Tuesday, June 30, 2015

Seeking Alpha: Enbridge Energy Partners Looking For A Pop From A Drop

I wasn't very keen on Enbridge Energy Partners (NYSE:EEP) a year ago, and while the units have outperformed many of the peer group MLPs, a 1% return before distributions doesn't leave me feeling as though I have missed very much by sitting on the sidelines (I liked Energy Transfer Equity (NYSE:ETE) better and that's up almost 20% over the same period). Clearly the steep drop in oil prices, the prospect of rising rates, and (more debatable) the big increase in MLP supply all have had their impact on the sector, but Enbridge Energy Partners has at least benefited from ongoing volume growth across its liquids pipelines. Now with the prospect of sizable drop-downs from its parent Enbridge (NYSE:ENB), maybe it's not too early to at least consider some due diligence on these units.

Owning Enbridge Energy Partners has a bigger "hassle factor" than a regular equity; as a partnership there are tax issues here that don't come up with regular equities and readers have to decide for themselves if those issues are problematic. I'm also still concerned that Enbridge Energy Partners is overstretched from a balance sheet perspective and will have to engage in complex, likely dilutive, financing to complete what could be up to $10 billion in asset drop-downs. All of that said, the shares look a little undervalued as is and meaningfully undervalued with the drop-downs and I don't think the outlook for liquids volumes is going to get too much worse from here.

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Enbridge Energy Partners Looking For A Pop From A Drop

Seeking Alpha: XPO Logistics Continues To Find New Mountains To Climb

XPO Logistics (NYSE:XPO) pursues a business model that isn't going to sit well with every investor, but it has been a fun story to watch develop, as the shares are up another 50% or so from the time of my last article and 167% from my first article a little more than two years ago. In a short span of time XPO has used aggressive-yet-savvy acquisitions to build itself into a formidable third-party logistics provider with strong operations across freight brokerage, intermodal, expediting, last mile, and contract logistics. With the acquisition of Norbert Dentrressangle, XPO has the opportunity to take an already-successful model and extend it to Europe while also entering new segments of the logistics market.

The shares still look undervalued, but there's more than a usual guesswork that goes into this model. M&A is so critical to the story that I believe you miss a lot if you only assess the company on the basis of the operations it owns today. Of course, projecting M&A is tricky as you have to make a range of assumptions regarding deal size (revenue, EBITDA, etc.), valuation, financing structures, and so on. My process gives me a valuation range between $45 and $56, but I tend to think that $50-$55 is probably a good range to think about for the next 12 months or so.

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XPO Logistics Continues To Find New Mountains To Climb

Seeking Alpha: Tidewater Hoping To Weather The Downturn

If a rising tide is suppose to lift all boats, an uncommonly weak tide carries the risk of leaving some high and dry. That might be a little melodramatic with respect to Tidewater (NYSE:TDW), but I do believe this global leader in marine supply and support vessels for the energy industry is looking at a multiyear period of lean times.

Tidewater has spent a lot of time, energy, and money modernizing its fleet, but utilization rates and dayrates are likely to plunge over the next couple of years as rig counts dive and offshore E&P companies flee the market. While I think Tidewater has the financial wherewithal to make it through to the other side, I'm not as keen on this company as a way to play this trough and the eventual recovery. The shares do seem undervalued on the premise that this is a company that can return to profitability eventually, and companies like this can see earnings rebound sharply from the bottom, but this is most likely a multiyear recovery story.

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Tidewater Hoping To Weather The Downturn

Sunday, June 28, 2015

Seeking Alpha: Superior Energy Searches For Opportunity Amid Adversity

There is still no clear sign that the U.S. onshore energy market has bottomed, nor that global energy prices are likely to head meaningfully higher quickly. With abundant overcapacity across multiple service areas, Superior Energy (NYSE:SPN) is looking at a long, hard, and painful slog through this weak part of the cycle.

The good news is that the bad times won't last forever - at a minimum, there are too many over-leveraged service providers accepting almost any price to keep the lights on and their business models aren't viable on a long-term basis. Superior Energy has no such concerns for the foreseeable future and has instead been pursuing a strategy of preserving key customer relationships and assets while searching for M&A opportunities that could leave it as a more viable back-up choice when the Big Three become the Big Two after the Halliburton (NYSE:HAL) - Baker Hughes (NYSE:BHI) merger.

Sell-side analysts have made multiple cuts to their estimates for Superior as 2015 has gone on and I wouldn't be surprised if there are further cuts still to be made. At a more fundamental level, though, I believe these shares offer some solid long-term upside. A range of methodologies (cash flow, EV/EBITDA, and ROE/BV) supports a fair value range of $22.50 to over $30, all of which suggest upside for investors willing to hold through what will almost certainly be a few more rough quarters if not a protracted recovery period.

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Superior Energy Searches For Opportunity Amid Adversity

Seeking Alpha: Unit Corp. Will Likely Struggle To Get Its Full Due

Diversification can reduce the operating risk of a company, but it comes at a cost. Analysts rarely have the skillset to properly evaluate all of the components, investors will punish a perceived "lack of focus", and the companies themselves are rarely equally good at all of the businesses.

I think that's a relevant risk factor for Unit Corp (NYSE:UNT), as this company has rarely traded at multiples similar to what blended peer comps would suggest as fair. While I think Unit has some interesting oil and gas assets in southwest Oklahoma and southeast Texas, I continue to think the company's suboptimal drilling operation is more of an anchor than an asset and I don't believe the company is likely to have the resources to really maximize its midstream assets. The shares do seem undervalued and would do well if energy prices accelerate again, but investors attracted by the apparent value here need to be prepared for a longer wait.

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Unit Corp. Will Likely Struggle To Get Its Full Due

Seeking Alpha: Oceaneering Holding Up Better Than Most

It says a lot about Oceaneering (NYSE:OII) that the most credible debates about the company concern whether it will be able to maintain its dividends and share buybacks at the levels to which investors have become accustomed in recent years. Survival is not really up for debate with this leading deepwater support company and neither is an eventual return to growth unless you believe that offshore development is going to just (somehow) stop.

None of that should be taken to mean that Oceaneering's operating environment hasn't become more treacherous, nor that there won't be a serious drop in profits. Ironically, Oceaneering may actually see free cash flow improve as it cuts back on capex in an oversupplied market. The quality of this company is very well appreciated by the Street and it seldom trades at a big discount to its peers, but I do believe the Oceaneering shares are undervalued and offer a relatively uncommon buy-and-hold opportunity within energy. Investors looking to really maximize the bang for their buck would probably do better with lower-quality companies, but those ideas carry survival risks that aren't a concern here.

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Oceaneering Holding Up Better Than Most

Thursday, June 25, 2015

Seeking Alpha: Parker Drilling May Be Undervalued, But It Will Need Time

Oil prices seem to have stabilized around the $60/bbl mark, but that's not nearly enough to fuel a recovery across the service space. With many E&P companies settling into a "lower for longer" view of oil prices, pressure is flowing downstream to the service companies as producers look to cut costs and maximize whatever returns are available to them at $60/bbl oil. That's not an inspiring backdrop for Parker Drilling (NYSE:PKD) and it is likely to mean more pressure on utilization and rates in the coming quarters.

Parker Drilling shares do still seem too cheap. A full-cycle FCF model suggests that today's price is about right, but EBITDA and ROE/BV-based approaches argue for a price above $5. I expect Parker to see worsening revenue and margin trends throughout 2015, and 2016 may not be much better, but the company's liquidity situation is pretty good and management seems to have taken a realistic approach to getting through this down-cycle. Unless you believe that the company will go bankrupt and/or that it will never manage more than a token level of earnings, this could be worth a closer look.

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Parker Drilling May Be Undervalued, But It Will Need Time

Seeking Alpha: FMC In The Right Businesses, But The Valuation Could Be Better

FMC (NYSE:FMC) has been making a lot of smart moves to better position the company for above-average long-term growth in multiple attractive specialty chemical markets. The Cheminova deal wasn't cheap, but added good diversification and offers expense-driven synergies, while the sale of the alkali business came at a better than expected price. Longer term, it's hard not to like crop protection, health/nutrition, and lithium.

I wasn't thrilled with FMC's valuation back in April of 2014, and the shares have fallen almost 30% since then, underperforming BASF (OTCQX:BASFY), Bayer (OTCPK:BAYRY), Dow (NYSE:DOW), and Monsanto (NYSE:MON) over that time. I'm still not enamored with the valuation today, but I do believe there is an opportunity for the company to outperform on both sales growth and margin leverage.

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FMC In The Right Businesses, But The Valuation Could Be Better

Seeking Alpha: Trying To Assess The EZCORP Black Box

"And if you gaze long enough into an abyss, the abyss will gaze back into you." Friedrich Nietzsche

It has to be some sort of karmic justice that within less than a week of me finally feeling positively inclined toward EZCORP (NASDAQ:EZPW), the company took a significant backward step in terms of corporate governance and shareholder confidence. That was only the start of the trouble, though, as the company has struggled amid a difficult pawn environment in the U.S. and ongoing pressures on the payday lending industry.

The multiple management shakeups at EZCORP haven't done wonders for investor confidence, but I can't argue with the overall direction that the company has laid out for getting itself back onto a better financial trajectory. Unfortunately, investors are still waiting to hear about fiscal second quarter earnings and the results of a review of the Grupo Finmart operations in Mexico - a review that has at least the potential to mark yet another troubled acquisition in EZCORP's history.

Valuation is an exercise in guesswork right now. I can say that low single-digit revenue growth from the FY 2014 starting point and the eventual attainment of double-digit FCF margins can support a fair value of $12 today even with a steep discount rate. Likewise, balance sheet-based metrics that attempt to value EZCORP on the basis of tangible book and/or future returns on equity support a valuation range between $9.50 to $11.

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Trying To Assess The EZCORP Black Box

Seeking Alpha: Can KLAC Get Its Mojo Back?

Defensive is a word you have to use with some caution when talking about semiconductor equipment companies, but it is a word that has been applied to KLA-Tencor (NASDAQ:KLAC) in the past and with some reason. KLA-Tencor has historically been at, or near, the top of the industry list in terms of operating margins and the company has long held strong market share in its core inspection and metrology markets.

How much is defensive really worth, though? KLA-Tencor has outperformed Applied Materials (NASDAQ:AMAT) over the last five and ten years, but has lagged ASML (NASDAQ:ASML) and Lam Research (LCRX) and the comparisons get less favorable to KLAC at three years and one year. What's more, the company is acting a little strangely for a leader, seemingly backing away from actinic inspection and e-beam and potentially opening a door for rivals, and cutting staff going into a period that should see orders growing again.

If I thought KLA-Tencor were significantly undervalued I might be inclined to think of this as noise and opt to focus on the opportunities that should lie ahead at 10nm as Intel (NASDAQ:INTC) and TSMC (NYSE:TSM) look to ramp up spending. As it is, though, I have some concerns about KLA-Tencor's operating plan and the shares aren't cheap enough for me to ignore them.

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Can KLAC Get Its Mojo Back?

Wednesday, June 24, 2015

Seeking Alpha: Taiwan Semi Running Hard ... But Is The Track A Treadmill?

Although I think the "picks and shovels" concept is often overplayed as an investment philosophy, it's hard to argue that it doesn't have a place in certain industries. If you map the performance of semiconductor foundry operator Taiwan Semiconductor (NYSE:TSM) (or "TSMC") against the ten largest semiconductor companies (excluding Intel (NASDAQ:INTC)) over the last five years, only Avago (NASDAQ:AVGO), NXP (NASDAQ:NXPI), and Skyworks (NASDAQ:SWKS) have outperformed TSMC. At a minimum, then, I would argue that makes TSMC a valid idea for investors to consider when thinking about adding exposure to that sector.

As an investor who is here to make money, I find the debates over TSMC to be pretty interesting. Sell-side analysts do battle every month with what their "sources" claim is going on with major customers like Qualcomm (NASDAQ:QCOM) and Apple (NASDAQ:AAPL), while likewise speculating as to the timelines and performance characters of next-gen processes at rival fabs like Intel and Samsung.

At the heart of it all, though, I do have some concerns about the growth outlook for TSMC. The company has shown some cracks (from a competitive standpoint) at the 14nm/16nm node that didn't appear at 20nm, 28nm, and 40nm, and Intel and Samsung aren't going to let up. While the company has proprietary technologies that bulls believe can build/hold share, the race to 10nm is key to sentiment. Given my concerns about overall market growth, though, it's hard for me to find a lot of reasons to make this a core holding today.

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Taiwan Semi Running Hard ... But Is The Track A Treadmill?

Seeking Alpha: Qorvo Hoping To Show One Plus One Is More Than Two

The smartphone space is a weird place these days. On one hand, there are worries that the best days of growth in the high end are already past. On the other hand, companies like Qorvo (NASDAQ:QRVO) and Avago (NASDAQ:AVGO) are looking at a world that still has a lot of room to adopt LTE handsets, each one of which offers richer switch, amplifier, and filter content.

I fully expect that Qorvo will eventually have to contend with lower-cost China-based RF component manufacturers, just as Qualcomm (NASDAQ:QCOM) has had to contend with lower-cost players in baseband, but I don't believe that cancels out the opportunity. Mid-to-high single-digit long-term revenue growth coupled with FCF margins in the 20%'s can support a fair value in the high $80's and I wouldn't rule out the possibility of Qorvo gaining share and/or exceeding its cost synergy targets.

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Qorvo Hoping To Show One Plus One Is More Than Two

Seeking Alpha: Newly Agile Agilent May Yet Be Weighed Down By Expectations

The life science tools market doesn't offer quite as much organic growth as many investors seem to think, but the high barriers to entry, relatively short product cycles, and consumables/service streams do tend to support good margins for the established players. The question facing Agilent (NYSE:A) isn't so much about whether the company can remain a strong player in markets like separation, mass spec, and pathology, but rather whether the company can reverse a long history of failing to live up to expectations and truly make the most of its technology and market positions.

At this point I'm a skeptic. Agilent shares may hold some appeal if you believe they can generate Waters-level (NYSE:WAT) FCF margins relatively soon, but I consider that to be a very ambitious expectation. Likewise, I'm a little concerned about the company's relatively weaker position in clinical markets next to Waters, Thermo Fisher (NYSE:TMO), Danaher (NYSE:DHR), and Bruker (NASDAQ:BRKR). Although I have little doubt that Agilent as a company will be fine, I'm concerned that there's too much optimism in the shares now that Agilent operates as a pure-play on life science and science tools.

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Newly Agile Agilent May Yet Be Weighed Down By Expectations

Seeking Alpha: Copa Holdings Battered And Bruised By Brazil's Malaise

Maybe the nicest thing I can say about Copa Holdings (NYSE:CPA) is that in the roughly nine months since I last wrote about the stock, its Latin American peers including Gol Airlines (NYSE:GOL), LATAM Airlines (NYSE:LFL), and Avianca (NYSE:AVH) all managed to do worse in terms of stock price performance. Then again, the fact that one stock was down about 33%, another down about 44%, and the last about 63% doesn't really lessen the sting of seeing Copa decline about 30% in value.

Copa has been thumped as investors have fled Latin American airlines on growing yield concerns in Brazil, Colombia, and Chile as commodity-driven exports show no particular signs of strength and averse currency moves weaken the local economies. I still believe that Copa is a good property, but the quality of a house is somewhat moot when investors won't go near the neighborhood. Like many other Latin American stories, I see value in Copa today but you have to have a high risk threshold to own it and there is most definitely a risk that conditions will get worse before they get any better.

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Copa Holdings Battered And Bruised By Brazil's Malaise

Tuesday, June 23, 2015

Seeking Alpha: Geely Automobile Leveraging A New Approach

I've see-sawed on Geely Automobile (OTCPK:GELYY) in the past and that has worked out pretty well given the up-and-down performance of the company over the last five years. I was pretty positive on Geely back in August, though, and the shares have risen more than 20% since that article, even with a 20% decline from April's highs. I believe the gains in Geely have come on the recognition that the company's efforts to restructure its dealership network and model line-up are solid moves that can produce real benefits down the line.

I believe the share weakness in Geely since April has had a lot to do with weaker overall industry sales performance and the subsequent decision by many industry participants to cut prices. I can't rule out the risk that this slowdown drags Geely's yoy unit sales down, but I think Geely's approach to take a Hyundai and/or Xiaomi-like approach to the Chinese auto market is a good one that can produce better results for years to come. Geely's ADRs should trade closer to $12 in the near term, with further upside potential if the company can truly leverage synergies with Volvo.

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Geely Automobile Leveraging A New Approach

Seeking Alpha: Keppel Hoping A Different Structure Can Produce Better Results

These are challenging times for Keppel Corp (OTCPK:KPELY). As one of the largest builders of offshore drilling rigs, Keppel is looking at an increasingly tough operating environment as low oil prices have pushed down rig utilization and dayrates, stressing already highly leveraged drillers and leading to delivery delays and cancellations. With that, the company's ADRs have fallen by more than a quarter since my last update.

Keppel is looking at a pretty solid order book that will keep its yards busy for the next two years, but there are serious questions about what happens after that. Unless oil prices turns up sharply this year (and look likely to stay there), it's hard to see where the replacement orders are going to come from. That makes management's decision to acquire all of Keppel Land even more significant to the long-term story, as property development may be the company's only viable option for growth after the offshore order book dries up. While Keppel does still pay a solid dividend and appears to be undervalued by a double-digit percentage, the significant operating uncertainties make it difficult to argue for buying these shares.

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Keppel Hoping A Different Structure Can Produce Better Results

Seeking Alpha: Mueller Water Finally Looking More Like A Bargain

The housing recovery continues to develop at a slower pace than the bulls had hoped and that has weighed on the performance of Mueller Water Products (NYSE:MWA). I've had some reservations about this company's valuation and the likelihood that it would meet Street expectations over the past eighteen months, and during that time the shares have basically gone nowhere. While the company does appear to have resolved some of its manufacturing issues and municipal tendering activity has improved, weakness in the oil/gas sector has added a headwind and expectations for housing starts this year have moderated.

The sustained underperformance of these shares has given the fundamentals a chance to catch up and the risk-reward looks more interesting now than it has for most of the last two years. The weakness in metering is disappointing and the company is going to have to spend to support the growth potential of its leak detection business, but I think there's meaningful untapped profit/cash flow leverage remaining in the company's underutilized capacity. With the shares about 10% to 20% undervalued and still offering long-term recovery leverage, this name may be worth a closer look as other housing stories have already run further.

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Mueller Water Finally Looking More Like A Bargain

Sunday, June 21, 2015

Seeking Alpha: All's Well With Neenah Paper, But It's Priced Like It

What can I really complain about with Neenah Paper (NYSE:NP)? The shares didn't provide that pullback I was hoping for back in October and they're up about 12% from the time of that last article, beating other specialty paper companies like Glatfelter (NYSE:GLT), Schweitzer-Mauduit (NYSE:SWM), as well as Finland's Ahlstrom once you adjust for the currency moves between the dollar and markka. What's more, while the organic revenue growth hasn't been torrid, it's been quite solid relative to the underlying markets and segment-level profitability has been looking good.

If I'm going to complain (and regular readers know I'm going to...), it's about the valuation. The valuation does look a little stretched on an organic DCF basis, but not unreasonable on an EV/EBITDA basis nor when factoring in the potential benefits of further M&A. I'm not a big fan of "buy high and sell higher" with companies where the revenue growth potential is modest, but I don't think I'd be in any rush to sell these shares unless I knew I had a better idea to pursue.

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All's Well With Neenah Paper, But It's Priced Like It

Seeking Alpha: Yara International Continues To Execute Well In A Turbulent Market

A year ago I wasn't sure what to make of Norwegian fertilizer giant Yara International (OTCPK:YARIY), as I was bullish on the company's overall business model and long-term prospects but thought that the shares adequately reflected a lot of the upside. The local shares (YAR.OL) have climbed about 20% over the last year, but the ADRs are down about 5% due the appreciation of the dollar (Eurozone investors would be looking at a roughly 13% gain).

Assuming that the currency rate settles down, the prospects for Yara's ADRs are neutral-to-positive in my view. While increasing Chinese coal-based exports are a concern, Yara's strategy of shifting more business toward higher-value products should offset this. At the same time, while the company saw some very unwelcome C-suite turbulence last year the company has continued to identify attractive capital investment prospects that should build more value in the years to come. I think $48.50 to $55 is a good range in which to think about Yara's value, but that doesn't lead to the most compelling investment argument today.

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Yara International Continues To Execute Well In A Turbulent Market

Seeking Alpha: S & W Seed Has A Huge Opportunity, But The Ability To Execute Is The Key Risk Factor

I suppose it would be easy to blame S & W Seed's (NASDAQ:SANW) ongoing share price weakness on the overall malaise in the ag sector. The shares are down another 15% or so from when I last wrote about the company, but at their worst they were down closer to 50%. That's not just "well, it's a tough market"; S & W has made more than a few mistakes, leaving the Street to wonder if management can really execute on what seems like a robust opportunity in the alfalfa market.

The acquisition of DuPont's (NYSE:DD) alfalfa business should mark a major point of transition for the business, as it brings immediate credibility and scale to the company in the dormant alfalfa variety market (80% or so of the U.S. alfalfa market and 50% of the world market). What's more, the company's commitment to improved varieties of alfalfa seed (GM and others) should lead to more pricing power. But it all comes back again to the question of execution.

I believe the market opportunity can support high teens annualized revenue growth and operating margins in the mid to high teens over the long term, but that's a lot of benefit of the doubt for a company that thus far hasn't earned it. That's how it is with emerging companies, though - if you want to get in early and get the really big long-term gains, you have to accept an elevated risk; by the time the question of management's ability to execute (and/or whether the alfalfa market can be what I believe it can be) is answered, the opportunity to get in at a low price will be gone.

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S & W Seed Has A Huge Opportunity, But The Ability To Execute Is The Key Risk Factor

Seeking Alpha: American Vanguard Paying For The Recent Glory Days

It has been about 10 months since I last wrote about American Vanguard (NYSE:AVD), but things haven't really gotten any easier in the company's core crop protection market. Lower corn acreage, high channel inventories, and benign insect pressure have severely sapped the company's insecticide business and the company is having to deal with suboptimal operating leverage and the cash absorption of excess working capital as it works through this tough stretch.

I believe that if you adjust for the "corn bubble", American Vanguard has continued to operate as a respectable niche crop protection company with mid-single digit revenue growth and the potential to generate double-digit FCF margins. "Potential" is a tricky word, though, and often the difference between value traps and successful investments. Monsanto's (NYSE:MON) aggressive bid for Syngenta (NYSE:SYT) has brought some excitement back to crop protection, but actual results show a tough environment and M&A is unlikely to benefit American Vanguard unless a company not currently active in the U.S. wants to facilitate a market entry. I don't think American Vanguard is particularly expensive here, but the year ahead is still going to be a challenging one for AVD management and investors.

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American Vanguard Paying For The Recent Glory Days

Thursday, June 18, 2015

Seeking Alpha: KMG Chemicals Unlocking Its Potential

I liked small specialty chemical company KMG Chemicals (NYSE:KMG) back in August of 2014, but little did I expect the company to shoot up 67% in less than a year. I believe the gains can be tied back to management doing what it said it was going to do - deploying capital to add a third business, delivering better margins through restructuring, and upgrading the overall business (by exiting the creosote operations).

I do have some concerns that this somewhat illiquid and under-followed stock has now overshot the mark. A mid-$20's fair value seems reasonable even when factoring in additional M&A, but if KMG can identify acquisition targets with margins and FCF potential along the lines of Val-Tex, perhaps that target too could prove conservative.

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KMG Chemicals Unlocking Its Potential

Seeking Alpha: POSCO Another 'Wait And See' Story

It's not hard to find a steel company that looks undervalued on the basis of past cycles today, but there's a very real question now as to whether the large global players like ArcelorMittal (NYSE:MT) and POSCO (NYSE:PKX) will see the same sort of upturns as in the past given the increasing size and influence of Chinese mills. Relative to ArcelorMittal, POSCO is more leveraged to growing markets (relatively little of its exports go to North America or Western Europe) and the company can still benefit from a more lucrative mix and lower-cost production technologies.

I was much too early in liking POSCO a year ago, as pretty much the entire steel sector has continued to underperform on mediocre demand growth and increasing Chinese exports. Although I do believe it will be difficult for POSCO to achieve the sort of growth and margins it has seen in past upturns, I think valuation is looking pretty washed out at today's price.

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POSCO Another 'Wait And See' Story

Seeking Alpha: BASF Continues To Execute A Proven Plan

BASF (OTCQX:BASFY) remains what it has long been - a very large, very diversified, and very well-run chemical conglomerate. A year ago I thought the shares didn't look all that promising on a risk/return basis and the ADRs have since underperformed (down about 21%) as have the local shares (BAS.XE) (down about 4%). DuPont (NYSE:DD), Dow (NYSE:DOW), Bayer (OTCPK:BAYRY), and Clariant (OTCPK:CLZNY) all would have given you a better capital returns performance, though all but DuPont have performed pretty well on a year-to-date basis.

For all of the fine attributes I see in BASF, I still can't get that excited about the shares today as a new money investment. Monsanto's (NYSE:MON) aggressive pursuit of Syngenta (NYSE:SYT) could very much work in BASF's favor, but against that upside are risks and concerns tied to growing global capacity in may of BASF's product categories and efforts by rivals in Asia to move further along the value curve. There are worse things than owning fairly-valued shares of a very good company, which I believe BASF is, but I'm not so excited about the valuation that I want to rush out and buy the shares.

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BASF Continues To Execute A Proven Plan

Seeking Alpha: After A Lot Of Pain, Can ArcelorMittal Deliver Some Gains?

Not every steel stock has been a crushing disappointment since my last update on ArcelorMittal (NYSE:MT), but most of them have lived down to that generalization. That 10-month stretch has seen Steel Dynamics (NASDAQ:STLD) fall almost 10%, while Gerdau (NYSE:GGB) has fallen more than 50% and ArcelorMittal itself has fallen another quarter. As I said, there have been a few exceptions as voestalpine (OTCPK:VLPNY) and Salzgitter (OTCPK:SZGPY) have managed positive returns in U.S. dollars.

The simple answer to what's gone wrong is that prices continue to erode in the face of too little supply discipline and weak demand. Iron ore prices have effectively collapsed and hot-rolled steel prices are down by double-digit amounts from the prior year. While conditions have actually been improving in Europe, North America and Brazil are still looking at lackluster demand and meaningful import competition.

Is ArcelorMittal at long last a true bargain or is this just a reloaded value trap? Over the long term, I lean toward the latter as I believe the company's iron ore operations are structurally disadvantaged and the company is unlikely to earn a good return relative to its cost of equity. In the short term, I think it's possible to make a more bullish argument as the shares seem to be pricing current conditions as close to a new normal.

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After A Lot Of Pain, Can ArcelorMittal Deliver Some Gains?

Wednesday, June 17, 2015

Seeking Alpha: Braskem Not Fully Broken

Trying to find value in the Brazilian industrial commodities sector has been an unrewarding task over the past year. Companies like Gerdau (NYSE:GGB) and Braskem (NYSE:BAK) have shown me no love at all, as the combination of economic malaise and currency erosion has weighed heavily on the value of these ADRs. In the case of Braskem, there are additional worries tied to the company's naptha supply arrangement with Petrobras (NYSE:PBR), global polyolefin spreads, and potential changes in the tax regime in Brazil.

The nearly one-third decline in Braskem's share price since my last update is almost enough to tempt me to erase the company from my spreadsheets and take a vow of silence on the stock. Brazil probably has not yet reached its point of maximum economic pain and there are legitimate concerns regarding the company's cost structure under the new Petrobras agreement. That said, the shares are trading at 4.5 times the average sell-side EBITDA forecast over the next 12 months and that seems punitive relative to the company's leverage to an eventual recovery in Brazil and its increasing diversification into natural gas as a feedstock.

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Braskem Not Fully Broken

Seeking Alpha: Sluggish Markets Dragging Out Harsco's Recovery

I don't want to be flippant about it, but it seems hard to remember a time when Harsco (NYSE:HSC) wasn't a recovery/turnaround story. The company has been working for years to improve its Metals and Minerals business, and management has taken several logical steps to exit or improve underperforming contracts, but it is hard to make progress fixing a steel mill services business when the steel mills themselves are struggling.

I'm not completely certain that Harsco can get back to a point where it earns a return on capital in excess of its cost of equity capital, but it's going to take several years to find out. You could argue that Harsco is undervalued, particularly on an EV/EBITDA basis, but I believe it is going to take a meaningful recovery in steel mill utilization to drive that recovery and I don't see that as especially likely in the near term.

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Sluggish Markets Dragging Out Harsco's Recovery

Seeking Alpha: Cemex At Last?

Careful stock selection in the building materials space has paid off over the past year. Steel Dynamics (NASDAQ:STLD), Headwaters (NYSE:HW), and Vulcan Materials (NYSE:VMC) have all done well, but Cemex (NYSE:CX) has been a loser, dropping 28% since my last update. Small comfort, then, other cement companies like Cementos Argos (OTCPK:CMTOY), Lafarge (OTCPK:LFRGY), and Holcim (OTCPK:HCMLY) have kept Cemex company in the underperformers list.

It's small comfort to those who have lost money on Cemex, but I don't think the company has committed many unforced errors over that time. More than anything, it seems that frustratingly weak recoveries in the U.S. (moreso in residential), Mexico, and Europe have weighed on results (and sentiment), with forex weakness in emerging markets adding another twist to the knife. The sluggish recoveries have pushed out the likely midpoint of Cemex's recovery cycle, but even if Cemex takes four years to get back to/over $4.5 billion in EBITDA, the shares still appear undervalued below $12.

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Cemex At Last?

Tuesday, June 16, 2015

Seeking Alpha: China Shenhua Can Have Life After Coal

Every time it looks coal may be bottoming, somebody manages to bring out a shovel. Hopes that Chinese coal prices would bottom in the summer of 2014 around RMB 510/t proved too optimistic, as prices continued to make new lows and coal recently traded at around RMB 400/t before a slight rebound. Against that backdrop, the 17% decline in China Shenhua Energy's (OTCPK:CSUAY) share price since my last article isn't so surprising.

What is more surprising about China Shenhua Energy is the extent to which it has a life beyond coal. The company has immense marketable reserves and is the largest coal miner in China, but it generates more than half of its EBITDA from power and transportation operations and these businesses are likely to make up an increasing share of future earnings. These operations don't immunize Shenhua against an even longer stretch of weak coal pricing, but they do at least offer some worthwhile growth potential. Insofar as the shares go, the ongoing declines in global steel, base metal, coal, and other commodity stocks has been a rough lesson in the risk of reaching out to grab falling knives - I can say that these shares look more than 10% undervalued on a 5.5x multiple to 12-month EBITDA, but who's to say that there isn't another 10% downside to EBTIDA?

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China Shenhua Can Have Life After Coal

Seeking Alpha: CapitaLand Still Not Getting Much Benefit Of The Doubt

The self-improvement story at Singapore's CapitaLand (OTCPK:CLLDY) has run up against investor concerns about the property markets in Singapore and China, and so far the concerns are winning. CapitaLand has gone nowhere fast since my last update on the company, as the local shares have climbed about 5% and the ADRs are down about 3%. That's pretty close to the performance of fellow Singapore property developer City Developments (OTCPK:CDEVY) and Chinese developers like Sung Hung Kai Properties and Hang Lung Properties; there have been outperformers in the comp group, but overall I think the performance of CapitaLand is more of a sector phenomenon than a verdict against the company.

I continue to believe that CapitaLand is undervalued on its potential, but it is incumbent upon management to prove that it can deliver on that potential. The company's suburban malls in Singapore and China are doing well (and there's growth/expansion potential into markets like Indonesia and Malaysia) and the company's expertise in integrated project development is leverageable across a large potential base of projects. If CapitaLand can hit the middle of its ROE target in five years, a fair value of $6/ADR still makes sense and an NAV approach supports a similar fair value.

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CapitaLand Still Not Getting Much Benefit Of The Doubt

Monday, June 15, 2015

Seeking Alpha: Bukit Asam Looking To Power Through Weak Coal Prices

It's a rough world if you're a coal company. While there has been plenty of coverage regarding the fall of met coal prices and the impact of natural gas on U.S. Appalachian coal prices, the weakness really is a global phenomenon as Newcastle thermal coal prices have been sliding for about four years and now sit less than 50% below their former peak.

I have liked Indonesia's PT Tambang Batubara Bukit Asam ("Bukit Asam") (OTCPK:TBNGY) as a company for a long time now, but I was less bullish on the stock back in August after it had enjoyed a good run of outperformance. Since then, the ADRs have fallen about 25% while the local shares have dropped more than 30% in value - a bad performance, no doubt, but not so bad compared to Bumi Resources or ITMG, and still quite a bit better than American coal companies like Arch Coal (NYSE:ACI), Cloud Peak (NYSE:CLD), and Peabody (NYSE:BTU).

Is it time to sound the all-clear? While the shares do seem about 20% undervalued on a long-term basis, the share price is still very vulnerable to further weakness in Newcastle spot prices. I like the clean balance sheet and low cash operating costs, and I think the company's efforts to diversify into power generation will offer good shareholder value down the road. The real question, then, may be whether investors have the patience to see the shares dig out a new low before heading up and whether the industry will show discipline with respect to production.

Before going further, it's well worth noting that Bukit Asam's ADRs are not very liquid. Buying the Indonesian shares may or may not be an option for you, but the weak volume of the ADRs is a definite risk factor that investors must consider. While I would expect to see volume pick up if/when coal stages a recovery, illiquid stocks can be painfully difficult to exit from when things get rough.

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Bukit Asam Looking To Power Through Weak Coal Prices

Sunday, June 14, 2015

Seeking Alpha: Alnylam's CC5 Data More Like A Long Foul Than A Home-Run Or Strikeout

Alnylam Pharmaceuticals (NASDAQ:ALNY) hasn't been shy about talking up its early-stage clinical work, nor the prospects for its deep pipeline of RNAi drug candidates. The good news is that enthusiastic investors have awarded the company with a market cap of over $11 billion even though the company is likely at least three years away from its first commercial launch (and even that is no sure thing). Management has also been willing to parlay that enthusiasm into equity capital raises that have filled the company's coffers with cash to fund its clinical development program.

But there is a downside to high expectations, and Alnylam seems to seeing some of that today in the wake of initial data on the company's ALN-CC5 drug for complement mediated disease. Alynylam's data were not bad, and in fact I believe would otherwise be seen as encouraging, but expectations have ratcheted up to a point where it seems as though the company has to hit a home run every time it comes to the plate.

I am changing nothing in response to the data on ALN-CC5. I had previously valued this drug at about $2 on the basis of a 15% chance of clinical success and I am not changing those numbers. Alexion (NASDAQ:ALXN) investors still have reason to be nervous, but Alnylam has a long way to go before it can be credibly said to be a real potential threat to Alexion's Soliris franchise.

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Alnylam's CC5 Data More Like A Long Foul Than A Home-Run Or Strikeout

Seeking Alpha: Natural Resource Partners Will Likely See Things Get Worse Before Any Turnaround

Natural Resource Partners (NYSE:NRP) continues to find itself in a tough spot. Utilities have significantly curtailed their use of thermal coal from Appalachia, met coal prices continue to scrape bottom, oil prices are well below the levels contemplated when the partnership diversified into petroleum, and aggregates and soda ash just aren't profitable enough to fill the gap. Like so many others in the coal space, conservation of liquidity and living to fight another day have become paramount and Natural Resource Partners has slashed its payout to preserve capital.

In my opinion, expectations of a recovery in utility demand for App coal is unrealistic and met coal may likewise never be what it once was. I believe the growth in NRP's aggregates business can partially fill the gap over time and the oil/gas business is a wildcard with upside potential, but NRP is unlikely to be in a position to raise its distribution for several years. A yield above 9% doesn't look bad today, but investors can find similar opportunities at Alliance Resource Partners (NASDAQ:ARLP) and OCI Resources LP (NYSE:OCIR) and arguably higher quality. I do think NRP's shares look pretty beaten up and the distribution should be well-covered even with no recovery in coal, but the coal sector has certainly been teaching the lesson over the last couple of years that conditions can always get worse.

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Natural Resource Partners Will Likely See Things Get Worse Before Any Turnaround

Seeking Alpha: After A Solid Run, Valuation At Forest City Enterprises Seems More Reasonable

There is a lot more that Forest City Enterprises (NYSE:FCE.A) could do to create/enhance value for its shareholders. This soon-to-be-REIT has a lot of room left to reduce operating expenses, reduce leverage, and reduce complexity - all of which play into valuation in a negative way. I also believe that there is also room to improve communication with the investment community and adopt a more shareholder-friendly corporate structure.

But for those positives, I see enough negatives to not be so favorably inclined towards the shares as I was back in August. Asset sales have developed at a slower-than-expected pace and I'm concerned that major asset sales like Barclays, the Nets, and 625 Fulton could disappoint. I also think that reducing corporate expenses is easier projected than done and that the conversion to a REIT structure isn't a panacea. Same-store net operating income growth remains solid and I do believe the shares are undervalued, but the 10% to 15% undervaluation I see isn't enough to leave me as bullish on the shares as I was 20% ago.

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After A Solid Run, Valuation At Forest City Enterprises Seems More Reasonable

Seeking Alpha: iStar A Complicated REIT For Complicated Times

The market often punishes complex stories, and iStar Financial (NYSE:STAR) is no exception. While the company is organized as a REIT, it doesn't currently pay a dividend and management doesn't seem to be chomping at the bit to resume them. It's not really a mortgage REIT, but originating loans for real estate projects is a big part of the business. Likewise, it would be a mistake to pigeonhole it as an equity REIT, a net leasing REIT, or a land developer/homebuilder, but those are all critical components of the business.

What iStar is, at least in my opinion, is an opportunistic supplier and manager of capital within the real estate sector - if the opportunities are good enough, management will figure out how they can play a role. It is also a tricky business to value, as GAAP earnings don't really reflect the economic value of the company's activity. I believe these shares are worth at least $15/share without any meaningful improvement in underperforming assets, and I believe execution of management's plan to improve noncontributing assets and reinvest/recycle portfolio capital can support a value in the $17 to $18.50 range.

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iStar A Complicated REIT For Complicated Times

Seeking Alpha: Insteel Biding Its Time

Investors continue to wait for a recovery in non-residential construction spending that has, in some ways at least, already taken place. Data from the St. Louis Fed shows a 13% yoy increase in total private non-residential construction spending in April, while spending on highways and roads is near an all-time high. While I wouldn't argue against the idea that the U.S. is still likely to see further growth in new private construction and needs to see growth in infrastructure projects like bridges and roads, I am starting to think that this is setting up as more of a "low and slow" process rather than a dramatic rebound to pre-recession levels of activity.

All of that brings me to Insteel Industries (NASDAQ:IIIN), a leading player in prestressed concrete strand and welded wire reinforcement products sold to concrete product manufacturers for use in a range of non-residential and infrastructure building projects. Insteel is a double-barreled play on growing construction activity, as higher shipments and pricing are clearly good for revenue, but also feed through to greater facility utilization and operating leverage. Above and beyond those drivers, management still believes that its engineered structural mesh is an underutilized reinforcement option that can be used in place of hot-rolled rebar and save money in the process.

I thought the shares were more or less fairly valued almost a year ago and that investors would do better in names like Cemex (NYSE:CX), Steel Dynamics (NASDAQ:STLD), Nucor (NYSE:NUE), and Gerdau (NYSE:GGB). While I was right about Insteel being positioned for lackluster performance (basically flat since then) and Steel Dynamics being undervalued (up more than 20% since), I was badly wrong about the prospects of Cemex (down 30%), Gerdau (down 55%), and Nucor (down 3). As things sit today, I think Insteel is somewhat undervalued, but I believe you need a pretty bullish outlook on non-residential construction activity to really see appealing value here.

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Insteel Biding Its Time

Thursday, June 11, 2015

Seeking Alpha: Meet The New Hutch, Almost The Same As The Old Hutch

American conglomerates have largely seen holding company discounts fade away to a non-issue, but that is not the case outside the U.S., and Hutchison Whampoa, now restructured and known as CK Hutchison Holdings (OTCPK:CKHUY) (1.HK), languished as a result. "Languish" is a relative term, though, as I can't complain too much about the performance (up 15%) of Hutchison Whampoa ADRs since my last article.

I continue to believe that these assets are undervalued, but I also recognize that a complex holding company with assets scattered across the globe and controlled by the founding shareholder is not everybody's cup of tea. I believe that both a long-term DCF approach and a part-by-part NAV valuation approach support the idea that CK Hutchison is 15%-20% undervalued, but I would note that CKH may well be looking at a period of asset/business reorganization in the near future.

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Meet The New Hutch, Almost The Same As The Old Hutch

Seeking Alpha: Glatfelter Has To Do Better

About a year ago, I wrote that Glatfelter (NYSE:GLT) could start to look more appealing as an under-the-radar pick if the company were to stop missing estimates. Since then the company has missed at the top line in every quarter, as forex headwinds, problems in Russia/Ukraine, and unexpected weakness in airlaid have sapped sales momentum. Add in some forced capex for boiler conversions and the prospect of greater environmental clean-up liabilities, and I think you could argue that the stock has done well to be down only 7% since that last article.

I like the prospects for Glatfelter to offset ongoing declines in uncoated freesheet volumes with greater volumes of engineered and specialty products. I also believe there is long-term upside from internal cost reduction efforts and an ongoing skew towards higher-value specialty products. Although the shares don't hold all that much appeal on a discounted cash flow basis, they are trading below 7x forward EBITDA and that's interesting given that I think the company can exceed 7% EBITDA growth over the next three to five years.

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Glatfelter Has To Do Better

Wednesday, June 10, 2015

Seeking Alpha: A Small Stumble For Neurocrine Biosciences Changes Little

The only biotechs that never report bad news are those lucky enough to be acquired early in their corporate lives or those run by inveterate liars that always manage to see "positive signals" in clinical data trainwrecks. Neurocrine Biosciences (NASDAQ:NBIX) has certainly had a few challenges in its past, but the news late Monday of a halt to the congenital adrenal hyperplasia program is really not the sort of news that should upset investors.

I do expect that some will regard this as an excuse to sell what has been a pretty strong stock (sometimes even professional investors need permission to dismount a winning horse). I also do acknowledge that Neurocrine needs to show a better track record of generating viable clinical candidates from its base R&D activities. All of that said, at most this looks like a $2 event to me and not a very good reason to exit a position ahead of far more significant data on its two lead programs later this year.

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A Small Stumble For Neurocrine Biosciences Changes Little

Seeking Alpha: Itochu Management's Unrealistic Goals Look Like A Real Obstacle

For some time now I had been thinking that Itochu (OTCPK:ITOCY) was a good value play on sector (Japanese trading companies) that is often overlooked as hopelessly unwieldy and uncommitted to shareholder value creation. In particular, I liked Itochu for its relatively lower exposure to natural resources (at least compared to Mitsui, Marubeni, and Mitsubishi) and its determination to pursue leadership positions in textiles, manufacturing, retailing, and food, with a particular focus on China.

This looks like I case where I should have gone with the conventional wisdom. While Itochu is indeed one of the most China-leveraged Japanese trading companies, I am concerned about the declines in earnings quality, management's strategic investment decisions, and their apparently unrealistic views concerning many aspects of the business. While the local shares have been quite strong over the past year (up more than 30%; while currency has reduced the gains to ADR shareholders to below 10%), and there is upside if Itochu can consistently deliver double-digit ROEs, I think it is time to call it a day with a company where I just can't share management's views on the best path forward.

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Itochu Management's Unrealistic Goals Look Like A Real Obstacle

Seeking Alpha: FLY In Friendlier Skies, But There's Work To Do

Relative to AerCap (NYSE:AER), I wasn't very bullish on FLY Leasing (NYSE:FLY) back in August of 2014 and the shares have been nothing special since then. While FLY's high dividend payout helps close some of the gap in terms of share price performance, FLY Leasing hasn't really stood out from an increasingly crowded field in aircraft leasing.

Past may not be prologue in this case. I believe management at FLY is making good decisions; selling older planes out of the portfolio, acquiring newer planes, more actively managing its lease expirations, and looking to drive down its cost of capital. I am concerned that there is a lot of capital coming into aircraft leasing and that it will ultimately push returns down closer to the cost of capital - that would be bad news for AerCap, but particularly bad news for FLY Leasing given its higher cost of capital. That said, FLY Leasing seems to be undervalued today and does offer quite a bit more upside from restructuring/self-improvement.

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FLY In Friendlier Skies, But There's Work To Do

Seeking Alpha: AerCap Making The Best Of A Good Situation

These are good days to be in the aircraft leasing business, and even if AerCap's (NYSE:AER) performance hasn't exactly set the world on fire since my last update it has at least beaten the market and its closest peer Air Lease (NYSE:AL).

Looking ahead, the numerous projections out there of a decade-plus of 5% annual global air passenger growth should be supportive of the leasing industry. That said, I do worry that high margins and low rates could lead to an influx of capital into the industry. What's more, I'd note that this is an industry that has never really shown an ability to generate positive economic returns across a full cycle. While I still believe that AerCap is undervalued, and one of the best-run lessors in the industry, I'd at least keep an eye on the entry of new players and the trends in margins and ROE across the sector.

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AerCap Making The Best Of A Good Situation

Seeking Alpha: WEX Offers A Long Runway Of Growth ... And Is Priced Accordingly

Figuring out the right price for growth is equal parts art, science, and voodoo and as close to a sure way to stir up comments as anything. If you're a momentum investor that doesn't care about the price you're paying for growth, WEX (NYSE:WEX) could have a lot to offer, as I do believe this payment process company still has a meaningful opportunity to gain share in its core U.S. fleet operations, to say nothing of the substantial opportunities in Europe, Asia, and Latin America and in other verticals like travel and healthcare.

For my part, though, I can't just buy a stock and trust that the growth will be there. Even with what I think are pretty bullish assumptions about future revenues and FCF generation (as well as ROE and EBITDA), about the best I can do is say that the growth opportunity here is reasonably priced. "Reasonably priced" with ample upside isn't a bad setup for a growth story, but I do expect these shares to be more volatile than normal.

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WEX Offers A Long Runway Of Growth ... And Is Priced Accordingly

Seeking Alpha: SABMiller Can Still Sell A Self-Improvement Story

The dominant question for SABMiller (OTCPK:SBMRY) and the shareholders of this large brewer remains that of whether or not Anheuser-Busch Inbev (NYSE:BUD) will bid for the company to create a global titan in beer. Although I can understand some of the appeal of such a deal (very complementary market exposures and compelling operating scale), I think there are so many obstacles in the way of a deal that it is no better than a "maybe" at this point.

Can SABMiller do well enough on its own merits to justify buying or holding the shares today? The best I can say is "maybe", as my base-case expectations for long-term volume and revenue growth and margin improvement suggest the shares aren't very cheap today. Then again, global staples often maintain higher multiples than would otherwise seem fair and SABMiller still has significant opportunities to drive higher margins and returns on capital and the company does have that attractive kicker of heavy leverage to emerging markets with below-average current consumption patterns.

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SABMiller Can Still Sell A Self-Improvement Story

Tuesday, June 9, 2015

Seeking Alpha: Currency And Competition Grinding On MTN Group

MTN Group (OTCPK:MTNOY) continues to be an underperforming stock for investors looking for exposure to Africa outside of mining or other natural resources. That the local shares are up a bit since my last update is no comfort at all to ADR holders, as ongoing depreciation of the South African rand has punished performance.

Operationally, I continue to like MTN Group's prospects, though I acknowledge that the company has to up its game in South Africa and faces a host of risks and uncertainties in Nigeria. While I think a long-term perspective can smooth these issues to some extent, and I continue to believe the shares are undervalued, MTN Group's need for both internal improvement and external stability puts in a category suitable only for high-risk investors.

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Currency And Competition Grinding On MTN Group

Seeking Alpha: Hurco Waiting On A European Recovery

As I have written before, Hurco's (NASDAQ:HURC) size and focus on high-spec machine tools makes it a little more challenging to track relative to large players like DMG Mori Seiki, Okuma, and so on. Hurco's business isn't driven as directly by large OEMs in industries like autos and aerospace, but the company is highly sensitive to exchange rates and the demand for manufacturing in countries like Germany and Italy. To that end, the significant moves in foreign currency and the lackluster recent economic performance of Germany have become bigger headwinds for this small industrial.

It's highly improbable that Hurco's business is going to shift meaningfully toward North America anytime soon and it is likewise improbable that this tiny, thinly-traded stock is going to attract much sell-side attention. That suggests that investors will have to have some patience to see this work out as an investment idea, but I believe Hurco is capable of generating long-term mid-to-high single-digit FCF growth through mid-single digit revenue growth and modest ongoing margin improvement. That still supports a fair value in the low-to-mid $40's, though the outlook for revenue growth in 2015 is such that it may be harder for the stock to make a lot of headway.

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Hurco Waiting On A European Recovery

Seeking Alpha: Can Lexicon Pharmaceuticals Make Any Progress In Diabetes On Safety?

Lexicon Pharmaceuticals (NASDAQ:LXRX) continues to languish (down 25% over the past year, but up almost 17% over the last six months) amid a hot biotech market as investors are paying very little attention to the company's carcinoid drug and largely writing off the dual SGLT-1/2 inhibitor sotagliflozin. That may yet prove to be a premature decision, though, as the company is moving into its Phase III program in Type 1 diabetes (whereas competing SGLT-2 drugs are approved for Type 2 diabetes, but used off-label in Type 1) and may have an emergent opportunity to stand out with its safety profile.

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Can Lexicon Pharmaceuticals Make Any Progress In Diabetes On Safety?

Seeking Alpha: Brookfield Asset Management's Fee Growth Bodes Well For The Future

If you want to torture yourself, try to build a detailed valuation model for Brookfield Asset Management (NYSE:BAM). I don't think there's much doubt that this firm is a premier fund manager in the world of real estate, power, infrastructure, and similar assets, but the process of estimating the cashflows from the publicly-traded LPs, the internally-managed funds, the directly-held assets, and the value of the private equity funds is challenging to say the least.

On a very simplistic level, I don't think it's entirely unreasonable to look at Brookfield Property Partners L.P. (NYSE:BPY), Brookfield Renewable Energy Partners L.P. (NYSE:BEP), and Brookfield Infrastructure Partners L.P. (NYSE:BIP), conclude that they are undervalued, and lean in the direction of assuming that Brookfield Asset Management is likewise undervalued. Going further and making some estimates and assumptions regarding the value of the asset management operations and unlisted assets, I believe that to be the case and that Brookfield is undervalued. What's more, I think the company is closing in on a point where its asset management operations are really about to take off and transform the perception of the company away from being a holding company and toward being an asset manager.

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Brookfield Asset Management's Fee Growth Bodes Well For The Future

Seeking Alpha: Multi-Color Stumbles A Bit, But Still Has Ample Room To Do Better

It has been a while since I've thought Multi-Color (NASDAQ:LABL) shares were truly undervalued, but I've been reluctant to sell out of a story with good underlying momentum and significant long-term share growth and margin leverage potential. Even with the 5% drop on Friday in response to fiscal fourth quarter earnings, the shares are up about 10% over the last six months and more than 70% over the last year - not a bad return on patience.

I continue to expect Multi-Color to modestly outgrow the industry on an organic basis and supplement that internal sales growth with additional M&A. The label industry remains extremely fragmented and while it does not require tremendous capital investment for long-term competition, I nevertheless believe that scale still matters and favors players like Multi-Color and CCL Industries (OTC:CCDBF). Two of the biggest opportunities for Multi-Color remain in improving operating margin and asset utilization, as both could unlock greater free cash flow production. As is, the shares look fairly valued to slightly undervalued.

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Multi-Color Stumbles A Bit, But Still Has Ample Room To Do Better

Monday, June 8, 2015

Seeking Alpha: Brookfield Infrastructure Looking At A World Of Possibilities

Infrastructure specialist Brookfield Infrastructure (NYSE:BIP) may not have the gaudiest recent track record - the shares are up almost 6% over the past year, and up about 8% since my last article - but the company has a good track record of efficiently generating cash flows from its investments and passing them along to investors as dividends. What's more, with many governments and emerging market corporations experiencing meaningful credit stress, Brookfield is looking to leverage its position as a high-quality buyer with a low cost of capital to add significant assets to the portfolio.

Modeling Brookfield Infrastructure is always going to require some guesswork about the amount of capital the company will deploy into acquisitions and growth, as well as the cost and form of that capital (including equity raises). That said, I believe management will succeed in generating a long term per-share distributable cash flow growth rate in the mid-single digits to high single digits. Discounted back, that suggests a fair value in the high $40's to low $50's and argues for serious consideration of these shares.

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Brookfield Infrastructure Looking At A World Of Possibilities

Sunday, June 7, 2015

Seeking Alpha: Macquarie Infrastructure Moves From Strength To Strength

I love high-quality "boring" infrastructure stories, as these companies can do very well for themselves by managing toll-taking operations that function as virtual monopolies. Macquarie Infrastructure (NYSE:MIC) has shown itself to be adept at both managing the operations it has and redeploying capital into new operations that generate incremental cash flow, and I'm not surprised that the shares are up about 15% from when I last wrote about them in the summer of 2014.

Up almost 40% over the past year and more than 160% over the past three years, I don't think these shares are the bargain they once were, but I think there's still a worthwhile long-term opportunity here. I have some concerns as to whether the shares can support a mid-teens forward EBITDA ratio over the long haul, but the company's incremental growth investments are coming at a 7x multiple, suggesting significant upside to new investments. What's more, Macquarie Infrastructure has access to capital that others don't and that could allow the company to pluck away assets from distressed players at attractive prices.

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Macquarie Infrastructure Moves From Strength To Strength

Seeking Alpha: Hartford Financial Still Has More To Give

Hartford Financial (NYSE:HIG) has the unenviable task of running off a multibillion-dollar portfolio of assets through a run-off operation that is unlikely to generate returns much above the mid-single digits. Even so, this excellent small commercial underwriter is on a path back to double-digit ROEs as strong underwriting results in commercial and personal P&C and aggressive capital management add value. If Hartford can get to 10% ROE in five years (and move closer to 12% over the long term), I think $45 is a fair price today. I'd also note that the Hartford is an appealing asset and its five-year performance may be moot as larger insurance companies ponder what to do with their surplus capital.

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Hartford Financial Still Has More To Give

Seeking Alpha: Endurance Specialty Is Getting Scale, But More Challenges As Well

Endurance Specialty (NYSE:ENH) chairman and CEO John Charman has made no secret of the fact that he believes Endurance needs more scale to be a truly competitive player in the evolving insurance and reinsurance markets. While Aspen (NYSE:AHL) rebuffed the company's takeover attempt, Montpelier Re (NYSE:MRH) put itself up for sale not long thereafter and the companies announced a merger on March 31 of this year.

While an acquisition of Aspen would have made more sense (at least superficially), the Montpelier deal should be accretive for Endurance on both earnings and ROE pretty much from day one. I'm a little concerned about the greater shift toward property catastrophe reinsurance, but it's not a transformative shift and it is one I believe Endurance can manage. What's more, Montpelier's Lloyds and Blue Capital assets may be a lot more valuable than the market currently projects. Valuing Endurance on the premise that the deal goes through suggests to me that the company could be more than 10% undervalued today, but there is going to be a "show me" process where management has to deliver on the proposed synergies to unlock the value.

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Endurance Specialty Is Getting Scale, But More Challenges As Well

Seeking Alpha: Everest Re Leaning Into The Wind

Even in the face of persistent double-digit declines in prop-cat reinsurance rates, Everest Re (NYSE:RE) shares have managed to gain another 13% since late September, outperforming rivals like Validus (NYSE:VR), RenRe (NYSE:RNR), Aspen (NYSE:AHL) and Endurance (NYSE:ENH). Investors remain concerned about the long-term returns on the business being written in the sector today, but Everest Re has continued to grow premiums at a strong rate and to report low combined ratios and solid underwriting profits.

There is a risk that the old rules about the reinsurance cycle no longer apply and that companies like Everest Re are looking at a prolonged stretch of single-digit ROEs that will fall below required returns. For its part, management believes they still have the opportunity to write attractive business and control risk, while also looking for growth in the primary insurance market. There is a considerably wider spread between best-case, base-case, and worst-case scenarios for reinsurers like Everest Re today than life insurers, P&C insurers, or mixed operations like Aspen. That said, if you believe that the company can generate long-term ROEs of 11% or higher, there is still upside here.

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Everest Re Leaning Into The Wind

Friday, June 5, 2015

Seeking Alpha: Allianz Less Robust On Growth, But Loaded On Quality

A year ago, I thought the shares of German insurance giant Allianz (OTCQX:AZSEY) (ALV.XE) were about 10% undervalued. The local shares have risen about 13% since that piece, but the stronger dollar has pushed that local return to a nearly 10% loss for the ADRs, and AXA (OTCQX:AXAHY), Aviva (NYSE:AV), and MetLife (NYSE:MET) have all done better for U.S. investors.

Absent a possible reversal in exchange rates, I'm not as bullish on Allianz at this point. Persistent low interest rates have hurt the profitability of the life insurance business and the P&C business may be challenged by the question of how to surpass already excellent results. I still like this company, and I've actually increased my fair value estimate on a constant currency basis, but it's harder to make a call that this is a must own until/unless rates turn up.

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Allianz Less Robust On Growth, But Loaded On Quality

Seeking Alpha: Argo Group Coming Along, But The Going's Tougher

Argo Group (NASDAQ:AGII) is taking a page from Aspen's (NYSE:AHL) book; trying to leverage strong core underwriting across a somewhat disjointed and sub-scale collection of operations. So far, it hasn't been a bad plan as the company has seen its shares climb more than 100% over the past three years, outdistancing larger players like Aspen, Allied World (NYSE:AWH), ACE (NYSE:ACE), and W. R. Berkley (NYSE:WRB) by rather healthy margins.

I am starting to wonder, though, if it is going to get harder for Argo to continue its path toward higher returns. The excess and surplus, specialty, and reinsurance markets have gotten a lot more challenging of late, with companies finding it more and more difficult to push higher rates - an important part of Argo's drive to write more profitable business upon renewal. I do still think that Argo can get its adjusted ROE above 10% over the next five years, and there is about $5/share of upside for every 1% improvement to long-term ROE, but the roughly 17% move since my last update has captured a lot of the undervaluation that I saw at the time.

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Argo Group Coming Along, But The Going's Tougher

Seeking Alpha: MetLife Muddling Through For Now

For all of the positives I can name about MetLife (NYSE:MET), only the pathetically low rate of return on money market funds keeps me from arguing that investors would have done better putting their cash there than in the shares of this leading life insurance company. I mentioned the risk of regulatory uncertainties weighing on the stock a year ago, but I underestimated the extent to which that would impact sentiment. Likewise, I had expected more action in interest rates by now, and MetLife sits with Prudential (NYSE:PRU), Lincoln National (NYSE:LNC), and AXA (OTCQX:AXAHY) in the part of the room that really needs to see higher rates to start performing better.

At the risk of making an "I wasn't wrong … just early!" call, I still do believe that MetLife shares are meaningfully undervalued today. I believe the company has done well in shifting its mix towards higher return products with lower capital requirements and I believe the shift toward more protection-oriented products has been a smart one. Additionally, I believe the company can do well both in emerging markets and with new annuity products that reduce the risk to the issuer. I've stretched out the timeline to MetLife achieving 12% ROE and have maintained a high discount rate to account for the regulatory uncertainty, but still believe fair value is in the mid-$60's today.

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MetLife Muddling Through For Now

Wednesday, June 3, 2015

Seeking Alpha: Separating The 'Coulds' And 'Woulds' At Genworth

It's been over a year since I wrote about Genworth (NYSE:GNW), and a lot has happened since. The roughly 50% drop tells you a lot of what you need to know about how things have gone, particularly as the "some reasons to worry" that I mentioned in regards to the company's reserve situation in long-term care exploded into a capital-destroying crisis. Along the way, management has lost a lot of the credibility that it once enjoyed and that's not a trivial detail for an insurance company.

There are a lot of options in front of Genworth that could at least theoretically improve the value. Restructuring the long-term care business could improve visibility and investor confidence, and there are some interesting options for the mortgage insurance businesses. All of that said, I'm worried that management believes it can just keep patching the holes as they appear and lacks the willingness to take a bigger swipe at restructuring the business for future profitability. Given that opinion, while I see meaningful potential value in a turned-around Genworth, I'm not inclined to take on the risk.

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Separating The 'Coulds' And 'Woulds' At Genworth

Seeking Alpha: AXA On The Right Track

When can a call be both right and wrong? When a significant move in foreign currency saps the strong performance of a company's shares on its home exchange and the ADR goes more or less nowhere. That is what has happened with AXA (OTCQX:AXAHY), as the shares of this global insurance giant have done quite well on the local market (up more than 25% since my last article) and better than peers/rivals like Allianz (OTCQX:AZSEY), Generali (OTCPK:ARZGY), Prudential Plc (NYSE:PUK), and Aviva (NYSE:AV), but the ADRs are basically flat after the significant move in the U.S. dollar-Euro exchange rate.

AXA is executing to plan and there is a lot to like about the company's operations. The company is successfully replacing risky (for them), capital-intensive products with profitable, less capital-intensive products and the company's P&C operations are doing well. The company's significant exposure to Asia is also helping, as these operations are contributing significant growth.

At current exchanges rates these shares look like an okay holding. The ADRs do look undervalued and the company pays a good dividend that is likely to increase in the coming years. If the dollar were to weaken, investors could recapture some of that "lost" performance but that is an inherently unpredictable call.

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AXA On The Right Track

Seeking Alpha: A Bigger, Better, But Less-Loved, Aviva

The past year has been a little unusual for Aviva (NYSE:AV). That the shares of this large European insurance company haven't performed well isn't so unusual, as Allianz (OTCQX:AZSEY), AXA (OTCQX:AXAHY), Prudential Plc (NYSE:PUK), and Legal & General (OTCPK:LGGNY) have all seen so-so results from their ADRs, due in no small part to adverse currency moves. What makes Aviva unusual is that the company undertook a sizable M&A transaction that significantly improved its capital position and should deliver meaningful revenue and cost synergies, but the market has been underwhelmed to say the least.

I understand the skepticism to a point. Euro insurance M&A hasn't often delivered the targeted synergies and in many cases it has led to a prolonged period of underperformance (has been the case with Aviva in the past). I think it's worth noting, though, that Aviva is led by a different team now and one that has done well with past cost-reduction efforts. I don't think a mid-teens ROE is an unreasonable goal for the new leader in U.K. life and protection, and these shares look as though they could be 20% undervalued today.

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A Bigger, Better, But Less-Loved, Aviva