The Amphenol Machine Rolls On

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

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

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The Amphenol Machine Rolls On

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

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

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

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

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

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

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


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

Omron Doing A Lot Of The Right Things

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

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

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Omron Doing A Lot Of The Right Things

Timken Looking Forward To Leveraging A Big Transformation

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

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

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Timken Looking Forward To Leveraging A Big Transformation

ESCO Technologies A Tough Mix Of Potential And Past Performance

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

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

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ESCO Technologies A Tough Mix Of Potential And Past Performance

First Bancorp Looking To Leverage New Opportunities

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

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

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First Bancorp Looking To Leverage New Opportunities

THK Struggles To Translate A Great Business Into Great Financials

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

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

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THK Struggles To Translate A Great Business Into Great Financials

Hancock Holding Seems Richly Valued For What It Offers

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

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

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Hancock Holding Seems Richly Valued For What It Offers

CAE Taking Aim At Much Larger Markets

CAE (NYSE:CAE) has had a good year, even though this is one of the relatively few companies I've looked at recently that has had a big post-election run. Already a leader in simulators and training across most categories of civilian and military aircraft, CAE is looking to continue a pivot toward more training and service that has been underway for more than a decade and that offers substantially greater addressable revenue to the company.

Valuation is interesting. The shares are pricing in double-digit long-term annualized free cash flow growth, but I don't think that is unreasonable. Likewise, with EBITDA. I'd be careful chasing a late-cycle aviation play, but should the market correct (or just the aerospace sector), I'd come back to this name as an interesting long-term play on aviation growth (particularly civil aviation).

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CAE Taking Aim At Much Larger Markets

Green Shoots May Be On The Way For Applied Industrial Technologies

Conditions are still challenging for industrial MRO and component distributors like Applied Industrial Technologies (NYSE:AIT). While construction-related markets are pretty healthy, manufacturing is still in rough shape and most MRO distributors like Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), MSC Industrial (NYSE:MSM), and Kaman (NASDAQ:KAMN) are still looking at pretty uninspiring near-term growth prospects.

And yet, there are some reasons to be encouraged. Only about a third of Applied Industrial's markets have been contributing growth, but the last quarter was a little stronger and it looks as though markets like oil/gas and metals are stabilizing and the recent improvement in the metalworking index could be an encouraging sign for manufacturing. The surge in this sector has taken Applied Industrial's stock out of clear value territory, with the shares up 20% since the election and about 40% since just before the last quarter's earnings, but the shares do seem priced for a roughly double-digit total return and the quality of this business makes it a name to consider as a play on a future industrial recovery if and when the sector pulls back.

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Green Shoots May Be On The Way For Applied Industrial Technologies

Ameresco Making Headway, But It's Not Easy

Of all the companies to see post-election runs, Ameresco (NYSE:AMRC) is one of the less obvious ones to me. Ameresco's business is built upon helping customers, particularly government and/or government-funded institutions, find ways to boost energy efficiency and lower their electricity bills. What's more, it's a business where the cost of capital for project financing makes a meaningful difference in the cost-benefit evaluation process. Given the incoming administration's priorities, I wouldn't think that investors would be feeling that much more confident now.

In any case, Ameresco does appear as though it might be undervalued, but I have a hard time working up a lot of conviction for it. While it is true that there are myriad ways that companies/offices can reduce energy (many of which aren't obvious and/or require the help of experts) and these ways are generally very cost effective, that has been true for a long time. And yet, a lot of Ameresco's growth has been tied to various government incentive progress designed to goose adoption of these measures. Nevertheless, as a "platform neutral" provider of energy efficiency and cost saving options, I do think Ameresco is at least worth your own due diligence.

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Ameresco Making Headway, But It's Not Easy

Rexnord Still A Work In Process

It has been a while since I've written on Rexnord (NYSE:RXN), largely because I thought the valuation wasn't all that interesting back in mid-2013. The shares are up about 10% since then, which is well below the return of the S&P 500, but in line with rival Regal Beloit (NYSE:RBC) and better than ABB (NYSE:ABB). Since the time of that last article, Rexnord has borne the brunt of a rough stretch in its industrial and resource-centric end-markets, and the company's margins have gotten worse, bringing the company down to mid-pack (or a little worse) in the industrial conglomerate space.

These shares have had a run since the election, but there may still be enough value here to merit a closer look. I really like the company's leverage to healthier end-markets like aerospace and food/beverage, as well as the prospects for improvement in industrial markets, eventual improvement in resource industries, and possibly a renewed focus on water infrastructure spending in North America. I believe management still has to earn the benefit of the doubt with respect to margin improvements, but mid single-digit FCF growth can support a fair value above $21 and a double-digit total expected return.

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Rexnord Still A Work In Process

Carlisle Companies Taking A Familiar Road To Growth

With over $3 billion in revenue and $7 billion in market cap, I'm surprised Carlisle Companies (NYSE:CSL) isn't a little better-followed than it is. While this conglomerate is heavily weighted toward construction, Carlisle's target markets are looking pretty healthy going into 2017 and management has done a good job of meeting and raising long-term growth and margin targets.

Following in the footsteps of companies like Danaher (NYSE:DHR), Illinois Tool Works (NYSE:ITW), and Parker-Hannifin (NYSE:PH) and with a clean balance sheet, I think Carlisle has a lot of options to add businesses through M&A in the coming years and improve them by applying its Carlisle Operating System. Although the stock looks rich now, that's a common issue in the market today and investors may want to run through due diligence with an eye toward adding shares if/when the market cools.

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Carlisle Companies Taking A Familiar Road To Growth

Flush With Capital, Beneficial Looking To Build Value For Shareholders

For all of the attention (if not hype) given to banking markets in southern states like Texas, Florida, Georgia, and North Carolina, it's worth remembering that there are still worthwhile markets in a lot of other places. Philadelphia isn't going to top the charts for population or household income growth, but it is still a large and growing market where banks like Beneficial Bancorp (NASDAQ:BNCL) can do well for shareholders by focusing on service quality and outperforming national and super-regional banks like Wells Fargo (NYSE:WFC), PNC (NYSE:PNC), and Bank of America (NYSE:BAC).

Not that far removed from its full conversion from a mutual holding company, Beneficial is flush with capital and holds a top 10 position in the Philly MSA. While current reported returns on assets and equity don't look good, I expect improving operating leverage in the coming years to complement steady loan growth, growth in non-interest income, better spreads, and capital deployment into M&A. Beneficial isn't undervalued today on its own merits, but I suppose there's a potential relative value call for more aggressive investors.

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Flush With Capital, Beneficial Looking To Build Value For Shareholders

Watts Water Pursuing Multiple Avenues Of Self-Improvement

Watts Water Technologies (NYSE:WTS) has had more than its share of management turnover in the past 15 or so years and the company's returns on capital have long been less than you'd expect from a company with market-leading products, but current management can't be faulted for sitting on their hands. Not only has the company undergone a fairly meaningful product portfolio restructuring, management has also set out to streamline its distribution and manufacturing footprint, while also seeking out cross-selling opportunities and international growth, and pursuing reinvestment in product development.

Margins have been picking up (on a non-GAAP basis), but organic growth hasn't been so impressive. What's more, the company's core markets aren't looking tremendously dynamic. I accept that companies in the water technology space often get a premium valuation, but paying a double-digit multiple on 12-month EBITDA for a company that is likely to generate high single-digit EBITDA growth isn't so appealing to me right now.

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Watts Water Pursuing Multiple Avenues Of Self-Improvement

Paragon Commercial Looking To Drive Growth From A Highly Focused Model

If things go right, Paragon Commercial (OTCQX:PBNC) could be a really interesting growth story to follow for the coming years. This branch-light bank company is following a model similar to that used by Bank of the Ozarks (NASDAQ:OZRK). That's not to say that Paragon is "the next Bank of the Ozarks," but a bank model focused on service-oriented private lending to businesses and high net worth individuals and efficient non-retail deposit gathering through a small branch footprint can work.

Paragon is one of the very few banks I've looked at recently that looks undervalued. That triggers my paranoia and leads me to question whether I'm overestimating growth/underestimating risk, or whether this is simply a bank that most investors don't really know about yet. Whatever the case, there are things management must address (like improving its deposit base), but the growth potential from this model is worth exploring further.

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Paragon Commercial Looking To Drive Growth From A Highly Focused Model

Carolina Financial Committed To Ambitious Growth

Unless you're a momentum investor, I'm not sure there's any U.S. bank stock left out there that looks like a good prospect. Frustrating as that may be, it doesn't mean that it's not a good time to do due diligence and build a prospective shopping list for when the inevitable pull-back comes. With that in mind, I think Carolina Financial (NASDAQ:CARO) is a small bank with big growth ambitions that is worth a closer look.

To be sure, ambition is no guarantee of success. Carolina Financial's deposit mix is not ideal (though it's not bad) and the company's growth plans are going to put it head-to-head with banks like BB&T (NYSE:BBT), Wells Fargo (NYSE:WFC), SunTrust (NYSE:STI), South State (NASDAQ:SSB), and Synovus (NYSE:SNV) when it comes to growing low-cost deposits and loans. Likewise, management's ambitious asset growth targets will require more M&A, a process that carries its own set of risks including overpayment and buying into problematic loan books.

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Carolina Financial Committed To Ambitious Growth

Behind Encore Wire's Sometimes Messy Numbers Is A Good Company

If you like fundamentally boring businesses, Encore Wire (NASDAQ:WIRE) should be up your alley. While there's actually a lot that goes into making and maintaining a top business in the space, electrical wiring for residential, commercial, and industrial construction isn't the sort of business that is going to get a lot of attention. Nevertheless, Encore Wire has managed to blend strict operational discipline with a surprising amount of innovation into a solid company within this overlooked sector.

As is the case with so many stocks now, the post-election rally has made this a problematic stock from a valuation perspective. Even my more aggressive methodologies top out in the mid-$40s for fair value, making this an iffy prospect for serious outperformance. That said, I really admire how management runs this company, and if you can live with the volatility of a business tied to the cyclical construction market(s) and commodity input prices, it is a name worth considering at a better price.

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Behind Encore Wire's Sometimes Messy Numbers Is A Good Company

Flowserve Dog-Paddling While Waiting For Orders To Recover

On a basic level, I think Flowserve (NYSE:FLS) operates an attractive business. The global addressable market for pumps, valves, and seals is around $120 billion to $130 billion and although Flowserve is one of the largest players (and the only one to offer all three major components), it still only has around 3.5% share of the market. As automation continues to move forward, I expect the demand for pumps and valves to increase, and I also believe Flowserve has the opportunity to build or buy its way into end-markets where it has lower-than-average weighting.

In the meantime, though, this is still a very challenging market for Flowserve. The oil and gas markets may be stabilizing, but that's not synonymous with growing and other markets like chemicals, power, and general industrial are still looking for stability. These shares have been lifted along with so many others in the post-election rally, but I would also note that this is a stock that historically has been valued more richly than might otherwise seem fair.

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Flowserve Dog-Paddling While Waiting For Orders To Recover

With Watsco, It's About Quality Versus Value

If somebody offered you a brand new Ferrari for $1,000, you'd probably be extremely suspicious of the offer and/or the car. Quality products don't typically come at a bargain price, and that's something investors largely have to make their peace with in the industrial distribution/MRO sector, as quality names like Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and WESCO (NYSE:WCC) often look pricey. So it is with leading HVAC distributor Watsco (NYSE:WSO), and especially now that stocks in this sector have shot up 15% to 30% in just the last month.

If you're happy with a lower total return, or you believe that Watsco can grow free cash flow in excess of a 10% compounded annual rate over the next decade, maybe there's some appeal here. I don't find either of those clauses acceptable, though, and so I will watch this distributor from the sidelines as it continues to benefit from a healthy residential HVAC market and invests in IT and supply/logistical improvements that should pay rewards in the coming years.

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With Watsco, It's About Quality Versus Value

Federal Signal May Find Rising Expectations Hard To Meet

Like Miller (NYSE:MLR), a small industrial vehicle company I've written on in the past, Federal Signal (NYSE:FSS) toils mostly in obscurity with relatively little coverage (though significant institutional ownership). This company has undergone a lot of changes in the last five years, selling off pieces of the business and refocusing around its Safety and Security and Environmental Solutions operations, and management is now operating with what I would call ambitious but realistic operating targets.

The issue, as is the case for so many stocks now, is the price/value trade-off. These shares have rocketed up post-election (up almost 40% since November 1) and while the municipal and oil/gas markets may be improving, and may do even better under the new administration, I don't believe they've improved that much. Even with mid single-digit long-term revenue growth (ahead of likely municipal spending growth) and higher FCF margins, it is hard for me to see today's valuation as a bargain, though there is at least a credible possibility that Federal Signal could itself be an M&A target.

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Federal Signal May Find Rising Expectations Hard To Meet

Trade Turbulence Adds A New Element To The Unifi Story

Unifi (NYSE:UFI) was already an interesting story on its own merits. This leading supplier of polyester and nylon yarns to the U.S. market has done a very good job over the last five years of using branded value-added products to lift margins and stand out from what is otherwise a challenging and highly competitive market. But with a new administration in Washington potentially bringing meaningful changes to U.S. trade policy, Unifi's status as a large domestic supplier to the apparel industry could get quite a bit more interesting.

I frankly have no idea what will actually happen with agreements like NAFTA and CAFTA, and that adds a potentially meaningful element of uncertainty to the model. That said, I believe Unifi will continue to find success in increasing its mix of value-added branded products, and I like the prospects for higher cash flow generation in the years to come. The shares have run about 20% since the election and are up about 50% from earlier lows, though, so it's harder to make a call that the shares are substantially undervalued today.

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Trade Turbulence Adds A New Element To The Unifi Story

Columbus McKinnon Poised For An Industrial Recovery, But So Is The Street

This may be obvious to many readers and investors, but timing is an invaluable part of the investment process. A couple of months ago, Columbus McKinnon (NASDAQ:CMCO) would have looked like a significantly undervalued and overlooked play on a general industrial recovery, not so much an underappreciated leader in the material handling market with a catalyst from increasing automation.

Fiscal second quarter earnings were quite encouraging regarding that recovery, though, and the recent Presidential election only strengthened investor conviction, taking these shares up almost 60% since the day before second quarter earnings. I do believe that recovery will come, though, and the recently-announced deal for Konecranes' (OTCPK:KNCRY) STAHL business should benefit revenue, margins, and cash flow in the years to come.

With an underlying expectation of mid single-digit revenue growth and high single-digit cash flow growth supporting a fair value of about $28, Columbus McKinnon still has some appeal, but it would definitely be a name to watch for a pullback if this rally hits the rocks.

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Columbus McKinnon Poised For An Industrial Recovery, But So Is The Street

Central Pacific Financial's Valuation Could Cause Some Trouble In Paradise

Grey skies, rain and what passes for cold weather around here may be why I was thinking about Hawaii and decided to look into Central Pacific Financial (NYSE:CPF), but the valuation there doesn't look too much like a tropical paradise. Central Pacific has done a lot to get itself on the right track from its flirtation with disaster during the credit crisis, but it is hard to see how management can drive the sort of growth it will need to make today's valuation seem cheap in a reasonable time frame.

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Central Pacific Financial's Valuation Could Cause Some Trouble In Paradise

Littelfuse's Valuation May Seem Demanding, But The Business Is Appealing

A lot of investors prize businesses with strong share in COGS/opex-oriented businesses with barriers to entry. Littelfuse (NASDAQ:LFUS) certainly fits the bill, as circuit protection products like fuses and suppressors and sensors tend to sell for low individual ASPs, but they are ubiquitous and customers prize reliability (you don't want a TV or CT scanner failing because of a $1 fuse). What's more, auto OEMs are adding more and more sensors and fuses to new models and the migration towards more electric power (including 48v architectures and all-electrics) should offer more content growth opportunities for Littelfuse.

I've made my peace with the fact that companies like Littelfuse and Sensata (NYSE:ST) (which aren't apples-to-apples comps) aren't going to often look cheap, but the strong performance of the shares (up about 35% over the past year, and up about 70% over the past three years) and the high multiples do at least lead me to pause. That said, the low double-digit long-term FCF growth implied by the current valuation doesn't strike me as ridiculous. I'd wait for a better entry point, but that could be a long and frustrating wait and stronger than expected growth in the auto business could support even higher multiples.

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Littelfuse's Valuation May Seem Demanding, But The Business Is Appealing

A Tough Macro Environment Is Masking Some Improvement At PolyOne

It has been a while since I've written on PolyOne (NYSE:POL), and I wasn't all that fond of the valuation on this specialty chemical company back in that last article in 2013. Since then, the share's performance has been about half that of the S&P 500, though somewhat less disappointing relative to other chemical companies like Schulman (NASDAQ:SHLM), Clariant (OTCPK:CLZNY), and Westlake (NYSE:WLK).

Performance has been hurt not only by execution issues in the acquired Spartech business, but also a weakening macro environment, and this most recent quarter was the first in over two years to show year-on-year revenue down (though organic growth was still negative absent an adjustment for energy-based pricing).

The investment prospects for PolyOne are more interesting to me now. I like specialty chemical companies, and I think PolyOne has a lot going for it with an array of value-adding capabilities. I also like that management has been shoring up some weaknesses and continuing to push the company in the direction of "value over volume" and toward a model that could conceivably produce double-digit ROICs on a more consistent basis.

Valuation isn't a slam-dunk, but I've learned that it is worth paying attention when quality specialty chemical companies look reasonably priced on a discounted cash flow basis, as the market is often willing to pay premiums to that value in healthier economic times.

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A Tough Macro Environment Is Masking Some Improvement At PolyOne

State National May Be Unusual And Almost Unknown, But It's A Business Worth Following

I like insurance companies and I especially like companies like Arch Capital (NASDAQ:ACGL), Argo (NASDAQ:AGII), and W.R. Berkley (NYSE:WRB) that do things a little differently than the typical insurance company. Well, State National (NASDAQ:SNC) may take the cake in that respect, as this is a pretty unusual insurance company compared to most publicly traded "P&C" insurance companies. While I do expect competition will limit returns to some extent, I think State National can maintain mid-teens ROE and generate enough adjusted cash earnings growth to support a fair value close to $16 today.

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State National May Be Unusual And Almost Unknown, But It's A Business Worth Following

South State Bank Pairing Organic Growth With A Growing Focus On M&A

I'm confident that South State Bank (NASDAQ:SSB) is going to be a meaningfully larger bank in three to five years' time, and I'm reasonably confident that it will not compromise its quality to get there. While management already has a credible plan in place to drive above-average growth by organic means, they have also made it clear that M&A is going to continue to be a meaningful factor in the company's long-term growth plans.

South State is at an interesting point in its growth story. The bank is about to break through the $10 billion threshold in assets and that's going to increase its regulatory/compliance costs, but I expect additional deals in growth markets along the I-85 corridor and southeastern coast will be coming and will help offset some of those costs with further growth. While South State Bank doesn't look cheap today, it's closer to its fair value than most and this would be a name I'd watch in the hopes of taking advantage of an eventual normalization in bank valuations.

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South State Bank Pairing Organic Growth With A Growing Focus On M&A

Safran Building Toward Better Days

It hasn't been the smoothest ride for aerospace companies, but France's Safran (OTCPK:SAFRY) is nevertheless worth a closer look. Safran is a tier one supplier in the aerospace market, and through its alliance with General Electric (NYSE:GE), a leading player in narrowbody aircraft engines. While the launch of a new engine program will pressure margins in the short term, aftermarket sales should start improving and management seems focused on removing the company from underperforming business lines.

The sale of the security business is going to bring a lot of cash to Safran and there are still concerns about what management will do with that money. Although management hasn't sounded particularly eager for M&A, and there aren't many deals out there that would seem to really improve the company, the Street is still batting around various names as potential targets. While this potential M&A is a significant swing factor, mid single-digit revenue growth and improving margins can drive a fair value more than 10% better than today's price, making these shares worth a closer look.

Investors/readers should note that Safran's ADRs are rather liquid, and while the home exchange shares are even more liquid, there should be adequate liquidity with the ADRs for most investors' needs.

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Safran Building Toward Better Days

Washington Federal Hoping A New Model Can Drive More Growth

Until relatively recently, Washington Federal (NASDAQ:WAFD) was pretty much a thrift - residential mortgages made up a large majority of the loan book, and the company financed those loans with a funding mix that skewed heavily toward savings accounts and CDs. In recent years, though, this multi-state Western regional bank has tried to become more like larger peers such as Wells Fargo (NYSE:WFC), U.S. Bancorp (NYSE:USB), and Umpqua (NASDAQ:UMPQ), with a turn toward more commercial lending.

I don't like how Washington Federal has been losing deposit share in many states, nor the already-high loan/deposit ratio. As the bank is not very asset-sensitive, I worry that the near-term drivers for near-term growth are relatively limited. I do believe that management is making a good call in diversifying its loan book, but I'd like to see more progress on accumulating lower-cost deposits and a willingness to look a little harder for better uses of capital.

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Washington Federal Hoping A New Model Can Drive More Growth

Westamerica Bancorp Struggling As A Supreme-Quality Bank In A Lower-Quality World

By a lot of metrics, Westamerica Bancorporation (NASDAQ:WABC) has a legitimate claim to being one of the best banks in the country, or at least one of the best small-cap banks. This Northern California-based bank produced numbers during the credit crisis/recession that were better than what many banks produce today, and the bank's service-oriented approach to business banking has made it a strong player for business deposits within its footprint.

But there's an ironic twist to this narrative. A lot of what has made Westamerica so good, particularly its rigorous underwriting discipline, is weighing heavily on the bank today. Credit quality is still excellent, but loans have declined at a double-digit rate for five years running and a shocking amount of the company's asset base is invested in securities because management can't find worthwhile loan opportunities. With that, valuation is a mystery to me. Even if I were to assume that ROE could double over the next five years, I don't see the path to today's valuation.

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Westamerica Bancorp Struggling As A Supreme-Quality Bank In A Lower-Quality World

Umpqua Seems Short Of Growth Drivers

Oregon's Umpqua (NASDAQ:UMPQ) is something of a case-in-point as to why I'm reluctant to overpay for stocks (and bank stocks in particular). When I last wrote about this high-quality bank back in 2014, I thought the shares looked expensive. Since that time, the shares are actually down about 5% - rare for most bank stocks and all the worse when compared to the performances of regional rivals like East West (NASDAQ:EWBC), Washington Federal (NASDAQ:WAFD) and Pacific Continental (NASDAQ:PCBK).

What's worse is that even after this run of underperformance, the shares still don't look all that cheap. Not only is Umpqua not all that asset-sensitive, it also lacks real leverage in more than a handful of major markets. Add in a loan book that is overweighted to commercial real estate and multi-family residential lending, an elevated cost structure (which is liable to be tough to tame) and weakening yields, and it's a tough near-term outlook. While there is definitely room for improvement, Umpqua may find it hard to go much above 10% ROE in the foreseeable future, and that limits the value proposition today.

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Umpqua Seems Short Of Growth Drivers

Fortive Could Be A New Industrial Star

When you carry the legacy of Danaher (NYSE:DHR) with you, expectations are going to be high. That is already the case for Fortive (NYSE:FTV), as this high-quality industrial conglomerate has debuted with a premium valuation and high expectations for growth. That said, those expectations aren't necessarily unreasonable, as the company's existing businesses already enjoy good market share, solid margins, and attractive free cash flow.

Valuing a stock like Fortive is tricky. If you exclude the impact of future M&A, you're largely missing the point of the business (which is to add value by skillful M&A selection, integration, and execution). On the other hand, modeling the impact of future M&A is a level of guesswork above and beyond the assumptions that underlie all modeling. Consequently, while Fortive doesn't look particularly cheap today (particularly after the post-election run), I wouldn't ignore it simply on the basis of valuation and would, at the very least, keep this on a watch list.

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Fortive Could Be A New Industrial Star

Glatfelter Needs To Rejuvenate Volume Growth

It's been a while since I've written on Glatfelter (NYSE:GLT), but this specialty paper and engineered fiber product company has remained frustratingly underpowered on growth, with year-over-year revenue contraction reported in every quarter since the fourth quarter of 2014. Meanwhile, Finland's Ahlstrom has been on much better footing with respect to volume growth, revenue growth, and margin improvement.

Glatfelter isn't unfixable, but it is going to take time and I don't think the company has any obvious quick fixes. What's more, there's a surprising amount of volatility here - the shares' 19% drop on the day of its last earnings was arguably excessive, but the subsequent post-election rally likewise seems more than a little optimistic. I believe the underlying markets for many of Glatfelter's specialty products can support mid single-digit long-term revenue growth, but the specialty paper business is likely in long-term decline and there's still work to be done to improve the specialty businesses. With an okay valuation today, but not especially bright prospects for near-term volume growth, these shares look uninspiring after the rally.

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Glatfelter Needs To Rejuvenate Volume Growth

Capital City Bank Needs Scale To Leverage A Good Deposit Franchise

As a bank focused largely on northern Florida, Capital City Bank Group (NASDAQ:CCBG) has had a tough go of it. The serious credit losses and recession that followed the housing bubble led to a significant contraction in the balance sheet and the firm's largely rural, largely retail branch network has established a high-cost base that has pushed returns on equity into the low single-digits.

There are some intriguing opportunities here. The bank has the capital to do some M&A and its core north Florida markets seem to be poised for above-average growth. If management can find the way to better-leverage its branch network and reduce operating costs, the profit leverage would be substantial. Likewise, with the bank having made meaningful progress on credit clean-up, larger banks could find the combination of low-cost deposits and elevated expenses very appealing as a takeover target. Unfortunately, the stock has shot up almost a third since the election, and it is difficult to see the obvious upside now.

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Capital City Bank Needs Scale To Leverage A Good Deposit Franchise

BancorpSouth Seems To Have A Harder Path To Growth

Sometimes different is better. Bank of the Ozarks (NASDAQ:OZRK) has focused on specialized real estate lending in the South to fuel exceptional growth, while Ameris (NASDAQ:ABCB) has used serial M&A to acquire footholds in multiple Southern growth markets. In the case of BancorpSouth (NYSE:BXS), though, I'm less certain that its different strategy of targeting mid-sized geographies with less competition is going to work out as well over the long run.

There are positives to this story. BancorpSouth should be approaching the end of some serious regulatory issues that have restricted its operations (particularly with respect to M&A), the company's capital position is fine, and the company's credit situation looks healthy. What's more, it generates a significant amount of fee/non-interest revenue and there is still operating cost leverage left to achieve. All of that being said, the market seems to be already pricing in mid-teens long-term growth, and I don't think that leaves a lot of room for disappointment or outperformance.

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BancorpSouth Seems To Have A Harder Path To Growth

Once Overlooked, Microsemi Is Now The Belle Of The Ball

It's been a long, and sometimes strange, trip with Microsemi (NASDAQ:MSCC). It wasn't that long ago when writing positively about this semiconductor company generated a lot of negative feedback from the peanut gallery, but management has stuck to its plan and reshaped Microsemi into a diversified semiconductor company with multiple growth drivers and good margin leverage potential. The market has recognized this improvement too, with the shares up over 130% over the last three years and up more than 50% over the past twelve months.

Now Microsemi is a relatively popular name - it's on multiple sell-side "Top Pick" lists and the stock is in play as an M&A target. I do believe there is a credible case that Microsemi could be a target, if for no other reason than M&A is a reasonable way to drive earnings growth in the semi market today and the recent wave of consolidation has thinned the herd of eligible and worthwhile targets. Given the upside potential of a deal, I'm inclined to hold on to what I have but I will note that it's not really plausible (in my opinion, at least) to validate today's price on a standalone basis.

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Once Overlooked, Microsemi Is Now The Belle Of The Ball

Iberiabank In The Middle Of A Tough Balancing Act

While the share price at IBERIABANK Corp. (NASDAQ:IBKC) ("Iberiabank") has rocketed up since the election (along with many, if not most, other bank stocks), there are still a lot of areas where management has work to do. The energy portfolio has shrunk, but credit quality has worsened, and there are some legitimate concerns about how management has been managing excess liquidity in a low-rate environment.

As is often the case with most stocks, a lot of it comes down to valuation. If Iberiabank were trading around 1.5x tangible book, I'd be excited about the deposit footprint and the toeholds in multiple growth markets across the South. As it is, though, I think the Street is more than rewarding the stock for the improvements in operating efficiency, the probable loan growth trajectory, and the possibility of a more constructive regulatory environment.

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Iberiabank In The Middle Of A Tough Balancing Act

Ameris Has A Lot Of Opportunities To Grow, But It's Not Cheap

If you like banks with above-average prospects for growth over the next three to five years (and beyond), Ameris (NASDAQ:ABCB) could be right up your alley. If you're looking for a quality overlooked opportunity trading below fair value, I don't think you're going to find as much to like here.

Ameris has been an aggressive acquirer and has built an interesting franchise in southern Georgia and northern Florida, as well as focused lending operations targeting segments like agricultural lending, SBA, and mortgages. Add in the potential from ongoing expense leverage and above-average growth in the region in which it operates, and I think Ameris has above-average growth potential. Trading close to 3x tangible book, though, and already pricing in high teens earnings growth, it's hard to call this a value.

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Ameris Has A Lot Of Opportunities To Grow, But It's Not Cheap

Better Days Ahead For Wärtsilä

This has been a challenging year for Finland's Wärtsilä (OTCPK:WRTBY) (OTC:WRTBF), as the sharp downturn in the energy market has continued to weigh on energy-related orders like drillships and gas carriers. When I last wrote about Wärtsilä, I didn't think investors needed to be in a hurry to buy up shares, and the stock's roughly 5% move since then doesn't leave me feeling as though I've missed much. That said, I believe things are looking up for this business.

While Wärtsilä's oil/gas-related business has definitely been hurt, the company's diversification is paying off as cruise operators continue to order new vessels. Although cruise ships take longer to build and deliver than merchant or energy vessels, they are potentially much more lucrative to Wärtsilä in terms of total addressable content beyond engines (electrical systems, automation, etc.). What's more, the company's power gen business has been gaining share and looks well placed to benefit from the growing demand for flexible baseload and peak load generation.

All told, while these shares are not wildly undervalued, and 2017 is unlikely to see a strong earnings rebound, they do look priced to generate a low-double-digit annual return. With a lot of skepticism around the name and a lot of worry about the oil/gas business, I think there could be an opportunity to start looking at a contrarian position here.

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Better Days Ahead For Wärtsilä

Bradesco Isn't Out Of The Woods, But The Credit Cycle May Be Bottoming

Banco Bradesco (NYSE:BBD) has had a rough time of it recently, as Brazil's weak economy has hurt demand for loans, pressured deposits, and led to greater credit losses. This isn't a unique situation, as other banks like Itau Unibanco (NYSE:ITUB), Banco do Brasil (OTCPK:BDORY), and Banco Santander Brasil (NYSE:BSBR) have seen similar pressures and stresses, but Bradesco has been the weakest of these performers over the past year (just slightly worse than Itau) and the strong rally that had pushed these shares up 50% to 100% has sharply reversed in recent days.

The good news for Bradesco is that it is at least plausible that the credit cycle has bottomed out and the company's capital position is okay. The worse news is that the recovery in Brazil could be slow and stretched out over many years - not unlike what the U.S. banking sector has seen. While I think management's inability to accurately predict worsening credit trends as the cycle dragged on is a concern, as is the indictment against the CEO, I do believe that the bank can return over time to ROEs in the high teens to 20% and generate high-single-digit to low-double-digit earnings growth, supporting a fair value above $10 for the ADRs.

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Bradesco Isn't Out Of The Woods, But The Credit Cycle May Be Bottoming

Knocked Back By Energy, Green Bancorp Looking To Rebuild The Growth Story Next Year

Energy lending has hamstrung many banks and Green Bancorp's (NASDAQ:GNBC) previously outsized exposure to the energy sector has come back to bite this small Texas lender. Management is moving fairly aggressively to exit its energy lending business and pivot toward lending growth opportunities in Dallas and Austin, but weakness in the Houston metro area remains a concern, as does this company's funding base.

I like Green Bancorp's portfolio banker lending model, and I think the underlying growth in major Texas metro areas like Dallas, Houston, and Austin can support above-average loan growth. That said, there's a lot of competition within Texas, and management needs to prove that it can carve out a durable differentiated lending franchise and expand its base of lower-cost deposits. The current valuation already assumes a lot of improvement (and long-term earnings growth in the range of 20%) and that doesn't leave much room for excitement from me.

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Knocked Back By Energy, Green Bancorp Looking To Rebuild The Growth Story Next Year

New Management Needs To Unlock Bancolombia's Potential

Bancolombia's (NYSE:CIB) ADRs haven't done too bad over the past year (up about 5%), but they've lost about a third of their value over the past three years, and investors have been suffering through a five-year stretch of weakening margins and returns. While some of the pressures have been external to the bank, poor management and aggressive M&A played a meaningful role. Bancolombia saw a change at the top earlier this year when Juan Carlos Mora Uribe replaced Raul Yepes, the CEO who oversaw that weak five-year period, and there is definitely a lot of work to do.

The good news is that, although Bancolombia's capital is depleted, the bank is starting from a workable footprint. A leading deposit-gatherer and lender in Colombia, Bancolombia can do a lot better than it has in its consumer/retail banking operations while operations in Central America offer some scope for improvement as well. It takes only relatively modest performance improvement to drive high-single-digit earnings growth and a fair value above $38, but Colombia is a still a commodity-driven economy with a competitive banking sector and Bancolombia's capital position doesn't allow for a lapse in discipline in underwriting.

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New Management Needs To Unlock Bancolombia's Potential

A Recovery In Argentina Can Take Banco Macro Further, But Mind The Risks

Argentina's Banco Macro (NYSE:BMA) has already had a pretty solid year, with the shares up 26% over the last 12 months on improving prospects for Argentina's economy. In fact, Banco Macro has been something of a standout, as Galicia (NASDAQ:GGAL) has climbed about 15% and BBVA Francs (NYSE:BFR) has fallen more than 15% over the same time period. Even so, better things could still be ahead.

Banco Macro is the third-largest private bank in Argentina and conservatively run, leaving the company with a good credit position and ample capital and liquidity to benefit from the improving Argentine economy. While I do expect Banco Macro's ROE to decline (due in large part to the distortions created by inflation), I believe the company can post double-digit earnings growth. If that's a reasonable expectation, a fair value of close to $80 is in play.

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A Recovery In Argentina Can Take Banco Macro Further, But Mind The Risks

Banco De Chile Looks Like An Island Of Relative Stability

Compared to South American neighbors like Brazil, Argentina, Venezuela, and Colombia, Chile's economy has held up well despite its heavy reliance on mining for export income. That said, growth has been slowing, sentiment is weakening, and there has been more grumbling about the government in the richest Latin American economy (as measured by GDP per capita).

That leaves Banco de Chile (NYSE:BCH) in an interesting spot. Banco de Chile has long been a standout performer among Latin American banks, with double-digit annualized asset growth over the last five years and double-digit earnings growth over the past decade, as well as strong credit, spread, and margin performance compared to rivals like Santander Chile (NYSE:BSAC), BCI, and Itau CorpBanca (NYSE:ITCB). At the same time, though, loan growth has been slowing and spreads have been tightening.

Assuming that Banco de Chile can continue to generate ROEs near 20% over the long term, the shares have some appeal at this price for investors who want exposure to the above-average growth potential of Latin America but with a lower degree of risk.

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Banco De Chile Looks Like An Island Of Relative Stability

With Western Alliance Bancorp, 'Different' Seems To Mean 'Better'

With a $4 billion market cap and meaningful institutional ownership, I can't say that Western Alliance (NYSE:WAL) is ignored or overlooked, but I'm surprised that a run of the numbers suggests potentially meaningful undervaluation here. While the company's intense focus on commercial lending and lending outside of its core footprint does represent a risk, the company's focus on more specialized types of lending is a strong positive, there is ample room to grow its deposit-gathering footprint and the company's strong internal capital generation creates a lot of long-term opportunities.

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With Western Alliance Bancorp, 'Different' Seems To Mean 'Better'

Southside Seems Priced Like A Better Bank Than It Appears To Be

Considering the size of the economy and the above-average population growth, it makes sense that both investors and other banks are interested in Texas-based banks. Although worries that weak oil/gas prices would undermine the entire state's economy pressured the shares of many Texas banks earlier this year, many have rebounded strongly and now sit at or near 52-week highs.

Southside Bancshares (NASDAQ:SBSI) is one such bank, and while I'm certainly interested in finding some good investment ideas in the Texas bank sector, I'm not convinced this one qualifies. In its favor, Southside could be an acquisition target for a bank looking to acquire a bigger presence in East Texas, and banks ranging from larger super-regionals like BB&T (NYSE:BBT) and U.S. Bancorp (NYSE:USB) to other Texas-based banks like Hilltop (NYSE:HTH) and Prosperity (NYSE:PB) are looking to build their deposit share in the state. Against that, though, is more leverage than I'd like, a heavily CRE-dependent loan book, and a valuation that already factors in some pretty solid growth expectations.

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Southside Seems Priced Like A Better Bank Than It Appears To Be

Dry Powder, Clean Exposures, And Valuation Make Hilltop Holdings Worth A Look

Like many other Texas banks, Hilltop Holdings (NYSE:HTH) got hit hard earlier this year, only to come back strong and recently challenge its 52-week high. While there is enough diversity to make the notion of a "typical" Texas bank a questionable one, Hilltop at the very least doesn't have the large energy lending exposures that have tripped up some of its comparables.

What Hilltop does have, though, is a strong capital position that can support expanded lending and M&A, not to mention an asset that can be sold (its insurance business) to fund additional moves. Hilltop also has a pretty clean credit profile and a management team that knows how to build (and sell) banking businesses. While the valuation isn't hands-down cheap, there does seem to be enough value and potential here to make it worth a closer look from investors shopping for some bank stock ideas.

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Dry Powder, Clean Exposures, And Valuation Make Hilltop Holdings Worth A Look

3M Executing, But Not Excelling

Investors who want to own large industrial conglomerates have some tough choices to make today. Solid companies like Illinois Tool Works (NYSE:ITW) don't trade cheaply, and many of the stocks that do look undervalued have issues attached - whether it's the uncertainty of Honeywell's (NYSE:HON) new strategy/management, the execution and market issues at Dover (NYSE:DOV), or the timing of end-market recoveries for companies like Eaton (NYSE:ETN).

3M (NYSE:MMM) looks to me to be on the Illinois Tool Works side of the ledger. I can't argue that the stock is undervalued, or at least not in terms of meeting my normal minimum return requirements. I can live with the argument that many investors will take a lower return on 3M shares in exchange for the lower operational volatility and higher reliability, but this isn't a business that looks poised for a big turnaround and there are some ongoing questions about how management is addressing future growth drivers.

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3M Executing, But Not Excelling

Aptose Remains In Limbo

In a market that has turned unfriendly toward biotechs, Aptose Biosciences' (NASDAQ:APTO) ongoing execution issues and cash drain have become serious issues. It has taken over a year (and counting) to resolve a clinical hold on APTO-253, and that's an execution shortfall that the company can ill-afford given the progress other companies are making with clinical candidates for hematological cancers and the need for real clinical data to support further capital raises.

The good news is that the company appears to be close to a resolution of the clinical hold with APTO-253 and the resumption of Phase I testing. The other good news is that the company has added another interesting preclinical asset for its hematology pipeline. The bad news is that this is all about "potential" and potential is the one asset small biotechs never seem to lack. What's more, the company is going to need to raise capital and the share price weakness is going to increase the dilution.

It's hard to stay bullish on a biotech that has needed more than a year to reformulate a drug and resolve its clinical hold (when that is really the only value-driving asset the company has), and that's particularly true given the risk that Aptose may have to raise money with little-to-no human clinical data. There's still upside here; if APTO-253 and CG-806 work, they can redeem a lot of these issues down the road. But make no mistake - this is a highly speculative pick that is not so far removed from gambling.

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Aptose Remains In Limbo

Brocade Looks Like Another Typical Broadcom (Avago) Deal

Broadcom (NASDAQ:AVGO) (or more precisely, the company previously known as Avago) knows what it wants in M&A and is not afraid to go for it. Management loves to find companies with few competitors, stable revenue, cost synergy potential, and a product/market assortment that slots in opportunistically with the existing business. So even allowing for an ongoing shift away from fibre channel toward Ethernet, Brocade (NASDAQ:BRCD) checks the boxes that Broadcom looks for and looks like a solidly accretive deal.

The Brocade deal appears to add around $10/share to my fair value estimate for Broadcom, and even if Brocade's fibre channel SAN switch business should suffer even greater erosion from the adoption of Ethernet switches, Broadcom has strong existing products there as well. The biggest downside I see to this deal is that it limits Broadcom's short-term M&A options. A rival bid for NXP (NASDAQ:NXPI) (which was not too likely either way) now seems even less likely and likely so too a bid for a company like Xilinx (NASDAQ:XLNX) that could more meaningfully broaden Broadcom's horizons.

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Brocade Looks Like Another Typical Broadcom (Avago) Deal

Wright Medical Checking The Boxes

Investors often seem to get bored with the actual execution of business plans, and I think that's at least partly responsible for the ongoing weakness in Wright Medical (NASDAQ:WMGI) shares. It's also been a weak stretch since early August for many of the company's peers, with Integra (NASDAQ:IART) and Zimmer Biomet (NYSE:ZBH) down as well, and Stryker (NYSE:SYK) just barely up.

Wright Medical continues to have a strong position in one of the fastest-growing segments of medical devices, and the company's Augment biologic has significant growth potential from here. The company has also largely tied up its hip implant litigation and at a cost that was within the prior bounds established by management.

Management has also been delivering successfully against its merger synergy targets, and I believe the company is on track for strong growth over the next ten years as new products drive more adoption of upper and lower extremity procedures. With a fair value in the mid-$20s, Wright Medical shares still offer worthwhile upside.

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Wright Medical Checking The Boxes

Can Prosperity Bancshares Build Value Outside Of M&A?

I thought Texas-based Prosperity Bancshares (NYSE:PB) looked like an interesting value back in late January of 2015, and the shares are up more than 10% since then but it has not been a smooth ride. Like other Texas banks, including Cullen/Frost (NYSE:CFR), Texas Capital (NASDAQ:TCBI), International Bancshares (NASDAQ:IBOC), and Green Bancorp (NASDAQ:GNBC), Prosperity shares had a rough time from late 2015 into early 2016 on worries that the steep decline in energy prices would undermine the bank's credit quality and loan growth in Texas and Oklahoma.

There are signs of weakness that shouldn't be ignored, including rising unemployment and shaky commercial real estate numbers in Houston, but Prosperity continues to have a strong credit quality profile, a good efficiency ratio, and a very disciplined overall approach. On the other hand, loan growth is weak and I have more doubts now about Prosperity's ability to grow outside of M&A. I believe that Prosperity can post mid-to-high single-digit earnings growth from here (equating to a low double-digit ROE down the road), but that no longer supports a compelling buy thesis.

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Can Prosperity Bancshares Build Value Outside Of M&A?

After A Post-Panic Rebound, It's Harder To Find Value In Texas Capital Bancshares

Quite a few banks with heavy Texas exposure took a beating in the market from the fall of 2015 through the spring of 2016, and Texas Capital Bancshares (NASDAQ:TCBI) took one of the heaviest beatings. But like Cullen/Frost (NYSE:CFR), Prosperity Bancshares (NYSE:PB), Comerica (NYSE:CMA), and BOK (NASDAQ:BOKF), Texas Capital has recouped a lot of that damage.

Texas Capital remains structured for significant growth, as loans continue to grow at a double-digit year-over-year clip, driving strong net interest income growth, while credit may be stabilizing. The question, then, is how much you want to pay for a very focused, growth-oriented Texas bank with ample room to expand. Banks like Bank of the Ozarks (NASDAQ:OZRK) underline some of the difficulties in valuing growth banks (they often, if not almost always, look expensive), and even mid-teens earnings growth isn't enough to generate a compelling fair value right now.

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After A Post-Panic Rebound, It's Harder To Find Value In Texas Capital Bancshares

Synovus Facing Some Tough Decisions

Credit where due - Synovus Financial (NYSE:SNV) management has done a great job over the last three or four years. One of the weakest mid-cap banks in the depths of the credit crisis, Synovus has done a very good job of cleaning up its credit, reinvesting in the business, and building up its capital position. With that, the return on tangible equity has improved about four points, tangible book value has improved about 10%, and the shares have solidly outperformed many regional peers.

But there is what I believe to be a very relevant "now what?" question with Synovus. Management has been returning capital to shareholders (which the market has certainly appreciated), but I think there's a choice to be made now whether to continue with the "slow and steady" approach of improving profitability through cost efficiency, continue a shift toward more C&I and retail lending, and maintaining solid buybacks, or whether to deploy capital more aggressively with M&A.

On its own, I don't think Synovus is particularly cheap right now. I do think the bank will return to low double-digit ROEs in time and I think the interest sensitivity here is appropriate, but the valuation seems right for all of that. Given the bank's footprint, though, ongoing M&A remains a real possibility - whether as a buyer or a seller.

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Synovus Facing Some Tough Decisions

MSC Industrial Paddling Hard Just To Stay In Place

I was cautious on MSC Industrial (NYSE:MSM) a quarter ago, and the stock's slightly negative performance since then (down about 1%) is better than I'd expected - not to mention better than what other distributors like Grainger (NYSE:GWW), Fastenal (NASDAQ:FAST), and Lawson (NASDAQ:LAWS) have managed over the same time.

And yet, the operating environment remains severely challenged - the metalworking index remains in contraction, industrial production is soft, and MSC's core heavy manufacturing sector is still struggling, not to mention ongoing pressure on industrial distributors as a group.

While MSC Industrial did get a bump after fiscal fourth quarter earnings, I think a lot of that was relief and the shares look more or less fairly priced right now. I'm still looking for mid single-digit revenue growth and high single-digit FCF growth, and I do expect an eventual recovery in manufacturing and industrial MRO demand, but I still also believe that distributors are looking at a more challenging future.

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MSC Industrial Paddling Hard Just To Stay In Place