Wednesday, January 18, 2017

Busy Neurocrine Biosciences Faces A Phase II Setback

Although Neurocrine Biosciences (NASDAQ:NBIX) shares have been getting buffeted around as investors worry about the potential impact of the incoming administration's policies on drug pricing and the potential for competition to the company's major programs, management has been doing a respectable job of handling what they can. In particular, the company continues to focus its efforts on building awareness and establishing the initial launch plans for its lead wholly-owned drug valbenazine in tardive dyskenesia.

Clinical trial results fall outside of the spectrum of what biotech management teams can control, though, and Neurocrine disappointed the Street Tuesday night with negative results from its Phase II T-FORWARD study of valbenazine in adults with Tourette's. Although this particular indication was not a meaningful contributor to the stock's fair value, and there may still be a path forward, it's more bad news at a time when the shares and market sentiment toward biotechs are already weak.

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Busy Neurocrine Biosciences Faces A Phase II Setback

Saia Heading Northeast And Looking To Unlock More Leverage

The last five years have been good to Saia (NASDAQ:SAIA), as this smaller less-than-truckload (or LTL) carrier has grown its way into a top-10 market position and seen its share price climb over 400%, trouncing ArcBest (NASDAQ:ARCB) and YRC Worldwide (NASDAQ:YRCW), and doing quite a bit better than Old Dominion (NASDAQ:ODFL) as well.

While the company's tonnage growth has been relatively modest (up less than 1% on a compounded basis since 2009), it has been able to improve pricing at a mid single-digit clip, while meaningfully improving its operating ratio by prioritizing better service and more efficient operations. Looking ahead, the company's expansion into the Northeast should drive meaningful revenue growth and help the company improve its operating leverage and asset turnover. The shares isn't like cheap today, though, so this looks more like a name for the watch list than a near-term buy.

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Saia Heading Northeast And Looking To Unlock More Leverage

Tuesday, January 17, 2017

JPMorgan Benefiting From Calm Credit, A Strong Competitive Position, And Potential Catalysts

Among the larger banks, JPMorgan's (NYSE:JPM) post-election performance has been on the higher side of average (up about 25%), but the shares have been a standout (along with Bank of America (NYSE:BAC)) over the past year as the bank has been leveraging its strong market share and competitive positions as it waits for rates and economic conditions to improve.

Credit quality has been good and likely can't get much better, but loan demand can improve if the economy grows from here and higher rates should drive better spreads. What's more, JPMorgan and the rest of its large bank peers could be in place to benefit from a less stringent regulatory environment and a lower tax rate. While the shares look priced for a high single-digit return absent a meaningful reduction in the bank's tax rate, a meaningful reduction of the tax rate could drive a fair value into mid-to-high $80's.

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JPMorgan Benefiting From Calm Credit, A Strong Competitive Position, And Potential Catalysts

A Significant Recovery Already Being Factored Into MSC Industrial Shares

Cyclical stocks have a way of surprising on both ends. When things get bad, some sell-side analysts (and institutional investors) turn tail and declare that the sector can never come back. Of course, when things do recover and valuations start baking in "permanent prosperity" we are all treated to those memorable "it's different this time..." notes.

I certainly didn't think MSC Industrial (NYSE:MSM) was going to see the huge post-election run that it had. While the most manufacturing-exposed of the major distributors (which includes names like Grainger (NYSE:GWW) and Fastenal (NASDAQ:FAST)), the run in the sector already reflects a lot of optimism about the impact of lower corporate taxes, greater infrastructure spending, improved pricing, and a strong all-around recovery in the U.S. economy. I'm reluctant to completely bail out of a long-held position, but the valuation now seems to reflect a strong rebound with high single-digit FCF growth this year forward for quite some time.

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A Significant Recovery Already Being Factored Into MSC Industrial Shares

Monday, January 16, 2017

First Community's Valuation Seems To Assume A Lot Of Positive Breaks

Stock prices (and valuations) across the banking sector have shot up since the election, with investors baking in expectations for valuation-friendly policy changes like lower corporate tax rates and less regulatory burden. Time will tell how many of these expectations become reality, but I think First Community Bancshares' (NASDAQ:FCBC) 35% rally (closer to 45% at the peak) is overdone.

Try as I might, I can't figure out exactly how to get in tune with the growth expectations that investors seem to be baking into the valuation here. I certainly see how a lower tax rate can boost the cash earnings stream, and I can at least understand the argument that potential new policies more favorable to extraction industries like lumber, coal and gas would help a bank with a footprint largely in southwestern Virginia and southeastern West Virginia. All of that said, it seems to me that you have to assume a mid-teens long-run return on equity and use a single-digit discount rate to get to today's value and that seems like an ambitious set of assumptions.

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First Community's Valuation Seems To Assume A Lot Of Positive Breaks

Knight Transportation's Leverage To A Trucking Recovery Amply Reflected In The Shares

It stands to reason that a company that is much more leveraged to trucking spot prices would outperform its peers when those spot prices start to show improvement. It also doesn't hurt when you're an above-average operator in terms of efficiency and margins. Knight Transportation (NYSE:KNX) wears both of those crowns, and the shares have been quite strong in what had been a challenging year for the truckload carrier market prior to the late fall.

There's a lot to like about Knight, as the company challenges Heartland (NASDAQ:HTLD) for the top spot in "clean" operating ratios and it has a long and strong track record of return on invested capital. What's more, the company's diversified customer base and spot rate exposure should serve it very well if/when capacity starts tightening up. The "but" is valuation; Knight's strong metrics and leverage to a recovering trucking market may argue for a premium, but 10x 2017 EBITDA is too rich for my blood at this point.

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Knight Transportation's Leverage To A Trucking Recovery Amply Reflected In The Shares

Thursday, January 12, 2017

Heartland Express Has Some Blockages When It Comes To Growth

As problems go, Heartland Express's (NASDAQ:HTLD) collection of challenges could certainly be worse. Long one of the best-run truckload operators out there, Heartland runs an exceptionally tight ship. This company's history of tight cost control, relentless efficiency, and high standards for driver performance has led to excellent operating ratios, good asset turnover, and strong operational metrics, which have in turn translated into good cash flows and excellent returns on capital.

The problem for shareholders, though, is that this already-excellent company doesn't have a lot of levers to pull to do meaningfully better. An improving trucking market will certainly help, but it likely won't help Heartland as much as other operators and the company still has some distance to go before returning to the sort of margins it generated before the Gordon deal (if that is even possible). Heartland does look reasonably valued on an EBITDA basis, though, and in this market "reasonably valued" is often about the best you can find.

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Heartland Express Has Some Blockages When It Comes To Growth

Monsanto Holding Serve Ahead Of Regulatory Debates

There's no question that the biggest value-driving events for Monsanto (NYSE:MON) are yet to come, as this leading agriculture technology company will have to go through what is sure to be a rigorous regulatory oversight process to get to the finish line with its would-be suitor Bayer (OTCPK:BAYRY) and deliver the $128/share in cash that a successful deal promises.

In the meantime, Monsanto is Monsanto. The ag market is still in recovery mode, and 2017 is not likely to be a banner year for acreage, but Monsanto is doing well with new launches in South America and continues to upgrade its product portfolio in North America. What's more, Monsanto has long been an R&D-driven story and management hasn't been shy about continuing to reinvest and expand that research pipeline. While the shares do trade above my estimate of standalone fair value, it seems as though today's price factors in only about a 20% chance of the deal going through, and that strikes me as a reasonable risk/reward.

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Monsanto Holding Serve Ahead Of Regulatory Debates

Teradyne Should Redeploy Capital Toward Growth

Not all semiconductor equipment is the same, and while Teradyne (NYSE:TER) is essentially a co-duopolist with Advantest (NYSE:ATE) in the back-end semiconductor test space (and a pretty well-run company on balance), it's hard for me to see this market offering a lot of attractive long-term growth opportunities. It does tend to support solid margins and cash flows over the full cycle, though, and that gives Teradyne the resources to consider its long-term options.

As is, I think Teradyne is basically fully valued today. The "but" is that the company has a healthy balance sheet and the opportunity to buy its way into new growth markets. The company's early position in collaborative robotics is one such example, and there are a lot of places Teradyne could go in industrial automation from here. By the same token, the company could make complementary acquisitions to augment existing test businesses; these deals wouldn't likely be growth drivers, but could make sense from longer-term synergy and cash-on-cash return perspectives.

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Teradyne Should Redeploy Capital Toward Growth

Axcelis Following A Different Plan As Semiconductor Tool Spending Ramps Up

Relative to the other semiconductor tool companies that I follow, Axcelis's (NASDAQ:ACLS) basic operating plan and drivers seem a little different than most. While the company is not unaffected by the drive toward new architectures in logic and memory chips, it's not as core to the story as it is for companies in other areas of the tool market like thermal processing, metrology, and packaging.

For Axcelis, the story is about carving out more share against Applied Materials (NASDAQ:AMAT), better addressing the full range of customers' ion implant needs, and exploiting growing investment in equipment for memory and "non-leading edge" chip types like sensors. Although I don't think Axcelis will achieve the same sort of margins I expect from Ultratech (NASDAQ:UTEK), Rudolph (NASDAQ:RTEC), or Nanometrics (NASDAQ:NANO), the market doesn't expect that either and there may still be some upside as the company heads towards a revenue peak in the next couple of years.

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Axcelis Following A Different Plan As Semiconductor Tool Spending Ramps Up

Tuesday, January 10, 2017

Hurco Doing A Little Better

I can't really complain about the post-election performance of Hurco (NASDAQ:HURC), as this small manufacturer of machine tools has seen its shares rise almost a third since the election. That's not out of line with what many smaller industrial-focused names have seen, as fellow machine tool company Hardinge (NASDAQ:HDNG) is up close to 30% since that time and welding equipment manufacturer Lincoln Electric (NASDAQ:LECO) is up more than 20% while the much larger (and less U.S.-focused) DMG Mori (OTCPK:MRSKY) is up around 15%.

I believe Hurco can still look forward to stronger economic conditions in both the U.S. and Germany, and the company should start to see even more benefits from its 2015 acquisitions of Milltronics and Takumi now that it has used a recent industry trade show to reintroduce and relaunch the brands. I'm not expecting Hurco to get back to the pre-2008 experience of gross margins in the mid-to-high 30%'s and operating margins in the mid teens, but I do expect the company to modestly outgrow its sector and generate solid consistent performance, supporting a fair value closer to $40 today.

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Hurco Doing A Little Better

Nanometrics Offers A Variation On A Familiar Theme

Nearly every semiconductor tool company is looking for its way to exploit the increasing complexity of semiconductors, as companies turn to 3D architectures and new packaging technologies to achieve new performance milestones. For Nanometrics (NASDAQ:NANO), its angle is exposure to growing process control needs and an increased number of inspection steps in the chip fabrication and packaging processes.

With solid (and growing) share in optical critical dimension tools, which are themselves gaining share in the metrology market, and solid positions with leading players in the memory and fab sectors, Nanometrics is looking forward to what ought to be double-digit revenue growth and peak EBITDA margins in the coming years. While competitors like KLA-Tencor (NASDAQ:KLAC) and Nova Measuring (NASDAQ:NVMI) aren't to be taken lightly, Nanometrics could still offer some upside provided that major chip companies continue to invest in new equipment to support more advanced process nodes.

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Nanometrics Offers A Variation On A Familiar Theme

Park-Ohio Holdings May Yet Have Leverage To Future Industrial Improvement

A lot of industrial stocks have strengthened since the election, and Park-Ohio (NASDAQ:PKOH) is no exception with a nearly 40% jump since early November. Unlike a lot of other industrials, though, it may be the case that Park-Ohio's surge hasn't completely captured all of the value from the prospect of improving industrial markets.

Certainly, there are things to be concerned about here. The company is heavily exposed to the auto sector and unit volumes in that market may have peaked. The company also has a large amount of debt relative to its equity and goodwill and intangibles make up more than 80% of the equity that remains. That said, the company has shown that it can cut costs quickly when it needs to and further reductions could offer long-term upside. What's more, management has shown that it can not only grow by M&A, but can also grow those businesses once they're in hand. With a fair value in the mid-$40s, Park-Ohio could still have a little upside to offer investors who are otherwise frustrated by the valuations in the industrial sector.

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Park-Ohio Holdings May Yet Have Leverage To Future Industrial Improvement

Mueller Industries Building From A Surprisingly Solid Base

You might not think that a supplier of copper plumbing tubes, fittings, and similar products would have a particularly impressive track record, but Mueller Industries (NYSE:MLI) is a different sort of beast. Although the company is highly leveraged to the residential and non-residential construction markets, the shares basically tracked the S&P 500 lower during the housing collapse/recession and then notably outperformed from about mid-2010 on. What's more, not only was the company able to generate positive free cash flow throughout the last decade, the company's ROICs have been consistently pretty good.

Mueller still has some merit as a play on the ongoing expansion of non-residential construction and the still-modest recovery in residential construction, but that's not the interesting part to me. I like how this company has chosen to leverage its low-cost position in copper products and its good cash flow into new markets (largely through M&A) like valves and assemblies for HVAC, refrigeration, and industrial markets - business that offer higher gross margins and meaningfully better operating margins.

Mueller doesn't look all that cheap right now, but that is true for a wide range of stocks. Although I don't see a need to rush into this one, I like the company's efforts to leverage its established businesses into new, higher-margin opportunities and this would be a name I'd monitor for a chance to reconsider on pullbacks.

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Mueller Industries Building From A Surprisingly Solid Base

Monday, January 9, 2017

Hardinge Offers Meaningful Leverage To An Industrial Recovery

It's been a decade to forget for many machine tool companies, as the 2008 recession hit many of them hard and the more recent weakness in natural resources and heavy machinery has knocked them back yet again. Hardinge (NASDAQ:HDNG), a small U.S. player in the space, has certainly seen better days, as the shares are about one-quarter lower than they were a decade ago on lower sales and weaker margins.

Why bother paying any attention to Hardinge? This is a small (less than $150 million in market cap and enterprise value) pure-play on the industrial economy and if/when manufacturing activity recovers, sales, margins, cash flows, and valuation multiples should all improve, and potentially quite significantly. While the shares have participated in the widespread post-election run, I believe relatively modest financial performance would be enough to lift these shares into the mid-teens.

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Hardinge Offers Meaningful Leverage To An Industrial Recovery

Preformed Line Products Poised To Benefit From Grid Spending

Preformed Line Products (NASDAQ:PLPC) is pretty far off the beaten path for most investors, as it has no coverage on the Street, a market cap of just under $300 million, and very modest daily liquidity. Yet, it is a leader in multiple "nuts and bolts" segments of the utility and telecom infrastructure industry, and particularly in areas like formed wire products and protective closures that help protect power lines and fiber optic cables.

Make no mistake - PLPC is hard to follow and hard to benchmark, and investors may be rightly concerned about the significant day-to-day roles still played by the Ruhlman family. That said, this is a company that has generated double-digit ROICs in better times and one that has still at least managed to maintain profitability during a challenging time for the industry. If utility, transmission, and distribution companies do ultimately reinvest in and grow their grids as many observers and research groups project they must, this stock could still do well in the coming years.

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Preformed Line Products Poised To Benefit From Grid Spending

Perpetually Restructuring Kennametal Tries To Recapture Lost Glory

Kennametal (NYSE:KMT) has been in a state of almost perpetual restructuring since 2007, but there's little to show for it as revenue and margins are both lower today than back in 2007. While the shares are up over the last 10 years, they are only by about 10% (versus a greater than 60% gain for the S&P 500) and due in part to the strong run that stocks have enjoyed since the U.S. presidential election.

New management is going about things in a much smarter way, and I think it is reasonable to think that the returns from this latest restructuring program will be more significant. On the other hand, Kennametal has lost a lot of shares (and a lot of credibility with the Street), its end markets are changing, and management's projections may be bold to the point of unrealistic. While I do think recovering end markets and a better strategy can drive above-market growth and double-digit FCF growth, today's valuation already seems to give a pretty hefty benefit of the doubt to the company.

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Perpetually Restructuring Kennametal Tries To Recapture Lost Glory

Thursday, January 5, 2017

Nidec Transforming Its Business In Meaningful Ways

Japan's Nidec (OTCPK:NJDCY) is best known as a dominant player in the market for spindle motors that power hard disk drives, but the company has done a lot to diversify its business and position itself for growth in other precision motor markets, robotics, autos, appliances, and industrial motors. What's more, it's an unusual Japanese company in that it embraces M&A, gives a lot of authority to operating units, and is shareholder-friendly insofar as targeting meaningful profit growth over size for its own sake.

Nidec shares look as though they could still offer upside from here, but the growth expectations are high. I believe the company's opportunities in autos, robotics, precision motors, and other applications can support (if not exceed) those expectations, but this is not an example of a company that has been overlooked and where the expectations are correspondingly modest. I would also note that while Nidec delisted its shares from the NYSE last year, the ADRs are relatively liquid.

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Nidec Transforming Its Business In Meaningful Ways

Can A New Team Restore Actuant's Shine?

For a lot of the first decade of the 2000s, Actuant (NYSE:ATU) was a Wall Street darling; the shares rose almost 400% for the decade (and more than 800% if you stop the clock at the end of May 2008), and trounced other industrial conglomerates like Dover (NYSE:DOV), Parker-Hannifin (NYSE:PH), Crane (NYSE:CR), and even the much-loved Danaher (NYSE:DHR). Since then, the script has flipped, with Actuant's less-than-50% return beaten pretty soundly by all of those comps (including much-maligned Dover).

Actuant hit a hard wall when the recession hit in fiscal 2009, and results have been choppy ever since. With the downturn in the energy sector hitting the company pretty hard, the last few years have been tough ones and Actuant now has a new CEO and a new CFO, and four of the major architects of the old Actuant are no longer with the company in any meaningful capacity.

What happens now is the real question. The company's Industrial segment is anchored by the excellent Enerpac business, and the energy segment's Hydratight is likewise a very good business. It wouldn't surprise me if the company looked to divest several other businesses, though, and a break-up of the company could offer something of a floor to valuation as Enerpac and Hydratight would likely find many willing buyers. While Actuant looks reasonably valued today, a stronger-than-expected recovery in resource-driven end markets like energy, mining, agriculture and off-highway equipment and/or better progress with margin improvement could offer some upside.

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Can A New Team Restore Actuant's Shine?

Houston Wire & Cable May Be Past The Worst

There's an old piece of investing advice that says investors shouldn't reach for falling knives. In other words, don't buy the stock of a company based upon its recovery prospects while the company is still in decline. That's all well and good as advice goes, but the reality is that the market is a forward-looking place, and if you wait for concrete evidence of stabilization and improvement, you will definitely miss some of the upside.

This comes to mind with Houston Wire & Cable (NASDAQ:HWCC), as the company has logged almost three straight years of double-digit quarterly revenue declines and significant margin and free cash flow erosion. On the other hand, metal-adjusted MRO sales were up in the last quarter, and sales are expected to rise year over year for this fourth quarter. The shares got a good post-election bounce (before a roughly 10% pullback), and there are definitely risks that the power gen and oil/gas markets will remain weak for a while, but all in all, the risk/reward trade-off here looks interesting albeit high-risk.

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Houston Wire & Cable May Be Past The Worst

A Different Model Has Made A Difference For Lawson Products

Nearly four years ago, I was cautious (if not outright skeptical) about the prospects for Lawson Products (NASDAQ:LAWS) leveraging a change in its operating model to drive meaningfully better operating results. Management has delivered, though, with gross margins up more than three points, operating margins in the black, free cash flow in the black, and the company well-positioned in its core service-driven MRO space.

The market has noticed, with Lawson shares significantly outperforming MSC Industrial (NYSE:MSM), W.W. Grainger (NYSE:GWW), and Fastenal (NASDAQ:FAST) since that last report on Lawson, though it took about a year or so for the Street to come around to the positive implications of Lawson's changes. While the shares don't look radically undervalued today, there are still above-average growth opportunities for Lawson to pursue and the company is not well-covered nor over-owned by institutions. What's more, Lawson should be relatively well-placed to benefit from improvements in industrial production in the U.S., should those take place.

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A Different Model Has Made A Difference For Lawson Products

Monday, January 2, 2017

Accuray Running Low On Chances

As the calendar is about to turn to a new year, not a lot has changed for Accuray (NASDAQ:ARAY) and that's a bad thing. This past year was supposed to be a big one for the company, but it really didn't live up to expectations. Management deserves some credit for improving the cost structure, the go-to-market strategy, and resolving some of its liquidity and dilution issues.

The challenges in front of Accuray remain the same. Can the company's high-quality CyberKnife system drive adoption of stereotactic radiation therapy? Can the company's much-improved image-guided platform drive meaningful share gain in single-vault centers? Simply put, can Accuray emerge as a meaningful player in the radiation therapy landscape alongside Varian (NYSE:VAR) and Elekta (OTCPK:EKTAY)? The current valuation says "no", which aggressive and bullish investors may regard as an ongoing opportunity for the shares.

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Accuray Running Low On Chances

Sensata Technologies Has Cooled, And That May Be An Opportunity

Sensata Technologies (NYSE:ST) is an example of what happens when a high-expectations story doesn't live up to those expectations. While the company has performed reasonably well since my last update from a financial/operating perspective, the shares are down about 7% since my last update and down about 12% this year as investors have come to realize that auto sales can't grow to the sky.

I do believe this may be a good time to do some due diligence on Sensata. The company still has strong positions in its addressed sensor and control markets, and sensors offer some respectable long-term margin opportunities. What's more, there's a lot more Sensata can do to grow its business outside of autos, while also leveraging the benefits of past acquisitions. If Sensata can pair mid single-digit revenue growth with high single-digit FCF growth, these shares look undervalued today and priced for a double-digit annualized return.

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Sensata Technologies Has Cooled, And That May Be An Opportunity

Manitex Waiting For The Tide To Change

Credit where due, Manitex (NASDAQ:MNTX) management is doing what it can to shore up the business during a tough cyclical downturn in its core businesses. In addition to cutting costs, management has been selling non-core businesses in an attempt to reduce the company's leverage and give it a little more breathing room while awaiting a turnaround in its key energy market and the benefit of efforts to grow the ASV and PM businesses.

Unlike so many other industrial names, Manitex didn't really see a post-election bounce (the bounce Manitex saw last week was due to more encouraging guidance for its crane business). Manitex isn't as leveraged to potential infrastructure spending increases as Terex (NYSE:TEX) or Manitowoc (NYSE:MTW), but it can still be argued that the shares don't reflect the possibility of a turnaround here.

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Manitex Waiting For The Tide To Change

Commercial Vehicle Paddling Through The Rapids

Commercial Vehicle Group (NASDAQ:CVGI) continues to see fierce headwinds across its business from the weak end-market demand for North American heavy trucks, construction and ag equipment, but management's efforts to improve the cost structure and cash flow are paying off. The market has noticed, with the shares more than doubling since my last update and trouncing the performance of other commercial vehicle suppliers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), and Grammer (OTC:GMEGF).

Looking ahead, I'm cautiously optimistic that there is more upside potential. Management has meaningfully improved the cost structure and margins of the Construction/Ag business despite ongoing revenue contraction and the Truck business should start to improve later in 2017 as the commercial truck market stabilizes. If Commercial Vehicle can grow revenue at an annualized rate of around 2.5% from the trough of 2017 and generate FCF margins in the 3% to 4% in the better years ahead, a fair value above $7 is still plausible.

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Commercial Vehicle Paddling Through The Rapids

Kemet Looking To Specialty Markets And Efficiency Measures To Change Its Trajectory

Selling electronic components is generally a tough business with fierce competition and ongoing price pressure, but companies like Littelfuse (NASDAQ:LFUS) and Amphenol (NYSE:APH) have found paths to prosperity by focusing on margin improvement efforts, prioritizing higher value end-markets, and using M&A to build and shift the business. Kemet (NYSE:KEM) is hoping that a similar approach yields better results for its capacitor business.

Kemet has had a lackluster trajectory - revenue has grown by only about 1% a year on average over the last decade (and really not at all over many quarters), margins have been quite weak, and the company hasn't earned its cost of capital on any sort of consistent basis for a long time. And yet, the shares are up over 150% in the last year as efforts to vertically integrate in tantalum capacitors, shift toward higher-margin specialty markets, and reduce/streamline costs seem to be paying off and improving margins and cash flow. It remains to be seen whether Kemet has improved the business to a point where consistent mid single-digit FCF margins are a reasonable expectation, but if they have, the shares are not unreasonably priced.

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Kemet Looking To Specialty Markets And Efficiency Measures To Change Its Trajectory

Monday, December 26, 2016

The Amphenol Machine Rolls On

Long-time readers know that I have a real soft spot for companies that make the "guts" of the equipment we use in our daily lives but don't often think about all that much. The connectors, interconnect systems, sensors, and cables made by Amphenol (NYSE:APH) certainly qualify; pretty much anything that uses electrical power uses connectors at some point.

Amphenol is among the market leaders in this nearly $50 billion industry, but the company has also been building its capabilities in other markets like coaxial cables and specialty cables, as well as sensors. Importantly, Amphenol doesn't try to be all things to all customers, and the company generally tries to focus on higher-margin, more complex product categories. Combined with ongoing M&A and very consistent high-end execution, Amphenol has been able to roughly double the industry growth rate while producing double-digit returns on invested capital. All of that makes it an excellent company, but alas, the valuation is no bargain now insofar as I can see.

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The Amphenol Machine Rolls On

Drew Industries Shooting Up On Content Growth, Margins, And Industry Growth

Up about a third since the election and up more than 100% from its 52-week low, Drew Industries (NYSE:DW) has received plenty of love this year. A lot of this attention is deserved - the company has continued to deliver on its pledges to improve content, leverage underlying market growth, and improve margins, as well as continue to cautiously expand into adjacent markets.

Strong performance expectations are built into Drew's share price today, but there are still opportunities for growth. Management has shown that it can identify and secure growth opportunities in its core market, and if it can execute with similar skill in newer markets like buses, trucks, and marine, Drew could be a substantially larger company and still offer some upside. That said, there's a lot of risk in a story that's predicated on repeating old success in new markets, and I'd prefer a wider margin of safety.

Readers should also note that Drew Industries has announced a name change. Starting in 2017, Drew Industries will be known as "LCI Industries," with the symbol changing to LCII.

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Drew Industries Shooting Up On Content Growth, Margins, And Industry Growth

Lexicon Continues To Build Its Case For Sotagliflozin In Type 1 Diabetes

Investing in biotechs can be an exercise in frustration, as Lexicon Pharmaceuticals (NASDAQ:LXRX) so amply demonstrates. While I believe the company has continued to build a solid case that its dual SGLT-1/2 inhibitor sotagliflozin can and should be approved for use in Type 1 diabetes, the shares are down about 20% from the time of my last update. Although the data package on sotagliflozin is not perfect, I believe it shows acceptable safety and worthwhile efficacy for a patient group with virtually no medical treatment options beyond insulin.


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Lexicon Continues To Build Its Case For Sotagliflozin In Type 1 Diabetes

Omron Doing A Lot Of The Right Things

Japan's OMRON (Omron) (OTCPK:OMRNY) is not likely a household name to many U.S. investors, although I suppose a sharp-eyed reader might have noticed their name on a blood pressure or patient monitor machine at the doctor's office. Nevertheless, Omron is an interesting player in the industrial automation space, and a company that seems to be focusing on some smart potential growth drivers that could improve the business in the years to come.

These shares have already recovered quite nicely from their lows, and there are some drawbacks to the conglomerate model that the company pursues. That said, the valuation isn't that bad and I suppose it is a name worth investigating further if you're interested in a smaller industrial automation story and/or a company with significant exposure to Japan and China.

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Omron Doing A Lot Of The Right Things

Timken Looking Forward To Leveraging A Big Transformation

Companies change over time, but Timken (NYSE:TKR) has actively sought to remake itself to a pretty significant degree over the past decade. In addition to spinning off Timken Steel (NYSE:TMST), this leader in bearings and power transmission components has jettisoned around $1 billion in lower-margin business over the past seven or eight years, while recommitting to long-term growth through collaborative product development.

Such has been the rally in the industrial space that I pause when I see a stock where the valuation looks interesting. While the stock already trades at a pretty healthy forward EBITDA multiple, mid-single-digit FCF growth should be able to support a total annual return of over 10% from this level. While I would be careful about buying any industrial stock at this point (for fear of a big correction when the earnings and guidance start rolling in in January), this is a name that definitely merits some consideration.

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Timken Looking Forward To Leveraging A Big Transformation

ESCO Technologies A Tough Mix Of Potential And Past Performance

Industrial conglomerate ESCO (NYSE:ESE) strikes me as another investment Rorschach test, as how you arbitrate between ESCO's high-potential collection of businesses and its uninspiring historical performance says a lot about whether you trust past performance as a good predictor of future results or whether you believe businesses should be valued based upon what they can do in the future.

ESCO's track record in terms of margins, free cash flow generation, returns on invested capital, and tangible book value growth doesn't inspire much confidence, and I don't think that the performance issues of the smart meter business (Aclara divested years ago) fully excuse it. On the other hand, it's hard not to like a good filtration/fluid control business and a collection of other business with good market shares and the potential for improved growth and margins. Today's valuation isn't absurd on the basis of what ESCO could become, but for my own personal investment approach, I demand a wider margin of safety unless/until management shows this "new and improved" ESCO really is here to stay.

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ESCO Technologies A Tough Mix Of Potential And Past Performance

First Bancorp Looking To Leverage New Opportunities

For a lot of its history, First Bancorp (NASDAQ:FBNC) was a relatively sleepy, run-of-the-mill community bank. The bank experienced elevated credit losses in the banking crisis, but also used the opportunity to make some FDIC-assisted acquisitions and change its direction. Now management is looking to take advantage of its low-cost, largely rural deposit base and leverage it into spread income growth in faster-growing urban areas of North Carolina.

The acquisition of Carolina Bank (NASDAQ:CLBH) will give First Bancorp a respectable franchise in a growing urban area of North Carolina, and tiny foothold positions in areas like Raleigh-Durham, Charlotte, and Winston-Salem can be expanded over time through organic efforts and select acquisition. In the meantime, though, management needs to show that it can drive meaningful cost synergies from its Carolina Bank deal, continue to improve its credit profile, and out-compete the seemingly endless number of rivals that want a piece of North Carolina's above-average market.

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First Bancorp Looking To Leverage New Opportunities

Wednesday, December 21, 2016

THK Struggles To Translate A Great Business Into Great Financials

In a lot of meaningful ways, Japan's THK (OTCPK:THKLY) is a great company. The company's linear motion systems are mission-critical components for machinery like robots, machine tools, and semiconductor tools that demand precision and reliability, and the company still enjoys roughly 50% global share. On the other hand, THK has struggled to translate that leadership into attractive margins, growth, or returns on capital, and in many cases, customers like DMG Mori (OTCPK:MRSKY) and Applied Materials (NASDAQ:AMAT) have been the better choice for investors.

I'm not optimistic that there will be a profound change for the better on the way. While THK should see an improvement in the machine tool and machinery end markets, competition is rising from component manufacturers in China, Taiwan, and other countries. What's more, I don't think the company's diversification into auto components is likely to build upon the margins and cash flow generation capabilities. THK shares don't seem unreasonably priced on an EV/EBITDA basis, but the cash flow valuation is not compelling and the 60% move from the lows of the past year seems like adequate compensation for the improving end market outlooks.

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THK Struggles To Translate A Great Business Into Great Financials

Hancock Holding Seems Richly Valued For What It Offers

Almost the entire banking sector has gone on a run since the election, so it's not exactly surprising to see that Hancock Holding's (NASDAQ:HBHC) shares ran up about one-third from the time of the election to a recent high of $45.50. Still, this is one where I have a harder time excusing the new premiums, given Hancock's ongoing problematic exposure to souring energy loans, slowing loan growth, and larger challenges in spread income growth.

I think it was smart of Hancock to raise equity at this higher valuation, as it is always better to raise money when you can as opposed to when you must, and it does bump up the company's capital ratios. At this point I could see Hancock as either (if not both) an opportunistic buyer within its current footprint or a seller at the right price. While a larger bank could justify a premium as part of a buyout, I'd be uncomfortable holding a bank stock that really needs that buyout to make the valuation seem reasonable.

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Hancock Holding Seems Richly Valued For What It Offers