Wednesday, August 21, 2019

Expectations For Cognex Could Be Washed Out, Though Multiples Are Still Robust

Machine vision specialist Cognex (CGNX) is still looking a little bleary-eyed, as the company is absorbing a rare one-two bunch of serious deterioration in its two largest markets (autos and consumer electronics). While the revisions to near-term growth expectations have been painful, it increasingly looks as though the stage is being set for easier comps in 2020 and beyond, and although I have my doubts about the consumer electronics business, I think the auto and factory automation end-markets will recover (while logistics continues to grow nicely).

Cognex isn't dirt cheap, but it still remains a favored name in discussions of "factory of the future" stocks, and the company's machine vision capabilities make it a fairly rare asset in industrial automation. While I do think Cognex's primary end-markets aren't likely to get much worse from here, a broader sell-off in the market (or increased risk aversion) could still shrink the multiple further. On the other hand, I don't expect Cognex to ever trade at a particularly wide discount to long-term fair value, and I wouldn't advise getting too clever about trying to call a bottom here.

Read more here:
Expectations For Cognex Could Be Washed Out, Though Multiples Are Still Robust

A Second Quarter Shortfall And Weakening Markets Aren't What Manitex Shares Needed

I was reluctant to give Manitex (NASDAQ:MNTX) full credit for its performance in the first quarter, and key end-markets have apparently slowed further. That, in turn, has led to a disappointing second quarter and a weak share price as the outlook for the second half is quite a bit cloudier now. Although Manitex does have credible attractive opportunities like its growing knuckle-boom crane business, I don't see the construction end-markets getting stronger from here, and I think margin leverage is going to be harder to achieve.

Compared to markets like Class 8 heavy trucks, I don't think Manitex is likely looking at an impending sharp cyclical correction, but I also don't think the company's end-markets are getting stronger. That sets up a difficult valuation/stock call, as the long-term discounted free cash flow opportunity still looks relatively attractive, but the Street tends to value machinery companies like Manitex, Manitowoc (MTW), and Terex (TEX) more on the basis of near-term margin and revenue expectations, and those don't work as much in the company's favor now.

Click here for more:
A Second Quarter Shortfall And Weakening Markets Aren't What Manitex Shares Needed

ABB Gets It Right With The CEO Search, But A Lot Of Work Lies Ahead

Perhaps proving that even a blind squirrel can trip over a nut once in a while, ABB’s (ABB) board of directors made one of the best decisions I’ve seen it make in a long time, announcing on Aug. 11 that it had hired Bj√∂rn Rosengren to become its next CEO. Mr. Rosengren joins ABB from Sandvik (OTCPK:SDVKY) and will assume the position on February 1, 2020.

I believe Rosengren is precisely the sort of CEO that ABB needs now, and he has relevant experience managing global multi-industrial conglomerates. What’s more, margin improvement and corporate agility are very much needed at ABB these days, and Rosengren’s record here is strong. While investors should recognize that ABB’s performance will likely get worse before it gets better, as the economic cycle turns and a new CEO brings still more disruption to operations, I believe there’s a more credible case now for owning ABB in anticipation of better results down the road.

Click here for more:
ABB Gets It Right With The CEO Search, But A Lot Of Work Lies Ahead

Alnylam Executing, But Concerns About Safety And Competition Linger

In terms of controlling what they can control, I believe Alnylam Pharmaceuticals (ALNY) management is doing a good job. While there has certainly been criticism of the high cash burn and the large sums that the company spends on R&D, I believe funding a robust Phase III development program is a sound strategy to build the business. In the meantime, though, the shares seemed to be dogged not only about concerns about the ongoing cash burn, but also concerns about competition and platform safety. My position remains that Alnylam is in a stronger position than the share price reflects.
 Competition is always going to be a threat (any indication worth targeting will attract competition), but I believe the safety questions are closer to resolution. With another approval likely in early 2020 and a robust late-stage platform, I still believe these shares should trade closer to $130.

Continue here:
Alnylam Executing, But Concerns About Safety And Competition Linger

Tuesday, August 20, 2019

Groundhog Day At Wright Medical, As The Lower Extremity Business Disappoints

“History doesn’t repeat itself, but it often rhymes,” Mark Twain (disputed)

Wright Medical’s (WMGI) problems with its lower extremity business in the second quarter of 2019 aren’t the same as the company’s prior issues in that business, but the Street doesn’t care. The fact remains that while Wright Medical still offers comparatively attractive growth rates and operating leverage within the med-tech space, the company has shown itself to be unreliable and unpredictable, whatever the reason(s) may be, and investors hate paying premiums for unreliable performance.

This is probably the time you want to consider these shares, but it takes a patient contrarian viewpoint to do so. Wright Medical is still on its way toward gaining the top spot in shoulders, and despite the issues in the lower extremity business, the company still has a strong portfolio of next-gen technologies and products. Add in the prospects for meaningful inflection in profits over the next three to five years, and this is an interesting name to consider on this pullback even with the threat of increased competition from companies like Stryker (SYK) and Zimmer Biomet (ZBH).

Read more here:
Groundhog Day At Wright Medical, As The Lower Extremity Business Disappoints

Sick Chinese Pigs Driving Healthier Profits For BRF

I have been generally bullish on the turnaround plan underway at BRF SA (BRFS), as management is bringing a great deal more operating discipline to a company that has never had much of it. Add that enhanced discipline and a greater focus on bottom line profits to a business with strong domestic market share and an underrated Middle Eastern business, and that’s why I’ve been consistent in saying that a successful turnaround could drive a meaningfully higher share price for BRF down the road.

Along the way, though, the company has picked up an unexpected tailwind from a serious outbreak of African Swine Fever (or ASF) in China. This outbreak has led to a dramatic increase in food imports into China, boosting global prices, while BRF has also started seeing lower input costs.

The ASF outbreak won’t last forever, but it is effectively “free money” for BRF and will both accelerate the turnaround process and give management more flexibility in its strategy. The improved near-term outlook supports a fair value near the double-digits, but I believe the ASF outbreak will have to get worse to support a substantially higher near-term price, though the longer-term fair value of a successful turnaround is still higher than today’s price.

Read more here:
Sick Chinese Pigs Driving Healthier Profits For BRF

Lundbeck's M&A Flexibility May Be Its Greatest Asset Today

The core business of Denmark's H. Lundbeck (OTCPK:HLUYY) (LUN.KO) is more or less an "is what it is" situation; while there is still some potential upside from the company's newer portfolio of drugs, potential market-expanding studies won't read out for years. Where the upside likely lies today is in the company's M&A strategy, as the company has deployable capital of over $4 billion that could meaningfully change the outlook for the company in the mid-term and beyond.

With the exception of certain serial acquirers, I almost never factor M&A into a company's valuation, and Lundbeck is no exception. That said, it's unwise to ignore it outright. Lundbeck shares look a little undervalued as is, and it seems like sentiment is still weighted toward the bearish view that Lundbeck will pursue dilutive, value-destroying deals. To the extent that Lundbeck management can deliver a good transaction or two, then, there could be a greater upside than what would otherwise be in the business as is.

Click here for more:
Lundbeck's M&A Flexibility May Be Its Greatest Asset Today

FEMSA Makes A Cautious Entry Into The Brazilian C-Store Market

Investors have been expecting two things from FEMSA (FMX) for some time – entry into the fragmented Brazilian convenience store (or c-store) market and deployment of some of the company’s sizable cash pile towards growth. While the agreement between FEMSA and Cosan (CZZ) announced on Aug 6 achieves the first one (at least in part), it doesn’t really impact the second expectation to any meaningful extent.

On balance, the JV with Cosan is a reasonable strategic move. While the nature of Cosan’s c-store business isn’t going to allow FEMSA to just replicate its OXXO model in Brazil, at least not initially, it gives the company a relatively low-risk, low-cost entrance into an important market and with a strong partner. I continue to like FEMSA as an investment (and Cosan, too), but this deal won’t move the needle on financial performance or valuation in the near term.

Click here for more:
FEMSA Makes A Cautious Entry Into The Brazilian C-Store Market

Commercial Vehicle Looks Undervalued, But Business Likely To Deteriorate From Here

Long-term investing may be best for individual investors, but the reality is that investors have to deal with a market that is much more focused on the short term. That’s relevant to the Commercial Vehicle Group (CVGI) investment thesis, as the market tends to value auto and truck suppliers on the basis of their short-term EBITDA margins and revenues, and both of those numbers are likely to get worse for CVGI as the U.S. heavy-duty truck market corrects off a cyclical peak.

I can see some downside risk toward $6/share if the market really punishes the sector for weaker results in 2020, but I think fair value is closer to $8 to $10. That’s decent upside relative to the downside, and Commercial Vehicle has liquidity that could be invested in growth-oriented M&A, but CVGI’s valuation is not so unusual relative to the wider auto/truck parts sector and this business has been more cyclical than many of its larger peers in the past.

Read more here:
Commercial Vehicle Looks Undervalued, But Business Likely To Deteriorate From Here

Accuray's 'Wait 'Til Next Year' Story Wearing Thin

It has been a long time since Accuray (ARAY) has shown any sustained momentum in the business, and it looks like the market is largely out of patience. Although the company hit an all-time high for quarterly revenue, it still can’t reliably hit the $100M/quarter order target I believe it needs to reach to achieve any real momentum in the business, and the share price is at an all-time low.

Does a record high quarterly revenue figure and a record low share price mean that there is a fundamental disconnect between the market and the company? There are a lot of good things I can say about this management team, but they haven’t been able to change the underlying competitive dynamic much (Varian (VAR) has only gotten stronger) and pretty much all of the company’s eggs are now in the “China will change things” basket.

I don’t believe Accuray’s China business will drive a fundamental shift in the business and I disagree that Accuray has particularly attractive prospects as a buyout candidate. Although I do think the shares should trade in the mid-single digits, and that’s considerably higher than today’s price on a percentage basis, this is a speculative call at this point.

Click here to continue:
Accuray's 'Wait 'Til Next Year' Story Wearing Thin

Lexicon Pharmaceuticals Now Walking A Fine Line

Lexicon Pharmaceuticals (LXRX) management reported earnings for the second quarter on July 31 and provided a little more context and detail about the situation with Sanofi (SNY) regarding the latter’s attempt to exit the development and marketing collaboration for SGLT-1/2 drug Zynquista in diabetes. Although the update does reinforce the notion that Lexicon has some enforceable rights here, management is realistic that the collaboration is effectively over.

Lexicon is in a precarious place. Relative to cash burn, the company probably has around a year’s worth of cash left, and it seems unlikely that any legal disputes with Sanofi could be resolved that quickly. Although the pipeline has some upside potential and Zynquista could still be a marketable drug, management will really have to thread the needle for the potential value of the stock to be a relevant concern.

Continue here:
Lexicon Pharmaceuticals Now Walking A Fine Line

FEMSA Plugging Along, But Not Really In Favor

Investors haven’t really been all that eager to invest in Mexico this year, and as one of the leading plays on consumer spending, FEMSA (FMX) has likewise had a lackluster performance. The underlying operating performance has remained strong, though, and stripping out the Coca-Cola FEMSA (KOF) and Heineken (OTCQX:HEINY) suggests a multi-year low valuation for the core FEMSA retail operations that, though understandable in the context of reduced near-term confidence around Mexico’s economy, still looks relatively attractive on a long-term basis.

I thought FEMSA’s valuation was “okay, but not great” back in April, but the underperformance since then has the valuation looking more interesting to me today. With management showing prudence on capital deployment and the underlying OXXO business still performing quite well, I believe this is a good time to reconsider the shares as a long-term idea, though a weaker macro outlook for Mexico remains a key near-term risk.

Read more here:
FEMSA Plugging Along, But Not Really In Favor

Neurocrine Executing Very Well With Its Lead Commercial Compound

Neurocrine Biosciences (NBIX) was never set up for a great year in 2019 from a clinical data/pipeline perspective, but management is compensating so far with strong sales execution with its approved drug Ingrezza. With the company now free cash flow positive, management has a lot of options when it comes to M&A and/or in-licensing, not to mention sponsoring robust clinical programs for promising new candidates. That said, this has always been a very deliberate, patient management team and investors shouldn’t expect that to change – this is very much a “do it right” as opposed to a “do it right now” company.

I’m content to wait, as Neurocrine has shown that it can develop effective drugs, market them well, and avoid wasting resources on low-probability assets. I believe fair value for the shares is around $120, with around 70% of that from Ingrezza, but meaningful potential data-driven upside from the CAH program and possibly underestimated potential for opicapone as well.

Continue here:
Neurocrine Executing Very Well With Its Lead Commercial Compound

Friday, August 2, 2019

STMicroelectronics' Content Growth Opportunity Outweighs Short-Term Cyclical Pressures

Everybody talks about companies surprising the Street, but, every once in a while, the Street has its own surprises - for instance, when investors are willing to look past near-term pressures and focus on the bigger picture. With weakness in autos and industrial markets pressuring STMicroelectronics (STM), analysts could have responded to lowered guidance for the second half of 2019 with "Hah! I told you they couldn't do those numbers!" Instead, the Street seems to be willing to look past a few bumps in the near in favor of the increasingly attractive long term.

While I'm a little surprised to see it, I agree with it. I think STMicro has a very attractive long-term story, driven by content growth and new product opportunities across a range of markets. What's more, I think this downturn has offered solid evidence that this is a new, better, more sustainably profitable company than in the past. Although I'd ideally like to pick up shares below $17.50, I think the stock can still work from here, particularly for more buy-and-hold-oriented investors.

Click here for more:
STMicroelectronics' Content Growth Opportunity Outweighs Short-Term Cyclical Pressures

Schneider Electric Standing Out In An Increasingly Challenging Market

A lot of investors still have a grudge against Schneider Electric (OTCPK:SBGSY) (SU.PA), due mostly I believe to a historical track record that left a lot to be desired, including an M&A policy that saw a lot of capital flowing out, reducing ROIC, and not always a lot of quality coming back in. Starting with the Invensys acquisition in 2014, though, and maybe even including Telvent in 2011, management has been making better choices and has crafted a company with a strong position in electrification and automation - two of the more attractive business areas for the industrial sector in the coming decade.

As things stand today, Schneider is one of the better-performing European multi-industrials, and I like not only the company's strong position in electrification (across residential, industrial, commercial, and data center markets) but also its improving software and control-heavy automation portfolio. With a roughly 30% year-to-date run, though, I can't be as bullish as before. I do still like this company and see it as a share-gainer in its markets for many years, but the prospective return isn't high enough.

Click here for more:
Schneider Electric Standing Out In An Increasingly Challenging Market

Stryker Making Excellence Look Effortless

Having covered the med-tech space for about 20 years, I can tell you that what Stryker (SYK) is doing - generating consistent mid-to-high single-digit organic growth, outgrowing its end-markets across multiple markets, and serially making value-additive deals - is not at all easy. And yet, you look at the quarter-to-quarter results Stryker has been putting together under CEO Lobo and it looks almost effortless.

I have no meaningful issues with the operational performance of Stryker. There's room for the company to do better overseas, likely some opportunities for gross margin improvement, and perhaps a few signs of competitive gains against the company in neuro and extremities, but on the whole, everything is going very well. The valuation is the problem; even though I believe Stryker is the best med-tech company out there, the valuation just doesn't work for me and my portfolio needs

Click here for more:
Stryker Making Excellence Look Effortless

Rockwell Automation Pressured As Short-Cycle Headwinds Spread

I don't believe there's much debate anymore about whether weakness in short-cycle industries is spreading, though longer-cycle industries have continued to hold up better (even if they're wobbling a bit) and some investors are still pinning their hopes on a second-half rebound. That's all bad news for Rockwell Automation (ROK), as this leading pure-play in industrial automation continues to see slowing markets that are sapping its growth and momentum.

The short-cycle slowdown is manageable; Rockwell has always been a cyclical business, and that's just part of the landscape. Beyond that, though, there are some interesting arguments about Rockwell's operating philosophy and its place in the future of industrial automation. I like buying proven operators when these sorts of questions crop up, but I'd rather hold off in the hope of getting another crack at the shares below $150.

Read more here:
Rockwell Automation Pressured As Short-Cycle Headwinds Spread

Strong Growth In New Drugs Propelling Roche

Roche (OTCQX:RHHBY) needed a good second quarter and management delivered, with the company’s portfolio of new pharmaceuticals helping drive double-digit growth for the drug business and high single-digit growth for the business overall. Better still, the pipeline remains stocked with opportunities, and the company should average about one major read-out a month for the next 18 months.

Valuation remains attractive, particularly in light of upgraded near-term expectations. Fair value remains in the mid-$30s, and management indicated that a higher dividend should be on the way.

Continue here:
Strong Growth In New Drugs Propelling Roche

Sanofi Wants Out, Dealing Lexicon's Hopes In Diabetes Another Major Blow

Lexicon Pharmaceuticals’ (LXRX) tortuous path to success in the diabetes market took another big hit late on Friday July 26, when Sanofi (SNY) issued a press release containing a brief summation of top-line results of three Phase III Type 2 diabetes studies of Zynquista and notification that it was terminating the collaboration with Lexicon to develop and market the drug for Type 1 and Type 2 diabetes. Lexicon issued its own statement shortly thereafter, casting the Phase III results in a more positive light and declaring Sanofi’s notice of termination to be invalid.

What happens now is open for debate, but it is difficult to see a positive spin for Lexicon. If Sanofi’s termination was legally invalid, Lexicon may be able to get some funding from Sanofi as part of a settlement, but forcing an unwilling partner to market a drug is effectively a non-starter. Given the significant costs to a commercial launch of a diabetes drug, the unlikelihood of another partner, and Lexicon’s iffy financial condition, this is another serious blow to a company that has already taken quite a few of them.

Read more here:
Sanofi Wants Out, Dealing Lexicon's Hopes In Diabetes Another Major Blow

Saturday, July 27, 2019

Another 'Ugh' Quarter From ABB

Looking at second quarter results, and reexamining the results over the past few years, it’s pretty clear that for all of the positives ABB (ABB) may have, including a strong portfolio of products and technologies across its electrification, automation, and robotics platforms, these assets have been badly mismanaged for years, and it’s going to take a while to climb out of this hole. New management, particularly if an outside hire is made for the CEO role, could help change the tone more quickly, but fundamental improvement will take a while and the cycle is now moving against the company.

I can’t honestly provide good reasons for choosing ABB over other automation investment options like Emerson (EMR), Rockwell (ROK), or Schneider (OTCPK:SBGSY) other than valuation and expectation. This company has beaten down to a point where I think the inherent value of the assets provides upside, but the competence of the board is very much up for debate and waiting for the ABB ship to turn could be a longer wait than most investors want.

Read more here:
Another 'Ugh' Quarter From ABB
Japan's Nidec (OTCPK:NJDCY) (6594.TO) is going through some challenges today as demand for motors and related components in markets like autos, appliances, and industrial end-markets softens, but the long-term story continues to look strong. Nidec continues to rack up wins for its EV traction motors, and Nidec looks like an appealing option for companies that want to get electric vehicles on the market sooner rather than later. Likewise, the long-term opportunity for smart DC motors in areas like appliances and industrials is quite attractive.

Valuation remains the biggest "but" to the story. The shares did pull back some after my last article on the company, but they've largely recovered, and the valuation is hard to reconcile with the admittedly above-average growth opportunity here. High single-digit prospective returns are tempting, but I'm inclined to hold out for a better prospective return before investing my own money.

Click here to continue:
Good EV Orders Support The Long-Term Nidec Story

Check Point Going Nowhere Fast

It is an oversimplification to say that software investors care only about growth, but growth is nevertheless a key driver of multiples. Check Point (CHKP) may be working hard behind the scenes, but the reality is that the company continues to lag rivals like Palo Alto (PANW), Fortinet (FTNT), and Cisco (CSCO) when it comes to revenue and billings, and it’s hard to see any meaningful reacceleration on the horizon.

The good news, if you want to call it that, is that I don’t think there are many investors interested in Check Point who expect a lot of growth out of the company. If the different billing cycle for Infinity is in fact obscuring underlying growth and this security as a service platform can catch on with more larger clients, Check Point could outperform. I’m not sold on the strategy though, and I continue to believe that Check Point has been surpassed by some of its rivals. The prospective return is getting more interesting, but isn’t high enough to coax me to take the risk.

Read the full article here:
Check Point Going Nowhere Fast

Teradyne Benefiting From Earlier, Stronger Orders For 5G, Handsets, Wireless, And Memory

I thought Teradyne (NASDAQ:TER) looked undervalued on excessive pessimism back in January, but I didn't see this 60% run in the shares, as Teradyne has managed to keep putting together strong quarters relative to expectations, sending sell-side estimates higher along the way. Although there were some fears going into this quarter that Teradyne was "pulling in" demand from later in 2019, I'm not so sure that theory holds water anymore.

The record Teradyne has relative to earnings expectations is impressive, so much so that I have to wonder whether management plays it intentionally too conservative just to give themselves leeway. Whatever the story may be on that, the fact is that the company is seeing good semiconductor test demand and is gaining share in memory, while the near-term headwinds in industrial automation have been pretty well anticipated by the market. Valuation is no longer attractive, though, and I don't see that same "hey, it's not so bad" trade opportunity that I did before.

Read the full article here:
Teradyne Benefiting From Earlier, Stronger Orders For 5G, Handsets, Wireless, And Memory

Healthy IoT Growth And Better Margins Support Silicon Labs

I’ve sort of thrown in the towel on valuation where Silicon Labs (SLAB) is concerned, accepting that the market is wiling to pay premiums beyond what I think is fair or reasonable to hold a position in one of the closest things to an IoT pure-play in the chip sector. To that end, my prediction from my last update that Silicon Labs could be a relatively attractive name in a growth-starved chip sector has helped up reasonably well, with SLAB continuing to outperform the chip sector as a whole.

Valuation doesn’t seem to be a consideration here; or at the very least, the Street is choosing to focus more on the buyout premiums paid for wireless assets like Cypress (CY), Quantenna (QTNA), and Marvell’s (MRVL) portfolio (3x-6x sales) than historical norms. Provided that Silicon Labs keeps growing, the party may not come to an end soon, but I have a hard time paying up to this extent.

Continue here:
Healthy IoT Growth And Better Margins Support Silicon Labs

Always-Reliable People's United Financial Executing To Plan

People’s United Financial (PBCT) is an exceptionally reliable, consistent bank – quarterly earnings rarely deviate more than a couple of pennies from expectations and PBCT management has been uncannily accurate in projecting its asset sensitivity over time.

What’s also reliable and consistent is the lack of value-added growth – although the company’s 15-year tangible book value per share growth record isn’t bad (8% annualized growth), the 10-year record is poor (down 1.5%), and the bank basically never earns my estimate of its cost of equity (the highest reported return on equity in the last 15 years is 10.1%). With that, it’s not so surprising that the bank’s performance over the last 5 and 10 years is lackluster, trailing the regional bank average by about 3.5%/year over the last five years and more than 8%/year over the last 10 years.

I like the company’s decision to remix its loan book and focus on growing its higher-yielding leasing business, and I don’t have any particular objection to the United Financial Bancorp (UBNK) acquisition, though I have to wonder about so many bank management teams I respect noting sub-optimal returns from serial M&A, particularly in the context of the less-than-stellar performance record from People’s United. The shares do look a little undervalued and pay a decent dividend, but history shows a pretty good tie between tangible book value growth and shareholder value growth (total returns), and I’d like to see TBVPS growth become a bigger priority here.

Click here to continue:
Always-Reliable People's United Financial Executing To Plan

Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

I’ve never been a big fan of Fifth Third (FITB), but I have to give credit where it’s due – management has been executing pretty well of late relative to its stated plans and goals. As far as the shares go, it has only recently started diverging (positively) from the peer group, so I still don’t feel as though I’ve missed out on all that much by being relative “meh, it’s okay… I guess” toward the shares.

At this point, with MB Financial in the fold and pretty bold middle-market growth plans, I’m leaning a little more positive on the shares. Although Fifth Third does look a little undervalued here, I do have some concerns that Fifth Third could see more spread compression than is currently in the sell-side expectations. On balance, below $30, I think it’s an okay name to consider, though still not my favorite bank.

Read more here:
Fifth Third Showing Steady Execution And A Little Aggression On Middle-Market Lending

Thursday, July 25, 2019

FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

Up more than 40% on a year-to-date basis (and up about 16% over the past year), there’s not much to complain about with FirstCash (FCFS). The integration of Cash America is gradually producing better results in the U.S. store base, and the Latin American operations continue to grow well as FirstCash benefits from serving an underbanked customer base.

It’s harder to recommend these shares, though. I do see a long runway for growth in Latin America – Mexico isn’t fully penetrated, Colombia is barely penetrated (by FirstCash), and Peru is one of many untapped markets – but a lot of that growth potential appears in the share price now. These shares give investors plenty of second chances, though, so those investors who regret missing the bus may want to wait for one of those eventual pullbacks to add shares.

Read the full article here:
FirstCash Keeping The Throttle Down On Strong Long-Term Opportunities In Latin America

ASML Has A Lot To Live Up To

In terms of moats, how do you not love ASML (ASML)? Not only is the company almost the only game in town in deep ultraviolet lithography (or DUV) with around 85% share, they are the only game in town in next-gen extreme ultraviolet lithography (or EUV), a new product category that will start to contribute much more meaningfully to revenue in the second half of 2019 and into 2020 and beyond. As lithography is a critical step in chipmaking, that puts ASML in a commanding position in a critical part of the foodchain, particularly as EUV tools are effectively essential for chip nodes below 7nm (and useful at 7nm).

There are some points of controversy around the stock, particularly with respect to the ramp timeline for EUV tools, how deeply EUV tools will penetrate the memory segment over the next few years, and the sort of gross margins that the company can really generate. The bigger issue for me, as an investor, is valuation. A virtual monopoly supplier in a growing industry certainly deserves a premium, but I’m not entirely comfortable with what looks like a prospective annual return on the low end of the high single-digits.

Continue here:
ASML Has A Lot To Live Up To

The ams AG Roller Coaster Shoots Back Up

Will the real ams AG (OTCPK:AMSSY) (AMS.S)please stand up? In just the past year ams has given shareholders a wild ride, with the shares losing 75% of their value from August of 2018 through the end of 2018 on a very disappointing adoption curve for new Apple (AAPL) phones and worries about overall adoption trends for 3D sensing technology and competition. Since cratering in late 2018, the shares have nearly tripled on signs of VCSEL share gains, wins on multiple Android platforms, a new under-OLED sensor, and a renewed focus on margins and efficiency.

For better or worse, I think the answer is “both”. I think both are the “real” ams, and this turbulence is par for the course when technologies come to market, and particularly when those technologies enter a market where consumer behaviors are changing (slower/longer phone replacement cycles). I do like the momentum in under-OLED sensors, though, and I think ams is on a much better track now. I’m less positive on this flirtation with OSRAM (OTC:OSAGY), as I worry ams may overpay and ultimately distract itself from its core opportunities.

Based upon where ams appears to be now, relying heavily upon management’s guidance for the second half of 2019, I believe the shares are still meaningfully undervalued. It is well worth remembering, though, just how quickly expectations can change and the magnitude of price moves that can drive.

Read more here:
The Ams AG Roller Coaster Shoots Back Up

Stronger Margins A Welcome Surprise From Stanley Black & Decker

There’s no “just one thing” that matters above all else when it comes to industrial companies and market valuations, but margins count for a lot. That makes Stanley Black & Decker’s (SWK) surprisingly strong second quarter margin performance all the more welcome, and particularly so with the company recently outlining a path to meaningful further margin improvement over the next three years.

Weaker end-markets remain a risk for the remainder of 2019, and management’s guidance seems a little conservative relative to the performance seen in the second quarter, but Stanley Black & Decker seems to be on better footing and with drivers still yet to materialize (expanding the distribution channels for Craftsman, for instance). The shares aren’t all that cheap now, but on another dip below $140, it would definitely be a name to consider.

Read more here:
Stronger Margins A Welcome Surprise From Stanley Black & Decker

Steel Dynamics Hoping To Put A Rough First Half Behind It

I’ve been relatively bearish on the outlook for U.S. steel companies this year, and so far that call has mostly worked out, with earnings coming in lower than initially expected for both the first and second quarters. While Steel Dynamics (STLD), Nucor (NUE), U.S. Steel (X), and Commercial Metals (CMC) are all up on a year-to-date basis, their performance has lagged the broader markets and the industrial sector. More specific to Steel Dynamics, while I thought this one looked a little better than Nucor from a valuation perspective last quarter, I thought Nucor had a better product mix for the near term conditions, and the share price performances have been pretty similar.

Both Nucor and Steel Dynamics managements are more bullish than I am about their second-half prospects. I see the key non-residential construction market continuing to slow (still growing, but a decelerating rate), I’m not optimistic about a big recovery in auto volumes, and I see more risk of inventory destocking across machinery and manufacturing leading to more sluggish steel demand growth. Although Steel Dynamics’ valuation isn’t bad, I see more downside risk to expectations and performance than upside risk, and I’m inclined to stay on the sidelines with U.S. steel companies.

Continue here:
Steel Dynamics Hoping To Put A Rough First Half Behind It

Crane Executing Well Despite A Lot Of Cross-Currents

The good, and bad, of running a conglomerate is that there’s always a lot going on – it’s relatively rare for a diversified business to see all of its units doing well (or poorly) at the same time. In the case of Crane (CR), Fluid Handling (or FH) is doing well on underlying strength in a range of process industries, and Aerospace & Electronics (or AE) is likewise benefiting from strong trends in the commercial aerospace market. On the flip side, the Payment and Merchandising Tech (or PMT) business is dealing with challenging comps in the currency business and Engineered Materials (or EM) is suffering from weakness in the RV market.

All told, though, Crane is doing well in absolute and relative terms, and while there are some signs of slowing momentum, I believe the company will hit its near-term targets and generate mid-single-digit long-term FCF growth. I don’t know whether CIRCOR (CIR) management can be persuaded to see reason, but Crane has other M&A prospects to consider, and the valuation remains surprisingly reasonable.

Click here for more:
Crane Executing Well Despite A Lot Of Cross-Currents

Marinus Hammered As Its Phase II Post-Partum Depression Studies Come Up Short

Marinus (MRNS) has been a controversial stock for some time, as the company looked to challenge Sage’s (SAGE) Zulresso with its “similar but different” compound ganaxolone, and questions about the efficacy of the drug and its chronic clinical timeline slips dogged the stock. Writing about the shares in late September of 2018, I very nearly top-ticked the stock and the shares declined sharply into the end of 2018 on growing doubts about both the post-partum and epilepsy pipelines before recovering into the mid-single-digits through April of this year.

With Phase II data in hand, the market certainly thinks that Marinus has little-to-no chance of seriously challenging Sage, and looking at the data I’m forced to concur. Maybe there’s a path here for the IV-only form of ganaxolone in severe PPD patients, but I think it will be a very steep climb to get any traction on Sage, particularly with the Phase III results of Sage’s oral drug SAGE-217, and I think the oral-only approach is likewise a non-starter.

Read the full article here:
Marinus Hammered As Its Phase II Post-Partum Depression Studies Come Up Short

Lincoln Electric's Shares Look Stronger Than The Business

Wall Street is an expectations game in the short term, and I think that’s likely the best explanation for Lincoln Electric’s (LECO) roughly 10% move over the past couple of weeks (including a 4% move after reporting second quarter earnings). Management’s relatively calm guidance certainly didn’t hurt, but underlying results weren’t so strong and I’m a little surprised that the Street took a margin shortfall without much consternation.

I do believe that Lincoln is a quality company and certainly a high-quality industrial, and the shares have done well over the long term despite the cyclicality of the business. I don’t think we’re in the clear yet with respect to the industrial sector, but if the shares pull back again below $80, I think this is a name to consider.

Read more here:
Lincoln Electric's Shares Look Stronger Than The Business

Liability-Sensitive Signature Bank Investing In Next Growth Drivers

At a time when asset-sensitive balance sheets are starting to really take a bite out of bank earnings, Signature Bank’s (SBNY) liability-sensitive balance sheet certainly stands out. That isn’t to say that Signature is going to reap a windfall as rates decline, but whereas many banks are look at 10bp-20bp of spread compression (or worse) over the next year or two, Signature will likely see some modest improvement. On top of that, Signature has been investing fairly aggressively to expand its private banking and venture/private equity banking capabilities.

With what I think will prove to be manageable exposure to New York multi-family real estate and new growth opportunities to pursue, I believe Signature is undervalued. Pre-provision profit growth over the next couple of quarters won’t look very exciting, and could well limit share price appreciation, but by early 2020 I believe the Street will start rewarding the stock for the above-average pre-provision profit growth it should start delivering.

Click here to continue reading:
Liability-Sensitive Signature Bank Investing In Next Growth Drivers

Eagle Bancorp Clipped On Spread Pressures And Corruption Worries

It’s been a rough week for Eagle Bancorp’s (EGBN) shareholders. One of the fastest-growing, most profitable commercial banks I know, Eagle saw its share price hammered on a combination of weaker second quarter results and a vague disclosure that Eagle is involved in an investigation tied to the activities of its former CEO Ron Paul, with the latter being the far more surprising and troubling news item.

Valuing Eagle right now is especially difficult. The spread pressures that this spread-based lender are facing are significant, and the company is having to slow down some of its more profitable lending to get its balance sheet in better place. On top of the uncertainty of just how much rate cuts will impact the business and the loan demand outlook in the D.C. area, there’s the open-ended question as to whether Eagle itself is being directly investigated and could face some sort of sanctions down the line. While I do believe the core operations of Eagle are undervalued, the investigation overhang is considerable.

Read the full article here:
Eagle Bancorp Clipped On Spread Pressures And Corruption Worries

Epiroc Seeing Margin Leverage As OE Orders Fade

This is a tricky time in the cycle for heavy machinery manufacturers, and mining equipment manufacturer Epiroc (OTCPK:EPOKY) is no exception. Aftermarket demand remains healthy and service orders continue to rise, but original equipment demand is clearly fading from the year-ago recovery levels. Longer term, Epiroc is well-placed to benefit from increased miner interest in automation and electrification, and the company also has a meaningful margin leverage angle.

I believe the market more or less has this story priced correctly now. There’s an argument that Epiroc shares should be worth a little more on the basis of strong margins and returns (ROIC, et al), but on the other hand, my DCF-based approach suggests a high single-digit annualized return from here on the assumption of mid-single-digit revenue growth and high single-digit FCF growth over the long term.

Read the full article here:
Epiroc Seeing Margin Leverage As OE Orders Fade

Citizens Facing Spread Compression And Credit Risk, But Fighting Back With Self-Help Measures

Citizens Financial (CFG) remains very much a work in progress, with an almost even balance of things to like and things to lament. Building a stronger core deposit franchise remains high on the list of things-to-do, and that won’t get easier with rivals like Bank of America (BAC), JPMorgan (JPM), and PNC (PNC) pushing harder into Citizen’s footprint (not to mention competition from other in-footprint rivals like M&T Bank (MTB) ), but Citizens’ proactive hedging should help mitigate spread pressure and the company’s active remaking of its balance sheet should help on credit risk. Beyond all of that, too, is a new efficiency program (TOP VI) with pretty ambitious targets.

Citizens has outperformed a bit (relative to other regional banks) since my January update on the company, but that outperformance came with the post-Q2 earnings jump, so that doesn’t count as a “win”. Looking ahead, it’s hard for me to get really excited about Citizens, although it is a little undervalued. I think BofA, JPMorgan, and PNC all have more dynamic plans underway and other banks like OceanFirst (OCFC) are more interesting from a valuation perspective, but Citizens does have the sort of counter-cyclical drivers I want to see now and the stock price is still trading below my valuation estimate.

Read the full article here:
Citizens Facing Spread Compression And Credit Risk, But Fighting Back With Self-Help Measures

Tuesday, July 23, 2019

Hedging And Cost Control Enough For Regions Financial To Outperform

There is no shortage of bank stocks that look undervalued today, but the key is to find banks that will somehow stand out in the next, more challenging, phase of the cycle – a cycle that will see spread compression from rate cuts, so-so loan growth prospects, and rising credit costs. I thought that Regions Financial (RF) was undervalued back in January but lacking in catalysts, and the shares have lagged regional bank indices by about 3% to 6% since then.

Regions is looking a little more interesting to me now, though. Management’s forward-thinking hedging strategy should limit some of the spread compression damage, and management is likewise focused on continuous efficiency improvement as a key driver over the next few years. Credit costs are a concern, and Regions doesn’t have great fee-based offsets, but this is an incrementally more interesting story and the mid-single-digit pre-provision profit growth I expect from Regions over the next three to five years could drive relative outperformance.

Read the full article here:
Hedging And Cost Control Enough For Regions Financial To Outperform

Nucor Upgrading Its Mix, But Plenty Of Challenges Remain

It’s a good thing to be a darling; Nucor (NUE) continues to miss expectations and analysts continue to lower expectations, but the sell-side more or less has kept up a drumbeat of “surely it will get better from here”. Although 2019 EBITDA expectations are about 9% lower now for 2019 (and 7% lower for 2020) relative to the time of my last update, Nucor remains a consensus “Buy” call from the sell-side and the shares are up slightly from where they were at the time of that last article (albeit with a dip below $50 along the way).

With evidence accumulating to support the short-cycle slowdown thesis, I’m incrementally less positive on Nucor, and I think steel companies are going to have a harder time making these recent price hikes stick with sluggish auto demand, weakening non-residential activity, and growing weakness in a range of manufacturing and machinery markets. I do believe that Nucor is a best-in-class operator but I’m not sold on the risk-reward tradeoff at these prices; yes, the P/E ratio is in the single-digits, but that’s for a company that’s like to post negative EPS growth of around 6% over the next five years and negative 15% over the next three years.

Click here to continue:
Nucor Upgrading Its Mix, But Plenty Of Challenges Remain

Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

I’ve been fairly bearish on Bank OZK (OZK) for some time, as I thought the bank’s heavy exposure to variable-rate construction and CRE lending was the wrong mix for this point in the cycle. With the shares down another 8% since my last update and down about 30% over the past year, that thesis has largely been playing out, and over the past quarter new concerns about spread compression have built up.

Oddly enough, I think Bank OZK may be better-positioned to resist spread compression than many investors might think. A high loan/deposit ratio (though far from the worst) and high-beta asset book are risk factors, but Bank OZK’s high-cost deposit base actually may give the bank more maneuvering room than banks like Commerce Bancshares (CBSH), Comerica (CMA), and M&T Bank (MTB) with low-cost deposit bases that probably can’t/won’t go too much lower.

I’m a little concerned there’s a future shoe to drop with respect to credit, but Bank OZK’s strong underwriting history should earn management more of a benefit of the doubt than they’re getting. Likewise, loan growth may not be spectacular in the near term, but management is working hard to diversify the loan business. I’m still worried about sentiment over the next couple of quarters, but the valuation is getting harder to ignore, and more patient (or aggressive) contrarian investors may want to sharpen up their due diligence.

Read more here:
Winter Is Coming For Banks, But Bank OZK May Have A Trick Or Two Left

The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

The United Kingdom's Competition and Markets Authority (that country's antitrust regulator, in essence) had already forwarded the Illumina (ILMN) - Pacific Biosciences (PACB) merger on to a Phase II review, but on July 19, investors got a look at the agency's reasoning, and it doesn't look good for the deal prospects. With the U.K.'s regulator insisting upon looking at short-read and long-read sequencing technology as effectively the same thing, the body has found that the deal would further consolidate a market already dominated by Illumina and potentially lock new entrants out of the market.

I do not agree with the CMA's assessment, but my opinion is beside the point. While the investigative process and hearings that are part of Phase 2 review will give Illumina and PacBio another chance to make their case that the two technologies are quite different, the tone of the report suggests an uphill climb. Consequently, while Illumina's $8/share offer to PacBio does still stand as a best-case near-term outcome, I believe it is more prudent to look at PacBio from a standalone perspective.

Read the full article here:
The Latest Objections To The Illumina/Pacific Biosciences Tie-Up May Well Be Insurmountable

SKF Sees Industrial Revenue Contract On Broad Weakness

There are a lot of reports left for the second quarter reporting cycle, but so far it’s looking like my call for weakening industrial markets (particularly short-cycle markets) is playing out, as several high-quality industrial players are seeing weakness, including SKF (OTCPK:SKFRY). Although management tried to strike a positive tone, industrial organic sales slipped into contraction, the weakness is broad-based across its markets, and the company hasn’t been working down its inventory.

Even with the prospects of a U.S. rate cut increasing, I’m concerned about how industrial stocks like Atlas Copco (OTCPK:ATLKY), Illinois Tool Works (ITW), Parker-Hannifin (PH), Sandvik (OTCPK:SDVKY), and SKF will perform over the next 12 months given how past cycles have played out. A more meaningful decline in inventories would be a welcome sight (in the past, inventory corrections have usually predicted rebounds), but that could still be some distance away. As is, while SKF’s valuation is not demanding on a margin/returns basis, the high single-digit annualized return implied by discounted cash flow isn’t enough to coax me into taking the risk that things get worse before they get better.

Continue here:
SKF Sees Industrial Revenue Contract On Broad Weakness

M&T Bank Facing Accelerating Headwinds

Relative to where things were at the time of the first-quarter earnings, expectations for the rate cycle and bank sector spread margins have changed pretty significantly, and to the detriment of most banks. M&T Bank (MTB) hasn’t performed very well since my last update on the company, as although this remains a very well-run “overgrown community bank” with a very good core franchise in the Northeast, it is also significantly exposed to these worsening spread headwinds.

M&T’s net interest margin could fall about 20 bps from here, and that is going to make it very hard to generate pre-provision profit growth, even though management has been adding hedges to limit the risk. I think M&T’s quality reputation has preserved the share price to some extent already, and I don’t see a lot of near-term upside in the shares at this point.

Click here to continue:
M&T Bank Facing Accelerating Headwinds

Chart Industries Really Just Getting Started

Chart Industries (GTLS) is still really difficult to model, but I said in my last piece that these shares would have a lot more appeal in the mid-$70s and here we are... and that’s with the company logging a big LNG order in the meantime and likely to book a few more before 2019 is over. I do have some concerns about a near-term slowdown in industrial gas demand, but that is counterbalanced, at least in part, by active efforts on management’s part to cultivate new market opportunities.

As fits a company that is difficult to model, with 2020 revenue possibly 70% (or more) above 2018’s level, Chart Industries shares are beastly difficult to value. The shares do look undervalued on discounted cash flow, but that assumes a reasonably accurate assessment of the size, duration, and profitability of the LNG building boom. The shares could be even more undervalued on a multiple-based approach (the average sell-side target is over $100), but with not even Chart management knowing what normalized earnings will look like over the full cycle, the “right” multiple is pretty much a guess.

Said simply, I think you can buy Chart here and make money, and possibly a lot of money when sentiment fires up again, but this will be a volatile stock.

Read the full article here:
Chart Industries Really Just Getting Started

Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

BB&T (BBT) has done okay over the last quarter, slightly outperforming the regional banking averages since the first quarter. BB&T’s strong fee-generating businesses are increasingly valuable as net interest margin compression looks to intensify, and the bank’s merger with SunTrust (STI) appears on track for a Q3/Q4 close. Unfortunately, while the merits of the deal still look quite sound on a long-term basis, both banks have exposure to tightening spreads over the next year.

Factoring in the impact of rate cuts, tempered in part by loan growth and fee-based income growth, as well as the deal benefits, I believe BB&T is modestly undervalued below the mid-$50’s. Cost savings and loan growth will be invaluable offsets to margin pressures in 2020, but given the challenges seen with past mergers of equals in the banking sector, I expect a “wait and see” attitude from many investors on these shares.

Read more here:
Fee Income And Loan Growth Helping BB&T, But Asset Sensitivity Is A Growing Risk

Strong Acyclical Growth Burnishing Danaher's Growth Star Status

As short-cycle industrial end-markets weaken further, Danaher’s (DHR) exposure to acyclical growth markets like life sciences and diagnostics looks better and better. A decent top-line beat and acceleration in those two segments certainly helps bolster the argument for Danaher as a company and a stock that has much less to worry about as the global economy slows, and margin growth across most of the business certainly doesn’t hurt either.

This is the broken record part of the show, but valuation remains the prime issue with Danaher. I have no doubt that I’ll hear again from the “you buy this and hold forever” crowd, but there are a number of stocks where that argument has been made before and investors ended up seeing big losses as circumstances changed. Danaher looks priced for a mid-single-digit annualized return on par with Honeywell (HON) or Dover (DOV), and with what I see as a high likelihood that industrial/mulit-industrial earnings estimates and multiples will be heading lower in the second half, Danaher’s valuation could continue to remain elevated as the company is poised to offer a lot more core growth than many of its peers.

Click here to continue:
Strong Acyclical Growth Burnishing Danaher's Growth Star Status

Dover Seems To Be Holding Up Well, And Self-Help Has Yet To Materialize

Dover’s (DOV) share price performance over the past quarter has been so-so, only slightly outperforming the overall industrial sector. Still, the company continues to deliver improving margins and decent organic growth at a time when many short-cycle industrials are starting to struggle. With exposure to multiple longer-cycle process markets with healthier near-term fundamentals and a refrigeration business that should be bottoming, I like Dover’s cycle exposure more than many industrials, but weakening orders (down in Q2 after flat performance in Q1) and a possible re-rating of the sector remain concerns.

Valuation is my biggest issue with Dover. I do think the company has a better end-market mix, and that should help the company post relatively better results over the next couple of quarters. On the other hand, the implied returns from my valuation models are on par with those of Honeywell (HON) and “Honeywell or Dover?” isn’t a question that I have to ponder very long.

Read the full article here:
Dover Seems To Be Holding Up Well, And Self-Help Has Yet To Materialize

Honeywell Living Up To Its Safe Haven Reputation

In a quarter where it has becoming increasingly clear that short-cycle industrial markets are slumping and long-cycle markets are starting to wobble, Honeywell’s (HON) steady performance and minor beat-and-raise for the second quarter certainly solidifies the safe haven credentials that have been part of my bullish thesis on the stock. With a strong Aerospace segment and steady performance in Building Tech and PMT offsetting temporary weakness in Safety and Productivity, there’s not much that concerns me about the performance for the company.

What does concern me is the valuation. Although Honeywell has modestly outperformed industrials since my last update, almost all of that outperformance came in the post-earnings jump. Moreover, I’m concerned that we’re going to see a downward revision cycle after this earnings reporting cycle across industrials and a reset in valuations as investors accept that the second-half rebound thesis is looking pretty shaky. I do believe that Honeywell’s valuation could continue to exceed historical norms as institutions flock to own one of the few industrial stocks that’s “working”, but I don’t like playing the game of assuming that above-trend valuation will continue to expand at a time when the sector is seeing downward re-ratings.

Click here for more:
Honeywell Living Up To Its Safe Haven Reputation

U.S. Bancorp Doing Fine, With Opportunities To Counterbalance Spread Pressure

For the most part, U.S. Bancorp (USB) thrives on consistency. That makes quarter-to-quarter reporting a little less exciting, but if you want excitement, U.S. Bancorp really isn't the stock for you anyway. Second quarter results were another solid performance from a reliably solid bank, and U.S. Bancorp's combination of low spread compression and healthy fee-based revenue growth was encouraging relative to increasing spread pressure.

U.S. Bancorp might have more going for it than you'd think at first glance. With net interest margins likely to narrow even more over the next year, investors will do well to find banks that can offset that pressure. For U.S. Bancorp, growing fee-based businesses, organic de novo branch growth, and branch consolidation can all help offset that pressure. Like PNC Financial (PNC), which also has some valuable spread counterweights, U.S. Bancorp isn't particularly cheap, but the shares still look like a decent hold here.

Read the full article here:
U.S. Bancorp Doing Fine, With Opportunities To Counterbalance Spread Pressure

Comerica Shares Struggling As The Street Prices In Rate Cuts

The upside and downside of asset-sensitive balance sheets aren’t mirror images of each other, but it is nevertheless safe to say that highly asset-sensitive banks like Comerica (CMA) have a lot to lose as the Fed shifts toward rate cuts. Making matters worse, Comerica’s low-cost deposit base doesn’t give much leeway for further cuts and the high loan/deposit ratio limits flexibility. Oh, and based upon second quarter results, it looks like there are some credit concerns in the energy portfolio.

It’s not so surprising that these shares have been weak – down more than 10% since my last update, and down about 26% over the past year. While the correction in the share price already seems to discount a lot of bad news, Comerica could still see worse than expected net interest margin compression, higher credit losses, and even weaker pre-provision profit performance than is already baked into the share price. Comerica’s hedging strategy should help some, and the share price definitely seems to discount a lot of bad news, but it’s hard for me to see what might inspire the Street to a “c’mon, it’s not THAT bad!” sort of rally in the near term.

Read more here:
Comerica Shares Struggling As The Street Prices In Rate Cuts
PNC Financial (PNC) has been consistent in their belief that they can best serve investors by pursuing selective organic consumer and commercial bank growth opportunities in lieu of whole bank M&A, and the last couple of quarters would seem to suggest that they're on to something in the commercial bank, as PNC continues to outpace its peers in loan growth. With spreads likely to get worse from here, PNC's organic growth potential may well help it stand out from the crowd.

I liked PNC a quarter ago, and the shares have outperformed the banking sector since then (and the market as a whole). The shares are trading closer to fair value now, but PNC offering a more credible case that it can offset spread compression with organic growth and above-peer loan growth, I'd be inclined to prefer a fairly-valued PNC to some undervalued bank stocks with less impressive near-term drivers.

Read more here:
PNC Financial Leveraging Organic Growth As A Not-So-Secret Weapon

It's Harder To Defend Wells Fargo Absent Meaningful Progress

It was never reasonable to assume the Wells Fargo (WFC) was going to fix itself quickly, but not unlike Citigroup (C), these shares have suffered as the management has failed to make the hoped-for progress in areas like operating cost reductions. Add in an ongoing regulatory/legal headwind, an ongoing CEO search, weak lending, and the prospect of more intense spread compression, and it’s harder to stay positive in the absence of better progress on operating efficiency.

I do think Wells Fargo will get itself sorted out eventually, and the core of the business is still strong – it is still one of the largest branch banks in the country, the #1 or #2 deposit-holder in about half of the country, one of the largest CRE lenders, the largest asset-backed lender, and a leader in consumer areas like auto and mortgage, with room to grow in areas like card and payments. The problem is how long it takes to get ROEs moving toward the mid-teens and generate real profit growth. The valuation here is hard to ignore, but this is going to be a frustrating hold until a new CEO is in place, and even then there will be risks tied to whatever restructuring plan that person puts into place.

Click here for more:
It's Harder To Defend Wells Fargo Absent Meaningful Progress

Sandvik Knocked Back As Signs Of Slowdown Accumulate

I suppose it’s still early in the second quarter reporting cycle, but I’m pretty much sold on the idea that the industrial economy is most definitely slowing, though in the interests of transparency, that’s been my expectation for a while, so there’s a risk of seeing what I want to see. Specific to Sandvik (OTCPK:SDVKY), shares have fallen more than 10% since my last update on the company, as those signs of slowdown continue to build and a second half rally seems less likely.

I like Sandvik as a business, but it’s tough to get excited about a company with heavy auto and general industrial exposure at this point in the cycle, particularly when past downcycles at Sandvik have lasted a little more than a year. Perhaps stimulus (the market expects the Fed to cut rates) will lead to a shallower, briefer downturn, but I think there could still be too much optimism for a second half rebound in the market. Sandvik shares are now a bit below my fair value estimate, though, so this is a name to keep a closer eye on if the pullback continues from here.

Continue here:
Sandvik Knocked Back As Signs Of Slowdown Accumulate

Thursday, July 18, 2019

PacWest Running Hard To Stay In Place

PacWest (PACW) is in a strange place right now, as management actively tries to upgrade and de-risk the loan book, offset major pressure from paydowns and payoffs, and figure out how to profitably grow deposits in an environment of increasing deposit cost pressure. While core earnings per share were basically in line with expectations, spread compression still remains a risk.

I still like the basic business that PacWest is in – niche commercial lending for smaller businesses and financial products for tech and VC firms like the capital call lending that has also been a growth driver for First Republic (FRC). It’s going to be hard for PacWest to make much core earnings headway with high repayment levels and rising deposit costs, but the longer-term potential is still attractive and the bank’s large dividend yield will pay investors to wait, though investors should realize that this isn’t “money for nothing” and the business strategy pursued by PacWest is riskier compared to typical community banks.

Read the full article here:
PacWest Running Hard To Stay In Place

Alfa Laval Swamped By Surprisingly Weak Marine Orders

Writing about Swedish conglomerate Alfa Laval (OTCPK:ALFVY) (ALFA.ST) after first quarter earnings, I said, “Give me a 10% to 15% pullback and these shares get much more interesting as a potential long-term holding.” With disappointing orders in the second quarter and increasingly shaky investor sentiment around industrials, Alfa Laval shares have now pulled back a little more than that 15% target.

In the short term, there are still risks. Alfa is benefiting from record high orders in Energy, and I’m not confident that that is sustainable. Elsewhere, ship contracting has been below expectations, raising some concerns about the near-to-medium-term outlook for the Marine business. Still, this is a quality multi-industrial leveraged to multiple attractive trends, and while this may not be the bottom, I think the price is attractive for long-term investors.

Read more here:
Alfa Laval Swamped By Surprisingly Weak Marine Orders