Friday, May 29, 2015

Seeking Alpha: Credicorp Needs A Little Self-Improvement

Peru's economy didn't have a great performance in 2014, and the sluggish performance of the country's largest bank, Credicorp (NYSE:BAP), reflects that to a certain extent. While Credicorp has continued to enjoy good organic loan growth and expense control, there are reasons to be concerned about credit quality and the sustainability of the company's loan growth. It's also a little more challenging to get excited about the valuation today. Unless the company can find a path back to over 20% ROE, the shares only seem about 10% undervalued today.

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Credicorp Needs A Little Self-Improvement

Seeking Alpha: Strong Share Growth And Margins Fueling Palo Alto Networks

By most reasonable metrics, Palo Alto Networks (NYSE:PANW) has a gravity-defying valuation. Then again, there's nothing particularly "reasonable" about the market share that Palo Alto is gaining within the growing security space, nor the company's strong positioning across a variety of technologies. If Cisco (NASDAQ:CSCO) and Check Point (NASDAQ:CHKP) can't do a better job of repositioning themselves to the leading edge of threat prevention, they are likely to continue to be involuntary share donors in the security market.

I am not going to argue that Palo Alto is cheap per se. I will say this, though - if Palo Alto can grab 15% share of the enterprise network and endpoint security market in 2019 (and the market continues to grow at a mid to mid-high single-digit rate) and generate 30%+ FCF margins, a $180 fair value is not unreasonable. If the company can reach 20%, the target can move above $200.

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Strong Share Growth And Margins Fueling Palo Alto Networks

Seeking Alpha: Absent Growth, CA Inc. Holds Little Value

I love to find stories that the market has beaten up, left for dead, and ultimately ignored. Plenty of tech stocks have done well for me over the years from that starting point, and there are attributes to CA, Inc (NASDAQ:CA) that remind me of some of those. What CA lacks, and what keeps me from believing that the shares can approach what would otherwise be over $40/share in potential value, is any real growth in the business and reasonable prospects for a significant near-term improvement.

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Absent Growth, CA Inc. Holds Little Value

Seeking Alpha: FEI Company Finally Showing Some Value Characteristics

It's been a long wait, but electron microscopy specialist FEI Company (NASDAQ:FEIC) is finally trading at a valuation where I think GARP investors might want to take a closer look. Of course, no opportunity comes without a cost and the price of this potential value opportunity is an eroding growth outlook that has seen estimates come down steadily for months. That, in turn, has led to a run of underperformance in the shares, which are down 3% since my last article, and underperforming relative to peers/comps like JEOL, Hitachi High-Tech, Keysight (NYSE:KEYS), PerkinElmer (NYSE:PKI) and Waters (NYSE:WAT).

Management is likely to be hard-pressed to achieve its long-term growth goal of 12% per year, and the upcoming Analyst Day may see revisions to the outlook that take another bite out of the valuation. Looking beyond that, I continue to believe that there is good growth potential in electronics, material sciences, life sciences, and resources that can support mid-to-high single-digit growth for the long term. A significant reliance on emerging markets is a risk factor, as are rival technologies, but there seems to be emerging value here.

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FEI Company Finally Showing Some Value Characteristics

Thursday, May 28, 2015

Seeking Alpha: Hoya Continues To Execute Very Well, But Growth Looks Tied To M&A

Publicly-traded Japanese companies are not often lauded for their strong, shareholder-friendly operating excellence, but Hoya Corp (OTCPK:HOCPY) certainly deserves a lot of credit in that regard. Not only does Hoya have a good record of generating ROIC despite serving cyclical (and in some cases, declining) tech markets, the company has done a good job of maximizing the potential of its electronics operations while building up its healthcare/medical operations.

The lingering question for Hoya Corp is what drives the next leg of growth. Extreme ultraviolet could be an underappreciated driver for the photomask business, but lenses and endoscopes are more likely to be long-term mid-single digit growers from this point. Management has ample cash with which to execute growth-oriented M&A, but a very commendable level of price discipline could lead to a longer wait for a meaningful deal.

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Hoya Continues To Execute Very Well, But Growth Looks Tied To M&A

Seeking Alpha: Will Avago Be A Rock In A Turbulent Semiconductor Sea?

Avago (NASDAQ:AVGO) is a great example of something that even after all these years in the markets still challenges me - knowing when to say "enough" on a winning stock and knowing when you're talking about a truly great growth story. I was worried about the valuation on Avago last summer, but the shares have risen another 85% since then. That makes that cautious stance a pretty terrible call in hindsight.

Looking ahead, I can't completely dismiss my concerns about valuation, but this is a company with strong margins and multiple growth drivers. What's more, it's a company with a clear operating plan in place and a strong sense of what it wants out of M&A - both of which can generate substantially more value in the future. I'm not expecting another double from Avago over the next year, but I think the company's growth opportunities and M&A options are strong positives in its favor.

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Will Avago Be A Rock In A Turbulent Semiconductor Sea?

Seeking Alpha: Can FormFactor Drive More Fitting Margins?

If you're looking for pick-and-shovel stories in the semiconductor space, you may want to think about probe companies like FormFactor (NASDAQ:FORM) and Cascade Microtech (NASDAQ:CSCD). While the equipment made by the likes of Applied Materials (NASDAQ:AMAT) and ASML (NASDAQ:ASML) is indeed critical to the manufacture of chips, semi conductor capex is notoriously cyclical and the industry has become even more unpredictable as clients increasingly look to re-use equipment. With companies like FormFactor and Cascade, though, you're talking about a model more similar to semiconductor consumables and businesses that are leveraged to actual wafer starts for their revenue.

FormFactor has work to do. The company is the largest supplier of probe cards to the industry and has very strong share in SoCs, but the company hasn't been able to generate the sort of margins that other semiconductor consumable companies and more direct comps like Micronics Japan and Cascade have delivered. The company seems to be on a better trajectory now and there's upside if FormFactor can outperform, but the shares already seem to price in a reasonable amount of self-improvement.

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Can FormFactor Drive More Fitting Margins?

Seeking Alpha: Cascade Microtech Still Levered To Wireless Growth

More people are buying more wireless devices and those devices hold an increasing amount of RF chip content with each generation. That, in a nutshell, helps explains a least in part why Cascade Microtech's (NASDAQ:CSCD) shares are up 50% from the time of my last article on this manufacturer of probes and probe stations for the chip industry.

Cascade is treated like a semiconductor equipment company and I think that misses the point. Cascade is indeed a chip equipment company, but its business also has a consumables-oriented operation tied to ongoing chip production levels. With that, I think the company remains well-placed to benefit from the ongoing growth in wireless chips produced by a top-tier client list that includes Avago (NASDAQ:AVGO), Broadcom (NASDAQ:BRCM), Qualcomm (NASDAQ:QCOM), and Qorvo (NASDAQ:QRVO), not to mention the emerging IoT that could potentially see millions of incremental wireless-enabled devices.

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Cascade Microtech Still Levered To Wireless Growth

Wednesday, May 27, 2015

Seeking Alpha: As Mellanox Scales Up, So Do The Challenges

As picks go, I can't really complain about how Mellanox (NASDAQ:MLNX) has been doing. Up about 45% from when I last wrote about the stock, Mellanox has been executing well on the Intel (NASDAQ:INTC) Grantley-driven high-performance computing cycle, but also doing well integrating itself deeper into markets like high-end storage and cloud/Web 2.0. Mellanox has also continued to broaden its horizons, improving the software capabilities of its Ethernet switch products, introducing additional interconnects, and pushing the frontier on its Infiniband interconnects.

Are there threats? Of course. While QLogic (NASDAQ:QLGC) and Avago's (NASDAQ:AVGO) Emulex may not be threats at the high end, Intel and Broadcom (NASDAQ:BRCM) most certainly are. I believe that Mellanox can continue to find success by pushing the outer limits of available performance, but that runs the risk of limiting the company to specialty/high-end applications. I continue to believe that Mellanox can deliver long-term annualized growth of around 10% and generate significant free cash flow growth, but that potential is not nearly so undervalued as it was about a year ago.

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As Mellanox Scales Up, So Do The Challenges

Seeking Alpha: Lenovo Facing Headwinds, But Managing Them Well

The core markets that Lenovo (OTCPK:LNVGY) serves haven't been in the greatest of health lately. PC sales continue to fall, and smartphone sales in China and large emerging markets have weakened. Despite that, the company continues to focus on building share and refining a lean model that keeps constant pressure on its rivals.

The key priorities for Lenovo's management need to be the improvements of the server business (acquired from IBM (NYSE:IBM)) and the mobile business acquired from Google (NASDAQ:GOOG). Both can support the company's basic functional value philosophy, but both need their cost structures further "Lenovo-fied". I continue to be bullish on the company's prospects for achieving these endpoints, but the shares aren't an obvious bargain today.

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Lenovo Facing Headwinds, But Managing Them Well

Seeking Alpha: Finisar Still Looking For Leverage

"Picks and shovels" is a popular trope in investing and sometimes there is logic to it - instead of trying to pick winners and losers in industries like oil/gas exploration and mining, sometimes it makes more sense to invest in the service and equipment providers. The details really do matter, though, and going the picks-and-shovels route doesn't serve investors as well when there are plenty of pick-and-shovel vendors and the buyers can play them off each other for better pricing.

Finisar (NASDAQ:FNSR) continues to be a tough case to evaluate within the networking universe. I thought the shares looked washed out back in September of 2014 and the shares have risen almost 20% since then, matching fellow components supplier JDSU (NASDAQ:JDSU) and broadly tracking customers like Ciena (NYSE:CIEN) and Cisco (NASDAQ:CSCO). On the other hand, the company's operating performance hasn't been stellar and particularly so at the margin line.

I am unconvinced that Finisar is a stock that readers should consider as a long-term holding, but I do believe it has more positive attributes as a shorter-term play. Ciena and Cisco should see 100G metro orders pick up next year as a Verizon deployment picks up, and a better CFP2 module and capacity constraints at rival Oclaro (NASDAQ:OCLR) should help the datacom business as Web 2.0 deployments pick up. A recovery in margins could run the shares into the high $20's (or higher), but I think investors should go into this thinking "whirlwind romance" and a long-term engagement.

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Finisar Still Looking For Leverage

Seeking Alpha: Ever-Volatile Ciena Doing Well In 100G

Optical equipment company Ciena (NYSE:CIEN) has been a pretty good stock for traders, as the market runs hot and cold on the shares in response to capex expectations from Verizon (NYSE:VZ) and AT&T (NYSE:T) and intermittent concerns about competition. Through this process, Ciena has done well for itself in the 100G space, and winning a spot at the table with Verizon for its 100G metro deployment was a solid, if widely expected, win. Looking ahead there should be plenty of 100G sales, as carrier deployments will go on for a while, and Ciena arguably doesn't get enough credit for its success with Web 2.0 companies like Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB).

Credit from the market is a tough thing to evaluate, though, and I don't believe the market is significantly undervaluing these shares today. Sustained double-digit FCF margins would support a fair value in the high $20's, but Ciena has never been able to do that and there are risks that the overall market growth will disappoint the bulls. Given those risks, a mid-$20's fair value is probably more realistic today but I'm favorably biased on this stock and I think Ciena could surprise with additional wins and better margin leverage.

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Ever-Volatile Ciena Doing Well In 100G

Seeking Alpha: Can Inefficient Markets Work To E.ON's Advantage?

Market efficiency is a controversial topic in the best of times. Quite a few veteran investors who've lived through a bubble or two laugh at the idea of market efficiency in equity prices, but other markets are little better. Extensive government involvement (or interference, depending upon your point of view) has likewise created numerous inefficiencies throughout the European electricity markets, as changing government regulations and commodity volatility has whipsawed power prices and generation profitability.

Compounding matters for E.ON (OTCQX:EONGY), Germany's largest power company, has been a long run of poor management decisions that included ill-fated expansions into markets like Brazil and Turkey and an asset collection philosophy that has often looked patchwork at best.

Now the company seems to be on its way to a new era. Splitting the company will allow investors to choose between what should be a more growth-oriented business built around renewables and distribution and a legacy business that is leveraged to the classic generation model, commodity assets, and a more benign regulatory environment. I wouldn't assume that there is no risk that the split goes off without a hitch, but E.ON does look undervalued as presently constructed and could offer additional upside if these two companies are in fact more efficiently valued separately than they are together.

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Can Inefficient Markets Work To E.ON's Advantage?

Seeking Alpha: Cavium Networks Has The Right Exposures, But It's Priced Like It

Cavium (NASDAQ:CAVM) doesn't lack for ambition, as it is taking aim at Intel (NASDAQ:INTC), Broadcom (NASDAQ:BRCM), and Freescale (NYSE:FSL) (which is being acquired by NXP Semiconductors (NASDAQ:NXPI)) across a wide range of markets. On the plus side, the company's chips offer strong performance characteristics and look well-placed to exploit growing markets like base stations, cloud, and SDN. On the negative side, the stock's 40%-plus performance since my last article has mopped up the undervaluation I saw in the shares and the trade-off between expectations and valuation is less compelling.

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Cavium Networks Has The Right Exposures, But It's Priced Like It

Seeking Alpha: All Is Well With Neurocrine Biosciences, And It Could Get Better

With the company's analyst day behind it, Neurocrine Biosciences (NASDAQ:NBIX) is looking well. This biotech could have two approved drugs in hand within a couple of years that each generate more than $1 billion in sales (at peak), plus a third drug with solid potential as an orphan indication. Better still, I don't believe it takes particularly robust expectations to generate an attractive fair value for the stock and significant trial data read-outs this year could unlock significant value if the data are positive.

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All Is Well With Neurocrine Biosciences, And It Could Get Better

Seeking Alpha: Brocade On Better Footing, But It Won't Be Getting Easier

A year ago I advised patience with Brocade (NASDAQ:BRCD), as I thought the Street was too bearish on the company's prospects for retaining high-margin SAN business and building up its IP networking operations. While the storage challenges are not going away, the company should be in position to benefit from the growing rift between EMC (NYSE:EMC) and Cisco (NASDAQ:CSCO) and growing deployments of all-flash arrays. On the networking side, the VDX line is doing well and the company is assembling a cogent collection of SDN/NFV pieces, but it remains to be seen if the company can grow share and monetize that opportunity.

With the shares up more than 40% over the past year, I'm calling it a day on the Brocade undervaluation call. Management has done a very commendable job with execution (particularly on margins), but now the questions are shifting more towards the company's real growth prospects and I'm not quite as confident about those as I was on the undervaluation a year ago. There are indeed opportunities for Brocade to outperform, but I need a better mix of growth and value here before getting more bullish.

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Brocade On Better Footing, But It Won't Be Getting Easier

Saturday, May 23, 2015

Seeking Alpha: Cemig Making Do, But Still Needs A Favorable Concession Decision

I wasn't very eager to own Brazilian utility company Cemig (NYSE:CIG) back in October of 2014 and the 13% decline in the share price since then (even with a sizable rally since March) hasn't really improved my view of the shares. Granted, Cemig shares haven't really done any worse than the iShares MSCI Brazil Index (NYSEARCA:EWZ) or fellow utilities like Copel (NYSE:ELP), Electrobras (NYSE:EBR), or AES Tiete (OTCPK:AESAY), but the company has a growing debt burden and the uncertainties over major concessions threaten an important source of incremental earnings potential.

I am still concerned that greenfield projects may not be priced to generate attractive enough returns for the long term. With that, I just don't see a lot of value in these shares today. I will note, though, that a strongly positive decision on the plant concessions could still add more than $3/ADR (at current exchange rates) to fair value and Brazilian authorities have been making more industry-friendly decisions lately. Last and not least, currency can have a big impact on the value of these shares and a strengthening of the Brazilian real could offer upside independent of the underlying fundamentals.

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Cemig Making Do, But Still Needs A Favorable Concession Decision

Seeking Alpha: Unable To Find A Foothold, Marvell Keeps Sliding

One of the things I notice in the bullish arguments for Marvell (NASDAQ:MRVL) is that there's a lot of talk about the company's "strong IP" and the likelihood that an appeals court will overturn a $1 billion-plus patent judgment against the company. The trouble with that is that Marvell hasn't given anybody particularly strong reasons lately to believe that they can translate IP into sustainable market share and the patent judgment reversal (if that indeed happens) is a one-time event.

As is, it's hard to find a strong argument to buy and hold Marvell for its turnaround qualities. The storage business seems to be incapable of supporting sustained growth, and I think the company's Quixotic quest to remain a player in mobile is bleeding away value. Last and not least, I see no particular signs that networking chip companies like Broadcom (NASDAQ:BRCM) and Cavium (NASDAQ:CAVM) are, or should be, worried about Marvell's efforts in this market.

I do believe that ditching the mobile business could add $1.50/share in value relatively quickly and a substantial reduction in the patent award could add another $2/share. Those two events would be worth around a 20% return, but neither are certain. What's more, absent a better vision from management regarding what Marvell does (and does not) actually do well, it's hard to regard this as more than a trading candidate.

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Unable To Find A Foothold, Marvell Keeps Sliding

Seeking Alpha: NetApp's Best Hope Is Probably Its Wallet

Given the operating struggles that are increasingly evident with each quarter, NetApp (NASDAQ:NTAP) may be best served by thinking along the lines of, "if you can't beat 'em, buy 'em". As is, I think NetApp has painted itself into a corner such that if it doesn't do something significant via M&A, the company is probably done as a real force in storage. Nimble (NYSE:NMBL) and Tintri are chewing on the company, and while Nutanix seems to talk and think more about EMC (NYSE:EMC) and VMware (NYSE:VMW), I can't see how the company's position in hybrid cloud today is encouraging for NetApp.

NetApp longs are not going to like this (and yes, I own EMC shares), but I don't see a very bright future for ONTAP, and I think the company's relative strength in the mid-range market is going to mean less and less with what's happening in hyper-converged infrastructure and hybrid clouds. While NetApp may have more value than the market credits today on the basis of a legacy business (external arrays aren't going to vanish tomorrow), the product revenue growth that the Street generally requires as a prerequisite for bullishness is going to be tough to create. With that, NetApp's best asset may be its nearly $4 billion in net cash and the opportunity to acquire a business like Nimble, Tintri, Tegile, or Nutanix and reinvigorate its positioning relative to where storage seems to be heading.

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NetApp's Best Hope Is Probably Its Wallet

Seeking Alpha: Has Fear Opened A Door Into Canadian Western Bank?

If you tried to base a drinking game on the number of times I write something to the effect of "I really like this company, but the shares aren't cheap enough", you could probably do some serious damage to your liver. In the case of Canadian Western Bank (OTCPK:CBWBF) (CWB.TO), it seems as though a long-awaited opportunity to buy the shares of a small but well-run Canadian regional bank may finally be here.

Of course, opportunity comes with its own cost. In this case, it is the risk that low oil prices hang around for a while and seriously damage the company's business in Western Canada (Alberta in particular). The recent election of a left-leaning, not exactly business-friendly, party in Alberta also doesn't help, and so now investors are worrying about the potential impacts to CWB's loan growth, net interest income, and profitability.

Energy is too important to the economy of Alberta for me to say that oil prices are an overplayed issue with CWB. That said, I think it takes a pretty dire scenario before CWB is in serious trouble. While the downside risk is potentially large, I don't currently think it's particularly likely (high severity, low frequency to use insurance terminology) and I think the shares offer an interesting level of value today. Before going further, I would advise investors who decide to buy the shares of this company to do so on the Toronto stock exchange, as the liquidity is better (and most brokers now do this for reasonable commissions).

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Has Fear Opened A Door Into Canadian Western Bank?

Seeking Alpha: Can Capex And Catch-Up Tariffs Support A Higher Price At Copel?

These are not easy times for power utilities in Brazil, as low reservoir levels and weak rainfall have undermined hydropower generation and the government tries to strike a balance between the needs of the utilities (sustainable economic returns) and the needs of consumers and businesses. While I'm not fond of Cemig (NYSE:CIG) due to its exposure to uncertain concession decisions, higher debt, and questionable greenfield investment decisions, I'm more favorably inclined toward Copel (NYSE:ELP).

I'm looking for Copel to benefit from "catch up" tariffs that were deferred by vote-grubbing politicians and I think the company's greenfield capex allocation strategy across fossil fuel, hydro, and wind assets will create a better portfolio down the road. There are clearly problems with the Colider plant and Copel may find itself in a worse position relative to spot prices as the year rolls on, but I think the fundamental value here is more appealing and less dependent upon the kindness of regulators.

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Can Capex And Catch-Up Tariffs Support A Higher Price At Copel?

Seeking Alpha: RenaissanceRe Changes With The Times

Insurance companies like ACE (NYSE:ACE), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are successful in no small part because they are structured in a way that management can smoothly reallocate capital across business lines as rates and projected returns dictate. That wasn't historically as much of an option for RenaissanceRe (NYSE:RNR), though, as this very well-run property catastrophe reinsurer didn't have the same level of diversification across its operations.

Having closed the deal on Platinum Underwriters, it's a new era for RenRe. Management can, and is planning to, allocate significantly more capital toward casualty and specialty reinsurance, sidestepping some of the rate pressure in prop-cat. While this move should decrease the volatility of the business over the long term, it will likely also temper some of the advantages of what had been arguably the best prop-cat reinsurer out there. Long-term ROEs are likely to be lower with the new business mix, but RenRe looks like a stronger company for the deal. The one hitch is valuation - as I have complained on several occasions lately, there aren't that many bargains in the insurance space, and while RenRe does seem undervalued, it isn't a compelling bargain.

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RenaissanceRe Changes With The Times

Seeking Alpha: China Resources Enterprise Rebases Around Beer

Playing to your strengths is great, but most companies won't go to the lengths that China Resources Enterprise (OTCPK:CRHKY) (291.HK) is going. Recognizing that turning around the Tesco retail operations (and its own retailing business) was at best a multiyear project and one that investors largely hated, and that those efforts would limit the company's ability to build scale in food and beverages, China Resources Enterprise announced that it will exit all but its beer operations. This will come in the form of a sale to China Resources Holdings and it will leave China Resources Enterprise as a pure-play on the largest beer business in China.

This has been a lousy call for almost two years for me, so I can't pretend I'm not relieved to see the announcement. The beer business was always the primary appeal of CRE to me (though I thought there was potential in the beverages operation and long-term turnaround potential in retail) and I do still see ongoing value in the shares for that operation. That said, I only see about 10% upside from here and that's not enough compensation for the risks of fiercer competition within China, potential disappointments in demand development, and company-specific execution challenges.

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China Resources Enterprise Rebases Around Beer

Thursday, May 21, 2015

Seeking Alpha: With Nektar Therapeutics, Value Never Comes Easy

Ordinarily you might think that the approval of one billion-dollar drug and the imminent approval of another would be good news for a biotech, but then Nektar Therapeutics (NASDAQ:NKTR) has never been an ordinary biotech. Investors remain rightly concerned about the odds of commercial success with the company's OIC drug Movantik and somewhat less rightly concerned about the prospects of Baxter's (NYSE:BAX) upcoming long-acting PEGylated rFVIII product, and the negative results from the Phase III BEACON study of NKTR-102 surely didn't help.

I've never been a particular fan of Nektar, so it serves me right that the shares would fall about 15% since I last wrote favorably about them. Even despite these concerns and the elevated level of risk, I continue to believe that Nektar shares look undervalued today.

The full article is here at Seeking Alpha:
With Nektar Therapeutics, Value Never Comes Easy

Seeking Alpha: Competition Will Be Tough, But Clovis Oncology Has Legitimate Compounds

One of the contributory causes to biotech bubbles seems to be a collective amnesia on the part of investors regarding the fact that not every drug launched for an indication is going to succeed. Even in underserved indications like lung cancer, there are winners and losers and competitive differentiation is an important part of long-term success.

In the case of Clovis Oncology (NASDAQ:CLVS), I think investors are right to be concerned about the potential competitive pressures from AstraZeneca (NYSE:AZN) and Tesaro (NASDAQ:TSRO) among others, but I also think the market is underestimating the value of the company's lead drug candidates for lung and ovarian cancer.

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Competition Will Be Tough, But Clovis Oncology Has Legitimate Compounds

Seeking Alpha: Not Simple To Value, Compass Diversified Holdings Looks Appealing Nonetheless

Conglomerates have always presented investors with valuation challenges, as few companies provide the level of detail necessary to value the components and even those that do often lack proper benchmarks. Compass Diversified Holdings (NYSE:CODI) adds some additional challenges and questions to the mix, including how to value management's value creation efforts and whether to factor an investor's tax status into the mix.

Compass is limited to some extent as an investment candidate by a lack of coverage and the added work that goes into getting a fair sense of the per-share value. I think the added work is worth it, though, as I believe these shares are worth around $20.

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Not Simple To Value, Compass Diversified Holdings Looks Appealing Nonetheless

Seeking Alpha: The Math Could Get Weird, But Intercept Pharmaceuticals Looks Too Cheap

Whether it was a "sell the news" reaction or legitimate disappointment in the size and scope of the Phase III NASH study, Intercept Pharmaceuticals (NASDAQ:ICPT) shares sold off to the tune of 16% on Tuesday when the company revealed its plans for further development of obeticholic acid (or OCA) in NASH. Calculating the value of any pre-revenue biotech requires a lot of assumptions (and I'm well aware of the "garbage in, garbage out" risk), but I continue to believe that the market is undervaluing what could be a platform company in liver disease.

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The Math Could Get Weird, But Intercept Pharmaceuticals Looks Too Cheap

Seeking Alpha: Innospec Continuing To Build A Quality Business From A Small Base

While Innospec's (NASDAQ:IOSP) foray into oilfield chemicals has run smack into price-related activity declines in North America, this small specialty chemical company continues to leverage a strong fuel additives business and a growing value-added personal care performance chemicals business. With the balance sheet flexibility to add more specialty business lines and a reasonable valuation, this company should still be look forward to above-average growth and margin leverage prospects.

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Innospec Continuing To Build A Quality Business From A Small Base

Wednesday, May 20, 2015

Seeking Alpha: Louisiana-Pacific Seems To Be Running Off The Bottom

These are interesting times in the housing/building materials space. I'd hardly call the recent data on housing starts exceptionally bullish, but household formation has been improving and low interest rates should be supportive for home buyers. At the same time, the producers of oriented strand board (or OSB), engineered wood products, and other wood-based building materials haven't exactly been paragons of discipline. That has led to lower prices, and in some cases multiyear lows for OSB in certain regions.

And yet, Louisiana-Pacific (NYSE:LPX) is up about 25% over the past year. What constitutes a fair price for LPX is certainly up for debate, but the shares ultimately reached a point where they were trading at less than half the replacement value of the assets and reflecting none of the potential upside to any recover in housing and OSB pricing.

Whether LPX is trading at an interesting price today has a great deal to do with your near-term outlook for housing and your investment horizon. A true recovery scenario should see EBITDA approach $500 million and that can support a fair value in the low-to-mid $20's, but it's impossible to reach that price on the basis of a long-term FCF model that captures both the profitability of the good times and the negative free cash flow of the bad times. As a trade on a better housing outlook (and by extension, better wood products pricing), Louisiana-Pacific could still have room to run, but this looks like more of a trade than an investment.

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Louisiana-Pacific Seems To Be Running Off The Bottom

Seeking Alpha: Sanofi's Trying To Go On Offense While Playing Defense

Drug companies face what I consider to be an under-appreciated dilemma when managing their portfolios - the tradeoffs between market size and competition. Sanofi (NYSE:SNY) has done quite well for itself for years by working within a small oligopoly in insulin and vaccines, but now there are concerns that biosimliars and novel compounds from Novo Nordisk (NYSE:NVO) and Lilly (NYSE:LLY) will threaten that business. What's more, while Sanofi does have good exposure to rare diseases through its Genzyme business and multiple potential blockbusters by virtue of its relationship with Regeneron (NASDAQ:REGN), it has what increasingly looks like a token presence in oncology - the must-have market in many investors' minds.

I can't say that I'm a big fan of Sanofi at today's price. I think the company has backed itself into a corner in diabetes where it will have to fight hard to push me-too and also-ran drugs and I expect ample competition in cholesterol and anti-inflammatory/autoimmune diseases. I think long-term revenue growth in the mid-single digits and FCF margins in the mid-20%'s are reasonable expectations for the company, but that's not enough to drive an attractive valuation.

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Sanofi's Trying To Go On Offense While Playing Defense

Tuesday, May 19, 2015

Seeking Alpha: Axiall's Ongoing, Frustrating, Gap Between Potential And Performance

I had more or less had my fill of Axiall (NYSE:AXLL) and its missteps/disappointments back in August of 2014, but it is nevertheless still a good idea to go back and review companies you once thought might have something to offer. After all, there's at least the chance that the original thesis wasn't so much wrong as early.

When it comes to this chlor-alkali and vinyl-based building products company, not all that much has changed for good or bad. Management seems to be less inclined to move forward with an ethylene joint venture, but PVC producers have been seeing a frustratingly lack of operating leverage and the long-awaited housing recovery has been slow to arrive. I can see how these shares could be worth more than $40 on an improving outlook for chlor-alkali and building products, but the risk of getting bullish on a laggard-to-leader story is that a lot of laggards stay that way for a long time.

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Axiall's Ongoing, Frustrating, Gap Between Potential And Performance

Seeking Alpha: Exact Sciences' Significant Upside Looks Reasonably Priced

Things have gone well for Exact Sciences (NASDAQ:EXAS) since I last wrote about this up-and-coming diagnostics company in July of 2014. With a favorable CMS coverage decision in hand and a commercial launch underway, the shares have appreciated more than 40% and outdone the $20 base-case fair value I laid out at the time.

Since commercialization has begun, Exact Sciences has followed a path that should be familiar to the more grizzled veterans of med-tech stocks - namely, adoption hasn't ramped up quite as quickly as the Street hoped and it is costing more money to build and support the sales effort. As is, the shares look pretty much fairly valued to me today.

Seeing the Cologuard designated a Class A or Class B test by the USPSTF would be a significant help in securing commercial insurance coverage, but a cost effectiveness study due later this year could pose a threat to future pricing, as does competitive blood-based tests on the way. I'd certainly be happy to reconsider the shares on a pullback, but it would take some combination of a lower price, faster adoption, more assurance on pricing, better visibility into European sales, and/or more color on the pipeline to get me more bullish right now.

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Exact Sciences' Significant Upside Looks Reasonably Priced

Seeking Alpha: Can Tyco Break Out Of A Persistent Lagging Trend?

For a company that is supposed to be in one of the more attractive industrial markets, fire and security, Tyco (NYSE:TYC) hasn't lived up to investor expectations. With weaker than average growth and margins, Tyco has been lagging other fire/security players like Honeywell (NYSE:HON), United Technologies (NYSE:UTX), Stanley Black & Decker (NYSE:SWK), and Allegion (NYSE:ALLE) for some time, not to mention the market as a whole (as measured by the S&P 500).

Can the company reverse this unimpressive trend? I can't immediately think of another company in this size range with as much exposure to the non-residential construction market (though Ingersoll-Rand (NYSE:IR) is close), both here and abroad, and perhaps the protracted lull in that market explains some of Tyco's underpeformance. That said, management needs to address what seems to be an elevated level of corporate expenses and a relatively bad track record of meeting projections.

I don't see a large amount of undervaluation here, but this is a significant "self help" story where outperformance on margins can have a disproportionate benefit on the valuation. It's also arguably still at a size where a larger conglomerate could consider it an acquisition target, particularly with the prospect of rooting out the company's elevated cost structure.

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Can Tyco Break Out Of A Persistent Lagging Trend?

Sunday, May 17, 2015

Seeking Alpha: With Medicaid And ACA Squared Away, Anthem Needs To Work On Medicare

One of the giants of the health insurance space, Anthem (NYSE:ANTM) does a lot of things well. The company has leveraged its experience in small group underwriting to become the most profitable public exchange player and its acquisition of Amerigroup established a leading position in Medicaid. Although Anthem remains a good commercial insurer, its weak performance in Medicare Advantage (or MA) is a notable weakness and likely a priority target for management over the next few years.

The ACA hasn't really hurt Anthem, nor other large players like UnitedHealth (NYSE:UNH), Aetna (NYSE:AET), and Humana (NYSE:HUM) and I see little remaining risk there unless political and legal maneuverings threaten to utterly overturn the system. The biggest question I see for Anthem then is how they go about improving their MA positioning - will this be a slow, mostly organic, multiyear process, or will the company look to scoop up Humana? I don't see a lot of undervaluation in these shares today unless it can grow behind a mid-single digit rate, but I think it is a reasonably solid core holding with upside to an improved MA position down the road.

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With Medicaid And ACA Squared Away, Anthem Needs To Work On Medicare

Seeking Alpha: Softer Prices Leading To Underwhelming Results At Weyerhaeuser

Weyerhaeuser (NYSE:WY) and Plum Creek (NYSE:PCL) have yet to see the recovery in timber demand that they need to post compelling earnings and cash flow, and it shows in the stock performance. While both offer decent dividend yields, the shares of both companies are only up about 3% since I last wrote about Weyerhaeuser in August of 2014.

Weyerhaeuser has made good progress with its cost cutting initiatives, but timber and wood product prices just aren't cooperating at this point. Although the near-term earnings prospects for Weyerhaeuser don't argue for this being a must-own stock, I believe the underlying value is more compelling for patient investors.

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Softer Prices Leading To Underwhelming Results At Weyerhaeuser

Seeking Alpha: Brazil's Ailing Economy Keeps Gerdau Under The Weather

As I recently discussed in an article on Mexico-centric steel company Ternium (NYSE:TX), I've been on the wrong side of the tape by liking Latin American steel companies and it has been even worse for the Brazilian companies. Growing Chinese exports have continued to weigh on global steel prices, but Brazil's economy hasn't improved since the election and weak civil construction and heavy manufacturing further undermined Gerdau's (NYSE:GGB) operations.

Like Ternium, I think there is long-term value in Gerdau. The company has a diversified production base (blast furnaces and mini-mills) and has been making investments to improve its vertical integration and skew towards more value-added products. Unlike Ternium, though, I see more challenges in Gerdau's biggest market and more operational risk. I do think Gerdau can trade higher over the long term, but it is harder for me to make a case that this is a must-buy today.

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Brazil's Ailing Economy Keeps Gerdau Under The Weather

Friday, May 15, 2015

Seeking Alpha: Can Improving Cash Flow Finally Lift Ternium?

Latin American steel stocks have been like a siren for me, with alluring valuations and long-term demand growth leading me to steer straight into the rocks. In the case of Ternium (NYSE:TX), not only has a multiyear decline in steel prices continued to weigh on results, but the company's ongoing commitment to its increasingly contentious stake in Usiminas (OTCPK:USNZY) is arguably an even bigger cloud at this point.

There's an old quote about stocks that goes something like "the markets can stay irrational longer than you can stay liquid," and that's certainly something to keep in mind with Ternium. I continue to believe that this is a well-run steel company and I expect that the company is in place to start logging solid free cash flows as it exits an investment phase. The trouble is that while a low single-digit revenue growth rate may suggest a fair value in the mid-$20's there is no obligation on the part of the market to be fair.

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Can Improving Cash Flow Finally Lift Ternium?

Seeking Alpha: Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Allied World Assurance (NYSE:AWH) has done pretty well since last I wrote about this small specialty insurance company. The shares have risen more than 20% since that late April 2014 article, basically matching fellow specialty underwriter W.R. Berkley (NYSE:WRB) and surpassing the likes of Arch Capital (NASDAQ:ACGL), ACE (NYSE:ACE), and Aspen (NYSE:AHL) that have all seen sub-10% returns over that time.

Every insurance story offers its own little twists. Arch Capital is looking to grow its mortgage insurance business, while ACE is looking to overseas markets and Aspen is looking forward to achieving the benefits of scale as numerous relatively new business lines reach scale. For Allied World, there would still seem to be many attractive market entry/share expansion opportunities (even as rates weaken) and the company's balance sheet appears to be in very good shape.

I do have some concerns that the business that Allied World is writing today won't be as profitable as the business it wrote over the last few years and the sizable reserve releases will start to shrink, but that's a common industry concern now. That said, I like the company's leverage to specialty lines and overseas markets and the shares do look undervalued now.

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Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Thursday, May 14, 2015

Seeking Alpha: Arch Capital Keeps Going While The Going Gets Tougher

I like MetLife (NYSE:MET), ACE (NYSE:ACE), and W.R. Berkley (NYSE:WRB) quite a bit as insurance companies, but Arch Capital (NASDAQ:ACGL) has long been at the top of my list as a well-run insurance company with an uncanny knack for profitable allocating and reallocating of capital across multiple lines of business. That skill is increasingly valuable as P&C and reinsurance rates continue to fall and the industry looks to be heading into a tough multiyear stretch.

I don't believe that Arch Capital needs to join into the recent upswing in M&A activity, but the company does have the capital to get involved if the right opportunity should show up. Failing that, I expect the company to continue looking to mortgage insurance and selective alternative markets and excess and surplus lines as a source of growth and adequate returns.

Arch Capital has been something of a middle-of-the-road performer over the past year, but it's not yet particularly cheap even with long-range ROE estimates in the low teens. Buying into a part of the cycle where rates are falling, reserves are shrinking, and earnings are likely to come under pressure for many players is a risk on its own and given that backdrop I'd wait in the hopes of being able to buy Arch Capital's shares at a better price down the line.

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Arch Capital Keeps Going While The Going Gets Tougher

Seeking Alpha: Heartland Payment Once Again Going Off On Its Own

If you're a company involved in payment processing, you've likely been seeing a good run in your share price. Although I didn't think Heartland Payment Systems (NYSE:HPY) looked particularly cheap back in July of 2014, the whole sector has done well since then. Heartland is up about 20% since that piece, with Vantiv (NYSE:VNTV) up a similar amount, Total System Services (NYSE:TSS) up almost 30%, and Global Payments (NYSE:GPN) up almost 40%.

I admit to being more than a little surprised by this run at Heartland Payment. I like the company's small/medium enterprise focus in card processing and the company's commitment to price transparency. I also like the efforts to diversify the revenue base, but the company has had some missteps with its acquisitions and margin leverage has stalled as the company invests for what management hopes will be a new leg of growth.

Already wrong once, I'm hesitant to beat the drum again and argue that Heartland is overpriced. The market certainly already expects a lot from a cash flow perspective, as high single-digit net revenue growth (10 years, annualized) and 20%-plus FCF growth rate (with long-term FCF margins in the high teens) isn't enough to get to today's price. On the other hand, management is recrafting itself as a provider of payment technology services to SMEs and targeting significant margin leverage in its non-card operations, as well as looking to integrated point of sale systems to generate sticky revenue. With the shares trading inline with near-term EBITDA growth prospects, I suppose there's still a play here for more aggressive investors.

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Heartland Payment Once Again Going Off On Its Own

Wednesday, May 13, 2015

A Little Progress On The Personal Front

Spent all day today at the cancer center with Melanoma Girl (the superhero alter-ego my wife adopted at the time of her diagnosis). The news was modestly positive. This round of chemo has indeed shrunk some of the tumors, but there are are still tumors in the lungs and liver. We would of course have liked to see more tumor shrinkage/disappearance, but we'll take what we can get.

Seeking Alpha: Materion Executing On A Multi-Armed Growth Strategy

Kudos to Materion (NYSE:MTRN) for creating a plan to emphasize value-added products, improve margins, and generate more free cash flow and then executing, or at least starting to execute, on it. The shares aren't much higher than when I last wrote about the stock, but I thought the shares looked a little pricey then and there haven't been too many outperformers in the specialty alloy space.

I do still like this company, and I think the company's leverage to advanced industrial components, auto electronics, consumer products, and so on will serve it well. I also like the prospects for margin leverage and improved asset efficiency leading to free cash flow that can be reinvested into complementary acquisitions that will further stimulate revenue growth and margin leverage.

All of that said, it's unusual for a specialty alloys company to generate FCF margins above the mid-single digits for any sustained length of time and I think my 7% annualized organic revenue growth number is generous as is. I like the prospects for Materion to do well against undemanding growth comps this year and tomorrow's investor day could be a catalyst, but there's not very much fundamental undervaluation here that I can see.

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Materion Executing On A Multi-Armed Growth Strategy

Seeking Alpha: Manitex Has Expanded Into The Downturn, But Can It Deliver?

What Manitex (NASDAQ:MNTX) has done is bold - in ten year's time the company will either be a well-diversified material handling company that is a thorn in the side of companies like Terex (NYSE:TEX) and Manitowoc (NYSE:MTW) or it will be a lesson on the risks of overly ambitious growth plans and aggressive use of leverage.

I've placed my own bet on the former outcome, and I do believe Manitex can drive double-digit revenue growth and build toward double-digit operating margins. Growth should come from share gains in larger cranes, exposure to a construction recovery, and a host of share-growth opportunities in areas like container handling and industrial cranes. It is likely going to take at least a few quarters for underlying demand to improve and there are risks that the costs of operating this expanded global enterprise will run higher than expected, but I continue to believe that Manitex can support a low-to-mid double-digit fair value.

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Manitex Has Expanded Into The Downturn, But Can It Deliver?

Seeking Alpha: Novadaq Knocked Back By Looming Competition And A Tough Transition

Small-cap med-tech Novadaq (NASDAQ:NVDQ) has continued to have a rough go of it, with the shares down about a quarter since my last update and down about a third over the past year. Investors are clearly frustrated with the noise and turbulence caused by the company's transition to a direct sales model, as well as spooked by the potential entry of Stryker (NYSE:SYK) this year into a market that Novadaq had had all to itself.

It's tough to advocate patience when a holding is deep in the red, but Novadaq does at least have a good platform technology to market - the company doesn't have to jump through hoops to make the argument that the SPY platform can lead to significantly better patient outcomes, including lower complication rates. What Novadaq does have to do, though, is build out its sales force, place units, train surgeons, and drive the recurrent revenue streams that the company needs to generate high margins. A mid-teens fair value still seems reasonable to me today, but this is likely a company that will be finding its way in 2015 and that isn't often good news for a company's shares.

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Novadaq Knocked Back By Looming Competition And A Tough Transition

Seeking Alpha: At IPG Photonics, Strong Performance Backs Aggressive Expectations

In contrast to Rofin-Sinar (NASDAQ:RSTI), IPG Photonics (NASDAQ:IPGP) continues to perform very well on the back of growing adoption of fiber lasers and strong operating efficiency. This has been may favorite laser name for a while now, and the 35% move in the stock price since my last piece has been nice to see (and well above the results from Rofin-Sinar, Coherent (NASDAQ:COHR), and Newport (NASDAQ:NEWP)).

Although Rofin-Sinar has looked a little stronger of late in its fiber laser efforts, it is still well behind IPG Photonics and that is going to be a difficult gap to fill. Meanwhile, while Rofin-Sinar tries to get to where IPG Photonics already is, the latter is moving on with newer offerings like green lasers, ultrafast lasers, UV lasers, and products targeted at large applications like spot welding and paint stripping. The only major downside to the IPG Photonics story that I see today is the high level of expectations - today's price already seems to anticipate a 10-year run of greater than 10% revenue growth and FCF margin expansion into the mid-20%'s. While I think the company can do that, I'm not sure it can do so much better that there's a lot of upside at today's price.

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At IPG Photonics, Strong Performance Backs Aggressive Expectations

Tuesday, May 12, 2015

Seeking Alpha: Absent Product Revenue Growth, What Drives F5 Networks?

Wanting to like a stock is always dangerous, and that's the position I find myself in with F5 Networks (NASDAQ:FFIV). While I do believe that demand for application delivery controllers (or ADCs) is on the wane and likely to push market growth into the single digits, I also believe that the company has a significant opportunity in attaching security products and pursuing SDN/NFV and diameter signaling revenues.

The problem is identifying what's going to drive a meaningful improvement in the value proposition and/or investor sentiment. The shares look only slightly undervalued on the basis of 7% to 8% long-term growth and the company likely needs to generate double-digit product revenue growth again to get a real tailwind behind the shares. I continue to believe that F5 is a high-quality company that is not overvalued, but it's more difficult to argue that this is a must-own stock today.

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Absent Product Revenue Growth, What Drives F5 Networks?

Seeking Alpha: W.R. Berkley Pushing On Through A Tough Market

Tougher times are in the property and casualty insurance market, as insurers like ACE Limited (NYSE:ACE), Chubb (NYSE:CB), Hartford (NYSE:HIG), Travelers (NYSE:TRV), and W.R. Berkley (NYSE:WRB) are finding it harder to push rate increases and weak interest rates limit returns on conventional investment options. With loss trends having been pretty benign in recent years, there are worries among some investors and analysts that the industry is setting itself up for a string of weak performance as losses bite into capital and push down returns.

I'm really not that concerned about W.R. Berkley in that context. I am worried about limited premium growth potential and the year-to-year risks of the company's more aggressive investment philosophy, but I think the company's underwriting quality has shown itself over time and I still see opportunities for the company to grow its underwriting operations organically. I'm still not crazy about the valuation, but bargains in the P&C are hard to find these days.

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W.R. Berkley Pushing On Through A Tough Market

Seeking Alpha: The Pepsi Launch Approaches, But Senomyx Needs To Deliver On Its Own Sales Efforts

The wait drags on for Senomyx (NASDAQ:SNMX), testing the patience of shareholders ahead of a long-anticipated launch from its major partner PepsiCo (NYSE:PEP). Chemophobia-laced "healthy living" nonsense aside, the fact remains that additives remain integral to the packaged food and beverage industries and a large revenue opportunity for Senomyx in the coming years.

The key question remains as to whether Senomyx can convert that large opportunity to real sales. Although the company's direct sales efforts have long lead times (up to, or beyond, two years in some cases), some fruits of those efforts should be visible in the next twelve months. Likewise, investors will know soon enough whether PepsiCo is going to launch products incorporating Senomyx's Sweetmyx S617 with its full marketing vigor or whether it will be a more cautious and limited effort. Delays in commercialization efforts and increased execution risk in my model have led to a lower fair value, but that fair value target remains close to $10 and offers substantial upside if those orders do in fact materialize.

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The Pepsi Launch Approaches, But Senomyx Needs To Deliver On Its Own Sales Efforts

Monday, May 11, 2015

Seeking Alpha: PMC-Sierra Leveraged To High-End Product Cycles

These aren't the best of times for the storage and carrier hardware industries, but PMC-Sierra (NASDAQ:PMCS) is looking to leverage new product introductions, the move toward software-defined networking in the data center, and a capex shift toward optical transport networking (or OTN) equipment to drive a meaningful upturn in revenue and further leverage in margins.

Mid-to-high single-digit revenue growth and low double-digit FCF growth can support today's stock price and the company's margins do argue for a higher revenue multiple than today's level. It's also worth noting that acquisition activity has picked up in the chip space and PMC-Sierra would fit in with multiple suitors that have the wherewithal to make a deal. I don't see a large discount to fair value here, but the company has a legitimate opportunity to gain share in multiple markets and the company is still of a size where a few extra points of market share can drive meaningful extra value.

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PMC-Sierra Leveraged To High-End Product Cycles

Seeking Alpha: For Ever-Volatile Maxwell, New Markets Must Start Placing Orders

Maxwell Technologies (NASDAQ:MXWL) shares have always been volatile, but the direction of that volatility has been decidedly negative over the last year. Investors have grown increasingly frustrated over the erratic performance of the company's Chinese hybrid bus market and the lack of significant orders or momentum in supposed-to-be-big markets like autos, trucks, and trains.

As speculations go, this could be an interesting stock for aggressive investors to consider. The company now counts PACCAR (NASDAQ:PCAR) as an OEM heavy duty truck customer and management has been guiding to greater auto adoption in the 2016 model year. Admittedly there is still frustratingly little substance for these shares to trade on, but that's the nature of emerging/speculative tech and the long-term rewards could still prove meaningful.

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For Ever-Volatile Maxwell, New Markets Must Start Placing Orders

Seeking Alpha: Out Of Recovery, Popular Needs A Healthier Home Market

Popular (NASDAQ:BPOP), the market-leading bank in Puerto Rico, has done a lot of good things to clean up its operations since the banking meltdown. The shares haven't really outpaced the sector over the last year, though, and I believe that has a lot to do with the ongoing struggles of the Puerto Rican economy.

I believe management's acquisition of assets from the wreckage of Doral (DRLCQ) was a relatively good move, but the company is likely still looking at tepid loan growth and comparatively high credit risk in the short-term. Higher rates would help (as it would for many other banks), but a better economy in Puerto Rico would help even more. I'm not bearish on Popular, but the shares only look about 10% or undervalued to me today and that's not quite enough to get me interested in adding them to my portfolio.

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Out Of Recovery, Popular Needs A Healthier Home Market

Seeking Alpha: Amidst Multiple Distractions, PRA Group Keeps On Collecting

PRA Group (NASDAQ:PRAA) has gone nowhere fast over the last two years, as the company has seen a shift in the profitability of the charged-off debt it can buy and the debt collection industry has continued to evolve. Management has also added complexity, integration risk, forex risk, and regulatory risk to the model in expanding into the European market through its acquisition of Aktiv. Now add in an ongoing investigation from the CFPB that will almost certainly result in some sort of payout from the company.

Despite that backdrop, I still think the shares are undervalued and that the company's performance is starting to improve again. Amortization rates are higher, recent purchases are performing well, and the quality of the receivables looks good. From an industry perspective, there are still reasons to believe that substantial volume could become available in the next year or two and Aktiv offers sizable opportunities for capital deployment. There are above-average risks inherent to this company's model, but I believe fair value is in the mid-$60's to low-$70's today.

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Amidst Multiple Distractions, PRA Group Keeps On Collecting

Seeking Alpha: Commercial Vehicle Still A Great Story That Nobody Cares About

The line between patient and stubborn can be a little fuzzy at times, but sometimes investors have to have the stamina to wait for the market to wake up to a story. That is still my approach to Commercial Vehicle Group (NASDAQ:CVGI), as management continues to execute on a plan to drive not only sales growth, but greater diversification and higher margins in the years to come.

Commercial Vehicle Group has badly lagged other commercial vehicle suppliers like Cummins (NYSE:CMI), Allison (NYSE:ALSN), WABCO (NYSE:WBC), and Grammer (OTC:GMEGF) over the past year despite double-digit revenue growth and noticeable improvements in margins. Some of that could be tied to the company's leverage to the possibly peaking North American truck market, but perhaps also because this barely-followed stock is just not on anybody's must-watch list.

Whatever the case may be, I continue to believe this is an interest relative and absolute value story today. I don't think my forecast of 5% long-term annualized revenue growth is that ambitious, particularly given the company's efforts to target growth in agriculture and construction, nor do I believe my mid-single digit FCF margin is ambitious relative to the norms in this sector. Those inputs still support a nearly $9 fair value, though, so I believe this is still a stock well worth consideration.

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Commercial Vehicle Still A Great Story That Nobody Cares About

Friday, May 8, 2015

Seeking Alpha: A New Beginning For Lundbeck, But Not A Clean Start

These are interesting times for H. Lundbeck (OTCPK:HLUYY) (LUN.CO) and its shareholders. This smallish Danish specialty pharmaceutical company is attempting to launch new drugs into crowded markets with questionable differentiation and has a relatively modest (and high-risk) pipeline, as well as limited resources with which to acquire new candidates. Amidst these challenges, the company saw its CEO resign for violating its code of ethics - hardly what investors ever want to see amidst challenging multi-market drug launches.

Wednesday may go down as a big turning point. There are still very legitimate worries about the future of the company's newest launches, but the company announced the hiring of a very well-regarded pharma executive as its new CEO. His options may be limited by Lundbeck's resources and reputation, but investors who are positive on the company's new drugs and underlying approach to drug development are going to very much look forward to what he can offer in terms of better sustained performance.

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A New Beginning For Lundbeck, But Not A Clean Start

Seeking Alpha: Margin Leverage Limiting WESCO's Potential

None of the major industrial distributors have been doing especially well of late (other than HD Supply (NASDAQ:HDS)), but WESCO (NYSE:WCC) has had a rough time of it as industrial spending has weakened and the company has struggled to generate meaningful margin leverage. WESCO's steady-eddy performance is one of its strong points during the tough times, but the company's going to be hard-pressed to generate substantial margin upside without some underlying inflation as rivals compete hard for business and customers push back on pricing.

I like WESCO as a company, but I think management has a tough challenge in front of them - very lean SG&A spending doesn't leave much room for meaningful cost-cutting, pricing power limits the gross margin potential that I see, and breaking out of the company's long-term average revenue growth rate range in the mid-single digits may well require M&A at the cost of risk and leverage.

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Margin Leverage Limiting WESCO's Potential

Seeking Alpha: After Flaring Off The Excess Enthusiasm, Chart Industries Looks More Interesting

Around nine months ago investors still had to go to pretty great lengths to come up with a growth scenario that made Chart Industries' (NASDAQ:GTLS) valuation look reasonable. With Chart Industries and other "natural gas economy" stocks like Westport Innovations (NASDAQ:WPRT) and Quantum Fuel Systems (NASDAQ:QTWW) having gotten hammered down in the ensuing months, though, it's worth taking another look at some of the better names leveraged to growth in LNG.

To be sure, I don't think my model for Chart Industries is exactly conservative, as I'm still looking for annualized revenue growth of nearly 7% and margin leverage based on a North American LNG build-out that may never materialize. That said, those numbers support a fair value above $45 and an EV/EBITDA multiple of less than 7x for a company that could grow at a 10% clip for the next decade seems like an interesting valuation for an admittedly speculative opportunity.

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After Flaring Off The Excess Enthusiasm, Chart Industries Looks More Interesting

Thursday, May 7, 2015

Seeking Alpha: PCTEL Still Looking To Leverage Growing Wireless Opportunities

Three months ago, I thought that PCTEL (NASDAQ:PCTI) was an interesting, albeit high-risk, opportunity to play growth in antenna-based applications like WLAN and transportation and China's LTE rollout through antennas and test equipment. So far the early returns have not been encouraging, as the shares have lagged both the Nasdaq and antenna rival Laird (OTC:LAIRY). The underlying opportunity is still sizable, though, and the shares offer a worthwhile opportunity to leverage growth in antenna-based applications and eventual wireless deployments.

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PCTEL Still Looking To Leverage Growing Wireless Opportunities

Seeking Alpha: Monsanto Doesn't Need Syngenta

Rumors have once again heated up around the idea that Monsanto (NYSE:MON) is trying to acquire its rival Syngenta (NYSE:SYT). To a certain extent, this is nothing new. Syngenta has long been thought to be a future M&A candidate, with past rumors tying them to Monsanto, DuPont (NYSE:DD), and Dow (NYSE:DOW), but the company's less-than-impressive run of performance (including a poor first quarter in 2015) has apparently reignited those speculations.

As a Monsanto shareholder, I'm hoping the company does not execute this deal. While I like the idea of Monsanto gaining more exposure to vegetables and crops outside of the corn/soy complex, as well as access to Syngenta's technology and diversification into the ag chemical business, I think Monsanto would be hard-pressed to earn a good return on the price paid, particularly after factoring in divestments and the probable reinvestments that need to be made into Syngenta.

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Monsanto Doesn't Need Syngenta

Seeking Alpha: Turkcell Looking At Short-Term Pain For Long-Term Gain

Neither Turkcell (NYSE:TKC) nor its local rival Turk Telecom (OTC:TRKNY), who operates Avea, have been getting much love in the market and it gets even worse when you factor in the currency moves between the dollar and lira. That comes despite the fact that the Turkish mobile market is actually pretty healthy relative to other emerging markets (South Africa, Russia, the Middle East, North Africa, et al) and there are credible reasons to think that the market will get more rational.

Turkcell at long last managed to hold its annual meeting and pass a dividend, a move that investors were waiting literally years to see. Turkcell being Turkcell, there are still challenges and controversies - Cukurova is trying to gain control of the company via a "shotgun clause" (that the Turkish government could reject), the company is adjusting to a new CEO, the company may be looking to make an acquisition in Ukraine, and the company will be looking at spending billions on new 4G licenses and equipment. While there are definitely some risks that cash could be flying out of the company for the next few years, I think the long-term advantages of the 4G migration outweigh the short-term volatility.

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Turkcell Looking At Short-Term Pain For Long-Term Gain

Wednesday, May 6, 2015

Seeking Alpha: Societe Generale Improving, But Still Unsettled On Several Fronts

ADRs are a very useful way of adding global exposure to a portfolio, but there can be that frustrating dichotomy between local performance and your actual results when currency moves get in the way. Such is the case with Societe Generale (OTCPK:SCGLY). While this giant French bank has put at least some of its troubles behind it and gotten some appreciation for that in the market since my last article (the local shares are up more than 25%), the ADRs have only posted a mid-single digit gain.

I continue to believe that SocGen can do better and merit a higher valuation, but there are still some significant challenges to surmount. SocGen needs to reignite growth in its French Retail operations and manage through the extreme challenges it is facing in its Russian operations, while also building the groundwork for future growth in areas like Africa. I believe the bank will fare better than the Street expects, but not all investors may see the 10% to 20% potential return as compelling enough to take on the currency risks, regulatory risks, and other assorted headaches that may accompany SocGen.

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Societe Generale Improving, But Still Unsettled On Several Fronts

Tuesday, May 5, 2015

Seeking Alpha: Arch Coal Holding On For An Appalachian-Driven Rebound

U.S. coal stocks have been almost universally pasted, and it's not hard to see why. Many price indexes have carved out new lows, and EBITDA has shrunk to a point where many companies are in a tight squeeze with respect to interest and debt payments. Worse still, there are signs that several key markets may be changing (or have already changed) in ways that fundamentally alter the long-term outlook for U.S. coal producers.

Arch Coal (NYSE:ACI) is one of the companies that finds itself in a tricky spot. While the company should have adequate liquidity for several more years, that liquidity won't last indefinitely, and this is one of the companies potentially at risk from fundamental changes to the markets it has served for so many years. Arch Coal does offer impressive leverage to any near-term recovery in coal prices, akin to what investors have seen with some of the more leveraged and commoditized energy service companies lately, but this is by no means a safe play on a troubled sector.

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Arch Coal Holding On For An Appalachian-Driven Rebound

Seeking Alpha: Cost Reductions Alone Can't Save Alpha Natural Resources

Unlike Cloud Peak Energy (NYSE:CLD) and Peabody Energy (NYSE:BTU), I'm not certain that Alpha Natural Resources (NYSE:ANR) will have the staying power to exploit a recovery in the high-quality coal that it mines in Appalachia. As is the case with commodity stocks, there is a return/quality trade-off here that may seem counterintuitive - Alpha Natural doesn't appear to have staying power at today's coal prices, but a solid recovery in prices would have a much more profound impact on the stock price than for Cloud Peak or Peabody (and likely Arch Coal (NYSE:ACI) as well).

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Cost Reductions Alone Can't Save Alpha Natural Resources

Seeking Alpha: Peabody Energy Not In Serious Danger, But Still Needs Higher Prices

As I work my way through the coal companies that interest me, Peabody Energy (NYSE:BTU) is in a tricky spot. Relative to Alpha Natural Resources (NYSE:ANR) and Arch Coal (NYSE:ACI), I don't think there's really a long-term liquidity problem here, but then the company also needs to see a real recovery in metallurgical coal and I'm not sold on the company's position here.

Peabody's share price still seems to include a quality premium and I don't have a problem with that. The balance sheet isn't pristine, and the company slashed the dividend to preserve liquidity, but the company's well-placed in the U.S. Powder River Basin (or PRB) market and leveraged to growing coal imports in China and India.

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Peabody Energy Not In Serious Danger, But Still Needs Higher Prices

Seeking Alpha: Cloud Peak Energy Dug In For The Long Haul

Cloud Peak Energy (NYSE:CLD) has done better than most of its peer group over the past year, but does that really count for much when the shares are still down almost two-thirds? Making matters worse, pricing for thermal coal continues to be weak both in the U.S. and in the export markets, giving producers like Cloud Peak no place to hide.

Powder River Basin (or PRB) coal is barely competitive with natural gas at current prices and isn't competitive with Australian or Indonesian coal in Asian markets, but there is some hope that coal and gas prices could bottom this year. Cloud Peak also benefits from a low cost basis and a relatively comfortable liquidity position. The shares of coal companies are pretty speculative today, particularly as the industry is likely is long-term decline in the U.S., but Cloud Peak does still offer some worthwhile upside if/when coal prices do finally reach that bottom.

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Cloud Peak Energy Dug In For The Long Haul

Seeking Alpha: Accuray On Its Way To Being A "Why Bother?" Stock

Small-cap radiation oncology equipment company Accuray (NASDAQ:ARAY) continues to give investors more than enough reasons to strike it from their lists and move on. I believe that the clinical evidence continues to support stereotactic body radiation as a very effective method of treating certain difficult cancers and that Accuray's CyberKnife is a very good SBRT system. I also believe that Accuray need only establish a mid-teens market share in the radiation oncology market with its specialized Tomo and CyberKnife systems for the stock to do well.

The problem is that Accuray just isn't on a clear path to growth at this point. While the financial results in the third quarter weren't awful, another sizable miss with orders puts near-term revenue growth at risk and reignites concerns as to whether Accuray really can keep its foot in the door with radiation oncologists. These shares are still priced to potentially produce above-average returns, but the inability to establish a firm, sustained trajectory of orders is a major worry and sufficient cause, at least in my mind, to consider moving on to other ideas.

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Accuray On Its Way To Being A "Why Bother?" Stock

Monday, May 4, 2015

Seeking Alpha: FEMSA Leveraging OXXO And Has Ample Dry Powder

The Mexican economy isn't helping much, but FEMSA (NYSE:FMX) continues to post respectable results on the back of its strong OXXO convenience store chain. Taxes in Mexico and extreme currency problems in Venezuela are hurting the company's stake in Coca-Cola FEMSA (NYSE:KOF), but FEMSA continues to explore new avenues of growth in Mexican retail like pharmacies, restaurants, and now gas stations and has the option of using its Heineken (HINKY) stake to fund larger initiatives.

Operationally, FEMSA still looks like an attractive stock to hold, but currency moves have negatively impacted my valuation. At around $90 or below, I would certainly give strong consideration to adding this name to a portfolio, as I believe it not only one of the best-run Latin American companies, but also one with extensive growth options for the coming years.

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FEMSA Leveraging OXXO And Has Ample Dry Powder