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

Tuesday, September 26, 2017

Nektar Therapeutics Building A More Exciting Pipeline

As Nektar (NKTR) has gotten investors more excited about its pipeline, including a somewhat surprising success with its late-stage pain drug NKTR-181, the shares have done all right since the fall of 2016 – rising more than a third since then (in line with the SPDR S&P Biotech (XBI) and ahead of the iShares Nasdaq Biotechnology (IBB)). The shares don’t look so undervalued to me now, but there are still multiple drivers in the queue for key pipeline candidates that could drive meaningful value.

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Nektar Therapeutics Building A More Exciting Pipeline

Weak Commodity Prices Distract From Adecoagro's Positives

One of the frustrating things about investing in commodity companies is that individual companies can run themselves exceptionally well and still see those benefits largely chewed up adverse moves in the commodity markets they serve. Such has been the case with Adecoagro (NYSE:AGRO). Although Adecoagro has an enviable cost structure in both its sugar/ethanol and farming operations, weaker prices have undermined the company’s earnings power and pressured stock throughout 2017.

I still believe in the quality of Adecoagro, and I still believe that the shares are undervalued based on the company’s long-term FCF potential. Unfortunately, the vagaries of the commodity markets are such that it’s difficult to feel particularly strong conviction about any short-term forecast. That may not bother long-term investors who appreciate a solidly-run business with low costs, good global competitiveness, and attractively long-term growth drivers, but less patient investors may find the commodity-induced volatility is too much bother.

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Weak Commodity Prices Distract From Adecoagro's Positives

American Eagle Following A Familiar Pattern

Teen retailer American Eagle (NYSE:AEO) may not be cyclical in the classical sense of the word, but a quick look at the long-term chart shows that this company and stock have long had a pattern of ups and downs.

The shares dropped below $11 this summer on worries about mall traffic and the impact of heavier promotional activity, as well as more existential worries about the future of store-based apparel retailing, but there is a pattern here. While those present-day worries have some validity, the shares fell below $11 in the summer of 2014, the late summer/early fall of 2011, and the fall of 2008. The fall of 2005 and 2002 were also low points along the way, although 2005 bottomed out above $14 and 2002's decline went below $5.

I'm not suggesting that investors should buy AEO shares just because the stock bottoms out every three years and then recovers. What I am suggesting is that this is a strong brand and a well-run company that has been through the wringer before. The apparel retail market is changing, but change is a constant factor in retail, and I believe American Eagle is better positioned than most to withstand these changes. These shares do look a little undervalued and offer an interesting dividend, but the negative drumbeat is likely to go on a little while longer.

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American Eagle Following A Familiar Pattern

Core-Mark Needs To Start Hitting The Target Again

When I last wrote about Core-Mark (NASDAQ:CORE) almost a year and a half ago, I thought the shares seemed too richly valued even though the company was executing pretty well and had a lot of growth opportunities since then. I didn't necessarily expect the shares to drop about 25%, and I certainly didn't expect the company to start struggling to meet Street expectations for its earnings, but both have happened, and Core-Mark finds itself in a position where it has to rebuild its credibility.

Competitive wins and losses are part of the business, but I'm a little disappointed to see the higher expenses that Core-Mark has seen as it has shuffled its deck of clients. With that, the uncertainty over the Rite-Aid (NYSE:RAD) relationship looms a little larger. While 5% long-term revenue growth and mid-teens FCF growth can support a fair value more than 10% above today's level, the missteps over the past year or so need to lead to some lasting changes (for the better) in how management monitors and operates the business.


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Core-Mark Needs To Start Hitting The Target Again

Saturday, September 23, 2017

Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

An open mind is a valuable asset in investing – in my own experience, it's hard not to start the research process without at least some preconceived notions (after all, something prompted you to start the process...), but keeping an open mind at least lets you respond to new information. That's relevant to me in the case of Nokia (NYSE:NOK), as I went in assuming it was not too likely that this very well-known networking equipment company would be undervalued as the market looks ahead to the start of the 5G rollout in a couple of years.

And yet, Nokia may still be worth a look. The shares are widely followed (around 30 sell-side analysts cover it), and the 5G story is no secret, but the market doesn't seem to think that Nokia will manage to get (or keep) better margins in the years to come despite good progress here since the Alcatel deal. These shares are down more than 10% over the past year and up only marginally in the last year, but breaking out into double-digit FCF margins again in four to five years would support a fair value at least 10% above today's price.

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Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

Colfax May Have More To Give

I've never been the biggest fan of Colfax (NYSE:CFX), mostly because I've felt in the past that investors and analysts veer into the “fanboy” zone with the comparisons of Colfax and Danaher (NYSE:DHR), overlooking the meaningful differences in business mix and the fact that ESAB (the core of the welding operation) needed a lot of work. Colfax got beat down pretty badly during the industrial recession, with even management acknowledging at one point that they underestimated the speed and severity of the downturn. 

Since the low point in early 2016, though, Colfax shares have bounced back – rising more than 100% from the low and surpassing the likes of Lincoln Electric (NASDAQ:LECO), Dover (NYSE:DOV), and Illinois Tool Works (NYSE:ITW). I'm not surprised that the shares have rebounded as conditions in end-markets like mining, power gen, general industrial, and oil/gas have recovered, but I am a little surprised that there could still be upside in the shares. I don't think that long-term revenue growth of 4% or FCF margins in the 10% to 12% range are all that ambitious, but it seems to support a fair value in the mid-$40's today.

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Colfax May Have More To Give

To Get Its Due, Societe Generale Has To Do Better

French multinational bank Societe Generale (OTCPK:SCGLY) continues to test investor patience with its slow turnaround. While the share price has improved over the past couple of years, the company's return on equity and return on tangible equity remain frustratingly low due to persistently high costs, recent challenges in its CIB operations, and foreign operations that until recently weren't carrying their weight.

SocGen is still somewhat undervalued on the basis of what I don't regard as especially ambitious assumptions, and the shares still yield more than 4%. What's more, key markets like France, the Czech Republic, Russia, and Romania are improving, and management is expected to unveil a new strategy for growth in November that will restore some investor enthusiasm.

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To Get Its Due, Societe Generale Has To Do Better

ON Semiconductor Quickly Clearing Away Doubts About Execution

It has been a good year for ON Semiconductor (ON), and the shares are up over 50% in what has admittedly been a strong market for chip stocks. The Fairchild acquisition is looking like the right deal at the right time, and management has done a lot in just a year to clear up concerns about their ability to execute. Better still, markets like auto and industrial offer good long-term potential, as do entries into markets like servers/datacenters where ON hasn't historically had a big role.

At this point, most of my concerns are about valuation and the overall health of the semiconductor market. Lead times have been growing, and recent industry unit shipments have been well ahead of long-term averages – suggesting the cycle is closer to the peak. With close to half of ON's mix consisting of more volatile product types, some of the company's margin leverage could be at risk if and when the cycle slows. While ON shares don't look overpriced, I would note the risk that even strong individual stories can get dragged down when the wider industry slows.

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ON Semiconductor Quickly Clearing Away Doubts About Execution

After A Strong Run, Check Point Doesn't Look Like A Bargain

I've had a lot of respect for Check Point (NASDAQ:CHKP) for a long time, and the company's less impressive growth rates (and emphasis on margins) compared to Palo Alto (NYSE:PANW) and Fortinet (NASDAQ:FTNT) have created a few buying opportunities over the years. Buying opportunities emerged three times since mid-2015, with the latest run taking the shares up about 50% on renewed evidence that Check Point can still, in fact, generate pretty good revenue growth.

I keep Check Point on my watch list to take advantage of those pullbacks but right now doesn't look like one of those opportunities. I think the company can generate high single-digit long-term FCF growth from here, and I think the opportunities in cloud and mobile are still meaningful, but I want more than the high single-digit return that seems to be figured into today's valuation.

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After A Strong Run, Check Point Doesn't Look Like A Bargain