Sunday, November 5, 2017

Alnylam Pharmaceuticals Wins Another Round

Alnylam Pharmaceuticals (ALNY) scored another big win Thursday morning, with the company's detailed presentation of clinical data on patisiran showing strong efficacy and safety relative to future competitor Ionis's (IONS) data on inotersen in patients with hereditary ATTR amyloidosis with polyneuropathy (also called familial amyloid polyneuropathy, or FAP).

Alnylam's data were quite good, but not a knock-out blow against Ionis's inotersen, as you can expect Ionis to build its marketing message around an easier and more tolerable administration and perhaps compete on price. Still, for Alnylam, this head-to-head competition went about as well as could be expected and should raise the hopes of getting an advantageous label from the FDA.

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Alnylam Pharmaceuticals Wins Another Round

Neurocrine's Ingrezza Launch Continues To Exceed Expectations

To quote from the A-Team, "I love it when a plan comes together." Although it is still very early, Neurocrine Biosciences (NBIX) is executing well on the launch of its wholly-owned drug Ingrezza, and its partner AbbVie (ABBV) continues to move elagolix closer to the finish line for both endometriosis and uterine fibroids - indications that could both support more than $1 billion in royalty-generating sales. Additionally, Neurocrine continues to develop its clinical pipeline, with the company having started a new Phase IIb study for Ingrezza in pediatric Tourette's and planning to move its drug for congenital adrenal hyperplasia (or CAH) into a Phase II proof-of-concept study.

The market is reacting quite positively to the much better than expected revenue for Ingrezza, and the strong initial launch is encouraging, but the next few quarters could be a little more volatile as Neurocrine will have to contend with a competitive launch from Teva (TEVA), sampling, and shifts between the 40mg and 80mg doses. Even so, I believe the shares are undervalued now, with multiple clinical events on the horizon.

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Neurocrine's Ingrezza Launch Continues To Exceed Expectations

Execution Risk Back On The Table At Wright Medical

Orthopedic extremity specialist Wright Medical (WMGI) continues to be a frustrating "two steps forward, almost two steps backward" story, as fiscal third quarter results came in below expectations, and management lowered guidance on ongoing execution issues in the lower extremity business. Although the strength of the shoulder business is a meaningful positive, and the lower extremity business is hardly beyond repair, the company's inability to drive consistent execution relative to its own targets remains frustrating and an impediment to the stock.

I've previously said that Wright Medical is a stock to consider buying in the mid-$20s and selling in the mid-$30s, and I believe that remains the case. While the latest reset to expectations is disappointing, Wright Medical still has the potential to grow revenue at a high single-digit long-term rate and drive FCF margins into the 20%s. "Potential" is one of the dangerous words in investing, though, so investors have to at least consider the risk that Wright Medical's ongoing execution issues remain in place, and/or that rivals like Stryker (SYK) steal the company's thunder in the still-fast-growing extremities market.

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Execution Risk Back On The Table At Wright Medical

Better Late Than Never For MSC Industrial

One of the recent concerns about industrial maintenance, repair, and overhaul (or MRO) supply distributor MSC Industrial (NYSE:MSM) was why this leading distributor of metalworking tools (among other MRO supplies) was not seeing more benefit from the emerging industrial recovery in North America. Those concerns should ease a bit with the strong daily sales reported for the fiscal fourth quarter, but the company's long-term margin leverage remains a key question, and increased competition from Amazon (NASDAQ:AMZN) and now Berkshire Hathaway (NYSE:BRK.A) shouldn't be ignored.

I've owned MSC Industrial for some time, and I've written many times that when there's a conflict between "good company" and "good valuation", I go with the former. That said, there are legitimate arguments as to whether MSC is as good of a company as it used to be and whether today's valuation already captures a lot of what can go right for the business. Although I'm not rushing for the door, and there aren't a lot of clear bargains in the industrial space, it's hard for me to make a buy-case on the stock beyond a play on improving trends (momentum) in metalworking and related industries and at least a few more beat-and-raise quarters.

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Better Late Than Never For MSC Industrial

Wednesday, November 1, 2017

3M Comes Back Strong In The Third Quarter

With its high valuation multiples and above-average visibility, 3M (MMM) needed a better result than what it delivered in the second quarter – a quarter that was marked by average organic revenue growth, rare pricing weakness, and weak margin performance. Fortunately, for shareholders, 3M came through and delivered a quarter that, while not perfect, was still quite strong on a relative basis.
Valuation is still problematic. I can’t really come up with a set of circumstances whereby these shares look cheap, so I suppose the argument comes down to some version of “almost of all of its peers are expensive, so if you have to own an expensive stock, why not this one?” I still own these shares myself (but it is not a large part of my portfolio), and I think management still has moves to make to drive better results, but I do worry that today’s valuation is setting the stage for unimpressive returns down the line.

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3M Comes Back Strong In The Third Quarter

Thursday, October 19, 2017

Renewed Operating Leverage From U.S. Bancorp Nice To See

Long one of the best-run banks out there, U.S. Bancorp (USB) has an interesting long-term challenge – as the performance of the “pack” continues to improve, does U.S. Bancorp still have levers to pull that can continue to allow it to stand out? This is, after all, a conservatively-run, very efficient, not especially asset-sensitive operation that already has sizable (and lucrative) fee-generating, non-banking businesses.

I thought U.S. Bancorp's shares were pretty richly valued at the start of the year, and the year-to-date performance, though positive, has lagged the S&P 500 and rival banks like Bank of America (BAC), PNC (PNC), JPMorgan (JPM), Citigroup (C), and SunTrust (STI). I expect profitability to improve next year, as the AML/BSA issue resolves, and asset sensitivity has been improving, but the shares still aren’t cheap. I wouldn’t suggest that long-term investors need to consider bailing out, but I do think the total return prospects are relatively modest.

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Renewed Operating Leverage From U.S. Bancorp Nice To See

Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Comerica (CMA) is something of an odd duck in its pond. Big enough to have to go through the CCAR process and operating across an extended geographic footprint, CMA is nevertheless quite a bit smaller than the likes of U.S. Bancorp (USB), PNC Financial (PNC), BB&T (BBT), and Fifth Third (FITB). It’s also uncommonly asset-sensitive and committed to business lending – residential mortgages and consumer loans make up less than 10% of the loan book – but has long struggled to achieve attractive operating leverage.

Odd isn’t always a bad thing, though, and Comerica is reaping the benefits of higher rates and a thorough restructuring effort. If U.S. growth can accelerate from here, driving better commercial loan demand, Comerica could really enjoy a run of strong earnings growth. That said, the share have shot up more than 50% in the last year, and more than 75% in the last three years, and it is difficult to see much undervaluation unless you factor in some combination of higher-than-expected rates, 3%-plus U.S. GDP growth, less regulation, and/or meaningfully lower corporate taxes.

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Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

I wasn’t overly fond of the short-term prospects for Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) (or “OMA”) back in July, as I was concerned about how the shares would respond to further weakness in traffic and headline risk around NAFTA, not to mention longer-term concerns regarding the Mexican economy, the next election cycle, and changes to air traffic patterns within Mexico. The shares are down about 20% in that short window since July, with rivals/peers Grupo Aeroportuario del Pacifico (NYSE:PAC) and Grupo Aeroportuario del Sureste (NYSE:ASR) down roughly similar amounts. 

Traffic growth has continued to weaken, and not just because of multiple natural disasters. Worse yet, there are particular pockets of weakness (like the non-aero revenue per passenger trends in Monterrey) that still concern me. As I already expected weaker results, the changes to my model are mostly tied to currency moves, and my fair value is still above today’s price. While the apparent undervaluation is tempting, buying into shaky traffic trends and problematic per-passenger revenue is uncomfortable for me and I’m inclined to keep watching this name from the sideline.

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Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

Not Much Going Right For Wells Fargo Yet

When I last wrote about Wells Fargo (WFC) earlier this year, I thought the shares were undervalued, but that the company was going to need time to pull itself out of the hole it created with its fraudulent sales/account processes. Since then, the shares have continued to underperform peers like Citigroup (C), Bank of America (BAC), JPMorgan (JPM), PNC (PNC), and U.S. Bancorp (USB), as the bank's performance continues to underwhelm on multiple fronts.

Although the shares do still seem undervalued (in a relatively expensive banking sector), the weak trends in loan growth, interest margin expansion, and key fee-generating businesses are a concern to me. I do believe Wells Fargo's huge deposit base and strong market share across a wide swath of the country should, and does, count for something, as well as the bank's sizable middle market and asset-backed/equipment finance operations. For patient investors who can live with near-term underperformance, these shares are still worth consideration.

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Not Much Going Right For Wells Fargo Yet

Tuesday, October 17, 2017

Monsanto Ending On A Position Of Strength

For a company that has been around for a while and leads its industry, there’s an odd cyclical quality to Monsanto (MON) where sell-side analysts seem to get ahead/behind of the company’s growth curve, leading to multi-quarter periods of out/under-performance relative to expectations. Monsanto looks to be late in the game with another outperformance cycle, but that likely matters much less now that the company should be approaching the end of the line as a publicly-traded company.

It remains to be seen if Bayer (OTCPK:BAYRY) will get all of the final approvals it needs to acquire Monsanto. No insurmountable obstacles have appeared yet, but there is still a risk that regulators could dig in their heels and/or demand concessions that Bayer finds unacceptance. Although there’s still about 5% upside between today’s price and the deal price, that’s not really out of line relative to the remaining risk (and time). Consequently, I’m more inclined to look for the exit with my Monsanto position and find new investment ideas.

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Monsanto Ending On A Position Of Strength

PNC Financial Producing Balanced, High Quality Growth

PNC Financial’s (PNC) management is relatively conservative in many respects, but that is not keeping the company from posting good numbers as spreads increase and credit remains benign. Better still, there are plans on the table with respect to expanded commercial lending and improved retail banking efficiency that should support additional incremental growth in the years to come.

Although Bank of America (BAC) has outperformed PNC over the last year, PNC’s share price performance has been quite strong relative to peers like Citigroup (C), JPMorgan (JPM), Wells Fargo (WFC), U.S. Bancorp (USB), and BB&T (BBT). Looking ahead, PNC has above-average growth prospects, but the shares do seem to already reflect a lot of that. Changes to corporate tax law and/or bank regulation could support higher growth rates, but the shares look more or less fairly-valued on the assumption of 6% to 7% long-term growth. That said, in a banking sector without a lot of clear bargains, I do believe PNC is an incrementally better option.

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PNC Financial Producing Balanced, High Quality Growth

For Citigroup, Slow And Steady Could Still Win The Race

Even though Citigroup (NYSE:C) has left something to be desired with respect to the pace of its recovery (particularly next to peers like JPMorgan (NYSE:JPM)), the shares’ 48% rise over the past year and 43% rise over the past three years is hardly embarrassing. Although shareholders of JPMorgan, Bank of America (NYSE:BAC), and PNC Financial Services Group (NYSE:PNC) have fared better over that longer time period, Citi has nevertheless outperformed U.S. Bancorp (NYSE:USB), BB&T (NYSE:BBT), and Wells Fargo (NYSE:WFC).., and could yet have the opportunity to do meaningfully better in the years to come.

I don’t believe Citi has really earned the benefit of the doubt when it comes to management’s performance targets out to 2020, and I do believe there are some optimistic assumptions in there, but I nevertheless believe that expectations are still relatively low. If Citi could generate long-term earnings growth in the range of 5% a year (a little higher than my base case), the shares would look undervalued on the basis of my discounted earnings model. Likewise, if the company can do better in terms of generating return on tangible equity (or if the Street decides to penalize lower-return banks less than it has), there would be upside on a ROTE-P/TBV basis.

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For Citigroup, Slow And Steady Could Still Win The Race

Sunday, October 15, 2017

JPMorgan: Another Quarter, Another Beat

The idea of “core” earnings can seem a little wobbly when it comes to large banks, but JPMorgan Chase (JPM) has been executing well relative to expectations for almost three years now. Not only has JPMorgan maintained a strong position in areas like trading and credit cards, it has shown that it can grow share in retail banking, commercial banking, and commercial services. With that, JPMorgan shares have done quite well over that same time period – handily beating Citigroup (C), U.S. Bancorp (USB), and Wells Fargo (WFC), and outperforming Bank of America (BAC) and PNC (PNC) too, although just barely in the case of PNC.

Although the shares no longer look like a clear-cut bargain, that’s a common issue across the banking sector (if not the market as a whole). It does still look as though the shares are priced for mid-to-high single-digit returns, so I wouldn’t be in a big hurry to sell – particularly as I believe JPMorgan still has opportunities to drive worthwhile revenue and earnings growth in the coming years.

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JPMorgan: Another Quarter, Another Beat

BorgWarner Delivering The Content Growth

BorgWarner (BWA) has had a good year. I last wrote about the stock around the time of its 2016 investor meeting and thought then that the stock was undervalued and that the Street was overly pessimistic about the company’s positioning for the eventual transition away from internal combustion engines. It also didn’t help matters that the company hadn’t been doing a great job with its quarterly financial results vis a vis management guidance and analyst estimates. Since then, organic growth has improved significantly and the company has made a pretty compelling case for how and why it will continue to be a leader throughout the process of electrifying passenger vehicles. The shares have certainly responded – rising nearly 50% since that last article.

It’s harder for me to bullish now given the valuation. I don’t think the company is likely to get the FCF margin leverage it needs to validate today’s price on a DCF basis, though I freely acknowledge that content/share growth and margin leverage are more important drivers to the shares of auto components companies in the short run. This is back on a watchlist for me now, though, as I would like a better balance of opportunity and risk before committing funds to a position.

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BorgWarner Delivering The Content Growth

Dana Doing The Right Things And Reaping The Benefits

Finding an undervalued stock with a solid story behind it is always good, but finding that story getting better with time is even better. That's what appears to be happening with Dana (DAN), as this diversified supplier of components for passenger, commercial, and off-highway vehicles continues to execute well on its plan to grow content, improve margins, and position itself for the evolving demands of its end-markets.

It can be deceptively easy to get caught up in and taken along with Wall Street's short attention span-driven boom-and-doom cycles. With that in mind, I've been cautious about fundamentally overhauling my long-term growth and profitability assumptions for the business. I do like Dana's prospects for value-adding M&A, margin self-improvement, and leveraging a better mix (including more power tech products down the line), but I don't believe Dana is going to suddenly become a FCF-generating machine in an industry where mid-single-digit margins are generally the best that even great companies (like Cummins (CMI)) can do. To that end, while a fair value in the $20s seems reasonable, and I'm comfortable modeling exceptional cash flow growth, today's valuation already seems to be pricing in a lot of progress.

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Dana Doing The Right Things And Reaping The Benefits

Thursday, October 5, 2017

Tenneco Generating Above-Sector Growth While The EV Future Looms


It’s commonly accepted that stock prices are, at least in part, a product of discounted future expectations. The trick here is that how far investors will try to look into the future, and how they view that future, is almost always in flux. And so it is with Tenneco (TEN) – while this leading provider of emissions control and ride performance products is enjoying above-sector growth on the back of increasing content, the shares have gotten smacked around from time to time on worries about Tenneco’s place in the future evolution of passenger vehicles.

Electric vehicles (and battery-powered vehicles in particular) are almost certainly coming, but how quickly they become the predominant vehicle type on the road is an open question and has a lot of ramifications for modeling out Tenneco’s cash flow. Assuming 10% annual erosion in the emissions business starting in the late 2020’s still gives me a fair value around $60, making these shares more of toss-up after this strong rally from the low $50’s.

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Tenneco Generating Above-Sector Growth While The EV Future Looms

Wabtec In A Value-Growth Tug-Of-War

Wabtec (WAB), one of the leading suppliers of parts, components, and systems to the freight and transit train sectors, continues to see turbulent conditions both in its operating results and its share price performance. The stock has gone basically nowhere since I last wrote about the company, but there’s actually been some pretty wide swings between the peak and trough (roughly 35%) over the past year as investors seem to be struggling with a strong “want to like” instinct and some rather spotty financial results.

The shares still leave me a little uneasy. I think Wabtec is well-run and I believe the Faiveley deal will add value both through expense leverage and broadening the company’s horizons (in transit and in non-U.S. markets). But I also believe that freight spending could be weaker than bulls expect, and these shares often react poorly to disappointment. I do believe that mid-to-high single-digit growth can support a fair value in the $80’s, but investors considering these shares need to be aware of that ongoing tug-of-war between the bull and bear camps and the impact it can have on the share price in the short term, and especially around events like earnings reports.

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Wabtec In A Value-Growth Tug-Of-War

Miller Industries Isn't Growing Like It Used To

Ignored by sell-side analysts, Miller Industries (MLR) has long been a company that I’ve liked – the long-term revenue growth is modest and the business is cyclical, but the returns on capital have been better than decent. These shares have done a little better than the S&P 500 over time and quite a bit better than Oshkosh (OSK) and Spartan (SPAR) – neither of which are great comps, but the pool of candidates is limited – and the shares are up about a third from the time of my last write-up.

I’m not as bullish now, though. Sales growth has slowed and margin leverage has started looking wobbly. What’s more, the valuation is more demanding now and there are some macro concerns for the towing industry as a whole. Although these shares are by no means wildly overvalued in my opinion (and could have some leverage to tax reform), I don’t see enough of a discount to fair value to excite me today as a new buyer.

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Miller Industries Isn't Growing Like It Used To

S&W Seed Has To Rebuild Its Growth Credibility

Small-cap growth stories rarely manage to avoid bumps in the road, but the bumps that S&W Seed (SANW) have hit have been larger than average, taking the shares down almost 40% since my article on the company back in October of 2016. In addition to some ongoing challenges in growing conditions, the company has seen serious destocking among major customers in Saudi Arabia and the resignation of its CEO, not to mention meaningful reductions in guidance and expectations.

S&W isn’t past a point of no return, but there’s a fair bit of debt on the balance sheet, not much likelihood of strong near-term cash flow, and a lot of variables that are outside of management’s control. This company could still generate $200 million or more in revenue within the next 10 years, but this is really only a story suitable for investors who can take on risks that are well above average.

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S&W Seed Has To Rebuild Its Growth Credibility

AllianceBernstein's Unsteady Progress Continues To Cap The Valuation

AllianceBernstein Holding LP (AB), the asset manager that is majority-owned by AXA SA (OTCQX:AXAHY), still just can’t get a lot of love on the Street. Although the company has continued to build its assets under management and margins are improving, progress has been inconsistent and AXA likely rattled investors with a major management shake-up earlier this year. AllianceBernstein continues to make progress in areas like its equity fund performance, but investors still seem reluctant to believe that the company can rebuild itself back into a leading money manager.

Even with a longer, slower ramp toward higher margins, AB units still look undervalued to me and they continue to offer a high yield (over 8% as of this writing). I understand that partnerships aren’t for everyone and the influence/control of AXA is another valid issue, but the shares continue to look undervalued to me for patient income-oriented investors.

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AllianceBernstein's Unsteady Progress Continues To Cap The Valuation

Wednesday, October 4, 2017

Cummins Revving Back Up

Cummins (CMI), a very well-run manufacturer of engines and components for trucks and other commercial vehicles, is a case in point as to why I’m often critical of typical sell-side valuation methodologies. Despite the fact that Cummins has been through many up-and-down cycles in the past decades, analysts still manage to freak out during the downswings – slashing estimates, cutting price targets, and just about everything short of walking around lower Manhattan wearing sandwich boards proclaiming that the end is nigh. And when orders for trucks and other equipment start to bounce back and signs of margin leverage reappear, they show a level of excitement close to that of ferrets that have overdosed on Mountain Dew.

To that end, the sell-side’s fair value for Cummins is about 60% higher than it was when I last wrote about the company for Seeking Alpha (in late September of 2016) and the revenue estimate for 2017 is about 14% higher.

I still like Cummins as a company, but the stock is harder to love now. The shares already trade at more than 7x what I think will likely be mid-cycle EBITDA, and seem to be pricing in double-digit annualized FCF growth over the next decade – a number I think Cummins could hit, but that doesn’t leave much room to maneuver (or disappoint). To that end, I’m not all that worried about Cummins’s exposure/vulnerability to electrification in heavy vehicles or competition from vertical integration, but I’m concerned that valuation is back to that point where perceived missteps will be punished harshly.

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Cummins Revving Back Up

Ono Pharmaceutical Needs To Reinvest Its Windfall

Ono Pharmaceutical (OTCPK:OPHLY) (4528.T) has a rare chance to reinvest in a bigger, brighter future, and management needs to execute, as the windfall from Opdivo won’t last forever. While this company has a strong history in manufacturing prostaglandin compounds, Ono has struggled to drive meaningful innovation from its own R&D, and although this Japanese pharmaceutical company can trace its history back roughly 300 years, it’s a small player in the overall Japanese (let alone global) pharmaceutical industry.

Ono currently looks slightly undervalued, but that is giving no credit to value-creation from the company’s cash hoard. While Ono has not historically done M&A, management has sounded more interested in pursuing deals as a way of gaining a foothold in the U.S. and reinvigorating its pipeline. Even so, investors need to consider the risk that growing competition in PD-1/PD-L1 antibodies and potential changes to Japanese drug pricing policy will hit the company’s overwhelmingly large driver of value.

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Ono Pharmaceutical Needs To Reinvest Its Windfall

Sunday, October 1, 2017

Palo Alto May Actually Be Underrated For Once

As a value investor, it’s almost painful to write this, but it looks as though Palo Alto Networks (PANW) may be a bargain when Check Point (CHKP) is not. Although I expect quite a bit more growth from Palo Alto, sales missteps and increased competition from Check Point, Cisco (CSCO), and Fortinet (FTNT) seem to have pushed Palo Alto down to a more interesting valuation even after a significant recovery from the lows earlier this year.

There are, of course, plenty of risks in the security market as enterprise customers try to figure out how to navigate the new cloud-filled landscape, but the basic underpinnings of IT demand seem sound, and Palo Alto has shown that it can combine technical excellence with strong marketing. If my model is in the ballpark, and Palo Alto can generate low-to-mid teens long-term growth in sales and adjusted FCF, a fair value in the $150s seems quite reasonable, with upside if/when the company can reassure the Street that its growth credibility remains intact.

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Palo Alto May Actually Be Underrated For Once

Thursday, September 28, 2017

Newly Slimmed Down, MetLife Worth A Look

MetLife (NYSE:MET) has had more than a few challenges over the past years, with the company battling government regulators over its status as a Systemically Important Financial Institution and battling the markets as weak rates and tough competition have made growth more challenging. Although I do not believe that spinning off Brighthouse Financial (NASDAQ:BHF) meaningfully improves upon a low single-digit growth rate, I believe the shares are undervalued on the potential for increased distributable cash flow and the quality of a more focused, more profitable business.

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Newly Slimmed Down, MetLife Worth A Look

Fortress Transportation And Infrastructure Investors Benefiting From Improving Energy Markets And Growing Asset Deployment

Hindsight being what it is, Fortress Investment Group may wish they had waited a little bit to take Fortress Transportation and Infrastructure (FTAI) public. Energy infrastructure was supposed to be a significant part of this infrastructure fund’s focus, but the company hit the market just in time to see other energy companies dive into their bunkers during the sharp downturn in the energy market. That has complicated the company’s asset deployment/investment plans, but investment is starting to return to the energy markets and FTAI has managed to build up its aviation leasing business in the meantime.

These shares are up about 50% from when I last wrote about them, as investors have turned more bullish on the prospects for deploying capital into markets like energy and as FTAI has put capital to play into assets that are starting to help support the dividend. With that move, the shares are no longer significantly undervalued, but they do offer some modest upside and a dividend yield above 7% that should be supported by funds available for distribution by year-end.

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Fortress Transportation And Infrastructure Investors Benefiting From Improving Energy Markets And Growing Asset Deployment

Wednesday, September 27, 2017

ABB Plugs A Gap

Growth-oriented M&A is often more exciting, but using M&A to fill in gaps in the product line-up can be a very sound use of shareholder capital. Such will prove to be the case, I think, with ABB’s (ABB) acquisition of GE’s (GE) Industrial Solutions business. Although this deal does not generate a significant change in my fair value today, I believe this was a sound move that shores up the company’s low-voltage market presence. I continue to believe that ABB shares are somewhat undervalued, but this company hasn’t had the best execution track record in recent years relative to some peers like Schneider (OTCPK:SBGSY) or Rockwell (ROK).

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ABB Plugs A Gap

SK Telecom Undervalued, But There Are Still Valid Reasons Why

Value and GARP investors know that there will be times where they must sift out the “cheap for good reasons” stocks from their watch lists, and SK Telecom (SKM) is a tough case in that regard. Although I thought expectations were low for the stock back in December of 2015 (and the shares are up about 15% since then, lagging the KOSPI), I had worries about management and competition that have lingered on to today.

The mobile business remains a good source of cash flow, but management hasn’t always (or perhaps even often) made good decisions about what to do with that cash flow. Right now, a lot of controversy surrounds just how far management will subsidize its SK Planet e-commerce operations (specifically 11st.com) and whether the new CEO will once again take the company down the path of M&A.

The shares do look meaningfully undervalued, but value of SK Telecom’s stakes in Hynix and POSCO (PKX) are significant parts of that value (both shares have more than doubled since late 2015) and Hynix in particular has been volatile over the years. I’m still not sold on management, and I’d like to see a greater commitment to returning cash to shareholders, but this could be a name to consider on this recent pullback.

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SK Telecom Undervalued, But There Are Still Valid Reasons Why