Tuesday, February 9, 2016

Seeking Alpha: Microsemi Bigger And Better, But Has Work To Do

Microsemi (NASDAQ:MSCC) won the bidding competition for PMC-Sierra in 2015 and closed the deal early in January. Now the hard work really starts. While PMC-Sierra brings attractive diversification, growth potential, and expense synergies, it falls to Microsemi management to prove that they can not only successfully integrate the deal (something they have a lot of experience with), but fully leverage the growth opportunities that PMC-Sierra was building towards before the deal.

I believe that Microsemi will get the job done and emerge a better, stronger, faster-growing company after this deal. This deal pushes my modeled fair value on Microsemi into the low $40's, and I think investors will pleased to see the company leverage growth opportunities in defense, aerospace, and communications while many chip companies try to navigate through a weaker smartphone and industrial environment.

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Microsemi Bigger And Better, But Has Work To Do

Seeking Alpha: Summer Infant's Slow Road Back

Progress in Summer Infant's (NASDAQ:SUMR) turnaround remains slow, but there have at least been signs of progress. Revenue growth has been disappointing, but the company's core revenue continues to grow despite price reductions in the monitor line and an ongoing restructuring of the company's core product line. Likewise, the company has made meaningful progress working off obsolete inventories and reducing its working capital.

Having a bigger presence in Europe may improve Summer Infant's long-term revenue growth prospects, but it will cost money to support. Moreover, Summer Infant is still a small player in a market that includes huge retailers like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and the Toys/Babies R Us chains and large competitors like Mattel (NASDAQ:MAT), Newell Rubbermaid (NYSE:NWL), and Dorel (OTCPK:DIIBF). While there would seem to be 25% to 50% upside from here on the basis of mid-single-digit, long-term revenue growth and low-to-mid single-digit FCF margins, the execution risk here is very high and management really needs to deliver better revenue and gross margin numbers over the next few quarters.

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Summer Infant's Slow Road Back

Seeking Alpha: AEIS Starts Its New Life

With the wind-down of the solar inverter business now complete, Advanced Energy Industries (NASDAQ:AEIS) is free to refocus itself around its expertise in power conversion and control systems. That's a pretty good business in its own right, and one capable of supporting operating margins in the mid-20%'s, but the real deciding factor for this company and stock will likely be the extent to which management succeeds in branching out from its historical reliance on the semiconductor industry.

What happens next in the semiconductor capital equipment space is anybody's guess, as major fab operators like Taiwan Semiconductor (NYSE:TSM), Intel (NASDAQ:INTC), and Samsung have generally been spending less than expected (or maybe "hoped") during this transition to next-gen architectures. While the cyclicality of its core semiconductor market will create volatility in reported results, I believe that mid-single digit growth can nevertheless support a fair value in the neighborhood of $29 to $30 per share for this stock.

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AEIS Starts Its New Life

Seeking Alpha: Miller Industries Is No Wreck

Although I thought the valuation of Miller Industries (NYSE:MLR) was getting a little stretched in the spring of 2015, I'm still a little surprised that the shares have fallen close to 20% despite a generally decent performance. Perhaps that's the price of toiling in obscurity (as Miller is uncovered) or maybe investors were spooked by the surprisingly weak gross margin in the first quarter and the generally unimpressive margin trajectory seen this year. After all, if Miller can't generate good margins when volumes are high and input costs like steel and aluminum are low, isn't that a problem?

I am inclined to think that things are fine at Miller. Given that the Tennessee plant is running two 10-hour shifts a day, I don't think lack of demand is the problem, and the eventual smoothing out of plant construction and reorganization should help. I think Miller is undervalued, but I'm also looking for levels of cash flow production in the future that have been difficult for the company to maintain in the past. Investors should also note that the liquidity and float are too low here for this to ever be a well-covered stock on the institutional side.

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Miller Industries Is No Wreck

Seeking Alpha: The Dell And Market Pessimism For EMC Is Too Much

Buyouts are generally supposed to produce upside for the shareholders of the company being acquired, but that hasn't been the case for EMC (NYSE:EMC) since the company announced its merger agreement with Dell back in October of 2015. While it has indeed been a lousy market for a few months now, EMC's 12% drop since the time of the deal is worse than the performance of the Nasdaq, as investors have grown increasingly worried about the weak performance of EMC's storage business, the poor performance of VMware (NYSE:VMW), and concerns that the deal may not go through at all.

I believe that the deal gets done, but even if it does not, I believe EMC would walk away with at least $4 billion in cash in its pocket and an underestimated PaaS business in Pivotal. I wouldn't expect EMC's reported storage results to improve much until mid-2016, but with a stand-alone value above today's price and very low implied value to VMware, I believe there's still upside in these shares that is worth the risk that the deal unravels.

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The Dell And Market Pessimism For EMC Is Too Much

Sunday, February 7, 2016

2016 Performace

Apologies for being so late to post this, but regular readers know how things are...

My performance for 2015 was okay, and given all of the other things going on in my life I'll look at it as a decent year.

Portfolio A: +8%
Portfolio B: -10.5%
S&P 500: +1.38%

Nasdaq: +5.73%
Russell 3000: +0.48%

Seeking Alpha: Check Point Software - Solid Performance, Familiar Worries

The more things change, the more they stay the same for Check Point Software Technologies (NASDAQ:CHKP). While this Israeli IT security company still has a leading presence in enterprise IT security and margins that many CEOs could only dream of, a segment of the investing world remains steadfast that the company is doomed to lose share to Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and other relative newcomers over time.

To be fair, Check Point has lost market share ... but the erosion seen in recent years has been less than the bears predicted. What's more, while Check Point's "fast follower" strategy means it will always arrive after the party has started, the company seems to have a credible platform for advanced threat detection, endpoint security, and cloud. The shares aren't dramatically undervalued, but they do trade below fair value, and I still think this is a quality idea in the tech space.

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Check Point Software - Solid Performance, Familiar Worries

Seeking Alpha: Dover Probably Undervalued, But Where's The Spark?

There's a pretty broad universe now of beaten-down industrial conglomerates that would seem to offer attractive upside for patient investors. Dover (NYSE:DOV) would seem to be among them, as the sharp decline in the energy business has mauled the company's financial results but not so much that the company couldn't still generate double-digit FCF margin in 2015.

Dover has never been the most exciting of the conglomerates, but I don't think mid-single digit long-term growth in free cash flow should be out of reach, and that still supports a fair value in the high $60's. The problem is that it's hard to see what gets investors interested in owning the shares in the next few quarters. Dover doesn't have meaningful exposure to popular end markets like aerospace, construction, healthcare, or passenger vehicle production, so unless energy starts recovering sooner than most expect, this stock will probably require some patience.

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Dover Probably Undervalued, But Where's The Spark?

Seeking Alpha: Finisar At Risk Of Profitless Prosperity

I've written in the past that Finisar (NASDAQ:FNSR) is best looked at as a fleeting engagement for active investors, and the last nine months underline why - the shares have lost about 40% of their value as the company has underwhelmed on revenue growth and found no traction with margins. To that end, revenue estimates for FY2016 are now about 6% to 10% lower than they were back in May and earnings estimates have fallen even farther.

The basic bullish driver for Finisar, increasing data traffic growth and increasing demand for 40G (and, eventually, 100G) equipment in the data center, is still valid but the current environment is challenging. Finisar doesn't have a good record of generating meaningful economic profits and the optical sector badly needs consolidation. What's more, the adoption of silicon photonics remains a significant long-term risk. These shares could still see the low-to-mid $20s on a renewed wave of bullishness on the data center upgrade opportunity, but that valuation is predicated in part on the market once again forgetting that this is a cyclical business with a bad record of full-cycle profitability.

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Finisar At Risk Of Profitless Prosperity

Seeking Alpha: Cavium Still Navigating Lofty Expectations

As I recently wrote in reference to F5 (NASDAQ:FFIV), growth investors are unforgiving when growth erodes, and Cavium (NASDAQ:CAVM) shares have not done well lately as this chip company's revenue has continued to decelerate ahead of what bulls hope will be significant product ramps. While Xpliant, LiquidIO, and ThunderX could add about $2 billion to Cavium's addressable market relative to 2015, companies like Intel (NASDAQ:INTC) and Avago (NASDAQ:AVGO) are hardly pushovers and the adoption of ARM servers has been disappointing so far.

It takes ambitious growth expectations to support a fair value in the $60s and the company's margin prospects over the next couple of years really don't support a corresponding EV/revenue multiple. That said, Xpliant, LiquidIO, and ThunderX are really just getting started and the company could be in a position to exploit M&A-related disruptions in its sector. This is by no means a safe stock, or one with low expectations, but the company's technology offers high performance, programmability, and cost of ownership attributes that could grab meaningful share in markets that can support multiple billions in long-term revenue.

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Cavium Still Navigating Lofty Expectations

Seeking Alpha: Steel Dynamics Grinding Through The Lows

I continue to believe that Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) are extremely well-run steel companies, but it's hard for even the best-run companies to make a lot of headway when imports help push prices down almost 40% in a year. Likewise, weakness in energy, off-road machinery, and "general industrial" is an ongoing concern going into 2016.

The good news is that Steel Dynamics has some internal efforts that can help, including ongoing improvements at the Columbus facility and efforts to improve its market penetration in categories like auto production. It also looks as though the government is going to help, as there seems to be a lot more momentum behind efforts to punish artificially cheap steel imports.

Valuation is a head-scratcher. The shares look about 10% undervalued on 2016 EBITDA, but closer to 20% undervalued on 2017 EBITDA and the company has continued to generate cash flow throughout this downturn. I'm not sure there is such a thing as a buy-and-hold materials company, but if you think the outlook for the U.S. economy is going to improve as 2016 goes on, Steel Dynamics could be a name to consider.

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Steel Dynamics Grinding Through The Lows

Seeking Alpha: Eagle Bancorp Flying High

Eagle Bancorp (NASDAQ:EGBN) has done well since I spotlighted the bank as a Top Idea back in mid-2013, with the shares up more than 90% in that time and basically matching super-performer Bank of the Ozarks (NASDAQ:OZRK). Like Bank of the Ozarks, Eagle is now in that tough grey zone where I love the growth and love management's strategy, but I don't love the valuation. I am generally loathe to tell investors to get out of a good growth story just because of valuation, and that's the case here, but I don't see enough valuation upside to recommend it as a new investment.

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Eagle Bancorp Flying High

Seeking Alpha: Commerce Bancshares Has A Strong Core, But Needs More Cardio

Analyzing and writing about a bank like Commerce Bancshares (NASDAQ:CBSH) can be a frustrating exercise, because there's nothing really wrong with this conservatively-run Midwestern institution, but the upside in the shares, absent a new growth driver, just isn't impressive. Like U.S. Bancorp (NYSE:USB), though, Commerce Bancshares knows what it is, and the management is not going to change course just to make the shares a little more exciting for short-term speculators.

I continue to believe that CBSH can leverage its low-cost deposit base in Kansas and Missouri, along with rising rates and good fee income growth, to generate mid-teens ROE down the road, supporting cash earnings growth of around 7% for the next five years. That's not enough to drive a compelling fair value today, but Commerce looks like a safer bet for investors who believe interest rate hikes will be slow to arrive and that credit conditions could get a little hairy in the short term.

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Commerce Bancshares Has A Strong Core, But Needs More Cardio

Wednesday, February 3, 2016

Seeking Alpha: First Horizon In Good Shape, But Looking At A Hard Slog

I thought Tennessee's First Horizon (NYSE:FHN) was more or less fairly valued a year ago, and I haven't missed out on much, as the shares of this regional bank are pretty much where they were a year ago. Of course, there's been movement in between, as bullishness on the prospect of rate hikes and loan growth saw these shares exceed $16 back in the summer before getting caught in the general downdraft.

I'm a little torn on First Horizon. On one hand, I applaud the management for being quite transparent with its plans and goals, but I don't think it's necessarily going to be able to reach all of those goals. Likewise, while I don't see much undervaluation in the shares on an "as is" basis, the stock should definitely do better if rates start heading up and/or if management deploys more of that surplus capital toward M&A. With all of that in mind, I'd call this a "high-quality hold"; I don't see enough undervaluation to buy these shares when BB&T (NYSE:BBT) and Regions (NYSE:RF) both look more undervalued, but there are definitely worse places for a bank stock investor to hang out while waiting for better conditions.

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First Horizon In Good Shape, But Looking At A Hard Slog

Seeking Alpha: Nektar Therapeutics Going Into The Decline With A Better Profile

I have no idea how long this downturn in the biotech sector will last, but Nektar Therapeutics (NASDAQ:NKTR) has survived its share in the 20-plus years of the company's existence. I also believe that the company is going into this downturn in the best shape it has been - Nektar can look forward to meaningful royalty streams from two drugs with $1 billion-plus potential, and the company has a more credible and focused pipeline.

My model suggests that the shares should be worth over $18 today, with royalties from approved drugs (AstraZeneca (NYSE:AZN)/Movantik and Baxter's (NYSE:BAX) Adynovate) making up about $9 of the valuation. Nektar's pipeline remains high-risk, but the potential of abuse-resistant painkillers and differentiated immuno-oncology drugs is meaningful, and the company seems to be making better decisions with regard to its R&D capital allocation.

It's certainly important to note that this is an ugly stretch in the biotech space and it could get worse (if not much worse) before getting better. My valuation is predicated in part on what the market has been willing to pay for approved drugs in the past, and the market can certainly undershoot those multiples during pullbacks.

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Nektar Therapeutics Going Into The Decline With A Better Profile

Seeking Alpha: Cosan Ltd Looks Like Value The Hard Way

The shares of Cosan Ltd. (NYSE:CZZ) are hardly unique in being Brazilian shares that have done poorly over the past year, as Brazil's ongoing economic struggles and currency weakness have badly hurt many stocks. Cosan has a host of its own challenges, though, as investors wrestle with the prospects for Cosan SA's (CSAN3.SA) Raizen joint venture to improve profits and cash flow in the sugar and ethanol operators, as well Rumo's (RUMO3.SA) very weak share price and its prospects for raising much-needed capital on acceptable terms.

The positive spin on Cosan Ltd. is that it gives investors a one-stop exposure to one of the largest sugar and ethanol producers in the world, as well as a leading operator of gas stations in Brazil, a large natural gas distribution business, and a growing rail and port operator. The negative spin is that those sugar and ethanol operations have never generated great returns on capital and that the logistics operations need very large amounts of capital in the coming years. There's also a negative argument for complexity here - this is a tough business to model and the holding company structure creates risks and inefficiencies.

When it's all said and done, I believe that Cosan Ltd. is undervalued, but this is a good example of a stock where investors may find the return prospects significantly overshadowed by the risk and complexity. These shares can definitely outperform on a Brazilian economic recovery, but there are significant commodity, macroeconomic, and operational risks to consider.

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Cosan Ltd Looks Like Value The Hard Way

Tuesday, February 2, 2016

Seeking Alpha: Xenoport Arguably Undervalued, But Low On Options

The days of talking about XenoPort (NASDAQ:XNPT) as a biotech are pretty much over, as the company has given up developing '829 and '279 on its own and refocused its efforts on maximizing the potential of its restless leg and postherpetic neuralgia (or PHN) drug Horizant. Unfortunately, XenoPort also really isn't a specialty pharmaceutical company either, as the company has no other marketed products and still lacks the scale (and the resources) to market Horizant to full effect.

The best outcome for XenoPort would appear to be a sale of the company to another pharmaceutical company with the primary care sales infrastructure to make Horizant a lucrative "drag and drop" addition. I believe such a transaction is worth about $6.50 to Horizant today, but I believe the shares would be worth far less in a go-it-alone scenario due to a slower revenue ramp and a lack of operating leverage. I don't presently see any meaningful value in out-licensing the portfolio.

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Xenoport Arguably Undervalued, But Low On Options

Monday, February 1, 2016

Seeking Alpha: Cresud And The Cost Of Complexity

With so many stocks out there for investors to choose from, I have never believed that investors are obligated to put up with confusing, complicated, or unfavorable situations just to generate a little extra return. That point has really been driven home at Cresud (NASDAQ:CRESY) in recent months, as investors have grown concerned about the relationship between Cresud's majority-owned IRSA (NYSE:IRS) and Israeli holding company IDB Holding (OTC:IDBZF) (IDBD.TA).

Given that IDB's debt is non-recourse to IRSA and/or Cresud, I'm not worried about IDB "ruining" CRESY, but I am concerned that management is stretching itself far and wide and really becoming much more of a diversified holding company. I suppose that's fine if that's what you want to invest in, but as a vehicle for investing in Argentina (and particularly Argentina's farmland), I'm not sure Cresud really fits the bill for me anymore.

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Cresud And The Cost Of Complexity

Seeking Alpha: Can Better Policies In Argentina Take Adecoagro Higher?

Agricultural and ethanol company Adecoagro (NYSE:AGRO) has been one of the few companies with significant operations in Brazil to do reasonably well over the last six months or so, although most of that outperformance has come since September. I've liked this company for a while, particularly because of its efficient sugar and ethanol operations in Brazil and its undervalued land assets in Argentina, and now it looks as though at least some of the macro factors influencing the company are pointing in a more positive direction.

Brazil's weak economy and weak currency remain real issues for the company, but Argentina's adoption of agriculture-friendly tax and policy reforms should offer a real boost to Adecoagro's farming results in the coming years. Weak global commodity prices remain a challenge, and it may take longer for Argentine land values to appreciate, but Adecoagro still looks modestly undervalued today.

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Can Better Policies In Argentina Take Adecoagro Higher?

Seeking Alpha: SLC Agricola Closer To Dirt Cheap

Like most equities in Brazil, reaching out to grab SLC Agricola (OTCPK:SLCJY) (SLCE3.SA) has been like grabbing a falling knife. While the local shares haven't done quite as bad (SLCE3.SA's shares down about 12%), the ADRs have fallen another 35% or so since I last wrote about the company, as the shares have been hit hard by a weak Brazilian real, some productivity challenges, and ongoing concerns both about Brazilian equities and farming companies in a lower commodity price environment.

The performance of Brazilian equities over the last year or so has been an abject lesson that things can always somehow manage to get worse. Even so, SLC Agricola's share price seems to reflect a level of pessimism that seems out of line with the real fundamentals. Although the company's land is consistently more productive than U.S. cropland when it comes to cotton and soy and not too far out of the running with corn, the market values SLCJY's land at nearly half the value of U.S. cropland. Even allowing that the challenges of the Brazilian market (including higher logistics costs) should demand a discount to U.S. values, I have to wonder whether the market isn't overly discounting the long-term value of SLC's farmland, and by extension, the shares of the company.

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SLC Agricola Closer To Dirt Cheap

Thursday, January 28, 2016

Seeking Alpha: The Market Seems To Think Chart Industries Is Back To Square One

That shiny new natural gas economy that was a rock star in the markets a few years ago and supposed to lead us into the next decade has wound up where sadly all too many rock stars of the past have - floating face down in a pool. In this case, it was a pool of cheap oil, as the sharp drop in oil prices has led many would-be users of LNG to table those plans for the time being, leading to much slower progress on LNG export terminals, and filling stations.

This hard stop in the natural gas industry, combined with much tougher conditions in China, has hammered the shares of Chart Industries (NASDAQ:GTLS), with the stock down over 40% in the past 12 months and nearly 60% since my last piece on the company.

While I had thought expectations were still a little elevated back in May, little did I suspect that activity across LNG would shrink so far so fast. At this point, it would seem that Chart Industries is being valued only on the basis of its industrial gas business, a good business where the company has long enjoyed #1 or #2 share in most of its primary markets, and arguably even undervalued just on that basis. While the timelines for large-scale U.S. LNG exports and wider usage of LNG as a transportation fuel have certainly stretched out, to give the shares no value for them at all seems unduly harsh to me.

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The Market Seems To Think Chart Industries Is Back To Square One

Seeking Alpha: Komatsu Lacking A Spark

There's really not much good news to celebrate among the makers of heavy machinery for construction and mining. Joy Global (NYSE:JOY) has been pummeled over the last year, and Komatsu (OTCPK:KMTUY), Caterpillar (NYSE:CAT), Sany, Hitachi Construction (OTCPK:HTCMY), Sandvik (OTCPK:SDVKY), and Atlas Copco (OTCPK:ATLKY) all pretty much occupy the same real estate in the down 20%-30% range. In fact, most of these companies' shares have pretty closely tracked the CRB Index down over the past 12 months.

I continue to think that Komatsu is a strong company within the heavy machinery sector, but it rarely makes a lot of sense to buy the best house on the block when the entire neighborhood is in flames. To that end, it's hard to look past the ongoing declines in machine utilization in Japan, China, and North America and the grim outlook for mining capital spending. While Komatsu shares do seem undervalued based on prior valuation ranges, it's hard for me to see what drives better earnings and more investor interest in the near term.

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Komatsu Lacking A Spark

Wednesday, January 27, 2016

Seeking Alpha: WESCO Hammered Down, But Margin Questions Linger

Finding a beaten down industrial stock takes no effort these days, and WESCO (NYSE:WCC) certainly qualifies. These shares have fallen about 45% over the past year, surpassing the declines in other distributors like Grainger (NYSE:GWW), Rexel, HD Supply (NASDAQ:HDS), and Anixter (NYSE:AXE). Given the company's higher exposure to energy, perhaps it is not entirely unfair that WESCO would see a sharper drop, but I find it interesting that WESCO is also the only name on that short list that is expected to see revenue declines in both 2015 and 2016.

The North American industrial sector has weakened a lot more than I expected back in May of 2015, and that has led me to reduce my fair value estimate by about 25%. While I do believe that WESCO's core markets will recover in time, I still have concerns about the company's long-term margin leverage. Although WESCO is very efficiently-run from an SG&A perspective, I think gross margin leverage will likely disappoint the bulls and I don't see what will shake WESCO out of its long-term status as an average grower. So while WESCO does look undervalued today and should have more leverage to an industrial recovery, it wouldn't be first pick for a long-term holding.

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WESCO Hammered Down, But Margin Questions Linger

Seeking Alpha: F5 Networks In Growth Purgatory

"My son, Here may indeed be torment, but not death" Dante Alighieri, Purgatorio Canto XXVII

As far as many tech investors are concerned, a company that cannot generate double-digit revenue growth might as well just take itself private. I could talk a lot about the double-digit growth in F5's (NASDAQ:FFIV) service business, as well as the strong margin it generates, but none of that is really going to matter unless and until F5 can perk up its product growth rate and its overall reported growth rate.

Unfortunately, that's not a simple process. The company's core application delivery controller market has most definitely slowed, software ADCs are worth less to the company than its traditional hardware ADCs, and product offerings in areas like security and diameter routing can't yet offset the impact. I can run numbers indicating that F5 is undervalued even if growth never again reaches double-digits (and, in fact, if long-term product growth is below 5%), but investors could have a frustrating wait before the Street embraces the value argument and/or the company restores its product growth performance.

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F5 Networks In Growth Purgatory

Seeking Alpha: Lincoln Electric A Lion In A Very Harsh Winter

There are some questions investors learn not to ask, and "how much worse can it get?" is most definitely at or near the top of the list. Operating conditions for Lincoln Electric (NASDAQ:LECO), the leading producer of welding equipment and consumables in North America, were already looking rough in the middle of 2015, but conditions have gotten even worse on a deeper plunge in overall manufacturing activity.

Many industrial companies, particularly in the machinery space, have gotten the snot knocked out of them since the summer of 2015 and I think there are some long-term values in the sector. Lincoln Electric looks like one of them, but I can't state with any real confidence that my estimates are finally low enough. I think a buyer of Lincoln Electric shares today will be happy to own them in three years' time, but I can't say that they'll be happy to own them in six months, and that is a key issue with any buy recommendation in the machinery space - while I think many high-quality names are attractive for the long term, things can certainly get worse in the meantime.

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Lincoln Electric A Lion In A Very Harsh Winter

Tuesday, January 26, 2016

Seeking Alpha: Mueller Water Still Waiting For Orders To Really Flow

Construction activity has been getting better in the U.S., but you wouldn't really know it by looking at the performance of water infrastructure supplier Mueller Water Products (NYSE:MWA), nor other related stocks like HD Supply (NASDAQ:HDS) and Rexnord (NYSE:RXN). On the other hand, it's hard to say that Mueller's shares ought to be outperforming as the company has racked up three straight quarterly revenue misses and sell-side estimates have been moving lower.

I'm still optimistic that municipal spending will pick up, but it's not all going to materialize in 2016 for Mueller. What's more, investors are still concerned about the impact of the profound weakness in the oil/gas markets and the lack of traction in Mueller's water technology businesses. Mid-single digit revenue growth and operating leverage-driven margin improvements can still support a double-digit fair value, but the shares definitely need to see some beat-and-raise quarterly performances.

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Mueller Water Still Waiting For Orders To Really Flow

Seeking Alpha: Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Watching Bank of the Ozarks (NASDAQ:OZRK) continue to climb higher is a little like standing outside of a restaurant and watching people eat your favorite food. I have tremendous respect for this bank's management and its business plan, but I've never been able to construct a model that makes me comfortable with the valuation. That's particularly true given that the bank hasn't exceeded my financial performance expectations by all that much, suggesting to me that Wall Street is simply willing to pay more for the company's growth than I am.

Not much has really changed in any of those respects. I like the company's 2015 acquisitions and I believe OZRK can generate more than 25% earnings growth per year (CAGR) for the next five years. But even with the 20% pullback in the shares from its 52-week high, I just can't make the numbers work from a value perspective. Painful experience has taught me not to stick my neck out in situations where I can't make sense of the valuation, but more aggressive and/or valuation-insensitive investors could see more on offer here.

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Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Seeking Alpha: Diworsification Messing Up Middleby's Growth

Among the many nuggets to be found in Peter Lynch's books, the concept of "diworsification" is one of my favorites. The term refers to companies that eventually expand or acquire beyond their core competencies and end up ruining their business in the process. With Middleby's (NASDAQ:MIDD) struggles in its Viking business leading to real pressure on growth and margins, it's fair to ask whether this company's foray into residential cooking equipment is destroying the value created by the strong commercial operations.

These shares have lost about a quarter of their value since I last wrote about them, as a slowdown in food processing sales and the mess in the residential business has led to disappointing quarters (including organic revenue contraction in the second quarter), downward revisions, and a re-examination of whether these shares still merit such a robust premium. I've cut back my growth expectations, but I believe Middleby is still well-placed to take advantage of growing demand for labor-saving automation in commercial kitchens. There's elevated risk right now, and I'd be nervous about buying ahead of fourth quarter earnings, but there's still above-average growth potential in the core business.

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Diworsification Messing Up Middleby's Growth

Seeking Alpha: Wärtsilä Down On Power ... For Now

These are challenging times for Wärtsilä (OTCPK:WRTBY) (WRT1V.HE), one of Finland's largest and oldest industrial companies. Orders for drillships, semi-submersibles, and supply ships have cratered alongside oil prices, and the demand for new cargo ships is hardly better. With that, the company's leading position in marine engines, automation, and propulsion doesn't look all that impressive. Likewise in the energy business, as emerging market orders for flexible baseload gensets has plunged on currency and commodity weakness.

It looks too early to be bullish on these shares, but I think this is a good time to get up-to-date with due diligence on companies like Wärtsilä. The company's biggest original equipment markets are weak, but the lucrative service business will help tide it over, and cyclical markets don't stay down forever. When demand for large ocean-going vessels and flexible electrical gensets recovers, Wärtsilä's niche leadership and operating leverage should serve investors well.

U.S. investors should note that Wärtsilä's ADRs are not especially liquid. Many brokers now support international trading, and there is more liquidity to be found buying these shares on the Helsinki Stock Exchange.

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Wärtsilä Down On Power ... For Now

Seeking Alpha: GKN Gets Interesting If They Can Get The Margins Up

Britain's GKN (OTCPK:GKNLY) is the kind of stock that can break an investor's heart. On one hand, the company's strong share in aerostructures and engine structures looks attractive as significant programs move forward at Airbus Group (OTCPK:EADSY) and Boeing (NYSE:BA). Likewise, the company's leadership in driveline components is appealing as penetration of all-wheel drive and hybrid vehicles grows. The problem is that aerospace and autos are cyclical businesses where OEMs habitually lean hard on suppliers and GKN doesn't have the best record of attractive sustained operating margins, free cash flow, or returns on capital.

If things go right, meaning that the aerospace and auto markets remain healthy, key programs ramp as expected, and GKN achieves better operating leverage, the shares could do very well over the next two to four years. If GKN drops the ball on margins, though, or if demand for aircraft and/or autos disappoint, the shares aren't likely to do so well.

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GKN Gets Interesting If They Can Get The Margins Up

Seeking Alpha: Talgo's Rail Opportunity Looks Frustratingly Binary

By and large, I think investors do well to stay away from binary investment outcomes where the stock is liable to be a big winner or a big loser, with not much ground in between. That may be an unfair assessment of Spain's Talgo (TLGO.MC), but the success of the company (and its shares) rests upon securing multiple high value rail bids, bids that Alstom (OTCPK:ALSMY), Bombardier (OTCQX:BDRBF), CAF, CRRC, and Siemens (OTCPK:SIEGY) will be competing for as well.

Talgo certainly has some technology in its favor, but companies like Alstom, Bombardier, and Siemens didn't build multibillion-dollar order books on the basis of blatantly inferior offerings.
I've tried to value Talgo on weight scenario basis that incorporates high win-rate, low win-rate, and moderate win-rate scenarios. Altogether, I come up with a fair value of EUR 6.70 per share today, and most of my bearish scenarios produce fair values in the EUR 3 to EUR 4 range, versus a current share price of EUR 4.50.

Readers should note that there is no ADR available for Talgo, so any investors who wish to purchase these shares will have to do so on the Madrid Stock Exchange (Bolsa de Madrid). Most of the larger brokers can and will handle these trades, but investors certainly need to ask themselves whether the added risk and hassle is worth it.

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Talgo's Rail Opportunity Looks Frustratingly Binary

Sunday, January 24, 2016

Seeking Alpha: BB&T A Little Poky, But Can Build From Here

The overall theme for most bank earnings reports this quarter has been "good enough, but not great", but BB&T (NYSE:BBT) broke from the pack a bit in the wrong way. BB&T's results were a little light, as weaker fee income weighed on revenue and drove a slight operating profit miss. Management was a little more upbeat about 2016 than fourth quarter results might have suggested, though, and there is scale to accelerate lending and drive operating synergies from the company's recent acquisitions.

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BB&T A Little Poky, But Can Build From Here

Seeking Alpha: Wells Fargo Well-Positioned And Willing To Deploy Capital

While JPMorgan (NYSE:JPM) shrinks its balance sheet and expands its lending, BB&T (NYSE:BBT) works to integrate its M&A binge, PNC Financial (NYSE:PNC) works on improving its branch network, and Citi (NYSE:C) continues to run off past bad debts, Wells Fargo (NYSE:WFC) is keeping busy too. Not only has the company adjusting its rate sensitivity down a bit, the company has struck three deals with General Electric (NYSE:GE) to acquire commercial real estate loans, a railcar leasing business, and a sizable commercial lending and leasing operation that includes distribution and vendor financing and asset-based middle market lending.

Wells Fargo looks pretty attractive to me right now. Not only is the business simple enough to avoid the steeper G-SIB surcharges that will apply to JPMorgan and Citi, but there's a very attractive mix of commercial and consumer lending, a leading mortgage and auto lending business, growing card loans, and fee-generating businesses like the expanded leasing operation. I suppose I could ask for better reserves and faster NPA resolution, but those aren't huge negatives to me. This next year may not be the best in terms of reported results, but I believe Wells Fargo is well-placed for growth over the next three to five years and attractively priced below $60.

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Wells Fargo Well-Positioned And Willing To Deploy Capital

Seeking Alpha: Regions Financial Has Capital To Spare, But What About Quality?

The fact that the shares of Regions Financial (NYSE:RF) are only up about 15% since mid-2011 doesn't tell you everything you need to know about this Southeastern regional bank, but its relative performance next to the likes of BB&T (NYSE:BBT), SunTrust (NYSE:STI), and Wells Fargo (NYSE:WFC) does underscore some of the issues of this asset-sensitive bank over the past few years.

Although management has outlined a credible plan to reduce expenses and has ample capital to deploy, I'm still concerned about the underlying credit quality of the bank and its ability to earn its cost of equity. On the other hand, those concerns appear to be more than accounted for by the share price. If the U.S. economy stays healthy enough to support higher rates and the economy in the Southeastern U.S. stays healthy enough to support Regions' loan book, the rewards here could be significant when compared to what most other banking stocks are offering in terms of prospective returns.

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Regions Financial Has Capital To Spare, But What About Quality?

Seeking Alpha: With The Pullback, Silicon Labs' IoT Opportunity Looks More Interesting

There aren't many sectors doing especially well right now in the stock market, so the pullback in semiconductor stocks isn't exactly surprising, let alone unique. As about a quarter of the industry's revenue comes from industrial markets, and meaningful amounts come from computing, consumer devices, and phones, it is not so surprising that investors are worried about the outlook for 2016 even though multiple semiconductor CEOs have opined that the slowdown will be briefer and shallower than past downturns.

This brings me to Silicon Labs (NASDAQ:SLAB). The shares of this microcontroller, sensor, and RF chip company have fallen around 15% since my last update, more or less matching the decline in Microchip Technology (NASDAQ:MCHP) and outperforming NXP Semiconductors (NASDAQ:NXPI) over that period. While the company has definitely had some challenges with more commoditized competition in segments like TV tuners, the company's Internet of Things (IoT) business continues to grow nicely.

Valuation is still mixed, though the shares are now below both my cash flow and margin/revenue-based fair values. IoT is still a somewhat sexy topic in the chip space, and the company's combination of MCU/sensor/RF capabilities and relatively high operating expenses (fueled by aggressive R&D spending) could generate some potential M&A interest. Although there are other chip companies I like better (including Microchip and Microsemi (NASDAQ:MSCC)), I won't pretend that Silicon Labs is trading at a more attractive level if you believe in the long-term potential of IoT applications.

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With The Pullback, Silicon Labs' IoT Opportunity Looks More Interesting

Thursday, January 21, 2016

Seeking Alpha: PNC Financial Still Biding Its Time

Caught up in the overall mass-selling of recent times, I wonder if PNC Financial (NYSE:PNC) also has a bit of an identity problem with investors. It's most definitely not a growth-oriented bank right now like Wells Fargo (NYSE:WFC), BB&T (NYSE:BBT), or Regions Financial (NYSE:RF), as management is taking a conservative view of lending growth and spending designed to transform the branch business model limits operating leverage. It's also not a rock-solid "come hell or high-water" story like U.S. Bancorp (NYSE:USB) where investors can rest relatively easy that the bank will always have a seat when the music stops playing.

While this almost indiscriminate sell-off has created a lot of bargains in the banking space, I'm still not all that enamored of these shares. The valuation is just okay on a relative basis and I think the company's middle-of-the-road asset sensitivity, underwriting history, and operating efficiency doesn't really argue for the stock as a must-buy.

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PNC Financial Still Biding Its Time

Seeking Alpha: U.S. Bancorp Still The Relatively Defensive Option

Since the middle of 2015, and particularly in the last month or so, investors have become more concerned about the health of the economy and the prospects for real growth in 2016. If that "lower for longer" scenario pans out, investors may want to take another look at U.S. Bancorp (NYSE:USB).

Much has been written (some of it by me) on the positive quality attributes of this large almost-national bank - the company's cost control is top-notch, as is the quality of the underwriting, and the bank has lucrative fee-generating businesses that chip in a substantial portion of revenue. U.S. Bancorp is also comparatively less asset-sensitive than peers like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan (NYSE:JPM), let alone smaller players like Zions (NASDAQ:ZION) and Regions (NYSE:RF), and if the economy slows in 2016 this bank will like fare better.

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U.S. Bancorp Still The Relatively Defensive Option

Seeking Alpha: JPMorgan Performing Well, But Credit Risk Back In Play

Not a lot is supposed to change in a month when you're talking about bank stocks, but it has been anything but an ordinary stretch since I last wrote about JPMorgan (NYSE:JPM). In those three weeks, the U.S. Big Four banks (JPMorgan, Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC)) have seen their shares fall around 10% to 20% on increasing worries about the health of the U.S. economy, the prospect for higher credit losses, and the uncertain outlook for rates.

There's definitely an interesting dichotomy between what banks are saying (good loan demand from businesses, generally good credit developments outside of energy) and what a lot of manufacturing / industrial companies are saying, and that ups the risk for 2016. As an asset-sensitive bank, JPMorgan should be able to generate better margins and returns as rates rise, but those increases may take a little longer to materialize. In the meantime, the bank continues to do a good job of shrinking its balance sheet, reducing its G-SIB burden, reducing costs, and pursuing revenue streams outside of banking. I still believe these shares should trade closer to $70, and with the declines in the stock it is a more interesting buy candidate than just a month ago.

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JPMorgan Performing Well, But Credit Risk Back In Play

Seeking Alpha: Parker-Hannifin: Good Company Meets Bad Markets

Parker-Hannifin (NYSE:PH) isn't a flawless company, but this leader in motion and process control has a pretty solid record of generating attractive full-cycle margins. What's more, the company is uncommonly diversified across its end-markets and generally eschews splashy moves in favor of just consistently doing a good job.

Unfortunately, Parker-Hannifin is caught up in a global butt-kicking of industrial equities and the company is facing a lot of demand weakness across its many markets. I believe that the company can generate long-term growth of over 3% and that the shares are probably too cheap today, but investors considering buying on this pullback have to have patience and a long-term vision to offset the near-term risks that weakness in oil/gas, off-road vehicles, and general manufacturing will get even worse before turning around.

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Parker-Hannifin: Good Company Meets Bad Markets

Seeking Alpha: Illinois Tool Works Is A Growth Story Now

Before hardcore Illinois Tool Works (NYSE:ITW) investors light the torches and sharpen the pitchforks, I'll explain the title right away; my view on this industrial conglomerate is that the biggest swing factor in the company's stock market performance in the next one to three years is going to be the amount of organic revenue growth that it can generate. ITW has done a good job of boosting margins through streamlining, and management is quite willing to divest commoditized businesses, but its projections call for the company to perform on a level that has historically been out of reach.

I do believe we're in the middle of a promising buy-the-dip opportunity for a number of industrials, but I can't make the numbers work for Illinois Tool Works today. I believe management can generate mid-teens FCF margins on a sustained basis (a marked improvement over the past 10 years), but I just don't see enough organic revenue growth to drive an exciting fair value today.

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Illinois Tool Works Is A Growth Story Now

Seeking Alpha: Atlas (Copco) Sneezed

How best to frame what has happened to Swedish industrial conglomerate Atlas Copco (OTCPK:ATLKY) in the six months since I last wrote about it? The roughly 25% drop in the ADR share price goes well beyond an Atlas Shrugged reference … we're talking full-on sneezing if not a pulled hamstring.

Some of this share price decline seems reasonable to me. First, Atlas has often carried a pretty healthy valuation and that's harder to support in a virtually no-growth environment. Second, the outlook for mining is feeble at best, while the "general manufacturing" segment served by the company is looking quite weak indeed and particularly so in the U.S. and China.

If you believe in buying good companies going through hard times not of their making, this is a good time to look further into Atlas Copco. There's definitely downside risk if a mild manufacturing recession for 2016/2017 proves more serious or longer in duration, but that's how it goes with "buy the dip" opportunities - there's almost always some reason for that dip.

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Atlas (Copco) Sneezed