Sunday, August 16, 2015

Seeking Alpha: In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Back in February, I had concerns that Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") shares were running a little ahead of themselves on hopes that the company was past the competitive pressures of new store entries into key markets. The shares have fallen 18% since then, as the company's respectable same-store sales growth has continued to come in a little lower than sell-side expectations and concerns about the economy and competition won't go away.

I believe there is a credible argument to be made that Natural Grocers shares are undervalued, but there is a lot of risk attached to the calculation. The company will very likely continue to generate negative free cash flow for three to four years, and the big improvements in free cash flow are well down the line. Add to that the intense competition in the natural/organic food space (arguably getting worse), and this is not exactly a can't-miss prospect.

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In A Fierce Food Retail Market, Natural Grocers Has To Perform Better

Seeking Alpha: Plum Creek Timber Biding Its Time

Maybe the nicest thing I can say about Plum Creek Timber (NYSE:PCL) since my last update is that investors in this timberland REIT fared better than those invested in Weyerhaeuser (NYSE:WY), Potlatch (NASDAQ:PCH) or lumber/wood product producers like West Fraser (WFT.T) or Canfor (CFP.T). The basic underlying problem will be familiar to many investors - housing starts aren't recovering to the extent expected around the beginning of the year, Asian demand has been weaker than expected, and prices for Northwestern and Southern logs haven't improved as much as hoped.

If you've been interested in Plum Creek for some time, nothing has really changed. The bull thesis on Plum Creek centers around the idea that management can drive more value by intensive management of the timberland resources (better planting and harvesting decisions), sell higher-value properties, and leverage an eventual housing recovery. Bears can argue that Plum Creek doesn't have enough leverage to value-added manufacturing, that higher-value sales will disappoint, and that the slower/shallower housing recovery will limit price recovery.

I continue to believe that Plum Creek is likely undervalued on a long-term net asset value basis (which assumes "fair" prices well below prior peaks), but not so much so that this is a must-buy. I think this remains a credible stock for investors interested in income, but this is not the sort of situation where management excellence can neutralize an underwhelming operating environment.

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Plum Creek Timber Biding Its Time

Seeking Alpha: A Long-Awaited Success For Lexicon Pharmaceuticals

Back in April of this year, I thought that the Street was focusing too much on the failure of Lexicon Pharmaceuticals (NASDAQ:LXRX) to find a partner for its diabetes drug sotaglifozin and the risks of its go-it-alone strategy focusing on development of the drug for Type 1 diabetes. In contrast, I thought there was an unappreciated opportunity in the company's Phase III asset for carcinoid patients refractory to somatostatin analogs (or SSAs) like octreotide, as Phase II results were encouraging and a global market opportunity of $1 billion could be in play.

On Monday morning Lexicon investors got the news they were hoping to see. Although the company didn't offer all that many specifics, management did announce that the Phase III TELESTAR study did see the drug (telotristat etiprate) achieve a statistically significant benefit for the primary endpoint. The data that the company did release suggest solid efficacy relative to placebo, with the magnitude of benefit improving over time and a generally good safety/tolerability profile.

With this result, there is an outside chance that the company could have its first drug approval in hand before the end of the 2016. This clinical update adds about $4 to my fair value estimate, though risks remain in securing approval and commercializing the drug in the U.S.; partner Ipsen (OTCPK:IPSEY) will handle marketing outside of the U.S. and Japan.

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A Long-Awaited Success For Lexicon Pharmaceuticals

Seeking Alpha: Structurally Light On Growth, Baxter Has A Lot Of Work Ahead

In healthcare, as in most segments of the market, growth fixes or at least papers over a lot of problems. Nobody really cares if the latest hot tech company is producing lousy margins and has no clear path to meaningful free cash flow - as long as the revenue growth is eye-popping, that's good enough for a high multiple until the day of reckoning comes into view.

For Baxter (NYSE:BAX), the split/spin-off of Baxalta (NYSE:BXLT) leaves behind a company with solid market share in stable markets, but management is going to have to roll up their sleeves and put in some work to find growth opportunities and drive better margins. There is certainly room for Baxter to do better in infusion pumps and renal care, and biosurgery can be a decent business in the coming years, but the market is already expecting a lot of improvements here in the years to come.

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Structurally Light On Growth, Baxter Has A Lot Of Work Ahead

Seeking Alpha: BRF's Strong Exports Offset A Tough Brazilian Market

There are times when boring businesses have their advantages, and this is one of those times in Brazil. BRF SA (NYSE:BRFS) local shares have outperformed the Bovespa by about 35% over the past year as this core consumer business has held up better than many during Brazil's difficult economic times. The weakness of the Brazilian real has hurt the performance of the ADRs (down about 18% over the past year), but I continue to believe that BRF is on its way toward establishing itself as a global packaged food company with a focus on emerging market consumption growth.

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BRF's Strong Exports Offset A Tough Brazilian Market

Wednesday, August 5, 2015

A New Round Of Bad News

Today's visit to the cancer center brought with it more bad news. She will soon transition to a new therapy regimen. Although this regimen is a legitimate breakthrough, it still only ultimately helps about 25-30% of people who get it.

She's not in pain, and her bloodwork is good. But the scans do show the cancer starting to grow and spread again.

I'm not sure what I'll be doing work-wise. I suspect that it will be "consistently inconsistent".

Monday, August 3, 2015

Seeking Alpha: Oshkosh Getting Squashed

I was nervous about Oshkosh (NYSE:OSK) back in January, as I thought there wasn't enough upside in my base-case assumptions to offset the significant risk and uncertainty. As it turns out, construction and energy demand have been even weaker than expected at the start of the year, and there are signs and warnings from companies like Eaton (NYSE:ETN) and Parker-Hannifin (NYSE:PH) that overall mobile equipment demand is not looking very good.

Down almost 20% from the time of that January piece, the investment case for Oshkosh is still broadly what it was before - buy Oshkosh if you expect a sharper recovery in oil/gas and solid growth in construction equipment demand, coupled with Oshkosh winning a major defense vehicle award. While my fair value hasn't gone down too much (I had generally more bearish than average expectations earlier this year), I still have elevated concerns about this business and I think there are safer risk/reward trade-offs out there. All of that said, there's definitely room for self-improvement here and a defense vehicle win could conceivably add as much as $10 per share.

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Oshkosh Getting Squashed

Saturday, August 1, 2015

Seeking Alpha: Eaton Seeing The Headwinds Blowing Harder

This hasn't been a quarter of good news for the industrial sector, and Eaton (NYSE:ETN) is no exception in that regard. In addition to a worsening short-cycle industrial environment and worries about the health of capital investment in China and auto/truck assembly in the Western hemisphere, there are real challenges in hydraulics and reason for concern in the company's Electrical Products margin structure.

The other thing that worries me about Eaton today is the announcement of another restructuring program that seems (to me, at least) to hint that this is not a lull in the company's end-markets, but potentially a longer downturn. Eaton does look undervalued today, but I have some concerns as to whether the company can meet my FCF margin improvement targets. General Electric (NYSE:GE) and Honeywell (NYSE:HON) seem like safer picks relatively speaking, but Eaton does still hold some appeal.

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Eaton Seeing The Headwinds Blowing Harder

Seeking Alpha: Storm Clouds In Front Of Parker-Hannifin

Parker-Hannifin (NYSE:PH) hasn't been a terrible performer since my article back in January, but I think investors should generally aim higher than "not terrible". I continue to believe that this diversified motion and fluid control company is well-run and a credible long-term hold, but the near-term outlook has gotten pretty scary lately and I think the odds favor that the company will underwhelm with its upcoming fourth quarter earnings release and guidance for the upcoming fiscal year.

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Storm Clouds In Front Of Parker-Hannifin

Seeking Alpha: Colfax's Benefit Of The Doubt Has Deservedly Gone Away

I have openly granted the growth potential of Colfax (NYSE:CFX), but I haven't ever really liked the valuation that the Street was willing to give the stock. While investors and analysts have expected a lot of magic from the company's welding, gas handling, and fluid management businesses, I think they have overlooked some of the structural challenges in the welding business and the end-market risks in the gas and fluid businesses.

The shares are down about 40% since my last article on the company, as multiple days of reckoning have hit its valuation hard. The evolution of the company's businesses over the last ten months has led me to slash my expectations and valuations, though I can now at least say that the valuation looks sane. I do have competitive concerns about the welding business, and I don't share the assumption that management has a magic touch that will turn every M&A transaction into a winner. That said, if you're shopping for ideas that have been pummeled into the ground, this is a name to consider.

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Colfax's Benefit Of The Doubt Has Deservedly Gone Away

Seeking Alpha: RPC Hoping That The Worst Is Soon To Be Past

I didn't see a reason to be in a rush to buy RPC (NYSE:RES) back in February and the slightly negative move in the shares since then doesn't really have me regretting that viewpoint. Investors certainly could have done worse in the oil services space (C & J Energy Services (NYSE:CJES), Basic Energy (NYSE:BAS), and Superior (NYSE:SPN) have all fared worse) and not too many names have done all that much better during this awful stretch, but this is still a tough market for bulls.

I continue to believe that RPC is an uncommonly well-run company in the space and a prime beneficiary of a recovery in rig counts and increased well completions … whenever that takes place. To that end, I like RPC for its strong leverage to a U.S. onshore recovery and the limited downside created by its strong balance sheet and very strong service reputations. Names like Basic Energy, Key Energy (NYSE:KEG), Superior, and even Weatherford (NYSE:WFT) offer more upside punch to a sharper turnaround, but with RPC it really doesn't seem that investors need to worry about survivability, accountability, or operational performance.

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RPC Hoping That The Worst Is Soon To Be Past

Seeking Alpha: Softer Markets And Weak Execution Are An Ugly Mix For Atmel

I wasn't overly fond of Atmel's (NASDAQ:ATML) valuation back in March, but I did think there was a chance that this chip company would see itself swept up in the M&A boomlet across the chip industry. The market thought so too, taking the shares up almost 20% at the peak after my last article. Then harsh reality started to set in, as markets like computing, handsets, and general industrial started looking weaker and weaker. All told, the shares sit about 6% lower than where they were at the time of that last writing, but now sentiment is definitely more sour - on chips in general and Atmel's execution/guidance issues in particular.

I still think that a sale of the company is a distinct possibility. The company's microcontroller business represents a relatively scarce asset that could appeal to companies ranging from Analog Devices (NASDAQ:ADI) to Microchip (NASDAQ:MCHP) to Texas Instruments (NASDAQ:TXN), with Avago (NASDAQ:AVGO) and Qualcomm (NASDAQ:QCOM) as potential long-shot bidders as well. If the company doesn't sell, better execution is an absolute must and likely to be the first priority for the new (and as of yet unannounced) CEO. Atmel does have a legitimate opportunity in front of it with increasing chip content in autos and the growth of Internet of Things (or IoT) applications, but past foibles make it an entirely legitimate question as to if the company can actually deliver on the potential.

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Softer Markets And Weak Execution Are An Ugly Mix For Atmel