long-suffering Distribution & Services business benefits from increased power generation, trucking, and energy sector demand.

These shares are up about 12% since my last update, beating both the S&P 500 and the Dow Jones Transportation Index over that time – neither of which are great proxies for this company, but you have to take what you can get sometimes. With the stock off sharply since the announcement of an agreement to supply barges for an offshore wind project, this seems like a good time to revisit the name.

 

Read the full article here: 

Anchors Aweigh For Kirby, As Chemical And Refinery Activity Drives More Barging Demand

Infineon Shares Already Pricing In Some Correction To Order And Margin Trends

No matter how many times the semiconductor sector proves its cyclicality, there are always analysts and investors ready to declare that “it’s different this time” during the next up-cycle. You can imagine what follows, and this cycle has been no different, with some analysts and investors attempting to claim that capacity constraints and new end-market demand will mean an end to the sector’s cyclicality, never mind the fact that past cycles had those same basic drivers (tight capacity and new growing end-markets).

Despite a strong long-term outlook, I didn’t like the shorter-term outlook for Infineon (OTCQX:IFNNY) back in August of 2021, and the shares are down more than 20% since then, underperforming the SOX index by close to 15%. At this point I’m still worried about the risk that estimates for 2023 (and possibly 2024) are just too high and that there’s further downside risk as orderbooks and margins shrink. I also note, though, that Infineon shares have already fallen close to 40% from their high and the valuation for longer-term investors is looking a lot more interesting.

 

Read more here: 

Infineon Shares Already Pricing In Some Correction To Order And Margin Trends

Donaldson Deserves A Second Look After A Steep Decline

Writing about Donaldson (NYSE:DCI) in August of 2021, I noted that I was more concerned about valuation with this high-quality filtration company, but that I was inclined to “let the winner run” on the basis of strong near-term demand and intriguing long-term diversification and growth opportunities.

That was not a good call, as the shares have since declined almost 25% over that period. While it’s true that many industrials have been taken to the woodshed over the last six months on fears related to supply chain pressures, global macro instability, and so on, Donaldson has dramatically underperformed, trailing the industrial space by almost 20%. All the more curious is that sell-side expectations for Donaldson actually aren’t all that much lower now; margin assumptions for FY’22 have come down, but have been offset by higher revenue.

I find Donaldson much more interesting at these levels. Not only do I believe there’s a healthy off-road cycle left to leverage, but I believe the company’s efforts to reapply core technologies into new markets like food/beverage and life sciences can drive higher revenue and FCF over time. I wouldn’t call the shares “screaming buy” cheap, but I do think the valuation is more interesting for long-term investors.

 

Read the full article here: 

Donaldson Deserves A Second Look After A Steep Decline

A Look At Citigroup And JPMorgan Going Into Q1 Earnings

Even as the banking sector moves toward a period where core earnings growth should be as good as it's been in years (helped by rates and loan growth), the large bank sector has been hit hard recently, with major banks around 20% from their highs. Several factors have contributed to this, including weaker capital markets, rising global macro uncertainty after Russia's invasion, ongoing worries about inflation, and yield curve inversion, to say nothing of growing chatter about a recession within 18 months.

Neither Citigroup (NYSE:C) nor JPMorgan (NYSE:JPM) have been spared from this weakness, with both on the weakest end of the performance curve year to date, but both continue to look undervalued going into this first quarter reporting period. What follows is a comparison of these two large-cap banks, as well as some trends worth watching.

Read more here: 

A Look At Citigroup And JPMorgan Going Into Q1 Earnings

BOK Financial Seems Overvalued Relative To Its Growth Prospects And Profitability

Banks are looking at improving earnings outlooks, with rates set to continue to rise and improving loan demand giving them better-earning options for their capital. Still, there are increasing uncertainties about the pace of rate hikes, as well as opportunities for operating cost leverage in 2022. I believe BOK Financial (NASDAQ:BOKF) has above-average loan growth prospects in 2022 and 2023, but I believe some of that leverage is tempered by less promising outlooks in the fee-based businesses and a structurally less profitable business than many peers.

At this point I’m not all that bullish on BOK Financial shares, even with the year-to-date underperformance. I like the bank's leverage to energy lending and the attractive Texas loan market, but higher expenses are a drag and I just don’t find the valuation all that compelling now.

 

Read the full article at Seeking Alpha: 

BOK Financial Seems Overvalued Relative To Its Growth Prospects And Profitability

NXP Semiconductors Has Already Sold Off Ahead Of Potentially Rockier Demand

A year ago, NXP Semiconductors (NASDAQ:NXPI) was a consummate example of “love the company, don’t love the stock (or the valuation, more precisely)”. Since my last update on the company, the shares have fallen about 18%, underperforming the SOX by around 17%, while names I preferred like onsemi (ON) and STMicro (STM) have done notably better. While nothing is fundamentally wrong with NXP, I think the weakness can be tied to limited margin upside over the next few years, as well as risk/vulnerability in the coming normalization (if not down-cycle).

I think a lot of the correction may already be in the shares and I’m increasingly intrigued by the value I see here. Although there are better plays to leverage auto electrification, NXP will generate growth here, and I like the company’s leverage to industrial automation, edge intelligence, and what I’d call “non-traditional” mobile (UWB in particular). I certainly acknowledge a risk that I may be underestimating the downside if the cycle really corrects sharply, but I still think NXP is set for high single-digit revenue growth and strong margins that can fuel an attractive long-term return from today’s price.

 

Continue reading here: 

NXP Semiconductors Has Already Sold Off Ahead Of Potentially Rockier Demand

US Foods Spotlight On Management's Operational Challenges

I've been lukewarm on US Foods (NYSE:USFD) for a while, as I feel stuck between valuing the company on the basis of what it could (and arguably, should) achieve in terms of organic growth and margin leverage and the reality that management hasn't been delivering on that potential in a meaningful way. Now there's a proxy fight for control of the board, with investor Sachem Head looking to take over and presumably put the company on the "right path".

These shares are up about 7% since my last update, beating the S&P 500, but largely tracking with food distribution peers Sysco (SYY) and Performance Food Group (PFGC). These shares do still look undervalued, but I see risks around the proxy fight - if management wins, I'm concerned that investors may see more of the same underwhelming results, but I haven't seen a compelling plan from the other side either, and I worry about the risks of a hack-and-slash approach to cost-cutting.

 

Click here to continue: 

US Foods Spotlight On Management's Operational Challenges

Cognex Could Come Back To Life In 2022

The last six months or so have not been good ones for industrial stocks, and particularly higher-multiple growth stories. Within that limited context, then, Cognex (NASDAQ:CGNX) actually hasn't done so bad; the shares have lagged the broader industrial space by about 10% since my last update, but the shares have held up better than those of other high-multiple favorites like Fortive (FTV), IDEX (IEX), and Rockwell (ROK).

I do still have some modest concerns about a transition in how Cognex is viewed by the Street - less of a "pure" growth story and more of a "good growth… for an industrial" - but sentiment is difficult to predict, and I think Cognex still has a powerful tailwind from overall growth in automation adoption across multiple industrial end-markets. I'm also concerned that my double-digit growth projections are too aggressive, but again I see significant growth opportunity in existing served markets, growth in new markets, and opportunities to grow/acquire adjacent products and software.

Cognex isn't what I'd call "truly cheap", but I do see high-single-digit total annualized return potential at this level, and I think 2022 could be a better than expected year for growth, so I'm leaning more favorably on these shares even after the nearly 25% bounce of recent lows.

 

Follow the link to the full article: 

Cognex Could Come Back To Life In 2022

Bank OZK Should Reverse Some Recent Underperformance As Loan Growth Accelerates

Given the prospect for numerous rate hikes over the next two years, not to mention improving loan growth, the over growth prospects for banks are looking better than they have in some time. Keys for this next part of the cycle will be the ability to grow loans, manage costs, and keep deposit costs low, and I think Bank OZK (NASDAQ:OZK) is well-placed to achieve two of the three, making it an above-average prospect at this point.

When I last wrote about Bank OZK a year or so ago, I thought the bank’s near-term prospects were more modest than for other banks I preferred at the time, and the shares have modestly underperformed since then. At this phase of the cycle, though, I’m more bullish on Bank OZK, and I think this is a name worth considering again.

 

Read the full article here: 

Bank OZK Should Reverse Some Recent Underperformance As Loan Growth Accelerates

Tuesday, April 5, 2022

POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

Among the steel companies I regularly follow, Korea's POSCO (NYSE:PKX) has become more and more of an outlier, and not in good ways. While there have been steel companies whose shares have done even worse since my last update on the company, the performance is still notably bad compared to companies like ArcelorMittal (MT), Nippon Steel (OTCPK:NPSCY), Nucor (NUE), and Steel Dynamics (STLD).

Some of this underperformance can be explained by margin pressures from input cost inflation and uncertainties in the demand outlook, but POSCO also stands out from the crowd with its desire to pursue empire-building - if management has its way, steel will only be around half of the business in eight years and the company will have extensive operations in areas like battery and hydrogen production.

I don't necessarily think that reinvesting the cash flows from the steel operations into new businesses is a bad idea, but POSCO has a bad historical track record outside of steel (even if that record was built by other managers) and investors these days tend to want their steel companies to be steel companies. While POSCO does screen out as quite cheap on fundamentals, it's hard to say when sentiment will turn around.


Read the full article: 

POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders

For most of the time I've followed Compass Diversified Holdings (NYSE:CODI), my feelings have been some version of "it's alright… I guess". Indeed, since my first piece on the company for Seeking Alpha, a positive write-up, the shares have basically matched the S&P 500 on a total return basis. Likewise, since my last piece, with a total return just a bit below the S&P 500.

Some of my lack of enthusiasm can be traced to what I've felt was a lack of capital recycling activity - a management team too willing to be passive and hold its portfolio instead of making more opportunistic transactions. That seems to be changing, with management selling several businesses in recent years and putting out a multi-year growth target that will require more acquisitions and faster revenue growth from its portfolio.

This strategy does carry some risk, but Compass brings a lot of positives, including a low cost of capital, an attractive operating structure for potential founder-sellers, and far more patience and long-term focus than most private equity buyers. I do consider a competitive M&A environment to be a risk, and the valuation today isn't spectacular, but I think this is a "steady as she goes" investment idea with some opportunities for outperformance-driven upside.

 

Continue reading here: 

A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders

Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

The shift away from high-multiple growth names in life sciences has been brutal, with many names down 50% or more over the last year. This list includes Pacific Biosciences (NASDAQ:PACB) (“PacBio”), which has dropped another 60% or so since my last write-up on this sequencing company. Although I think PacBio is in even better shape now than a year ago from a long-term perspective, the reality is that sentiment has shifted and this is the risk that goes with owning shares valued at double-digit multiples of future revenue.

Between improvements to its long-read sequencing technology and the addition of a short-read technology platform, I believe PacBio has an even stronger long-term outlook, and while there is (and likely always will be) chatter about what competitors in the space are doing, so far none have come close to PacBio where accuracy is concerned. Long-term revenue growth of over 30% is hardly a humble assumption, but I do think PacBio shares look undervalued today.

 

Read the full article here: 

Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

Badger Meter In The Right Water Markets, But The Valuation Is Steep

For some time now, my refrain on water-leveraged industrials has been iterations of “yes, this is a good sector to be in long term, but the valuation more than reflects that”, and the sector has definitely pulled back and derated recently. Badger Meter (NYSE:BMI) has been caught up in that, with the shares underperforming since my last update; underperforming the broader industrial space by about 15%, as well as other water plays like Mueller (MWA) and Franklin (FELE), though outperforming Xylem (XYL).

As I’ve said in other articles, I don’t believe that all water exposure is equal, and I think Badger is in some of the best places to be, including water quality and loss mitigation. Even so, I can’t make the valuation work at this level and it’s hard to recommend this name over some other companies in the water space with more reasonable valuations.

 

Read more here: 

Badger Meter In The Right Water Markets, But The Valuation Is Steep

Enpro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

At a point in the cycle where the market really isn’t fond of short-cycle industrial exposure, Enpro’s (NYSE:NPO) decision to shift toward faster-growing, higher-margin, and less typically cyclical business is looking better and better. Since my last update, not only has the company steadily beaten expectations (including full-year results that were comfortably above my expectations), but the shares have outperformed the broader industrial group by almost 15%, with a 16% total return that also surpasses what the S&P 500 has returned.

Given Enpro’s greater leverage to a faster-growing semiconductor end-market, my long-term revenue growth estimate moves from around 4% to between 5% and 6%, and I see stronger long-term FCF margins as well. I still see these shares offering more than 10% near-term upside, as well as long-term total annualized return potential in the high-single-digits, which is better than what most industrials are offering today.

 

Continue reading here: 

EnPro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

As The Colfax Chapter Ends, Both ESAB And Enovis Have Something To Prove

By the time this is published, Colfax (NYSE:CFX) will no longer exist as it did before, with the company changing its name to Enovis (ENOV) and keeping the medical business, while spinning out 90% of the welding business ESAB (ESAB.WI) to shareholders. In executing on this transaction, I believe management is hoping to unlock more value on the med-tech side, with the idea being that a nearly debt-free mid-cap med-tech company with growth potential should obtain a better valuation on its own than it could blended in with ESAB.

I was mixed on Colfax’s prospects a year ago, as I thought turbulence related to the split and operational challenges in the med-tech business could still weigh on the shares, but that there was likely more value here than was being reflected in the share price. The stock underperformed since then, and while I do see opportunities here, there are challenges ahead for both businesses.


Read the full article: 

As The Colfax Chapter Ends, Both ESAB And Enovis Have Something To Prove

After A High-Profile Failure In Melanoma, Nektar Therapeutics' Value Shifts To Its Early-Stage Pipeline

Nektar Therapeutics (NASDAQ:NKTR) is now facing the unenviable challenge of picking up the pieces and rebuilding investor confidence in the company and the stock after the disappointing failure of the company’s pivotal combo study in melanoma. Although there are still additional studies of bempegaldesleukin (or “bempeg”) that have yet to read out, it seems unlikely that there will be winners here, leaving Nektar as a more development-stage biotech with three early-stage lead compounds.

I was completely wrong about the likelihood of bempeg succeeding in melanoma, and that was what I believed to be the program with the highest likelihood of success given the established use of IL-2 as a last-ditch therapy. I can’t completely write-off the remaining bempeg studies, but I think it would be highly surprising if any of them showed efficacy to warrant an NDA submission, and the three remaining lead compounds (NKTR-358, NKTR-255, and NKTR-262) are too early in their development to support a strong share price today.

 

Follow this link for the full article: 

After A High-Profile Failure In Melanoma, Nektar Therapeutics' Value Shifts To Its Early-Stage Pipeline

A Multiyear Enterprise Investment Cycle Continuing To Drive Opportunities For Broadcom

It hasn’t been that long since my last update on Broadcom (NASDAQ:AVGO), but the shares have continued to outperform (up 8% versus a slight decline in the SOX) on the company’s strong leverage/exposure to a red-hot enterprise/networking segment and ongoing excellence in execution on margins. Moreover, with lead-times still near record levels and not as much inventory-building in markets like networking and broadband, Broadcom is better-protected from some of the cyclical sentiment risk that has hit chip stocks.

I continue to like Broadcom today. Taking another look at the key data center market, I believe this market can continue to drive strong revenue growth for Broadcom for several more years, helping offset some of the risk in markets like wireless. With longer-term revenue growth potential above 6%, along with further margin leverage, these shares look undervalued below the $700’s.


Read the full article at Seeking Alpha: 

A Multiyear Enterprise Investment Cycle Continuing To Drive Opportunities For Broadcom

Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Supply chain challenges added another pelt to the wall when Ciena (NYSE:CIEN) warned in mid-February that the company would miss fiscal first quarter targets due to supply chain challenges, and management subsequently indicated that supply chain pressures remained a risk in the second quarter. While this is a setback, the company still grew more than 10% in the quarter, is still poised to benefit from significant spending growth in telecom and datacom markets, and is still an attractive play on global data traffic.

These shares have given back about 7% since my last update, underperforming rivals like Cisco (CSCO) and Infinera (INFN) by around 7% to 10%, with Nokia (NOK) performing similarly. While the near-term supply challenges take a trivially small amount of my fair value estimates, the share price decline has these shares set up again for a double-digit long-term total annualized return, making this an attractive name to consider again at this price.

 

Read more here: 

Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Manufacturing And Self-Help Come Through For MSC Industrial

I've been skeptical about MSC Industrial's (NYSE:MSM) latest self-help initiatives, but management is providing the best rebuttal possible - good execution. I can, and will, quibble that sales growth should be higher given the underlying strength in manufacturing, but the company is definitely doing better on margins, and that helped drive better fiscal second quarter results - a set of results that should also bode well for the broader multi-industrial space in the upcoming calendar first quarter earnings cycle.

I flipped from neutral to positive on these shares in late February, in part due to valuation/sentiment, and in the short time since, the shares are up about 10% - roughly doubling the performance of the underlying industrial sector. With some positive adjustments to my margin assumptions, I still see around 10% to 20% near-term undervaluation, with longer-term total return potential in the high single-digits.


Read the full article here: 

Manufacturing And Self-Help Come Through For MSC Industrial

Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down

Writing about Calyxt (NASDAQ:CLXT) in the past, my concern was never whether the company’s core TALEN gene editing technology (licensed from Cellectis (CLLS)) worked, whether it could work in agriculture, or whether it could develop credible modified crops. My concern was whether the company could execute, and the answer was definitively “no”.

Now the company is on to its third iteration, attempting to remake itself as a “synthetic biology” company that harnesses its core competencies to develop and produce sustainable plant-based molecules for use in end-markets like pharmaceuticals, food/supplements, and cosmetics. The company starts this next chapter with less than $25 million in cash and not much time to convince potential partners of the validity of the platform in order to secure partnerships.

The basic concepts behind the company’s PlantSpring and BioFactory platforms seem credible, but this company has never given investors a reason to believe that they can deliver, and this is at best a speculative bet that Calyxt can secure enough capital to prove the commercial viability of this latest plan.

 

Click the link for the full article: 

Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down

Thursday, March 31, 2022

onsemi Riding High, But The Ride Doesn't Have To End Soon

onsemi (NASDAQ:ON) (formerly "ON Semiconductor") is rising quickly up my list of go-to examples when I say that successful turnarounds can go much further than the market initially thinks. CEO Hassane El-Khoury has quickly established credibility for the company's margin-improvement efforts, including exiting less-efficient fabs and walking away from low-margin business, and it lends more credibility to a long-term growth story built on rapidly-growing demand for advanced power and sensing/imaging chips across a range of auto, industrial, and compute markets.

I've liked onsemi for a while, and I still do even after a 40% run since my last update. Along with Infineon (OTCQX:IFNNY) and STMicro (STM), I expect onsemi to ride strong demand in power and sensing to high single-digit long-term revenue growth, while company-specific drivers lead to substantially higher margins and free cash flow generation. With updated expectations, I think these shares have near-term upside well into the $70's, though I do see more short-term cyclical risk here.

 

Click the link to continue: 

onsemi Riding High, But The Ride Doesn't Have To End Soon

With The First Midwest Merger Done, Old National Bancorp Needs Execute On The Opportunity

Banks undergoing significant mergers are typically put in the penalty box now due to concerns about regulatory delays and real post-deal synergies, but the close of Old National Bancorp’s (NASDAQ:ONB) merger of equals with First Midwest hasn’t really helped much. These shares have continued to lag peers since my last update, with the shares up about 4% against closer to a 10% positive move in the peer group and a similar 4% move in the S&P 500.

I have decidedly mixed feelings on Old National shares at this point. On one hand, the valuation doesn’t seem ambitious or aggressive to me, even in the context of long-term term earnings growth in the neighborhood of 4%. On the other hand, neither of these two banks stand out on customer service or long-term core growth, and the Chicago-era lending market is getting increasingly competitive.

 

Read the full article at Seeking Alpha: 

With The First Midwest Merger Done, Old National Bancorp Needs Execute On The Opportunity

Hammered By Supply Issues, Inogen Could Be A 2023 Comeback Story

I was concerned about Inogen's (NASDAQ:INGN) supply chain risk back in August of 2021, but that situation went from bad to worse since, culminating in a roughly one-month suspension of manufacturing. While there have been encouraging developments (including growth in the rental business), supply chain and margin challenges are likely to loom over the company and the stock for the remainder of 2022.

These shares have fallen another 45% since my last update, and they look pretty washed out at this point, with little sell-side support and a pretty undemanding valuation. With ongoing growth opportunities in the rental and international channels, I think this is a name that could come back to life when the supply situation improves (likely 2023), allowing for revenue reacceleration and margin leverage.

 

Continue here: 

Hammered By Supply Issues, Inogen Could Be A 2023 Comeback Story

Employers Holdings Leveraging The Reopening And Expansion Of The Economy

Employment and job growth are looking pretty good for the time being, and while the workers’ compensation insurance market is quite competitive, operating conditions look basically favorable for Employers Holdings (NYSE:EIG) right now. Premiums have been growing nicely, and while I do have some concerns that loss frequency will increase, I think management is generally conservative with underwriting.

The shares haven’t done all that much since my last write-up, and comparisons to other large underwriters like Hartford (HIG) and W. R. Berkley (WRB) are of limited value given very different business mixes, and likewise with Amerisafe (AMSF), which is also a pure workers’ comp underwriter, but focuses on higher-risk groups. I do still see fair value in the mid-$40’s on the basis of both near-term ROE (P/BV) and long-term core earnings growth, but that makes this a relatively middling prospect today.

Read the full article here: 

Employers Holdings Leveraging The Reopening And Expansion Of The Economy

Lattice Semiconductor Continues To Tear It Up With Strong Execution

Given that the SOX is still down about 10% on a year-to-date basis, maybe it’s time to check in with Lattice Semiconductor (NASDAQ:LSCC) and see if investor nervousness about the semi cycle and peaking lead-times has led to a sustained sell-off in this great growth stock.

Yeah … no.

Although the shares are down about 25% from their November peak, Lattice shares are up another 30% or so since my last update. Fueled by incredibly strong momentum in its core lower-range FPGA business and very good ongoing execution, there’s really nothing to fault here other than the valuation, and even I’m willing to acknowledge that special growth stories fall into their own bucket where “fair value” is concerned.

 

Continue here: 

Lattice Semiconductor Continues To Tear It Up With Strong Execution

Atlas Copco - Always Excellent, Almost Always Expensive

Maybe no other company illustrates the challenges with the idea of "you have to pay for quality" better than Atlas Copco (OTCPK:ATLKY). While the Swedish industrial conglomerate doesn't get quite the same "compounder" fanfare as companies like Fortive (FTV) or Roper (ROP), the company nevertheless has an established track record of above-average margins, ROIC, free cash flow growth, and so on … as well as a 10-year total return (annualized) below that of the S&P 500. I believe a long history of an elevated valuation has contributed to keeping a lid on the share price, though a 10%-plus annualized return over a long period is not exactly "bad".

These shares are down about 7% since my last update, and now there are a lot more concerns in the market about industrials - particularly whether these companies (and stocks) are going to get squeezed between slowing demand (as indicators like the PMI slow) and persistent supply chain pressures. I think Atlas will navigate these challenges well, but the valuation is certainly not in straightforward bargain territory. While this is about as attractive as I've seen the valuation in a while, investors should be alert to the risk of further derating.

 

To read the full article, follow this link: 

Atlas Copco - Always Excellent, Almost Always Expensive

Columbus McKinnon's Transformation Still Not Fully Reflected In The Shares

Change takes time, but Columbus McKinnon (NASDAQ:CMCO) has made it clear that they’re serious about transforming into a higher-value-added provider of automation-enabling machinery and generating stronger margins in the process. Multiple M&A transactions have augmented the company’s product lineup, while the newest iteration of the company’s Blueprint for Growth strategy continues to offer avenues to margin improvement.

When I wrote about Columbus last summer, I said I saw a window of opportunity in the shares. That window has stayed propped open longer than I expected, though the shares have kept pace with the wider industrial sector while slightly underperforming the S&P over that time. With mid-single-digit long-term revenue growth potential, improving margins, and the possibility of double-digit ROIC in FY’23, I still see meaningful potential in these shares today.

 

Read more here: 

Columbus McKinnon's Transformation Still Not Fully Reflected In The Shares

Reliable Execution Has Done A Lot Of Good For MTN Group

Another year has gone by and sentiment around MTN Group (OTCPK:MTNOY) is as good as it has been in quite a while. CEO Ralph Mupita has proven that he and his management team can deliver on a number of value-creating moves without dropping any balls across this pan-African telco provider’s vast business footprint (272M subs). Better still, the company’s relationships with regulators seem to be on better footing, while economies across Africa are benefiting (to varying degrees) from higher export commodity prices and waning burdens from the pandemic.

The good and bad of MTN Group as a stock is that valuation is driven so much more by sentiment around emerging markets (Africa in particular, naturally) than underlying financials. I thought the shares were exceptionally cheap a year ago, but they had been that way for some time. In the last year, though, sentiment has shifted significantly, driving the ADRs up more than 100%.

I continue to view these shares as undervalued and capable of delivering double-digit annualized returns for some time, largely on the back of strong growth in higher-value data and fintech services. This is a harder stock to recommend to casual investors, though, as there are a lot of moving pieces to track and sentiment on emerging markets can swing so wildly.

 

Read the full article at Seeking Alpha: 

Reliable Execution Has Done A Lot Of Good For MTN Group

Lundbeck Languishing Without Clear Drivers

Danish drug company H. Lundbeck A/S (OTCPK:HLUYY) ("Lundbeck") hasn't underperformed in terms of core operating earnings since my last update, but the company has seen unsatisfying results for its main growth drivers and the pipeline remains skewed to high-risk late-stage programs and unproven (and high-risk) early-stage compounds. On top of all that, the company is proposing "a heads we win, tails we still win" split share structure that favors its primary shareholder.

I'll discuss the share split later, as it really irritates me. Operationally, I don't see the story as having changed so much from my last update, and a lot is still riding on a normalization of marketing behaviors where the company can get its reps in front of doctors. While I can make the argument that these shares are undervalued, potentially significantly so, a lot is riding on the upcoming read-out of Rexulti in Alzheimer's-associated agitation, as there is little to drive the stock higher in the short term beyond that.

Click the link to continue: 

Lundbeck Languishing Without Clear Drivers

Valeo Hammered On Sector-Wide Operational Challenges And Future EV Fears

The last seven or eight months have been brutal for tier one European auto suppliers. It's bad enough that component shortages have led OEMs to produce less than they'd like, but erratic start/stop schedules have wreaked havoc on supplier operations, and supply and labor challenges have done them no favors either.

The best thing I can probably say about Valeo's (OTCPK:VLEEY) performance since my last update is that a quick glance at Faurecia (OTC:FAURY) and Vitesco (VTSCY) shows that it could have been even worse, though all of these have underperformed American suppliers like Aptiv (APTV) and BorgWarner (BWA).

It's not smooth sailing ahead for Valeo just yet. While the company should be past the worst of the production disruptions, I expect the Street is still going to fret about losses tied to the EV development programs and the risk that EV component insourcing limits the long-term opportunity. These aren't new concerns, but there aren't many positives to offset them now. I believe that Valeo is materially undervalued here, but the company needs beat-and-raise reports (particularly on margins) to shift sentiment.

 

Follow the link for the full article: 

Valeo Hammered On Sector-Wide Operational Challenges And Future EV Fears

Sunday, March 27, 2022

For 3M, Inertia May Be The Bigger Long-Term Threat

3M (NYSE:MMM) has been hit hard by growing concerns over the company’s potentially large financial liabilities tied to PFAS (per- and polyfluoroalkyl substances) contamination and allegedly defective military earplugs. It certainly also hasn’t helped that the company’s revenue and margin leverage performances have been lackluster at best, all contributing to a nearly 25% decline in the stock price since my last update on the company – far worse than the basically flat performance of the broader multi-industrial sector.

I do still see some value in these shares, but for reasons I’ll discuss in greater detail, I don’t have as much confidence in management as I'd like, and it’s harder to argue for owning these shares given the sentiment headwinds from the legal liability issues.


Read the full article here: 

For 3M, Inertia May Be The Bigger Long-Term Threat

Friday, March 25, 2022

Insteel Generating Historically Strong Margins With Robust Underlying Demand

These are interesting times to be in the steel business, particularly with the market uncertainty unleashed by Russia’s invasion of Ukraine. Insteel Industries, Inc. (NYSE:IIIN) has different exposure than companies like Commercial Metals (CMC) or Nucor (NUE), as it is a steel products producer, taking wire rod and producing prestressed concrete strand and welded wire reinforcing products for the non-residential and infrastructure markets. Nevertheless, navigating the challenges of inadequate domestic supply, strong end-user demand, and rising input costs makes things pretty “interesting” for Insteel as well.

I was more cautious on Insteel at the time of my last article, as I was concerned how the market would react to what looked like some turbulence in the outlook for non-residential construction. The shares have held up better than I expected since, rising almost 10% as the company has done a good job securing better spreads and managing a challenging supply environment.

Given my expectation that non-residential construction will accelerate later this year and into 2023, and that infrastructure and institutional spending will start accelerating in 2023, I like the near-term outlook, but I am still concerned about the risk of peaking financial performance.

 

Read the full article here: 

Insteel Generating Historically Strong Margins With Robust Underlying Demand

Allegheny Technologies Setting Up For Higher Highs As Aerospace Recovers

The shares of specialty alloy producer Allegheny Technologies (NYSE:ATI) have already doubled lows in the late fall of 2021, as the market has started pricing in both the recovery in the commercial aerospace market and management's progress on self-help initiatives. Still, these are the early days of the recovery, and it doesn't look as though the market is fully pricing in what this newly more efficient company can earn as the cycle ramps further.

To be clear, I do not think that Allegheny is a good buy-and-hold stock for long-term investors. The commercial aerospace cycle should take several years to play out, but even with the improvements made to the business, I think full-cycle returns are unlikely to be all that attractive. In other words, this is a stock to try to own on the way up, but you really don't want to ride along for the down-cycle. Given low double-digit EBITDA margin in 2022, accelerating into the mid-teens and beyond over the next five years, I think there's at least 10% to 15% more near-term upside today.

Read the full article here: 

Allegheny Technologies Setting Up For Higher Highs As Aerospace Recovers

ICU Medical: There Is Still Upside Here As Management Goes Big To Drive Value

Operating in a sub-sector of med-tech that has long rewarded scale, ICU Medical (NASDAQ:ICUI) has gone for scale in a big way. The acquisition of Smiths Medical from Smiths Group (OTCPK:SMGZY) was very nearly a “merger of equals”, at least in terms of revenue and so forth, and while the logic of the deal is sound, management is taking on some meaningful integration challenges and risks, including leveraging up the company.

There are a lot of things I like about this deal. Not only does Smiths Medical give ICU Medical more scale in its core infusion business, it adds complementary assets elsewhere in the business. Smiths will increase ICU’s international presence, and I see a lot of “blocking and tackling” opportunities to improve operational metrics.

Although these shares aren’t as cheap as I might like on cash flow, that’s not uncommon in med-tech, and I see fair value above $265 today.

 

Follow the link for the full article: 

ICU Medical: There Is Still Upside Here As Management Goes Big To Drive Value

New York Community Bancorp Idling Until Regulators Wave Green Flag On Flagstar Merger

At this point New York Community Bancorp (NYSE:NYCB) shares remind me of an F1 driver that has to start the race from pit lane; they’re sitting there watching the pack fly by while the company waits for regulators to wave the green flag and clear the transformational merger with Flagstar (FBC). Since my last update, these shares have fallen more than 10%, underperforming regional peers by more than 15%.

I don’t see any evidence that NYCB and Flagstar won’t get that clearance, and that’s key to the bull argument here. While there are several good things going on at NYCB beyond that deal, a liability-sensitive effectively single-market lender is not going to fare well in this market. I still expect the deal to close in 2022, though, and I still believe that the combined bank will generate mid-single-digit core earnings growth that supports a fair value in the $15-16 range today.

Click here to continue: 

New York Community Bancorp Idling Until Regulators Wave Green Flag On Flagstar Merger

Gorman-Rupp A More Off-The-Radar Play On Water

Pump manufacturer Gorman-Rupp (NYSE:GRC) didn't see quite the same level of excitement when institutional investors piled into water-related stocks, and the shares have held up comparatively better as that sector has cooled. Basically flat now from my last update (but up as much as a third in the interim), the valuation is still in that "okay but not great" gray zone where it's harder to make a definitive call either way.

There's plenty to like about Gorman-Rupp, and not just its exposure to water infrastructure spending. The company is also leveraged to a coming recovery in new commercial construction, as well as infrastructure, and further growing in process-oriented industry. That said, the margins aren't really exceptional and I do think that limits some of the upside.

 

Read the full article here: 

Gorman-Rupp A More Off-The-Radar Play On Water

Vontier - Faster EMV Erosion Is A Near-Term Challenge, And The Street Needs To See A Better Path For Growth

I've written in the past that oddly undervalued stocks make me nervous, and Vontier (NYSE:VNT) is at least partly a case in point. Writing about the stock a year ago, I wondered why the shares seemed so cheap, and the shares have fallen another 20% since then despite posting better-than-expected financial results.

While management's guidance for a quicker decline in EMV-related revenue certainly drove recent weakness, the reality is that Vontier shares have been weak since September of 2021 (the time of the company's first significant M&A transaction) despite generally good results and a decent outlook. While I can understand some degree of frustration over capital deployment and concerns about near-term growth leverage, expectations are so low now that low single-digit growth can drive a double-digit forward return.

 

Read more here: 

Vontier - Faster EMV Erosion Is A Near-Term Challenge, And The Street Needs To See A Better Path For Growth

Xylem Worth Another Look After A Big Valuation Reset

Xylem's (NYSE:XYL) valuation has clearly benefited in the past from its strong leverage to ESG themes, with the company's leverage to water infrastructure leading it to score well on the environmental part (the "E") of ESG fund mandates. With that tailwind of investor enthusiasm for water stocks, Xylem has enjoyed a multiple typically reserved for companies with stronger "compounder" credentials like Danaher (DHR) or IDEX (IEX).

That valuation, not the company's qualities, has long been my prime issue with the stock, but after a one-third decline in the share price since my last update (far worse than declines in other compounds like IDEX or other water infrastructure names like Franklin Electric (FELE) or Mueller (MWA)), a revisit is warranted.

There are certainly things that I find less than ideal about Xylem, but I'm also a believer that almost every asset has its right price. What's more, for all of my skepticism and cynicism about what the Street was recently paying for water-related names, I do think that the water market has attractive long-term structural characteristics. Xylem isn't a slam-dunk just on valuation now, but it's a great deal more interesting than before.

Read the full article here: 

Xylem Worth Another Look After A Big Valuation Reset

Cullen/Frost: Stretched Valuation, Can't See Fundamental Value

I never expect the market to be completely rational, but occasionally you do find some head-scratching valuations in the banking sector. In the case of names like First Republic (FRC) or SVB Financial (SIVB), high multiples can be explained by an established track record of well-above average organic growth. In the case of Commerce (CBSH), you can argue for a “sleep well at night premium”.

And then there’s Cullen/Frost (CFR). This is one of those situations where I can say I love everything but the valuation, and while that was true a year ago, that didn’t stop the shares from going up another 30% and handily beating regional bank peers. Cullen/Frost doesn’t offer extraordinary growth, but it may well have an M&A “backstop” and I can’t argue with the quality of the bank franchise. Still, with the shares trading at 18x my above-Street ’23 EPS estimate and the valuation implying long-term core earnings growth in the mid-teens, I just can’t see the fundamental value here.

Read the full article here: 

Cullen/Frost: Stretched Valuation, Can't See Fundamental Value

Armstrong World Leveraged To Non-Residential Recovery And Pricing, But Self-Help Could Go Even Further

Writing about Armstrong World Industries (NYSE:AWI) in August, I was ambivalent on this leading manufacturer of commercial ceiling tiles and specialty ceiling materials, as I thought the company's strong leadership in its core market was offset by the share valuation and the prospect of weaker renovation activity in 2022 ahead of recovery in non-residential construction.

Since then, the shares have fallen more than 10%, and management's guidance for margins in 2022 was softer than the Street had expected. At the same time, though, the company is showing exceptional pricing power and the company is still leveraged to what I expect will be a meaningful renovation cycle targeting "healthy building" initiatives. If Armstrong can generate long-term revenue growth in the mid-single-digits, free cash flow growth in the high single-digits, and mid-20%'s adjusted operating margins, I see upside of around 20% from here.

 

Click the link to continue: 

Armstrong World Leveraged To Non-Residential Recovery And Pricing, But Self-Help Could Go Even Further

Merit Medical's Underperformance Seems Overdone As Elective Procedures Normalize

The medical device space has taken a few more body-blows in recent months, with elective procedure counts once again impacted by the pandemic and cost inflation pressuring margins. While the cost inflation is going to be a lingering issue, elective procedure counts should improve and normalize as the year goes on, driving some decent revenue prospects as hospitals work through their backlogs.

Specific to Merit Medical Systems Inc. (NASDAQ:MMSI), the share price underperformance since my last update looks a little excessive. Although I didn't find the valuation compelling then, a 10%-plus decline on top of good results in the second half of 2021 and guidance for 2022 changes the math some. Although smaller med-techs with single-digit revenue growth prospects can sometimes linger in valuation purgatories, mid-single-digit revenue growth and ongoing margin improvement should be able to support a return to the $70's for these shares.

 

Read more here: 

Merit Medical's Underperformance Seems Overdone As Elective Procedures Normalize

With Underwhelming Growth And Expensive M&A, Fortive's Compounder Credentials Are In Question

It took a little longer than I expected, but at least some of the derating process that I'd expected for the industrial sector is taking place and it's been unpleasant so far, with many higher-multiple industrials down 10% or more since the start of the year, including "compounder" stocks like Danaher (DHR), IDEX (IEX), and Rockwell (ROK) (Ametek (AME) and Roper (ROP) are in this group too, but have declined less than 10% since the start of the year).

Fortive (NYSE:FTV) is included in that group, with a roughly 20% year-to-date decline and a similar move since my last update on the stock. I wasn't that fond of the shares then due in large part to valuation, but now there seems to be more grumbling about the multiples that Fortive is paying and whether shareholders are getting good value for that money.

I do share many of these concerns, though I think Fortive is also building a less-cyclical "all-weather" company that can generate some pretty solid free cash flow over the long term. While not my favorite company in terms of drivers or business strategy, and the valuation argument is not at all straightforward, I do think the share price is getting more interesting.

Read the full article here: 

With Underwhelming Growth And Expensive M&A, Fortive's Compounder Credentials Are In Question

Unifi Looking To Translate Solid ESG Credentials Into Better Financials

ESG investment mandates are becoming more and more common, but not all ESG-compliant companies are created equal - a fair few of these businesses are still more "vaporware" than real, with an investment case that rests on significant fundamental shifts in how consumers, companies, and economies operate. Not so with Unifi (NYSE:UFI), as this yarn producer has a long operating track record behind it, including a strong track record with its REPREVE line of polyester and nylon yarns made from recycled plastics.

Unifi's management has some bold goals, including a nearly mid-teens revenue growth rate over the next three and a half years, as well as significant margin improvement. While I do think the wind is at Unifi's back where the increased use of recycled materials is concerned, I do have some concerns that the goals a bit too ambitious. Even still, a more modest set of targets can still drive a double-digit annualized return from today's level.

Please click the link to continue: 

Unifi Looking To Translate Solid ESG Credentials Into Better Financials

Bio-Techne - Exceptional Leverage To Biopharma Growth, And Priced Accordingly

You don't go to the leading edge of life sciences/bioproduction looking for bargains, as the strong growth and margins available to companies facilitating the rapid growth of new biologic treatment options like gene and cell therapies have fueled strong share price performance (and multiples) for larger, better-known companies like Danaher (DHR) and Thermo Fisher (TMO), as well as smaller players like Bio-Techne (NASDAQ:TECH).

I find a lot to like in Bio-Techne's leverage to cell and gene therapy-enabling products like GMP protein production and non-viral gene editing, as well as its leverage to life sciences/bioproduction research tools, spatial biology, and molecular diagnostics. I don't find nearly as much to like in the valuation, but stocks like these are a "you either get it, or you don't" sort of proposition where you're basically betting that the underlying growth of the market and the company's strategic decisions will eventually lead to enough revenue and profit growth down the line to redeem an eye-watering valuation today.

Read the full article here: 

Bio-Techne - Exceptional Leverage To Biopharma Growth, And Priced Accordingly

W.W. Grainger Continues To Ride High As Company-Specific Strategic Initiatives Produce Results

Seven months later, and not all that much has changed for me in regards to W.W. Grainger (NYSE:GWW). The company continues to have important, differentiating growth drivers in the short term, but long-term concerns about margins and valuation. Still, that debate continues now from a higher valuation, as the shares have climbed almost 20% since my last update, beating the S&P 500, industrials in general, and specific distributors like Fastenal (FAST) and MSC Industrial (MSM).

In that last update, I thought Grainger at least had the virtue of a differentiated growth story to separate it from what I thought was an expensive overall industrial sector. With a lot of quality industrials taking a beating since then, I see that as a less compelling argument and I don’t find as much to like at this price.

To continue reading, please follow this link: 

W.W. Grainger Continues To Ride High As Company-Specific Strategic Initiatives Produce Results

Cycle Risks Remain, But Analog Devices Has Solid Long-Term Credentials

There is certainly a faction of analysts and investors that perpetually view semiconductors as either in a downturn or heading toward the next downturn, and I suppose while that may be technically true, you will miss a lot of winners that way. That being said, it's equally foolish to ignore the cyclicality of the semiconductor space, as buying at the top can lead to a lot of years of lackluster performance.

I was neutral on Analog Devices (NASDAQ:ADI) back in April of 2021 mostly due to my concerns about a sentiment shift against semiconductors as investors would eventually come to the conclusion that unsustainable lead-times are, in fact, unsustainable and will eventually lead to an order correction cycle that would likely compress growth and margins for a time.

Since then, the shares have returned about 5%, underperforming the S&P 500 and the SOX, as well as some of the chip names I've preferred, including Broadcom (AVGO) and STMicro (STM). I'm still concerned about sentiment and the prospect of negative revisions when lead-times shrink, but this is definitely a name I'd at least follow now and seriously consider if there's another re-test of those lows in the $140's.

 

Read more here: 

Cycle Risks Remain, But Analog Devices Has Solid Long-Term Credentials