Thursday, September 21, 2017

Aptose Looking Toward Human Studies

I've tried to go to some length to be clear that Aptose Biosciences (NASDAQ:APTO) is a very high-risk biotech stock, and the company has continued to back up that notion. Management has not been able to resolve manufacturing issues with its promising cMyc-inhibitor APTO-253 and has shifted its focus to another preclinical candidate (CG'806), but progress toward human testing has remained frustratingly slow.

Aptose has been an interesting study in all of the “i's” that have to be dotted and “t's” that have to be crossed to get a drug from the lab and into human trials (let alone through trials and FDA and onto the market). Unfortunately, investors don't buy stocks to learn things and the shares have chopped along below $2 since my last update. I normally don't bother with preclinical biotechs, and I'm not really advising anybody else to either, but I remained intrigued by the strong preclinical signals of efficacy and safety of these two drugs. The odds are that the light at the end of the tunnel is an oncoming train (that's how it goes in biotech and that's not an Aptose-specific comment), but I can still argue for a value well above today's price.

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Aptose Looking Toward Human Studies

Takeda Offers Restructuring And Portfolio Upside

Takeda (OTCPK:TKPYY) (4502.T) is no longer the sleeper pick it once was, as the local shares of Japan's largest drug company have risen more than 25% year to date and close to 35% over the past year (the ADRs have done well too, just not as well as the local shares). Even so, patient investors should be looking at the potential of high single-digit appreciation from here as the company continues to realize the benefits of its restructuring initiatives and reports on key clinical studies

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Takeda Offers Restructuring And Portfolio Upside

Tuesday, September 19, 2017

Alnylam On Its Back Foot Heading Into A Major Event

Alnylam (ALNY) needs some good news and its upcoming Phase III APOLLO read-out on patisiran really needs to hit the mark with respect to efficacy and safety. With a $7 billion market cap, a lot is still expected of this company even though it has had more than a few setbacks in the past year. Programs in hemophilia, porphyria, and cholesterol still have worthwhile potential, but yet another major setback would seriously diminish management credibility and investor confidence in what is still an unproven platform.

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Alnylam On Its Back Foot Heading Into A Major Event

A Window Has Opened For NuVasive

Writing on NuVasive (NUVA) three months ago I said, “Given the history here of the market swinging too far during both the bad times and the good times, I'd be careful buying near the highs, but I'd certainly reconsider if the sector sells off on another bout of health insurance reform uncertainty and/or a company-specific shortfall in earnings/guidance.”

One of those big swings has occurred, with the shares down a quarter since then. The decline hasn't come without some reasons, including a slower U.S. spine market, executive departures, and a subpoena from the OIG, but these don't strike me as long-term issues. Instead, they remind me of a lot of the other short-term setbacks that have created interruptions in NuVasive's long-term run. To that end, I believe strong revenue growth and margin leverage are still in play here, and I believe the shares are actually undervalued.

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A Window Has Opened For NuVasive

Lattice Semiconductor Has To Get Back To Business As Usual

After around a year of speculation and worry, Lattice Semiconductor (LSCC) finally got resolution on the $8.30/share Canyon Bridge takeout offer, as an executive order from President Trump blocked the deal on security grounds after a recommendation from the Committee on Foreign Investment in the United States. This decision wasn't exactly a surprise, as the company had multiple go-arounds with the Committee (including two re-filings), and the shares were down about a quarter year-to-date.

Lattice has a lot of work to do. Guidance and context have been lacking, as management elected not to host conference calls while the Canyon Bridge deal was pending, but revenue and gross margins have been choppy. On the other hand, the company's IP and capabilities in low-power programmable logic devices (including FPGA) and app-specific standard products have value, and the company's cost structure could offer meaningful (and attractive) synergies for the right acquirer.

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Lattice Semiconductor Has To Get Back To Business As Usual

Fortive Exceeding Expectations And Deploying Capital Into M&A

Fortive (FTV) hasn't wasted time showing investors that it fully intends to follow the model and map left by Danaher (DHR). In addition to driving continuous internal improvement, Fortive has started putting shareholder capital to work in M&A – deploying more than $1.5 billion so far this year. Although the deals have been a little pricey, particularly the most recent acquisition, the businesses seem to very much fit in with the vision management has outlined for the company.

These shares have been quite strong year to date and over the last year, so I can't say that the Street is asleep on this name anymore. The appreciation potential in the shares is no longer in that sweet spot I'd like for a new investment, but quality doesn't often come cheap, and I'd note that Danaher did well for investors for a long time despite elevated valuations.


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Fortive Exceeding Expectations And Deploying Capital Into M&A

Sunday, September 17, 2017

Dover Looking To Exit Energy

Analysts have been speculating about Dover's (NYSE:DOV) long-term commitment to its upstream energy business for a little while now, and earlier this week management acknowledged that after completing a strategic review they were looking at “strategic alternatives” for the business. A sale would seem to be the preferred outcome, but management seems committed to getting out of this industry and a spin-off (similar to what the company did with Knowles (NYSE:KN)) is also on the table.

I'm skeptical that this move will add significant value, but I can understand the timing and at least some of the rationale. I think the energy recovery is likely to slow down and the energy segment won't be as much of a contributor to Dover's growth in 2018. What's more, the company is going to have to start reinvesting in the business fairly soon and I believe management is wary of the “tail wagging the dog” and the impact that this segment has had on company valuation. 

Dover shares have been strong since my last update, up close to 15% and well ahead of the S&P 500, as well as peers like Illinois Tool Works (NYSE:ITW) and General Electric (NYSE:GE). The shares have closed that relative undervaluation gap I saw back in May, but investors could still push this higher on optimism around the energy sale process.

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Dover Looking To Exit Energy

First Bancshares An Emerging Growth Story Worth Considering

Bank stocks aren't typically thought of as growth stocks, and that is not unfair, given that quality banks like BB&T (NYSE:BBT) and PNC (NYSE:PNC) probably aren't going to see long-term organic earnings growth much above 5% to 6%. If you're willing to go much smaller, though, and take on meaningfully higher execution risk, you can find some more interesting stories, and I think First Bancshares (NASDAQ:FBMS) is one such story. 

Management has executed on a focused growth plan since 2009, using organic expansion and targeted acquisitions to move into desirable markets in Louisiana, Alabama, and Northern Florida. With the company closing in on $2 billion in assets and meaningful potential operating leverage, not to mention future M&A options, I believe First Bancshares could be looking at high-teens earnings growth over the next three to five years, justifying a fair value in the low-to-mid $30s. Do note, though, that this is a small, off-the-radar bank stock and carries above-average risks.

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First Bancshares An Emerging Growth Story Worth Considering

Thursday, September 14, 2017

Lexicon Thumped Despite Favorable Data

Readers who used to play SimCity 3000 might remember the frustration of seeing “Lack of chocolate sprinkles” as an explanation for setbacks in the game, and I'm reminded of that today seeing Lexicon (NASDAQ:LXRX) shares down over 10% on otherwise positive full data from its Phase III inTandem3 study of sotagliflozin in Type 1 diabetes.

Sotagliflozin isn't a flawless drug and the results of inTandem3 weren't perfect, but I don't believe they were so far out of line with prior trial results to justify the move in the share price. While chatter around other issues pertaining to Type 1 diabetes coming out of the EASD meeting may be contributing to the anxiety, I think the reaction is exceedingly negative and that these shares remain undervalued compared to the potential of sotagliflozin in Type 1 diabetes and Xermelo in carcinoid syndrome.

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Lexicon Thumped Despite Favorable Data

Chemical Financial Offers Some Value And A Proven Growth Model

Today, Chemical Financial (NASDAQ:CHFC) is still digesting the transformative acquisition of Talmer, but this top-10 Michigan bank (and the largest bank headquartered in Michigan) is likely not done with its one-two punch of organic community banking growth and growth through acquisition. Although there has been some turbulence since the deal and the company is still looking at a few quarters where results will be impacted by strategic shifts, the company is on a trajectory for low double-digit earnings growth and should trade above $50 a share.

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Chemical Financial Offers Some Value And A Proven Growth Model

SPX Flow May Still Be Ugly Enough To Love

Life has not been easy for SPX Flow (NASDAQ:FLOW). Based upon what happened to other companies with significant oil/gas exposure like Dover (NYSE:DOV) and Emerson (NYSE:EMR), as well as power generation (also relevant to Emerson), it is no great surprise that a company leveraged to selling pumps and valves to upstream and midstream energy companies would be weak. But then dairy processing weakened significantly and kicked out another leg of SPX Flow's stool. With that, annualized revenue from the last quarter was about 30% below the level of 2012 and the company's efforts to improve its cost structure have largely been buried by operational deleverage.

Not all of SPX Flow's problems have been macro-driven (there have been some self-inflicted wounds along the way), but I do believe that there is a reasonable price for most going concerns and I think SPX Flow may be below that level. Orders have started to improve and I believe margins have bottomed out. Although I'm not looking for a V-shaped recovery in oil/gas, and I believe food/beverage isn't going to grow like it used to, modest revenue growth and margin improvements can drive a fair value close to $40. As a stock that hasn't really rocketed up on its recovery prospects, I think SPX Flow might be worth a closer look.

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SPX Flow May Still Be Ugly Enough To Love

Wednesday, September 13, 2017

Integrated Device Has More To Offer, But Transitions Can Be Tough

It stands to reason that after the strong run in the SOX (up over 40% in the past year and over 80% in the last two years), lingering undervaluation in individual semiconductor stocks is going to come with a “but” attached. In the case of Integrated Device Technology (NASDAQ:IDTI), the company is looking at some decidedly mixed market outlooks, with uncertainty in attach rates for wireless charging, weakness in wireless infrastructure spending, potential for disappointment in server unit shipments, and ambitious targets for the auto and sensor businesses.


I like the collection of technologies that Integrated Device has assembled in-house, and I believe the company can generate double-digit FCF growth from here. Although the shares do not look undervalued on a DCF basis, the shares do still seem to offer some upside on an EV/revenue business and could attract M&A interest. Integrated Devices looks buyable today (although I think MaxLinear (NYSE:MXL) may be more interesting), and it would definitely be a name to reconsider on a pullback into the low $20s.

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Integrated Device Has More To Offer, But Transitions Can Be Tough

Stryker Still Rolling With The Punches

I believe there's a case to be made that Stryker (NYSE:SYK) is among the best-run med-tech companies in the last quarter-century, and maybe one of the best-run companies overall. Through multiple management transitions, numerous M&A transactions, and significant shifts in the med-tech landscape (in terms of technology, competition, reimbursement, etc.), this company has remained a surprisingly consistent grower and a good steward of capital. 

With that in mind, what's a fair price for this company? The shares dropped about 5% on the news of significant issues relating to Sage, but that decline has been almost fully recouped. The second-quarter results marked almost four straight years' worth of 5%+ organic growth and we're now talking about a new streak of close to 7% growth – for a company that is quite large already. I had actually hoped that the Sage news might open a wider window for more value anxious investors like me, but it's tough for me to get excited about buying the shares above the $130's.

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Stryker Still Rolling With The Punches

MaxLinear In A Challenging Transition, But The Upside Is Interesting


Microsemi (NASDAQ:MSCC) has been a good stock for me, generating a double-digit annualized return for the seven-plus years I've owned it, and I like investing on the basis of patterns – figuring out a constellation of attributes that have worked for me in the past and finding them again. With that in mind, I think MaxLinear (NYSE:MXL) might be a name to look at a little more closely.

MaxLinear is not exactly “the next Microsemi,” and the products/markets served are quite different, but here is another growth-through-acquisition story that is underpinned by some solid technological / design capabilities and a desire to grow the addressable market by applying those capabilities to new markets. If MaxLinear can deliver on these opportunities and generate high single-digit revenue growth with improving margins, a fair value range in the mid-to-high $20's seems fair, not including the potential that MaxLinear itself could be a target.
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MaxLinear In A Challenging Transition, But The Upside Is Interesting

Hurco Seeing A Recovery, But It's Choppy

This hasn't been a great year so far for Hurco (NASDAQ:HURC). Although the “industrial recovery” theme is generally playing out, machine tool orders have been choppy and inconsistent at best. For Hurco's part, revenue and margins have recovered slower than I'd expected, making the share price underperformance relative to the S&P 500 not so surprising. I am a little surprised, though, that the shares have lagged those of other machine tool companies like Hardinge, Inc. (NASDAQ:HDNG) and DMG Mori Seiki to the extent they have (roughly 17-20% year to date); Hurco's performance has been somewhat disappointing, but not that much so on a relative basis. 

I continue to believe that Hurco is undervalued, but that comes with the caveat that this is an illiquid and unfollowed company. Moreover, the lack of margin leverage at this stage of the recovery is somewhat concerning. Even so, long-term FCF growth in the mid-single digits can support a fair value in the high $30s, and I believe the prospects remain good for ongoing improvement in the machine tool sector.

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Hurco Seeing A Recovery, But It's Choppy

Monday, September 11, 2017

An Unexpected Management Transition Rocks Lundbeck

One of the frustrating parts about investing is that you can do everything right in terms of due diligence and still see unforeseeable events whack a company's share price. Such is the case this Monday with H. Lundbeck A/S (OTCPK:HLUYY) (LUN.KO), as the stock is down by a double-digit percentage on the sudden announcement of the departure of two key executives, including its CEO Kåre Schultz.

These losses are in the management suite are not good news. No company runs on “autopilot” and strategic direction is an important part of a CEO's role. Although a good operational plan is in place, and the Board of Directors has reaffirmed its commitment to it, a new CEO will almost certainly bring some changes. Bulls can argue that there is at least a chance that the next CEO will be even better, but I believe the market is likely to shift to a “show me” mode for the time being as investors await news on the new CEO and the early-stage Alzheimer's pipeline and whether the company can continue to generate beat-and-raise quarters.

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An Unexpected Management Transition Rocks Lundbeck

Aviva Executing, But The Stock Continues To Test Patience

There are many types of value traps, but one of the most frustrating is when a company executes on its self-improvement plans but can't get much love from the market. Such is the case with Aviva (OTCPK:AVVIY), which has continued to underwhelm in the market since my last update, particularly when compared to the likes of Prudential plc (NYSE:PUK), AXA (OTCQX:AXAHY), and Legal & General (OTCPK:LGGNY). 

The company has done well with its acquisition of Friends Life and subsequent restructuring efforts that have seen it sell down stakes in non-core areas and boost performance in areas like asset management. Nevertheless, the market still seems skeptical about the company's ability to generate meaningful growth and translate excess capital into liquid capital that can be returned to shareholders. Although I don't expect Aviva to be any sort of growth champion, I do believe the company can grow at a mid-single-digit rate, supporting a fair value about 20% higher than today's price.

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Aviva Executing, But The Stock Continues To Test Patience

Euronet's Fee-Based Businesses Continue To Support A Healthy Growth Outlook

Euronet (NASDAQ:EEFT) has been a consummate second-chance stock for me over the years. While this leading operator of ATMs, digital payment, and money transfer systems has maintained a strong record of revenue and EBITDA growth, that performance hasn't always been as consistent as the Street would like. Add in periodic fears about competitors like Western Union (NYSE:WU) and MoneyGram (NYSE:MGI), new money transfer options, and pricing pressure from major partners like Wal-Mart (NYSE:WMT), and the shares have reliably given investors a roughly 15%-20% pullback opportunity at least once a year for a few years. 

These shares have been strong since the bottom of the last pullback, rising about a third since early February (and about 25% since my last update). Both the underlying EFT and money transfer businesses remain strong, and the epay operation is arguably better than it looks as the company transitioning away from mobile top-up and toward newer offerings like iTunes and Google Play, but the shares are not exactly bargain-priced today. 

Given the strong underlying trends in the business and the history of meaningful pullbacks, I'd give this stock a prominent spot on a watchlist in anticipation of another pullback opportunity at some point in the next year or so.

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Euronet's Fee-Based Businesses Continue To Support A Healthy Growth Outlook

Recovering Loan Growth And Long-Term Prospects Argue For Credicorp

Even though lending growth in Peru has slowed dramatically in the past year, as has GDP growth, I can't really complain about the performance at the country's largest bank, Credicorp (NYSE:BAP). The shares are up more than a third since my last update on the company, which most of that move occurring in the last four months as the economic and political situations in Peru seem to be improving. 

I still believe that high-teens long-term ROE can support double-digit earnings growth at Credicorp, but I've become incrementally more bullish on Credicorp's ability to hold on to its strong ROEs as the Peruvian market matures. Credicorp remains a strong player across the board, and management seems committed to sustainable growth and good capital management. Although the shares only seem to be slightly undervalued today, I still believe that they can generate double-digit returns from here with an increasing dividend payout.

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Recovering Loan Growth And Long-Term Prospects Argue For Credicorp

Astellas Changing Its Approach, But Investors Are Skeptical

Astellas (OTCPK:ALPMY) still has quite a bit of work to do. While Astellas is still among the largest of the Japanese drug companies (behind Takeda (OTCPK:TKPYY)) and one of the most profitable (in terms of CROCI), the company has a well-earned reputation for a weak internal R&D effort and a heavy reliance upon partnerships and M&A to drive its pipelines. Making matters worse, the company has had a number of setbacks, including stopping the development of Xtandi in breast cancer and halting its once-promising EGFR inhibitor for lung cancer.

Even with that sour backdrop, Astellas shares could be worth a look. There are credible reasons to believe that Xtandi sales growth could re-accelerate and late-stage pipeline assets like roxadustat, gilteritinib, and claudiximab should help offset the loss of patent coverage for Vesicare (a major sales contributor). Moreover, Astellas seems to have accepted that its internal R&D efforts are not up to snuff, and instead of throwing good money after bad, has chosen to refocus around partnering and external development. It's a risky move, but it arguably does play to Astellas's relative strength as a marketing operation (versus an R&D innovator). With the shares potentially undervalued by more than 10%, Astellas is worth consideration from investors looking to add some OUS pharmaceutical exposure.

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Astellas Changing Its Approach, But Investors Are Skeptical

Fidelity National Information Services Looks Ready To Grow Again

I can't say that FIS (NYSE:FIS) (also known as Fidelity National Information Services) hasn't felt more love this year. While some growth concerns have stalled out the stock a few times in the last three years, the shares have risen more than 20% year to date, outperforming peers like Fiserv (NASDAQ:FISV) and Jack Henry (NASDAQ:JKHY) and more or less keeping pace with First Data (NYSE:FDC). 

While FIS certainly isn't as cheap as it was, the shares still hold some appeal as the company looks toward improving underlying conditions. Not only is management executing very well with its integration of Sungard, it's leveraged to expanding interest margins among its bank customers, aging IT infrastructure, and growth overseas. With the potential to drive FCF growth in the high single digits to low double-digits, FIS's share price could approach $100.

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Fidelity National Information Services Looks Ready To Grow Again

Fulton Financial Looking To Fulfill Its Potential

Sentiment towards a sector has an under-appreciated influence in individual stock performance, and I think Fulton Financial (NASDAQ:FULT) is a case in point. The last year has been pretty mixed for this Pennsylvania-based bank, but its performance has been pretty close to that of Provident (NYSE:PFS) and Valley (NYSE:VLY), with the wider group of Northeast/Mid-Atlantic comparables largely bracketed by S&T Bancorp (NASDAQ:STBA) and F.N.B. (NYSE:FNB). All told, these banks have been benefiting from improving loan demand, improving spreads, and a healthy credit environment, even though they operate in a region with less population and household income growth potential than perennial favorites like Texas, Florida, and the Southeast. 

In the specific case of Fulton, this is an interesting time for the bank, as I feel it is teetering on the edge of some significant developments. These aren't make-or-break in the sense of “will this company still be here in five years?”, but rather will have a lot to do with whether the company can reverse a recent multiyear trend of lackluster profitability relative to its peer group. Getting out from under a consent decree, driving additional consolidation (internal and external), and reaping the benefits of its asset sensitivity and expanding lending capacity could all support meaningfully higher returns, but reversals on these drivers could shrink the multiple and drive underperformance.

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Fulton Financial Looking To Fulfill Its Potential

Tuesday, August 29, 2017

Turbulent Markets And Imperfect Execution May Mean An Opportunity With Benefitfocus

It's great when a stock that you own is supported by a company posting ongoing beat-and-raise quarters with strong revenue growth and impressive margin leverage, but those stories rarely trade cheap for long and especially not in the software sector. On the other hand, if you find an opportunity to get into a story that has double-digit revenue growth potential at a decent price, it's a fair bet that something is not altogether right in the short term.

And so it is with Benefitfocus (NASDAQ:BNFT). I like the basic story here - a company that offers a cloud-based platform of tools that help carriers and employers manage increasing complex healthcare benefit programs. The “but” is that the company has not handled a sales strategy shift very well and it has also seen meaningful turbulence in its market from the uncertainties surrounding healthcare policy in the U.S. I believe both issues are fixable, and I think the stock offers decent upside albeit at the cost of elevated risk.

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Turbulent Markets And Imperfect Execution May Mean An Opportunity With Benefitfocus

Harder And Harder To Find A Spark With Accuray

I tend not to like to write frequently about companies, as I believe investing is best approached as a long-term endeavor and not many short-term moves prove to be all that meaningful. I'm making an exception in this case, though, as Accuray (ARAY) continues to offer a lackluster outlook that suggests only modest progress at best.

With fiscal fourth quarter earnings in hand and guidance for the next year in place, it's tough to find much to get excited about. Management has done a good job of handling the balance sheet, and particularly in managing debt in such a way as to avoid large potential dilution, but the basic trends in the business just aren't improving fast enough to give me much incremental new confidence. While there's still upside even on lowered expectation, it will be hard to see how there's much enthusiasm around this name unless and until order growth meaningfully improves.

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Harder And Harder To Find A Spark With Accuray

Emerson Looking Forward To Improving Process Markets

About a year ago, I was not that keen on Emerson Electric (NYSE:EMR) given what I saw as ongoing challenges in the core business and a management track record that left something to be desired. With the shares up less than 10% in that time versus 11% for the S&P 500, over 15% for Honeywell (NYSE:HON) and more than 35% for Rockwell (NYSE:ROK), at least some of that skepticism was valid. Then again, I also liked ABB (NYSE:ABB) better than Emerson, and ABB has barely squeaked out any gain, so I'm not exactly running a victory lap here.

Emerson looks priced for mid-to-high single-digit returns, which isn't bad given overall industrial valuations, and there is some potential that the recovery in end markets like oil/gas and chemicals could be stronger and that the non-residential HVAC cycle could last longer. The acquisition of Pentair's (NYSE:PNR) valve business was a logical if somewhat risky move and it should give the company a lot of opportunities to improve margins in the coming years. I'd be more excited about Emerson if it were cheaper, but then that's true of a lot of companies, and I think the company's long-term underperformance versus other automation companies like Honeywell, Rockwell, Siemens (OTCPK:SIEGY), and even ABB shouldn't be completely dismissed.

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Emerson Looking Forward To Improving Process Markets

DBS Offers Leverage To Higher Rates And A Recovery In China, But Credit Remains A Concern

Buying good companies that are down on momentary hiccups is a time-tested strategy, and the nearly 40% move in the ADRs of DBS Group (OTCPK:DBSDY) since late October certainly backs that up. As provisioning seems to be tapering off and coming in well below the worst-case scenarios that sell-side analysts were batting around last summer/fall, investors have once again come back to core long-term drivers like DBS Group's strong market share in Singapore, China-driven growth potential, and leverage to higher rates and growing fee-generating businesses. 

I have long liked DBS Group, and I'm generally slow to move away from the stocks of companies I like. That said, the share price now seems to factor in high single-digit long-term earnings growth and low double-digit ROEs, so I really can't say that the shares are dramatically undervalued. There are some concerns again now, though, about credit trends, and investors interested in adding Asian banking exposure should keep an eye on these shares in case the nearly 10% pullback from the recent high stretches out a bit further.

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DBS Offers Leverage To Higher Rates And A Recovery In China, But Credit Remains A Concern

Sunday, August 20, 2017

The Pieces Are In Place For Ongoing Success At Broadcom

It's hard to complain about Broadcom's (AVGO) performance, as this top-tier semiconductor company has seen its shares rise almost 45% since my last update in late 2016. While a few stocks have done better (NVIDIA (NVDA) certainly springs to mind), Avago has by and large doubled the returns of peers like Analog Devices (ADI), Cavium (CAVM), Texas Instruments (TXN), and Xilinx (XLNX). Better still, this is not just a multiple inflation story, as Avago has continued to deliver beat-and-raise performances that support confidence in the ongoing growth potential in areas like handsets and routing/switching.

I don't believe Broadcom is strikingly cheap, but then I wouldn't expect such a large, well-known, well-followed, and well-liked company to be trading at a substantial discount. I do believe ongoing content growth at Apple (AAPL), growth of products like Tomahawk and Jericho in the datacenter, and less appreciated opportunities like its custom ASIC business can continue to support story, and it's not a bad candidate if you find yourself in a “gotta buy something” frame of mind. After all, how often do you find a company that generates more than 60% of its revenue from products where it has 60% or better market share, growth rates above the underlying end-markets, and excellent margins?

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The Pieces Are In Place For Ongoing Success At Broadcom

A Marked Improvement At Turkcell Restores Some Confidence

Shareholders of Turkcell's (NYSE:TKC) ADRs might understandably feel as though they've been cursed. Even when the company is executing very well on its strategy and seeing an exceptional improvement in results, the adverse move in the Turkish lira chews up most of the benefit. Since my last piece on Turkcell around a year ago, revenue expectations for FY 2017 have risen around 13%, and the local shares are up better 20% … and the ADRs are up less than 10%. Strong dividend payments this year sweeten the pot a bit, but Turkcell remains the sort of stock where you feel like you have to cover your eyes and peek between your fingers whenever there's news.

While I'm admittedly being a little flippant about this situation, I do believe Turkcell's strong execution over the past year deserves respect. Likewise, I think the recent trend in performance lends a great deal more credibility to management's long-term strategic view of the company. There is still a lingering shareholder dispute to resolve and ample uncertainty about Turkcell's M&A plays (not to mention plenty of uncertainty about Turkey itself), but the shares look around 20% undervalued today, and that's enough to keep me interested.

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A Marked Improvement At Turkcell Restores Some Confidence

PRA Group Has Cyclical Rebound Potential, But Execution Must Improve

When I last wrote about PRA Group (NASDAQ:PRAA), I thought the shares of this leading debt collector where undervalued on an intrinsic/fundamental basis, but that the company had a lot of work to do to rebuild confidence and convince the Street that its issues where primarily cyclical and not structural. 

Although the shares are up more than 10% in the year since, it has not been a smooth ride – the company has seen a few sharp sell-offs after quarterly earnings reports, including the roughly 25% drop that has followed the latest second quarter report. Key metrics remain under pressure, and while there are several positive drivers that argue for better results in the future, the now-consistent inconsistency of results argues for a healthy “margin of safety” discount. PRA Group shares continue to look undervalued to me, but the company badly needs to start showing improvements where it really counts.

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PRA Group Has Cyclical Rebound Potential, But Execution Must Improve

Tuesday, August 15, 2017

BRF Has A Lot Of Work Ahead To Rebuild Credibility

The nearly 25% drop in BRF's (BRFS) share price over the past year is hardly the worst part of the story; I think you could argue that the market has been relatively merciful all things considered. While I've often noted (and lamented) BRF's above-average cyclicality, I thought management had a strategy in place that would see ongoing global growth in processed/packaged food lead to more sustainable results. I was wrong on many accounts, as the company's strategy is still unclear and inconsistently managed.

I do still believe BRF has a lot of potential, but “potential” is a word that has brought many investors to sorrow. Results should improve in the second half of the year, but management has a lot left on the “to do” list – including showing that they can manage the Brazilian business to generate growth and margins and that they can make the international operations less dependent upon commodity products. There is still upside into the high teens, but BRF management has a lot of work to do to rebuild the trust that would justify such a fair value today.

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BRF Has A Lot Of Work Ahead To Rebuild Credibility

Shifting Perceptions Around Allison Transmission

When I last wrote about Allison Transmission (NYSE:ALSN) in September of 2016, I thought the shares had decent appeal as a buy-and-hold ahead of a recovery in commercial trucks, an eventual recovery in energy, and ongoing growth in commercial automatic transmission penetration rates outside of North America. The shares have exceeded my expectations since then, up about 35%, as companies like Allison and Cummins (NYSE:CMI) have benefited from improving build rates in commercial vehicles.

At today's valuation, I'm more nervous about making a “buy” call. Allison has been logging nice beat-and-raise quarters, and I think Allison's management is quite good. What's more, energy and defense are still barely contributing to results right now and should offer more in the next few years, while OUS adoption of automatic transmissions remains a long-term driver. The “but” is the prospect of accelerating timelines for the adoption of electric vehicles in the commercial space – attention on this market has increased to a point where Cummins, Daimler, Volvo, Navistar (NYSE:NAV), and even typically-conservative PACCAR (NASDAQ:PCAR) have all come out with commentary on their plans/roadmaps for future EV's. Actual adoption of EVs in commercial applications like refuse hauling, metro transit, and straight Class 8's is likely to take many years, but I'd be careful paying up for a cyclical company that could be facing meaningful market erosion within the next decade.

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Shifting Perceptions Around Allison Transmission

Management Unreliability Has Soured The GEA Group Story, But Value Remains

Eighteen months or so ago, I thought GEA Group (OTCPK:GEAGY) (G1AG.DE) looked fully valued despite the long-term attractiveness of a leading company in the food/beverage automation and equipment market. Since then, confidence in management has soured due to an extended period of underperformance and questionable moves like a substantial guidance reduction only a couple of weeks after the 2016 Capital Markets Day. 

GEA Group's dairy processing end-market, which is responsible for around 20% of sales, is likely to struggle for another year or so, but farming, food/beverage, brewing, pharmaceuticals, and industrial markets (including oil/gas) are looking better. What's more, an activist investor is now involved in the shares, which may put a little more pressure on management to up its game. 

I do have some worries about recent cost overruns on new projects and self-inflicted inefficiencies, but I believe the food and beverage markets are attractive long term and I believe GEA Group can get back to double-digit returns on capital. Even with lower assumptions regarding revenue and margins (versus my last article) and a higher discount rate, these shares now look a little undervalued and worth a look from patient investors. 

Investors should note that GEA Group's ADRs don't offer optimal liquidity, so those investors willing and able to trade on foreign exchanges may want to consider buying GEA Group shares on its home exchange.

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Management Unreliability Has Soured The GEA Group Story, But Value Remains

Sunday, August 13, 2017

How Much Better Can Lundbeck Get?

One of my core investment principles is to be slow to sell the shares of companies that have proven themselves to be well-run. Not only do the shares of well-run companies tend to garner higher multiples than might otherwise seem fair, these companies also have a knack for outperforming expectations over the long haul. 

All of that said, I am trying to find that boundary between patience, enlightened self-interest, and greed when it comes to H. Lundbeck A/S (OTCPK:HLUYY) (LUN.CO). The management of this Danish drug company has executed a masterful turnaround, and the shares are up around 37% over the past year despite multiple clinical disappointments and a very thin late-stage pipeline. There are still drivers that can support a higher price, and I am reluctant to part company with a well-run business, but at some point, even the best stocks can get expensive.

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How Much Better Can Lundbeck Get?

Another Quarterly Wobble At Multi-Color Ahead Of A Transformative Deal

Some industries make it very difficult to deliver consistent results every quarter, but I don't think that really explains the consistently inconsistent results at Multi-Color (LABL), as wobbles in quarterly growth rates have been blamed on acquisition-related hiccups (even though growth through acquisition has been a core driver for a long time), plant inefficiencies, contract changes, mix shifts, and so on. Multi-Color has likewise had a tough time showing consistent margin leverage, though the choppy trend has still been upward. 

Since my July 7 update, the company has announced the acquisition of Constantia Labels, a transformative deal, and announced another iffy quarter. Management's up-and-down execution increases the integration risks for such a large deal (not to mention the mix shift), but it is worth noting that it will be Constantia's CEO leading the company relatively soon. 

I've more or less made my peace with Multi-Color's inconsistencies, but Constantia doesn't add tremendous incremental value relative to the risk. That said, the shares do look 10% to 15% undervalued now and the company is an under-followed consolidator in a large, fragmented, and relatively recession-resistant industry.

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Another Quarterly Wobble At Multi-Color Ahead Of A Transformative Deal

Real Recoveries Are Flowing Into Parker-Hannifin's Numbers

Despite its reputation as a high-quality short-cycle play, not to mention one with significant self-help potential through business simplification and the integration of CLARCOR, Parker-Hannifin (NYSE:PH) has cooled off a bit since my last update. Although these shares have outperformed Eaton (NYSE:ETN), a fellow player in hydraulics, they've lagged other industrial stocks like Honeywell (NYSE:HON), Emerson (NYSE:EMR), and Illinois Tool Works (NYSE:ITW), as well as the S&P 500.

With fiscal 2017 in the books and improving trends across a large swath of its end-markets, Parker-Hannifin may be worth another look now. I'm worried about the overall health/valuation of the market, and I don't think Parker-Hannifin would be immune to a wide correction, but mid-single-digit revenue growth and mid-to-high FCF growth can support a fair value around $160, suggesting a high single-digit annual return even from these levels.

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Real Recoveries Are Flowing Into Parker-Hannifin's Numbers

Commercial Vehicle Skids On Surprisingly Weak Margins

The North American commercial truck market continues to improve and Commercial Vehicle Group (CVGI) had been having a great 2017 compared to other commercial truck suppliers like Cummins (CMI) and Allison (ALSN). Unfortunately, the company's efforts to restructure its operations (and reduce costs) and the recovery in off-road vehicle markets like construction have combined in an unexpectedly bad way, leading to meaningfully lower margins, a disappointing second quarter report, and a sharp drop in the stock.

The company's issues with its non-truck wire harness business aren't going to go away, and the company's 2017 margins are going to suffer for it. The bad news is that the company is going to miss out on some of the benefits of this recovery, and they're not going to get that money back. The better news is that the truck market is doing better than expected, the company is doing well in construction on a revenue basis, and the company has made good progress with operating cost reductions.

Commercial Vehicle's margin trouble does reduce the short-term fair value and likely will have the stock in the penalty box for a little while, but the decline does make the valuation more interesting again for investors with a longer-term orientation.

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Commercial Vehicle Skids On Surprisingly Weak Margins

Eaton Offers An Interesting Valuation, But A Lot Of Uncertainties

Despite a good overall run in the industrial space, Eaton (NYSE:ETN) hasn't really kept pace, as the shares have actually lagged the S&P 500 over the past year, not to mention peers like Parker-Hannifin (NYSE:PH), Honeywell (NYSE:HON), and Schneider (OTCPK:SBGSY) (Emerson (NYSE:EMR) has more or less traveled in step with Eaton). Eaton management has been relatively less upbeat than some in its peer group, and the company's organic growth has trailed its peer group for a while now. 

Eaton's above average cyclicality is an “is what it is” sort of thing, and I don't believe management is likely to undertake a major restructuring that would see it sell or spin off an entire vertical. Likewise, I don't like large-scale M&A is especially likely. Although the company should be in place to benefit from several improving end-markets, weakness in commercial construction and passenger vehicles is a concern, as well as uncertainty regarding U.S. tax and trade policy. Eaton shares look like a rare undervalued option in the industrial space (assuming 6% long-term FCF growth), but the lagging revenue growth could be a headwind for a while longer.

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Eaton Offers An Interesting Valuation, But A Lot Of Uncertainties

Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

Despite a growing database on the benefits of stereotactic radiosurgery (or SRS) with its CyberKnife system and significant improvements to its mainline Tomo platform, the unfortunate reality is that Accuray (NASDAQ:ARAY) has maintained its reputation as a company that comes up short of its guidance. Although management will hit its 5% gross order growth target for this year, fiscal 2017 will go down as another year where the company underperformed relative to management's initial expectations for the year. 

That's a sour way to begin an article, but the reality is that Accuray shares are down about 10% or so from the time of my last update, and the company continues to struggle to execute and to drive wider adoption of its core radiation oncology platforms. I do believe fair value is close to $6, and that there is considerable upside potential if management can leverage the advantages of its platforms into real sales, but I have been involved in this story for a long time, and it is getting harder to believe that “if” will become a “when”.

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Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

FirstCash Management Has Several Opportunities To Execute And Drive Value

When I last wrote about First Cash (FCFS) in October of 2016, I thought the shares offered good value despite some elevated risks. The shares have since risen around 25%, helped in no small part by a stronger Mexican peso and a solid recent trend in consumer health in Mexico.

Looking ahead, there are multiple areas where management could add value, but the move in the share price makes execution on these items much more critical for ongoing outperformance. Organic expansion into Colombia is likely to be measured at first (though management would like to acquire if possible), and the process of wringing synergies from the Cash America deal is not likely going to show much until 2018 at the earliest. First Cash shares should still be able to generate double-digit total annual returns from here (provided the company hits my high single-digit FCF growth target), but this remains a riskier-than-average name with significant exposure to Mexico's economy and currency.

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FirstCash Management Has Several Opportunities To Execute And Drive Value

Manitex Still On Its Bumpy Road To Recovery

Maybe comparisons to Icarus are a little unfair to Manitex (NASDAQ:MNTX) management, but the company has definitely paid a price for its former reliance on the oil/gas sector and using debt to fund a significant M&A expansion program during the U.S. onshore energy boom. Now, though, the company is largely through a stark restructuring effort that has seen management refocus around its core boom truck and knuckle-boom crane product lines.

The shares are about 10% since my last update, boosted by a strong positive reaction to second quarter earnings, but the shares have been pretty volatile in the meantime, with the stock price heading up above $9 earlier this year on optimism around restructuring and market recoveries. While Manitex's core markets remain skittish and volatile, it looks as though older used equipment has been largely absorbed, and the table is set for a return to growth. I don't expect a V-shaped recovery (even if a comprehensive federal infrastructure bill is passed and signed), but I do think Manitex can grow at a long-term rate in the mid-single digits and the shares can still perform as the recovery story unfolds and matures.

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Manitex Still On Its Bumpy Road To Recovery