Thursday, July 30, 2015

Seeking Alpha: Check Point Doesn't Need To Feel Insecure

The way things have been going lately, you'd think that Check Point Software Technologies (NASDAQ:CHKP) showed up to a Formula 1 race on a tandem bike. Check Point is certainly being outgrown by up-and-comers in security like Palo Alto (NYSE:PANW), Fortinet (NASDAQ:FTNT), and FireEye (NASDAQ:FEYE), and the shares have largely missed out on the hockey stick rise in security stock prices, but I wouldn't exactly call this leading firewall company chopped liver either.

I do believe that Check Point will hold more share in firewalls than many seem to think, and I think the company's fast-follower approach into areas like endpoint security do offer growth in the coming years. But to recycle that prior metaphor, talking about fair value in the context of software stocks can often feel like bringing a bike to a car race, and Check Point shares don't exactly jump out as shockingly undervalued on an absolute basis.

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Check Point Doesn't Need To Feel Insecure

Seeking Alpha: Advanced Energy Industries Looking For A New Start

The angst over the health/trajectory of semiconductor capital equipment orders hasn't hurt Advanced Energy Industries (NASDAQ:AEIS) any more (or any less) than most of its peers. Applied Materials (NASDAQ:AMAT) has been noticeably weak since my February piece on AEIS, due to the fallout of its aborted merger with TEL, but AEIS, MKS Instruments (NASDAQ:MKSI), Entegris (NASDAQ:ENTG), Lam Research (NASDAQ:LRCX) and ASML (NASDAQ:ASML) have all clustered around low-to-mid single-digit loses over that span.

Given how tied Advanced Energy Industries is, and will be, to the semiconductor industry, that's not an unreasonable performance. The company has a good track record and reputation in supplying the semi equipment market with power conversion systems, remote plasma sources, thermal instrumentation, and so on, but the fact remains that major equipment buyers like TSMC (NYSE:TSM) and Intel (NASDAQ:INTC) have generally been buying less than expected and guiding down with respect to their plans as development timelines stretch out and the fabs reuse older equipment to save money.

Looking ahead, I believe AEIS is making the right decision in cutting its losses in the inverter business. Likewise, I think management is on the right track in looking to expand its precision power business beyond the semiconductor industry and into areas like medical devices and aerospace/defense. The "new" AEIS will likely emerge as a better, more profitable company, but the current valuation seems to largely reflect that.

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Advanced Energy Industries Looking For A New Start

Seeking Alpha: Ingersoll-Rand: Good Exposures, But Not So Much Value

It has been a while since I've written on Ingersoll-Rand (NYSE:IR), in no small part because I haven't had a lot to say beyond reiterating that the company is following a more or less cogent restructuring plan and that its end-market exposures (non-residential construction and commercial vehicles) are broadly attractive. Now, though, the prospect of a sharper downturn in the industrial sector is threatening to undermine some of the progress.

Two years ago, I thought Ingersoll-Rand didn't look like a particular bargain, and the shares have risen about 16% since then - less than half the rise in the S&P 500 and well below the likes of Honeywell (NYSE:HON), Lennox (NYSE:LII), and Johnson Controls (NYSE:JCI). Dover (NYSE:DOV), too, had been an outperformer over much of that time until it was laid low by energy while Atlas Copco (OTCPK:ATLKY) shares have lagged in no small part because of its large mining exposure. Looking at Ingersoll-Rand today, I still don't see enough undervaluation to be truly interested in the shares.

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Ingersoll-Rand: Good Exposures, But Not So Much Value

Wednesday, July 29, 2015

Seeking Alpha: Stryker Seems Next In Line For A Big Deal

It's hard to find much to complain about with Stryker (NYSE:SYK). The shares aren't cheap, but then they weren't back in January and they've managed to tack on another 10%, making them one of the better performers in the group this year. I suppose I could complain that the company's solid revenue growth isn't unlocking a lot of margin leverage, but then this is a pretty efficiently run company from the off.

Looking ahead, I'm still not wild about the valuation, but I do acknowledge that Stryker has dry powder that it can deploy toward accretive M&A. I would be in no rush to sell Stryker if I owned it, but I generally like to see some discount to DCF-based or EV/rev-based fair value to make a new purchase, and I just don't see that here in Stryker's valuation.

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Stryker Seems Next In Line For A Big Deal

Seeking Alpha: Weatherford Slowly Changing The Tone

To be clear from the outset, Weatherford (NYSE:WFT) has given investors ample reason over the years to hate the management and have nothing to do with the stock. It's likewise entirely fair to say that a leader who presided over the making of an epic mess is rarely the person to lead the company out of it.

That said, I believe there is more than a little stubbornness out there regarding Weatherford and I believe that ignoring the cost and management improvements made by the company is a mistake. The current state of the North American onshore market is lousy, but I had already expected that, and I still believe that Weatherford shares ought to trade closer to the mid-teens. There is most definitely a real risk that the onshore market(s) stay weaker for longer, but I likewise believe there is an opportunity for a new and improved Weatherford to emerge as a viable new Top Three player in a market that wants one.

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Weatherford Slowly Changing The Tone

Seeking Alpha: Lincoln Electric Trying To Manage The Nearly Unmanageable

Between the well-telegraphed declines in oil/gas and shipbuilding and the emerging weakness in heavy manufacturing seen through the reports of companies like Kennametal (NYSE:KMT) and MSC Industrial (NYSE:MSM), the writing was on the wall for Lincoln Electric (NASDAQ:LECO). This well-run welding company is managing the downturn as best it can, but there's only so much the company can do when there is weakness on multiple fronts and little-to-no visibility regarding a turnaround.

Conditions can certainly get worse, but I would like to think that the shares already reflect a pretty unpleasant scenario. My base case fair value on the shares is around $67, but another 10% cut to 2015 and 2016 expectations would still suggest today's price is about 5% too low. That's not quite "heads I win; tails I don't lose", but it's close enough to have my bumping this name up my watch/buy list as short-term problems muddy the waters for a proven performer.

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Lincoln Electric Trying To Manage The Nearly Unmanageable

Seeking Alpha: Microsemi Executing Its Model To Good Effect

Going its own way seems to still be doing some good for Microsemi (NASDAQ:MSCC), as this consistently off-beat semiconductor company appears to be better-positioned than many of its rivals for the near term. With good leverage to relatively healthy commercial aerospace and defense end markets and modest exposure to weaker areas in industrial, PCs, or handsets, Microsemi should have a decent backdrop against which to continue driving long-promised margin improvements.

Although I don't personally value share buyback announcements all that highly, Microsemi has been improving its cash flow generation and continues to trade below what I believe to be its fair value. Given the stock's strong run of relative outperformance, though, the contrarian call may no longer be to prefer Microsemi, but rather to take another look at names like Qorvo (NASDAQ:QRVO), Atmel (NASDAQ:ATML), and Linear (NASDAQ:LLTC) that haven't done as well.

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Microsemi Executing Its Model To Good Effect

Seeking Alpha: FEMSA Continues To Play The Long Game

As a family-controlled operation, FEMSA (NYSE:FMX) management has the option to run the business with an exceptionally long-term focus and make trade-offs between short-term growing pains and long-term opportunities. To that end, recent ventures into fast food, pharmacies, and gas retail aren't going to do much to boost near-term valuation, but they support a long-term vision of FEMSA as a comprehensive play on the Mexican consumer across multiple facets of their lives.

The near-term performance of FEMSA's ADRs is certainly tied to the performance of the Mexican peso, and that's not a good thing at the moment. Nevertheless, I believe these shares now trade at a double-digit discount to fair value and offer a good option for investors looking to gain exposure to the Mexican consumer.

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FEMSA Continues To Play The Long Game

Tuesday, July 28, 2015

Seeking Alpha: Cameron Coming Through In The Pinch

During this steep downturn in the energy space, Cameron (NYSE:CAM) has stepped up in terms of operating performance, market share, and order flow. That has not gone unnoticed, as the shares have sold off less sharply than those of National Oilwell Varco (NYSE:NOV), FMC Technologies (NYSE:FTI), Dril-Quip (NYSE:DRQ), and Forum Energy Technologies (NYSE:FET). Not only is the company's OneSubsea venture with Schlumberger (NYSE:SLB) really coming into its own, but also Cameron seems to be gaining share in markets like surface equipment.

Whether or not Cameron is a good stock to consider today depends in large part on your outlook for the energy sector. If you believe the major service companies that activity levels have bottomed in the North American onshore market and that the offshore markets will come back in another two or three years, Cameron should do well. I do believe that the next couple of years will be difficult in markets like drilling equipment, but modeling this as a three to four year recovery story still suggests upside toward $60 per share.

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Cameron Coming Through In The Pinch

Seeking Alpha: Honeywell And Melrose Tango For Mutual Benefit

A week ago, I wrote that Honeywell (NYSE:HON) had been quieter than most people expected with respect to M&A, and that automation/controls could be an area where the company would want to look. A week before that I had written that Melrose (OTC:MLSPF) (MRO.L) was likely looking to sell its Elster business (in whole or in pieces), return some cash to shareholders, and then move on to its next turnaround opportunity.

In a peanut butter-meets-chocolate moment, the two companies got together and made both of those calls come true (more or less). Honeywell and Melrose announced Tuesday morning that the two companies had reached an agreement wherein Honeywell will acquire Melrose's Elster business in its entirety (and including pension obligations) for about $5.1 billion. This is a very good deal for Melrose and its shareholders, and management will likely move quickly to share the proceeds and identify the next target. For Honeywell, too, I believe this is a good deal and one that could open interesting doors down the road.

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Honeywell And Melrose Tango For Mutual Benefit

Seeking Alpha: With Minimal Guidance, Ultratech Left Groping In The Dark

The last year hasn't been particularly kind to most semiconductor equipment companies, but Ultratech (NASDAQ:UTEK) has fared among the worst as the company has come up far short of the expectations that the company's laser spike annealing tools would play a significant role in the migration to 14nm/16nm FinFET chips at major manufacturers like TSMC (NYSE:TSM), Intel (NASDAQ:INTC), and Samsung. While emerging opportunities in advanced packaging, inspection, and atomic layer deposition take away a little bit of the sting, it hasn't been nearly enough to maintain the prior outlook.

Management hasn't been much help, as the guidance on the last couple of calls really hasn't shed much light on the outlook for the company's tools. I do not believe that management is misleading or withholding information from investors, but the lack of visibility in the market is a definite risk factor. So too is the risk that the company has lost enough share to companies like Screen Holdings (OTC:DINRY) and Mattson (NASDAQ:MTSN) that it threatens the basic thesis that Ultratech's tools offer much-needed advantages in performance.

There is a chance that Ultratech can support a higher valuation largely on the basis of its opportunities in advanced packaging, and the company's cash-rich balance sheet largely takes survivability off the table as an issue. Unfortunately, the lack of traction and visibility in thermal processing makes this more and more of a gamble/speculation than a real investment.

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With Minimal Guidance, Ultratech Left Groping In The Dark

Seeking Alpha: ABB Muddling Through Amidst Ample Skepticism

Swiss automation and power product company ABB (NYSE:ABB) has plenty of doubters and skeptics out there, and I don't think second-quarter results are going to be enough to bring them over to the bull side. The company should get credit for delivering a better result than was expected, but that has to be tempered by the fact that expectations have been heading lower with worries about demand in energy-related process automation and a slow bottoming out of the power end markets.

I'm more bullish on ABB's opportunity to turn around the power businesses and continue to deliver growth in automation through new opportunities like human-safe robots, smart buildings, and so on. The company lacks Rockwell's (NYSE:ROK) leverage to higher-value software and controls, but then it comes at a lower valuation and it still has balance sheet flexibility to add to its capabilities in those areas. ABB is a more of a turnaround story than a growth story, and on that basis, I still see some value here.

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ABB Muddling Through Amidst Ample Skepticism

Monday, July 27, 2015

Seeking Alpha: 3M's High Multiple Likely Magnifying The Disappointment

For some time now, it has been very challenging to call 3M (NYSE:MMM) a bargain on the basis of its probable future cash flow streams. Investors were willing to pay up for 3M's stability and strong margins, but a somewhat lackluster second quarter seems to have market participants reconsidering whether the company deserves that premium.

As I have said in the past, I'm willing to pay up for quality stories like 3M, but I'm not going to argue that you have to own this stock when Honeywell (NYSE:HON) and General Electric (NYSE:GE) appear to offer better relative value. I still think there are arguments for owning 3M in portfolios oriented for long-term performance, but second-quarter results should serve as a reminder that even a great company like MMM isn't shielded from short-term performance and market exposure worries.

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3M's High Multiple Likely Magnifying The Disappointment

Seeking Alpha: Everything's Coming Up Roches

Given the hope and hype surrounding cancer immunotherapy/immuno-oncology (or IO), it almost seems anticlimactic when a Big Pharma company talks about earnings or drugs outside of the IO space. Roche (OTCQX:RHHBY) posted good results for the first half of 2015 and the company has recently reported some very encouraging data from drugs outside its core oncology franchise - a welcome respite from what had been a litany of failure that left the company's pipeline overly dependent upon oncology.

Roche doesn't look remarkably cheap right now, but there's a lot of uncertainty in some important value drivers. Depending upon what happens with pivotal studies, the oncology markets that Roche is targeting with its anti-PD-L1 antibody atezolizumab could be worth twice as much as I currently expect, though there will most definitely be fierce competition from Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), AstraZeneca (NYSE:AZN), and others. A more bullish assessment of the size of these end-markets in 2025 could take my target above $40, but I'm content to own Roche on the expectation of high single-digit to low double-digit annual returns.

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Everything's Coming Up Roches

Seeking Alpha: Entellus Medical's Valuation Doesn't Leave A Lot Of Breathing Room

Entellus Medical (NASDAQ:ENTL) checks a few attractive boxes within the med-tech space - namely, a less invasive procedure that can be performed in a physician's office instead of a hospital. Entellus offers an appealing solution to the balloon sinus dilation (or balloon sinuplasty) market, with a system that is smaller, more flexible, and less complex than rival systems. That said, key questions remain as to the true market potential for office-based balloon sinuplasty and the willingness of ENT specialists to adopt this technique (and Entellus's tools).

I have some issues with this as an investment idea, though. First, there's still ample controversy regarding the proper role of balloon sinuplasty within the treatment of chronic sinusitis. Second, Entellus is a small player competing with some very large rivals. Third, even if Entellus dominates the office market, I don't see enough revenue or profit potential to make the valuation truly compelling at this price.

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Entellus Medical's Valuation Doesn't Leave A Lot Of Breathing Room

Thursday, July 23, 2015

Seeking Alpha: How Do You Solve A Problem Like Qualcomm?

Referencing a 56-year old song for the title of an article about a tech company is admittedly bizarre, but then so too is Qualcomm's (NASDAQ:QCOM) situation. The acknowledged leader in handset baseband and app processors, the stock is down about 25% over the past year, as weaker handset sales momentum and weaker margins have really started to bite hard.

Qualcomm is in the enviable situation of having a pretty darn good business in hand, as well as ample cash (and cash flow) to fund complementary or expansionary M&A. The question is whether the company has the courage (and/or vision) to risk the short-term wrath of investors in order to improve the long-term outlook. Although the company's valuation does stand out in an otherwise expensive crowd, I'm not so proud that I won't admit that I really don't know what to do about the shares.

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How Do You Solve A Problem Like Qualcomm?

Seeking Alpha: EMC Corp Sticking To Its Guns

Right or wrong, EMC (NYSE:EMC) is committed to its path of evolving into a leading provider of "IT-as-a-service". Likewise, the company remains committed to an operating structure that is going to continue to frustrate some investors, as it believes (correctly, in my view) that VMware (NYSE:VMW), Pivotal, and other components are vital to its future strategy.

The problem is that EMC is not delivering all that much right now. Reported margins are unimpressive and the company is on a downward slide in several productivity and inefficiency measurements. I believe that this is a product of the company investing substantial sums today to generate revenue and profits down the line, but I won't deny that there's a strong element of "You gotta just trust me on this..." that does not make for an airtight investment thesis. I continue to believe that EMC is undervalued on relatively modest expectations, but it increasingly looks to me that EMC is at least a year away from being able to deliver the sort of results that will quiet critics and encourage its long-term shareholders.

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EMC Corp Sticking To Its Guns

Seeking Alpha: Fifth Third Catches Up To The Pack

Like Wilshire Bancorp (NASDAQ:WIBC), I thought Fifth Third (NASDAQ:FITB) offered investors some interesting and attractive value back in January of this year. Like in the case of Wilshire, I thought that investors would have to have some patience to see the Street come around and recognize that value given a less-exciting outlook for loan growth and interest spread improvement. And like in the case of Wilshire, I was wrong about the timing - the shares rose almost 25% since that piece, very nearly making it the best performer in its weight class (just edged out by Key (NYSE:KEY), but Regions Financial (NYSE:RF) is very close behind).

I'd just as soon see my performance come sooner than later, so I'm not complaining that Fifth Third has gotten the recognition I thought it was due. Looking ahead, though, here again we have another story where the future returns are likely to be more traditionally "bank-like", with future rate hikes, expansion of fee-generating businesses, and expense reductions as the primary performance drivers. Given better valuation I'd lean more toward U.S. Bancorp (NYSE:USB) today with new money (or banks outside the U.S.), but Fifth Third isn't overvalued today and can still generate a decent return from here.

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Fifth Third Catches Up To The Pack

Seeking Alpha: The Going's Tough, But Steel Dynamics Still Going

As Chinese steel mills continue to throw steel into the export market, producers like Steel Dynamics (NASDAQ:STLD), Nucor (NYSE:NUE), and ArcelorMittal (NYSE:MT) are finding it difficult to make much headway with their own operations. I liked Steel Dynamics on a relative and absolute basis back in February, and I'm happy to say that the shares have risen more than 10% since then - beating out other producers' stocks by a pretty healthy margin (Nucor down about 4%, ArcelorMittal down about 7%, and Gerdau (NYSE:GGB) down more than 40%).

I believe Steel Dynamics is faring better due to its better free cash flow generation profile, its stronger EBITDA/ton, its decision to curtail Mesabi Nugget, and its leverage to opportunities in fabrication and higher-value products like rail. I do still believe the shares are undervalued, but there's no shortage of cheap-looking steel stocks and it is hard to see how steel prices will improve when low coal and iron ore prices, not to mention government subsidies, continue to encourage Chinese mills to export more and more steel.

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The Going's Tough, But Steel Dynamics Still Going

Seeking Alpha: Dover On The Defensive

I closed my last article on Dover (NYSE:DOV) with the admonition that "how much worse can it get?" are maybe the most dangerous words in investing (although "it's different this time" is a top contender). Dover hasn't been a disaster since then; the shares are down about 8% and on par with Emerson (NYSE:EMR), but investors are right to wonder why management has apparently misestimated the scope of the energy decline. What's more, it would seem that opportunities like "close the case" in refrigeration aren't quite what they were cracked up to be.

I don't think that Dover is a bad or broken company, but I do think it is at least fair to ask whether this is a particularly well-run conglomerate. Valuation isn't demanding at this level, but energy could be weaker for longer, and there are some areas of concern in multiple industrial markets. Patient investors will probably do alright with Dover, but General Electric (NYSE:GE), Eaton (NYSE:ETN), and Honeywell (NYSE:HON) all seem undervalued to varying degrees and are at least worth a look before committing to Dover.

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Dover On The Defensive

Seeking Alpha: Mortgages And Rates Can Drive Growth, But Wilshire Bancorp Has Had A Good Run

I've been bullish on the value potential of Wilshire Bancorp (NASDAQ:WIBC) for some time, but thought that investors would have to be patient to see the real value come through. I suppose another six months is exceedingly patient for some investors, but I was surprised to see the strong 30%-plus move in the shares since my last article. That performance beats peers like Hanmi (NASDAQ:HAFC) and BBCN (NASDAQ:BBCN) by a healthy margin, as well as the KBW Regional Banking (NYSEARCA:KRE) index.

At this point, I'm less bullish on Wilshire Bancorp shares. I like the bank's move into residential mortgage originations, as I believe this will be a solid fee/gains-generating opportunity. I also like the company's leverage to higher rates and further expansion to Korean-American communities outside of its core Southern California market. All of that said, I think the risk and potential reward are in much closer balance now, and it's no longer as appealing for value hounds in the banking sector.

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Mortgages And Rates Can Drive Growth, But Wilshire Bancorp Has Had A Good Run

Seeking Alpha: SKF's Erosion Is Cause For Concern

Bearings are virtually ubiquitous in manufacturing and transportation, so I don't believe it is a stretch to say that Sweden's SKF (OTCPK:SKFRY) can be an invaluable barometer of early-cycle trends. That makes the company's ongoing erosion in organic growth worrisome, even allowing for the possibility of company-specific issues playing an increasing role.

SKF's new CEO seems to be taking the company in a disappointingly less-open direction, and the market really hasn't gotten much specificity regarding price/mix, the restructuring plans for the automotive segment, nor the ongoing cost reduction initiatives. That might not bother me as much if the shares were a bargain, but I don't see a lot of reason to lean toward giving a benefit of the doubt right now.

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SKF's Erosion Is Cause For Concern

Seeking Alpha: General Electric On A Better Path, But Not Yet Priced Accordingly

Investors certainly could have done worse than buy into General Electric's (NYSE:GE) turnaround prospects three years ago, as companies like Emerson (NYSE:EMR) and Siemens (OTCPK:SIEGY) ably demonstrate. Then again, a look at Honeywell (NYSE:HON), Rockwell (NYSE:ROK), or 3M (NYSE:MMM) likewise demonstrates that General Electric still hasn't regained all of its luster in the eyes of many investors.

It has been about three years since I last wrote about General Electric for Seeking Alpha, and quite a lot has changed. Management has moved from "right-sizing" GE Capital to significantly shrinking the operation, while significantly increasing its commitment to power and aviation as long-term core markets. The valuation on these shares doesn't seem to fully reflect the ongoing improvements in the business and while I can understand hesitancy to invest in a business with sizable leverage to power generation and oil/gas (and possibly some interest in mining) and little leverage to auto/truck or non-residential construction, GE still looks like one of the more undervalued industrial names today.

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General Electric On A Better Path, But Not Yet Priced Accordingly

Seeking Alpha: Komatsu Looking For A Foothold

Six months ago, I thought investors could afford to wait on buying into Komatsu (OTCPK:KMTUY) (6301.TO), as this Japanese manufacturer of construction and mining equipment was likely looking at a multiyear process of demand repair. I don't think investors have really missed out on much - the roughly 8% drop in the ADRs since then is not catastrophic (certainly not relative to Joy Global's (NYSE:JOY) 31% drop), but investors would have done better in Caterpillar (NYSE:CAT), Volvo (OTCPK:VOLVY), Terex (NYSE:TEX) or by avoiding the space altogether.

Looking ahead, there's arguably a little more value in the shares but the outlook still isn't promising. There's a real threat that U.S. equipment demand isn't going to get much better and that growth in Europe won't offset weakness in Asia and particularly China and Japan. Komatsu does have an opportunity to stand out on a relative basis with its automation initiatives and internal cost reductions, but I'm not sure there's enough upside to make the wait a comfortable one.

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Komatsu Looking For A Foothold

Seeking Alpha: Amicus Fairly Rewarded For Substantial Progress

Amicus Therapeutics (NASDAQ:FOLD) is shaping up as a positive example of what happens when patience is matched with good underlying science. There have definitely been some large potholes along the way, including accusations that the company was playing fast and loose with post-hoc analysis, but the underlying idea that Fabry disease is a heterogenous disease and that Galafold (migalastat) can help some, but not all, of those patients as a monotherapy seems to have ultimately won the day.

Although these shares don't look particularly cheap today, there are still value-creating opportunities in front of the company. Actual approval should de-risk the valuation and final pricing of the drug could be a value-driver as well. Amicus's pipeline behind Galafold monotherapy isn't particularly mature, but the opportunities to leverage Galafold into combination therapies and advance additional rare disease treatments into the clinic are potential value drivers down the road.

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Amicus Fairly Rewarded For Substantial Progress 

Tuesday, July 21, 2015

Seeking Alpha: Honeywell Checking Almost All Of The Right Boxes

There's an interesting dichotomy with a lot of industrial stocks these days - the stereotypically bullish sell-side is concerned that demand is going to start fading (and take margin leverage with it), while the valuations would seem to reflect more of a "what, me worry?" attitude on the part of owners.

For its part, Honeywell (NYSE:HON) has continued to execute well and there is still a credible forward-looking story for margins and M&A. What's more, Honeywell has pretty attractive leverage to the more attractive industrial markets today and relatively low leverage to the less attractive sub-sectors. Valuation could be a little better, but that Honeywell might be cheap at all is somewhat surprising to me and there still may be some room left to run with this name (not to mention an attractive long-term angle for more patient investors).

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Honeywell Checking Almost All Of The Right Boxes

Seeking Alpha: U.S. Bancorp Standing Out A Bit On Value

U.S. Bancorp (NYSE:USB) has done alright in the six months since I last reviewed this large U.S. bank. The shares are up about 11%, which puts it on par with Wells Fargo (NYSE:WFC), but a little behind BB&T (NYSE:BBT), Fifth Third (NASDAQ:FITB), and PNC Financial (NYSE:PNC). As is the case for most of the large U.S. banks, there's nothing particularly wrong with the company today but it is tougher to drive growth in a market where lending competition is heating up and rates are still pretty cool.

On a relative basis, U.S. Bancorp is starting to look a bit like a bargain, but I would note that solid lending growth is a little more important to the value here than it is for some of the peer group. Over the long term, I continue to believe that U.S. Bancorp has a proven model that can drive above-average returns and while I think the valuation of U.S. banks has gotten to a point where future returns are likely to be unexciting (not bad, just unexciting), this is still a credible long-term holding.

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U.S. Bancorp Standing Out A Bit On Value

Seeking Alpha: PNC Financial Doing Enough In A 'Good Enough Is Good Enough' Environment

Nobody expected this to be a banner quarter for large banks, and with the likes of Wells Fargo (NYSE:WFC), BB&T (NYSE:BBT), U.S. Bancorp (NYSE:USB), and PNC Financial (NYSE:PNC) now having reported, it seems safe to say that it hasn't been. Sluggish economic performance in the U.S., not to mention ample competition, is keeping a lid on loan demand and rates, and most banks just don't have enough dry powder in their fee businesses or expense reduction plans to build strong growth.

I like PNC well enough back in January, and the shares are up about 17% since then - more or less matching Fifth Third (NASDAQ:FITB) and outperforming BB&T, U.S. Bancorp, and Wells Fargo. I don't see many obvious bargains in larger U.S. banks, but with the recent run of performance of PNC, these shares look a little less of a bargain on a relative basis. From here on, this looks like a long-term value accretion story - if you're comfortable with that, hold what you have. If you're looking for more dramatic outperformance, I'm not sure this is the name for you.

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PNC Financial Doing Enough In A 'Good Enough Is Good Enough' Environment

Monday, July 20, 2015

Seeking Alpha: Alcoa Trying To Find The Path To A Better Neighborhood

What do you do when your neighbors are committed arsonists who know that they don't have to face the full costs and consequences of their actions? That may be rather extreme and hyperbolic, but it's how I've started to think about Alcoa (NYSE:AA). I really like Alcoa's progress in reducing its cost structure , shutting down higher-cost capacity, and leveraging itself more toward downstream higher value-add applications, but a lot of the progress the company has made has been undone by Chinese producers willing to produce at uneconomic standalone prices due to input cost supports from the Chinese governments.

I think there's an argument to be made that Alcoa ought to trade closer to $16 to $17 today, but just a few minor model adjustments can drop the fair value down to $10 or lower. Alcoa is well-positioned to play a more prominent role in the aerospace cycle, but the company's balance sheet likely restricts the amount (or at least the pace) of transformation from this point and other drivers like increased use of aluminum in auto production aren't certain.

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Alcoa Trying To Find The Path To A Better Neighborhood

Seeking Alpha: Atlas Copco's Frustrating Quality-Value Conundrum

I will grudgingly accept that it sometimes makes sense for investors to pay up for quality, but it is still a hard pill to swallow at times. In the case of Atlas Copco (OTCPK:ATLKY), I can't feel too bad about calling them a little pricey back in February, as the shares fell more than 10% from that point until a strong rebound after second quarter erased a chunk of that underperformance.

Atlas Copco remains a very good company, with leading positions in compressors (used throughout manufacturing and many other end markets), underground mining equipment, and certain segments of the industrial tool and construction equipment markets. What's more, margins are solid and the company has made a point of emphasizing its parts and aftermarket service businesses. The hang-up for me remains price, as Atlas Copco's quality has thus far kept the shares from selling off all that much.

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Atlas Copco's Frustrating Quality-Value Conundrum

Saturday, July 18, 2015

Seeking Alpha: BB&T Not Content To Just Wait For Better Rates

On the whole, most of the larger banks in the U.S. are playing a waiting game - they're competing for growth where they can, particularly in commercial lending, but largely sitting tight in the hope of a more profitable yield curve in the quarters ahead. That hasn't been BB&T's (NYSE:BBT) approach, as this super-regional has not only been looking to the M&A market to find good returns on capital, but is also actively reconfiguring its loan book.

I do still expect BB&T's efforts to lead to ROEs in the low double-digits in a few years, and I believe BB&T is one of the few larger banks with meaningful capacity to be active on the M&A front (or at least in the banking space). Like most other quality banks, including U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC), this potential is not lost on the Street and the shares aren't a striking bargain. I believe that BB&T is still a solid holding, but investors need to calibrate their expectations back to more normalized levels for bank stocks and not expect significant market outperformance.

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BB&T Not Content To Just Wait For Better Rates

Seeking Alpha: Monsanto: Changing With The Times, Or Losing Focus?

Agribusiness giant Monsanto (NYSE:MON) is no stranger to controversy, and I can't imagine that the company's aggressive attempts to bring Syngenta (NYSE:SYT) to the bargaining table are going to ease concerns. In addition to worries about antitrust, divestitures, and synergies, there is at least an argument to be explored that Monsanto's shift away from a reliance on seeds and traits is part of a wider issue of the company losing focus on what made it such a winner in the ag space.

I don't really share the "losing focus" concern, but I do think Monsanto's interest in Syngenta, its Climate Corp business, and its ventures into biologics and RNAi may reflect a growing need for the major players in agriculture to touch multiple parts of the value chain to maximize their value-add.

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Monsanto: Changing With The Times, Or Losing Focus?

Seeking Alpha: Fortress T & I : One Of The Newest Infrastructure Options

Infrastructure investing is a reasonably hot space now, and one of the end results is more investment options for the regular investor. Fortress Transportation and Infrastructure (NYSE:FTAI) isn't a brand new company, and the investment team behind is most definitely not new to infrastructure investing, but it is a newer kid on the block, and its recent IPO gives the company more financial ammunition to build its investment portfolio.

Relative to Brookfield Infrastructure (NYSE:BIP) and Macquarie Infrastructure (NYSE:MIC), I think there's more risk here. The larger pool of uncommitted capital makes it quite a bit harder to model future revenues and cash flows, and the company's involvement in offshore energy and crude terminaling seems to me to carry more market and execution risk. That said, a mid-to-high teens return on investments (at the lower end of management's target) would work back to a fair value of around $21 today with a mid-single-digit yield in the same ballpark as BIP and MIC.

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Fortress T & I : One Of The Newest Infrastructure Options

Seeking Alpha: First Cash Financial Trying To Grind It Out

However bright First Cash Financial's (NASDAQ:FCFS) future may be, the here and now remains challenging. While the adverse moves in the Mexican peso are outside of the company's control and arguably not so significant long term (as the company doesn't rely on repatriating that cash), the ongoing weakness in the U.S. retail operations is a concern, as is the weakness in loan growth in Mexico.

Tempering my disappointment is the fact that I was already factoring a lot of this into my model. I'm looking for high single-digit long-term revenue growth and mid-teens free cash flow growth on the basis of growth potential in Mexico and consolidation in the U.S., but I'm expecting the next year or two to remain challenging. I continue to believe that fair value for these shares is in the high $50s, but the short-term moves are likely to be dominated by moves in the peso.

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First Cash Financial Trying To Grind It Out

Seeking Alpha: Going Its Own Way Has Been Good For Rockwell Automation

There are a lot of things about how Rockwell Automation (NYSE:ROK) runs its business that stand out as different from the likes of ABB (NYSE:ABB), Siemens (OTCPK:SIEGY), Emerson (NYSE:EMR), and Honeywell (NYSE:HON), but it's hard to argue with the results. A strong position in software and controls and a good operating structure have supported attractive margins and returns on capital, while a disciplined sense of what the company is about seems to lead the company away from value-destroying empire building. Looking at the shares, Rockwell lags only Honeywell over the last year and five years and far surpasses ABB, Siemens, and Emerson, and I believe you could argue that Honeywell's share price performance is not all that tied to its automation business.

I have a lot of confidence in the thesis that Rockwell Automation is a high-quality automation company, but I'm not as confident that the shares are a bargain today. I don't necessarily buy into the "peak margin" idea and I believe Rockwell's exposure to less-cyclical markets like consumer products is a positive, but it's tough to get the numbers to work. That said, Rockwell remains an appealing acquisition candidate as well as potential acquirer in its own right and M&A activity could drive more value.

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Going Its Own Way Has Been Good For Rockwell Automation

Seeking Alpha: Xylem May Yet Be Better Than It Seems

It has been more than two years since I've publicly updated my thoughts on Xylem (NYSE:XYL). Back in early 2013, I thought that the company looked like a pretty typical example of an industrial that didn't immediately pop out as a bargain, but where I nevertheless expected further gains. That forecast has sort of worked out; I say "sort of" because although the shares are up about a third since that article, most of the progress was in the last quarter of 2013 and the shares have spent most of the rest of that time trading around the mid-$30s.

I think Xylem has made a lot of progress under its current CEO in fixing its operating structure and improving its margins. With that progress, it sounds as though the company is back on the hunt for acquisitions. The "but" is that the water market really doesn't seem to be what a lot of investors have long thought it was/would be. There's a long-term steady growth opportunity from maintenance and replacement and urbanization in emerging markets, but water isn't the municipal priority that some investors want to believe it to be, and strategic buyers have generally undervalued pumps (XYL's core business) relative to filtration, desalination, and other product categories.

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Xylem May Yet Be Better Than It Seems

Thursday, July 16, 2015

Seeking Alpha: Global Payments Amply Rewarded For Solid Growth Traits

Investors are definitely excited about the long-term potential of companies tied into non-cash payment systems and processing. Between Vantiv (NYSE:VNTV), Heartland Payment (NYSE:HPY), and Global Payments (NYSE:GPN), Vantiv is the laggard in having appreciated "only" 15% or so over the last year. Global Payments has maintained a more torrid pace, rising 45% over the last year and another 25% since my last update on the company.

I continue to be a little surprised at the extent to which Global Payments continues to identify opportunities to build its revenue base, its competitive positioning, and its long-term margin structure. I'm a little more surprised at the extent to which the Street seems more than happy to continue paying a high price for those improvements. The market seems to already be discounting 20% long-term annualized free cash flow growth, and that seems like a steep price when rivals like JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and U.S. Bancorp (NYSE:USB) not only possess competitive scale in the acquiring/processing markets but are looking to non-banking markets like this as a way to offset sluggish prospects in their core banking operations.

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Global Payments Amply Rewarded For Solid Growth Traits

Seeking Alpha: Fastenal Caught Up In The Distributor Slowdown

When your business revolves around supplying manufacturing and construction companies with (literally) nuts and bolts, your fate is always going to be tied to the underlying health of the manufacturing sector. That's a problem for Fastenal (NASDAQ:FAST), as well as other industrial MRO distributors like MSC Industrial (NYSE:MSM), Grainger (NYSE:GWW), and Applied Industrial Technologies (NYSE:AIT), as various metrics of industrial and manufacturing activity have weakened in response to a softer export market, a weak domestic energy market, and still-sluggish construction activity.

Pricing power seems to be almost non-existent in the distributor space right now, and that's going to continue to pressure gross margin. Fastenal has done a good job of offsetting this with tight expense management elsewhere in the business, but nothing will help as much as a solid upturn in underlying manufacturing and construction activity. As for the shares, they have long carried a premium due to the company's above-average growth, but they haven't really outperformed MSC Industrial by all that much over the last five years and they've actually underperformed over the last three (and both have underperformed Grainger and AIT). I still don't like the price today and would rather play an industrial recovery through other names.

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Fastenal Caught Up In The Distributor Slowdown

Seeking Alpha: Melrose A Tough-To-Value 'Buy And Hope' Story

I'll concede from the get-go that valuation is never an easy or foolproof exercise; the best an investor can hope to do is make some reasonable assumptions and estimates and respond appropriately as new data come in. There are cases, though, where the valuation difficulty level is well above average, and I believe Melrose (OTC:MLSPF, MRO.L) is one such example.

Management here has a well-established "buy, improve, sell" model, but investors really have no choice but to make some very broad estimates (or guesses, really) with respect to what future acquisition activity will look like. In my mind, that makes this more of a "buy-and-hope" type of stock. I don't mean that to denigrate management in any way, nor cast aspirations on its ability to generate value by identifying underperforming assets that it can acquire and improve. What I do mean, though, is that this value creation exercise is integral to the value of these shares, and without a firm sense of what Melrose will buy, there is a great deal of uncertainty in the valuation today.

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Melrose A Tough-To-Value 'Buy And Hope' Story

Seeking Alpha: Laird's Business Is Attractive, But The Valuation Is Less So

All things considered, I think a company leveraged to growth in high-end consumer devices, wireless communication, wired autos, and automation is sitting at an attractive intersection of revenue growth potential and pay-for-performance margin leverage. Britain's Laird (OTC:LAIRY, LRD.L) is such a company, with a strong presence in electromagnetic interference and thermal shielding, as well as telematics and antenna systems. What's more, I believe management's focus on R&D-driven sales growth will pay dividends in terms of sustainable market share and margins, and there is ample room for improvement in free cash flow generation.

The "but" is that the stock's nearly 40% move over the last year and nearly 100% move over the last two years would seem to capture a lot of these positive attributes. The company is small enough to be an acquisition target, and there is certainly upside potential from automation, auto OEMs, healthcare, and IoT, but I wouldn't pay just any price for those opportunities.

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Laird's Business Is Attractive, But The Valuation Is Less So

Wednesday, July 15, 2015

Seeking Alpha: Wells Fargo Managing Through Low Growth

Based off of the results posted Tuesday by JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), this is shaping up as another low-to-no growth quarter for the larger banks. Low rates are offsetting most of the benefits of loan growth, and net interest leverage is coming more from shrinking the balance sheet and reducing excess deposits, while expense reduction is not really driving strong profit growth.

Wells Fargo needs higher rates and/or a stronger economy to really thrive, but I think the bank is well-placed for the realities of the market today. It is far less complex than JPMorgan, Citi (NYSE:C), and Bank of America (NYSE:BAC) and that will reduce its capital requirements, but it is large enough to benefit from significant economies of scale in marketing and distribution (cross-selling and the like). While I like the business and have no issues with Wells Fargo as a core holding, the valuation doesn't really argue for it as a must-buy today.

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Wells Fargo Managing Through Low Growth

Seeking Alpha: Receptos Bows Out

The Receptos (NASDAQ:RCPT) story, at least as an independent company, looks as though its coming to a graceful end for shareholders. Rumors of M&A interest have swirled around this biotech for some time now, and rumor became fact on Tuesday when Celgene (NASDAQ:CELG) announced that it had reached an agreement to acquire the company for $232 per share in cash.

Celgene is offering a fair price and you don't often see bidding wars for publicly traded biotechs. "Don't often" is not the same as never, though, and I wouldn't completely dismiss the possibility of another bidder entering the fray. That is not my base-case assumption and I'm not suggesting investors buy Receptos shares now on that basis, but if I were a Receptos shareholder I might think about hanging on for at least a little while longer to see if any rivals emerge.

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Receptos Bows Out

Seeking Alpha: Greatness Recognized With JPMorgan Shares

Up another 10% from my last article and significantly outperforming peers like Wells Fargo (NYSE:WFC), Citi (NYSE:C), Bank of America (NYSE:BAC), and U.S. Bancorp (NYSE:USB) over the past year, there's not much I can complain about as a JPMorgan Chase (NYSE:JPM) shareholder. Management is delivering on its stated objectives of cutting expenses and strategically shrinking its balance sheet, while continuing to pursue growth opportunities in asset management, cards, and commercial/middle market banking.

The Street is pretty much up to speed on this story; an argument could perhaps be made that some still underestimate JPMorgan's ability to offset increased capital requirements by optimizing its cost structure and/or redirecting capital to less-heavily regulated businesses, but I think the shares are pretty fairly valued. What's a bank stock investor to do, though? You can pay up for growth if you like (Bank of the Ozarks (NASDAQ:OZRK) being my go-to example) or try a riskier story like Canadian Western (OTCPK:CBWBF), Itau Unibanco (NYSE:ITUB), or Popular (NASDAQ:BPOP), or you can accept that banks like JPMorgan, Wells Fargo, and U.S. Bancorp are priced to generate the sort of more modest returns that were typical before things went nuts with the housing bubble, recession, and recovery.

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Greatness Recognized With JPMorgan Shares

Seeking Alpha: Middleby Demands A Stiff Price For Growth

Investors will almost always pay up for growth. If you don't understand that, you'll never understand the trading in Middleby (NASDAQ:MIDD) shares, nor large swaths of the market. This doesn't mean that investors are always rational about what they'll pay for growth (if you remember the tech bubble, you know what I mean), and there are plenty of flame-out stories of stocks that carried steep multiples for five or more years, only to double back down to reality. But the bottom line is that growth draws investors like moths to flames.

I still like this company quite a bit, and I believe there are still significant growth/expansion opportunities in commercial foodservice (especially on the cold side), food processing, and residential (on the cold side and outdoor cooking). That said, while I don't think the valuation is crazy and I do think that the company can continue to double the growth of the underlying market, there's just not much breathing room left in the valuation from my perspective.

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Middleby Demands A Stiff Price For Growth

Seeking Alpha: Sunshine Heart's Path Is Long, But The Rewards Could Be Enormous

In the multiple times I've written about Sunshine Heart (NASDAQ:SSH), I've tried to emphasize the point that this is a "consenting adults" type of stock - the commercial promise of an effective device therapy that can not only halt the progression of heart failure but hold the line (and maybe improve it) is tremendous, but this is an undercapitalized company that still has to establish that the device works and that they can commercialize it.

Looking at other cardiology device companies, I believe there is at least a credible chance that Sunshine can generate $300 million or more in revenue ten years from now, with a gross margin in the 70%s and an operating margin potentially in the 30%s. Discounted back and adjusted for further funding needs, I continue to believe that $7 to $9 per share is a reasonable valuation range for what could well be a high-risk/high-reward story.

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Sunshine Heart's Path Is Long, But The Rewards Could Be Enormous

Seeking Alpha: AtriCure Has Earned Its Multiple

It's hardly a household name, but AtriCure (NASDAQ:ATRC) is a good example of how success rarely goes unrewarded by the Street for too long. The company has done a good job of driving utilization of its surgical ablation tools, and is still ramping up its left atrial appendage exclusion device. As surgeons become increasingly familiar with the procedures, cardiologists, electrophysiologists, and surgeons increasingly coordinate their continuum of care and overall recognition of the danger of untreated/under-treated atrial fibrillation grows, I expect AtriCure to log many years of double-digit growth. Add in the potential of minimally invasive procedures, and I believe this is a company looking at $125 million or so in revenue this year and $2 billion in addressable revenue less than a decade from now.

Companies rarely capture 100% of their available market, and I expect the same from AtriCure. That said, this is a company that has shown that it can drive adoption of its products without the help of a large sales infrastructure, and I still believe a larger medical technology company could look at this as a low-risk/high-return M&A candidate. As the stock is trading about midway between its standalone value and its M&A value (with possible upside from a motivated buyer), I don't see it as a terrific bargain, but it does likely still have some upside from here.

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AtriCure Has Earned Its Multiple

Tuesday, July 14, 2015

Seeking Alpha: Xenoport Not Getting Much Love Ahead Of Key Data

Serial disappointments have made investors understandably cagey about Xenoport (NASDAQ:XNPT) and the question of whether its "transported prodrugs" can really achieve meaningful improvements in efficacy and/or safety. Even so, I find it curious that the shares have been so weak over the past six months as the company approaches key data from a study of XP23829 (or '829) in psoriasis. I don't believe there is anything like enough evidence to say that this is "another Receptos (NASDAQ:RCPT)", a company that has seen a pronounced run in its shares on the back of strong data in multiple sclerosis and ulcerative colitis, but the fact remains that this company may yet have a clinical pipeline candidate with more than $1 billion in revenue potential in both multiple sclerosis and psoriasis.

I continue to believe that Xenoport is a long-shot story. The company has yet to establish that its R&D approach can develop meaningfully better drugs, but bulls can fairly retort that it only takes one success for the stock to work. The multiple sclerosis and psoriasis markets are competitive markets already, and likely to become more so, but even modest assumptions regarding the odds of clinical success would argue that Xenoport is undervalued ahead of what could be a significant share-moving event.

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Xenoport Not Getting Much Love Ahead Of Key Data

Seeking Alpha: The Going Is Getting Tougher At MSC Industrial

With market conditions going from "not great" to "weak", the road ahead of MSC Industrial (NYSE:MSM) is getting tougher in the short term. Overall economic weakness is a concern for the entire industrial MRO distributor space, but with the company's higher leverage to heavy industry (particularly metalworking/cutting) relative to Grainger (NYSE:GWW) and Fastenal (NASDAQ:FAST), it has more to worry about in the near term.

I don't think this is a great stock for short-term investors, unless you believe that there's a high probability that U.S. manufacturing will stage a sharp rebound over the next few months. Longer term, I continue to believe that MSC Industrial is a well-run MRO distributor with ample opportunities to gain share, expand into adjacent markets, and play a part in consolidating the industry.

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The Going Is Getting Tougher At MSC Industrial

Friday, July 10, 2015

Everything's Okay(ish)

Circumstances being what they are, I know that not writing an article for a few days could have ominous implications, so I wanted to just give a quick update.

First, things with my wife are okay. She had another round of bloodwork this week and everything's holding steady. Another PET-CT (or just CT) will come next month and then she'll probably go to a new chemo regimen. She hasn't gotten the maximum benefit from this chemo, but that's kind of the point. There is another type of drug left to try and while it has a small chance of achieving long-term remission, that small chance is still a chance. If this third regimen doesn't work, she can still might be healthy enough to go back to this second regimen, get some more benefit and maybe find a clinical trial for the fourth round.

In conjunction with all this, I've been a little under the weather, which is the primary reason I haven't been writing. I expect things to get back to normal next week.

Wednesday, July 8, 2015

Seeking Alpha: Receptos Continues To Reward

Receptos (NASDAQ:RCPT) is the gift that keeps on giving for its shareholders, with the shares up another 75% since my last piece and up close to 1,100% since my initial write-up on the shares as a Top Idea in August of 2013. Sock away a few 1,000%-ers in your investing career, and you'll do pretty well.

I don't believe Receptos is just a product of the biotech boom (or bubble, depending upon your point of view). This company seems to have a legitimate blockbuster in ozanimod (formerly/also known as RPC1063), as this drug appears to be very effective in both multiple sclerosis and ulcerative colitis, and possibly effective in Crohn's disease as well. Add in more long-dated options like RPC4046 for eosinophilic esophagitis and a potential oral GLP-1 drug for the type 2 diabetes market, and it's not hard to see why this is a hot stock in the space.

Receptos's finer qualities are no secret now. Valuing biotechs is an inexact science, at best, and I'd be in no hurry to sell these shares if I owned them, but I don't see the sort of discount to fair value that I look for when considering new purchases. That said, Receptos is assumed to be for sale to the right bidder, and I wouldn't underestimate the sort of price the company could get from a Big Pharma that feels it badly needs a multi-billion dollar drug to boost its business.

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Receptos Continues To Reward

Seeking Alpha: Celldex Therapeutics Still Looks Undervalued With Multiple Clinical Shots On Goal

Immunotherapy biotech Celldex Therapeutics (NASDAQ:CLDX) has continued to do well in a hot market for biotech, and an especially hot market for oncology immunotherapy companies. The shares are up another third or so over the last six months, as the company has continued to post encouragingly strong data from its studies of Rintega in glioblastoma multiforme (or GBM) and sign up partners for its t-cell co-stimulator varlilumab.

Rintega now represents about one-third of my estimated value for Celldex, with gemba making up closer to half. Varlilumab contributes relatively little today, but that could change significantly over the next year as early data from combo studies are expected. Combination therapy is likely to be the defining characteristic of immuno-oncology and with a broad (albeit early-stage) pipeline of IO assets, I believe Celldex is attractively positioned as a go-it-alone partner of choice or an M&A target for a larger pharma/biotech company that is lacking in homegrown IO candidates.

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Celldex Therapeutics Still Looks Undervalued With Multiple Clinical Shots On Goal

Tuesday, July 7, 2015

Seeking Alpha: EnerNOC Hard To Value And Facing Major Regulatory Unknowns

Utility services provider EnerNOC (NASDAQ:ENOC) has always been a more challenging story than average, but the company's operating environment has become considerably more uncertain since I last wrote about the company. In a nutshell, the risks that regulatory changes would change/challenge the company's core business have come home to roost in a big way, and there is little-to-no certainty now regarding how the demand response market will look in a year or two.

While the source of almost 50% of EnerNOC's revenue spasms, management is pivoting the company toward its software-as-a-service (or SaaS) business and the opportunity to help enterprises and utilities better track, plan, and control energy consumption and spending. Here too, though, there are ample uncertainties as most SaaS businesses have yet to establish a consistent level of GAAP profitability, making comparisons and projections for EnerNOC more challenging.

Modeling and risk-weighting various scenarios leads me to believe that ENOC shares are undervalued, with a fair value in the mid-teens. That assumes, though, that the demand response business is still viable on a long-term basis and that the SaaS business can deliver strong growth. The bull-case and bear-case boundaries are much wider than normal, though, and it is hard for me to argue that the potential here is worth the uncertainty and risk.

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EnerNOC Hard To Value And Facing Major Regulatory Unknowns

Seeking Alpha: Summer Infant's Recovery Story Veers Into The Bizarre

Some companies have a knack for snatching defeat from the jaws of victory. While the latest setback to Summer Infant (NASDAQ:SUMR) - a management change brought on by an apparent attempt from prior management to steal trade secrets and form a new company - is not the fault of the business, it represents yet another weird setback in a story that has seen plenty of challenges on its road back.

The resume of Summer Infant's new CEO should bring some confidence, and the company's basic plan of prioritizing new product development and margins seems sound. What's more, and as bizarre as this may sound, I think there's an argument that a new product good enough to steal probably has some above-average potential. A higher risk premium moves my target down a bit, but Summer Infant should arguably trade 50% higher than it does today.

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Summer Infant's Recovery Story Veers Into The Bizarre

Seeking Alpha: ACE Puts Its Excess Capital To Work In A Big Way

With iffy near-term prospects for premium rate growth in the property & casualty insurance market and plenty of under-earning surplus capital on the balance sheet, I expected ACE Limited (NYSE:ACE) to continue looking for deals as a way of creating long-term value for shareholders. In that same piece back in April, I speculated that either Hartford (NYSE:HIG) or Chubb (NYSE:CB) could be an attractive target for ACE and that is what has happened - ACE has announced its intention to acquire Chubb in a $28 billion deal that makes ACE the largest P&C insurance company in the world.

ACE is not getting Chubb at a bargain price, but then I wouldn't expect that it would, as Chubb is a well-run and well-regarded insurance business with a very strong, high net worth personal lines business. I'm a little concerned that ACE may be overselling the revenue synergy potential from this combination, but I do think that expense reductions seem reasonable. For now, I'm only increasing my fair value on ACE by $3/share, but that still leaves ACE as one of the more attractive options in the insurance space, and it likewise may be leaving upside from deal-related synergies.

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ACE Puts Its Excess Capital To Work In A Big Way

Monday, July 6, 2015

Seeking Alpha: Cloud Will Change Microsoft, But The Valuation Looks Interesting

Like IBM Corp. (NYSE:IBM), Oracle (NYSE:ORCL), and SAP AG (NYSE:SAP), Microsoft (NASDAQ:MSFT) is looking at a major shift in the way it does business as the industry shifts away from discrete license-based software sales and toward the subscription-based "X as a service" model. Making matters more challenging for Microsoft is the company's heavy reliance on the PC ecosystem, its so far unconvincing device strategy, and its relatively poor history of adding value through acquisition.

The migration to service-based software is going to change Microsoft's model, but the company's cloud businesses (including Azure) seem to be on a good path today. It's very uncommon for winners/leaders of one generation to extend that leadership into the next generation, but even a lower level of assumed performance seems to support a value argument for Microsoft.

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Cloud Will Change Microsoft, But The Valuation Looks Interesting

Seeking Alpha: The Cloud Tail Keeps Wagging Oracle

I look at Oracle (NYSE:ORCL) for largely the same reasons I look at companies like Cisco (NASDAQ:CSCO) - the search for relatively less volatile, undervalued, big-cap tech stories that can offset the risk of owning a collection of more aggressive plays. In the case of Oracle, though, I think I've found more things that concern me than encourage me, but those are short-term issues that I believe the company can address. What's more, the valuation would seem to suggest that a lot of these worries are in the price, and that this one may be worth a closer look.

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The Cloud Tail Keeps Wagging Oracle

Sunday, July 5, 2015

Seeking Alpha: Fixing Transocean Isn't Going To Be Easy

It's tough enough to operate in a deeply cyclical industry, but when management makes a series of strategic blunders that leaves the company in an noncompetitive position, you get the situation Transocean (NYSE:RIG) is facing today. By refusing to build rigs without contract coverage and prioritizing scale above all else, the company finds itself with a large, outdated, and difficult-to-market fleet that has sizable day-to-day maintenance costs, whether the rigs work or not. Making matters worse, the drillers seem to be looking for any twitch in oil prices as an excuse to hold off on scrapping idle rigs.

Unless there is a dramatic increase in oil prices before year-end or a sustained above-average level of scrapping, the rig market may not come back into balance for two or three years (if not longer). Transocean is probably undervalued as a going concern, and I believe the new CEO's pedigree speaks well to the likelihood of operating improvements, but the company is going to burn through a lot of liquidity, and it's likely going to be hard road for a number of years.

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Fixing Transocean Isn't Going To Be Easy

Seeking Alpha: Should This KEG Be Tapped?

If you believe that the ugly conditions today in the U.S. onshore energy market are just a part of the ups and downs that the market has seen over decades, you probably see several values in the space. Whether Key Energy Services (NYSE:KEG) belongs on that list is an interesting question to me. This wasn't always a particularly well-run company before the widespread downturn, and I believe it is going to be difficult to generate attractive economic returns in coiled tubing and fluid services due to the low barriers to entry.

On the other hand, Key has the largest well services fleet in the U.S. onshore market and the steep decline rates of new unconventional wells, not to mention their high drilling cost, should make for a worthwhile long-term opportunity. In addition, a refinancing last month should significantly reduce the company's liquidity risks (albeit at a cost). Looking at the long-term FCF potential, EV/EBITDA, and ROE-TBV, I believe that $2.50 to $3.50 is a credible range for valuation, but this is a very high-risk proposition in a market where residual asset value means little and E&P companies are more than willing to use service companie

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Should This KEG Be Tapped?

Thursday, July 2, 2015

Seeking Alpha: National Oilwell Varco May Be Undervalued, But It's A Long Road Back

National Oilwell Varco (NYSE:NOV) may well be undervalued, to begin with, but the company is looking at a rough road for several years. Offshore drilling companies have refreshed and renewed their fleets, and National Oilwell Varco was a major beneficiary of that trend, but the weak utilization of offshore rigs today and the poor prospects for a near-term turnaround in drilling plans (absent a sharp reversal in oil prices) seem to point to a long hangover for this leading equipment manufacturer.

I think companies with leverage to service (offshore or onshore) and subsea will recover more quickly, but National Oilwell Varco may have some appeal if you are exceptionally patient and/or believe that drilling activity is going to recover faster than most other analysts and investors expect today. I think multiple approaches support the idea that NOV shares should be trading in the low to mid-$50s, but I'm happier owning Cameron (NYSE:CAM) today.

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National Oilwell Varco May Be Undervalued, But It's A Long Road Back

Seeking Alpha: American Eagle Back On Track, But The Shares Reflect It

I liked American Eagle Outfitters (NYSE:AEO) as a long-term turnaround play back in February of 2014, and while there were some hard times still to come (the shares traded down another 25% or at their worst), the stock is up more than 25% overall since then - better than the S&P 500, better than Gap (NYSE:GPS) or Urban Outfitters (NASDAQ:URBN), and much better than still-struggling Aeropostale (NYSE:ARO) and Abercrombie & Fitch (NYSE:ANF).

I don't believe AEO's share price recovery has been based on wishful thinking; management has made real progress in rationalizing its selling space, improving its inventory management, increasing its floorset turnover, and upgrading its merchandise assortment. The question is where the business can go from here. I think American Eagle is still going to have a tough time growing revenue at more than a mid-single digit rate given rampant competition, and I likewise believe there is only so far the company is likely to go with its margin improvements. A return to the good old days of mid-teens FCF margins would support a fair value well into the $20s, but I don't see that as particularly likely and I think the shares are more likely only a dollar or two undervalued today.

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American Eagle Back On Track, But The Shares Reflect It

Wednesday, July 1, 2015

Seeking Alpha: Emerson Finally Looks Serious About Change

I wasn't very interested in Emerson Electric (NYSE:EMR) a year ago, as I thought management was dragging its feet in dealing with the problematic Network Power business and was overly optimistic regarding its capacity/capability to upgrade its Industrial Automation business all on its own. Coupled with a valuation that I thought was already giving a lot of credit to future improvements, I thought the shares weren't set up to outperform. Since that article, Emerson shares have fallen around 16% as the steep decline in oil prices has severely undermined the process automation industry and generalized weakness in industrial end-markets (especially in emerging markets) has led to weak IA demand.

Just the other day, though, Emerson management a set of strategic moves that many have long called for - the separation of the Network Power business and the sale of certain IA businesses (motors/drives and power gen), as well as the sale of the Storage business from the C&RS segment. There are still a lot of unknowns tied to this restructuring, and arguably the biggest is whether the company will reinvest the proceeds into strengthening its Process Automation and IA businesses through M&A. While I thought Emerson was worth around $55 to $60 before these moves, I believe these moves could possibly put $70 in play as a reasonable target down the line.

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Emerson Finally Looks Serious About Change

Seeking Alpha: Nvidia Looking To Leverage Serial Transformation

Not evolving with the times is basically suicide for a semiconductor company, but Nvidia (NASDAQ:NVDA) has gone a little further than most with its transformations over the years. Once seen as a graphics chip company, management has long since leveraged the company's IP into markets outside of traditional graphics processing/gaming and is now looking at markets like automobiles and datacenters as meaningful future growth drivers. Not only that, the company's IP position gives it at least a fighting chance of morphing further into a hybrid chip/software/technology company.

How to value it is the key question. I'm accustomed to seeing significant gaps between FCF-driven and OM-EV/Rev-driven approaches, but the gap here is pretty large. What's more, there are definite uncertainties as to the future of the high-margin revenue Nvidia derives from its IP business. I don't see a lot of downside risk unless the gaming market suddenly tumbles, but investors are likely going to need to exercise some patience to see a delivery on the potential here.

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Nvidia Looking To Leverage Serial Transformation

Seeking Alpha: Can Cisco Pull Its Weight As A Barbell-Type Pick?

A stock like Cisco (NASDAQ:CSCO) isn't really part of my normal beat, as I prefer to write about far more obscure companies. And yet, I do like to have stocks like Cisco in my portfolio - I find a lot of value in looking for well-established companies trading below long-term fair value, as I find they help reduce the volatility in portfolios that include far riskier stocks. This is basically a barbell strategy where one "bulge" is higher quality, lower-risk picks and the other is lower quality, higher-risk picks; when you can get a better return out of the high-quality end, it can really add to your returns.

In my view, Cisco seems like a reasonable (if imperfect) candidate. It doesn't take particularly generous assumptions to drive a fair value about 10% above today's level, but if management can cut costs and/or drive better sales of higher-margin products, there could be worthwhile upside. There is a well-known and widely reported risk that the basic operating environment Cisco serves is in the early stages of a fundamental transformation that will devalue high-margin hardware, but I believe Cisco is already taking some reasonable steps to offset the risk.

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Can Cisco Pull Its Weight As A Barbell-Type Pick?

Seeking Alpha: ONEOK Partners Looks Undervalued, But There Are Reasons Why

A lot of things have gone wrong with ONEOK Partners, LP (NYSE:OKS), but not all of them are management's fault. Constructing a business model with meaningful commodity price risk was a choice (or gamble, depending upon your point of view) that looked better when NGL prices were stronger, but few were calling for the sharp decline in energy prices that occurred over the past year. A bigger concern now is whether ONEOK (NYSE:OKE) will offer any relief to the high incentive distribution rights that are depleting cash flow and distribution coverage, particularly as ONEOK Partners will almost certainly need to issue more units to fund its growth projects.

ONEOK Partners is basically a leveraged bet on natural gas, with a particular focus on the Williston Basin (the Bakken) and NGL prices. A sharp turnaround in gas prices and drilling activity in the Bakken would help ONEOK Partners more than most, but then there is the real risk that this MLP's distribution growth will lag its peers due to low coverage today and the need to fund additional growth projects. It's a more speculative call within MLPs and as is the case with Enbridge Energy Partners (NYSE:EEP), there are reasons why the yield stands out on the high side.

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ONEOK Partners Looks Undervalued, But There Are Reasons Why