Thursday, January 28, 2016

Seeking Alpha: The Market Seems To Think Chart Industries Is Back To Square One

That shiny new natural gas economy that was a rock star in the markets a few years ago and supposed to lead us into the next decade has wound up where sadly all too many rock stars of the past have - floating face down in a pool. In this case, it was a pool of cheap oil, as the sharp drop in oil prices has led many would-be users of LNG to table those plans for the time being, leading to much slower progress on LNG export terminals, and filling stations.

This hard stop in the natural gas industry, combined with much tougher conditions in China, has hammered the shares of Chart Industries (NASDAQ:GTLS), with the stock down over 40% in the past 12 months and nearly 60% since my last piece on the company.

While I had thought expectations were still a little elevated back in May, little did I suspect that activity across LNG would shrink so far so fast. At this point, it would seem that Chart Industries is being valued only on the basis of its industrial gas business, a good business where the company has long enjoyed #1 or #2 share in most of its primary markets, and arguably even undervalued just on that basis. While the timelines for large-scale U.S. LNG exports and wider usage of LNG as a transportation fuel have certainly stretched out, to give the shares no value for them at all seems unduly harsh to me.

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The Market Seems To Think Chart Industries Is Back To Square One

Seeking Alpha: Komatsu Lacking A Spark

There's really not much good news to celebrate among the makers of heavy machinery for construction and mining. Joy Global (NYSE:JOY) has been pummeled over the last year, and Komatsu (OTCPK:KMTUY), Caterpillar (NYSE:CAT), Sany, Hitachi Construction (OTCPK:HTCMY), Sandvik (OTCPK:SDVKY), and Atlas Copco (OTCPK:ATLKY) all pretty much occupy the same real estate in the down 20%-30% range. In fact, most of these companies' shares have pretty closely tracked the CRB Index down over the past 12 months.

I continue to think that Komatsu is a strong company within the heavy machinery sector, but it rarely makes a lot of sense to buy the best house on the block when the entire neighborhood is in flames. To that end, it's hard to look past the ongoing declines in machine utilization in Japan, China, and North America and the grim outlook for mining capital spending. While Komatsu shares do seem undervalued based on prior valuation ranges, it's hard for me to see what drives better earnings and more investor interest in the near term.

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Komatsu Lacking A Spark

Wednesday, January 27, 2016

Seeking Alpha: WESCO Hammered Down, But Margin Questions Linger

Finding a beaten down industrial stock takes no effort these days, and WESCO (NYSE:WCC) certainly qualifies. These shares have fallen about 45% over the past year, surpassing the declines in other distributors like Grainger (NYSE:GWW), Rexel, HD Supply (NASDAQ:HDS), and Anixter (NYSE:AXE). Given the company's higher exposure to energy, perhaps it is not entirely unfair that WESCO would see a sharper drop, but I find it interesting that WESCO is also the only name on that short list that is expected to see revenue declines in both 2015 and 2016.

The North American industrial sector has weakened a lot more than I expected back in May of 2015, and that has led me to reduce my fair value estimate by about 25%. While I do believe that WESCO's core markets will recover in time, I still have concerns about the company's long-term margin leverage. Although WESCO is very efficiently-run from an SG&A perspective, I think gross margin leverage will likely disappoint the bulls and I don't see what will shake WESCO out of its long-term status as an average grower. So while WESCO does look undervalued today and should have more leverage to an industrial recovery, it wouldn't be first pick for a long-term holding.

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WESCO Hammered Down, But Margin Questions Linger

Seeking Alpha: F5 Networks In Growth Purgatory

"My son, Here may indeed be torment, but not death" Dante Alighieri, Purgatorio Canto XXVII

As far as many tech investors are concerned, a company that cannot generate double-digit revenue growth might as well just take itself private. I could talk a lot about the double-digit growth in F5's (NASDAQ:FFIV) service business, as well as the strong margin it generates, but none of that is really going to matter unless and until F5 can perk up its product growth rate and its overall reported growth rate.

Unfortunately, that's not a simple process. The company's core application delivery controller market has most definitely slowed, software ADCs are worth less to the company than its traditional hardware ADCs, and product offerings in areas like security and diameter routing can't yet offset the impact. I can run numbers indicating that F5 is undervalued even if growth never again reaches double-digits (and, in fact, if long-term product growth is below 5%), but investors could have a frustrating wait before the Street embraces the value argument and/or the company restores its product growth performance.

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F5 Networks In Growth Purgatory

Seeking Alpha: Lincoln Electric A Lion In A Very Harsh Winter

There are some questions investors learn not to ask, and "how much worse can it get?" is most definitely at or near the top of the list. Operating conditions for Lincoln Electric (NASDAQ:LECO), the leading producer of welding equipment and consumables in North America, were already looking rough in the middle of 2015, but conditions have gotten even worse on a deeper plunge in overall manufacturing activity.

Many industrial companies, particularly in the machinery space, have gotten the snot knocked out of them since the summer of 2015 and I think there are some long-term values in the sector. Lincoln Electric looks like one of them, but I can't state with any real confidence that my estimates are finally low enough. I think a buyer of Lincoln Electric shares today will be happy to own them in three years' time, but I can't say that they'll be happy to own them in six months, and that is a key issue with any buy recommendation in the machinery space - while I think many high-quality names are attractive for the long term, things can certainly get worse in the meantime.

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Lincoln Electric A Lion In A Very Harsh Winter

Tuesday, January 26, 2016

Seeking Alpha: Mueller Water Still Waiting For Orders To Really Flow

Construction activity has been getting better in the U.S., but you wouldn't really know it by looking at the performance of water infrastructure supplier Mueller Water Products (NYSE:MWA), nor other related stocks like HD Supply (NASDAQ:HDS) and Rexnord (NYSE:RXN). On the other hand, it's hard to say that Mueller's shares ought to be outperforming as the company has racked up three straight quarterly revenue misses and sell-side estimates have been moving lower.

I'm still optimistic that municipal spending will pick up, but it's not all going to materialize in 2016 for Mueller. What's more, investors are still concerned about the impact of the profound weakness in the oil/gas markets and the lack of traction in Mueller's water technology businesses. Mid-single digit revenue growth and operating leverage-driven margin improvements can still support a double-digit fair value, but the shares definitely need to see some beat-and-raise quarterly performances.

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Mueller Water Still Waiting For Orders To Really Flow

Seeking Alpha: Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Watching Bank of the Ozarks (NASDAQ:OZRK) continue to climb higher is a little like standing outside of a restaurant and watching people eat your favorite food. I have tremendous respect for this bank's management and its business plan, but I've never been able to construct a model that makes me comfortable with the valuation. That's particularly true given that the bank hasn't exceeded my financial performance expectations by all that much, suggesting to me that Wall Street is simply willing to pay more for the company's growth than I am.

Not much has really changed in any of those respects. I like the company's 2015 acquisitions and I believe OZRK can generate more than 25% earnings growth per year (CAGR) for the next five years. But even with the 20% pullback in the shares from its 52-week high, I just can't make the numbers work from a value perspective. Painful experience has taught me not to stick my neck out in situations where I can't make sense of the valuation, but more aggressive and/or valuation-insensitive investors could see more on offer here.

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Bank Of The Ozarks Offers Rare Growth, But It'll Cost You

Seeking Alpha: Diworsification Messing Up Middleby's Growth

Among the many nuggets to be found in Peter Lynch's books, the concept of "diworsification" is one of my favorites. The term refers to companies that eventually expand or acquire beyond their core competencies and end up ruining their business in the process. With Middleby's (NASDAQ:MIDD) struggles in its Viking business leading to real pressure on growth and margins, it's fair to ask whether this company's foray into residential cooking equipment is destroying the value created by the strong commercial operations.

These shares have lost about a quarter of their value since I last wrote about them, as a slowdown in food processing sales and the mess in the residential business has led to disappointing quarters (including organic revenue contraction in the second quarter), downward revisions, and a re-examination of whether these shares still merit such a robust premium. I've cut back my growth expectations, but I believe Middleby is still well-placed to take advantage of growing demand for labor-saving automation in commercial kitchens. There's elevated risk right now, and I'd be nervous about buying ahead of fourth quarter earnings, but there's still above-average growth potential in the core business.

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Diworsification Messing Up Middleby's Growth

Seeking Alpha: Wärtsilä Down On Power ... For Now

These are challenging times for Wärtsilä (OTCPK:WRTBY) (WRT1V.HE), one of Finland's largest and oldest industrial companies. Orders for drillships, semi-submersibles, and supply ships have cratered alongside oil prices, and the demand for new cargo ships is hardly better. With that, the company's leading position in marine engines, automation, and propulsion doesn't look all that impressive. Likewise in the energy business, as emerging market orders for flexible baseload gensets has plunged on currency and commodity weakness.

It looks too early to be bullish on these shares, but I think this is a good time to get up-to-date with due diligence on companies like Wärtsilä. The company's biggest original equipment markets are weak, but the lucrative service business will help tide it over, and cyclical markets don't stay down forever. When demand for large ocean-going vessels and flexible electrical gensets recovers, Wärtsilä's niche leadership and operating leverage should serve investors well.

U.S. investors should note that Wärtsilä's ADRs are not especially liquid. Many brokers now support international trading, and there is more liquidity to be found buying these shares on the Helsinki Stock Exchange.

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Wärtsilä Down On Power ... For Now

Seeking Alpha: GKN Gets Interesting If They Can Get The Margins Up

Britain's GKN (OTCPK:GKNLY) is the kind of stock that can break an investor's heart. On one hand, the company's strong share in aerostructures and engine structures looks attractive as significant programs move forward at Airbus Group (OTCPK:EADSY) and Boeing (NYSE:BA). Likewise, the company's leadership in driveline components is appealing as penetration of all-wheel drive and hybrid vehicles grows. The problem is that aerospace and autos are cyclical businesses where OEMs habitually lean hard on suppliers and GKN doesn't have the best record of attractive sustained operating margins, free cash flow, or returns on capital.

If things go right, meaning that the aerospace and auto markets remain healthy, key programs ramp as expected, and GKN achieves better operating leverage, the shares could do very well over the next two to four years. If GKN drops the ball on margins, though, or if demand for aircraft and/or autos disappoint, the shares aren't likely to do so well.

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GKN Gets Interesting If They Can Get The Margins Up

Seeking Alpha: Talgo's Rail Opportunity Looks Frustratingly Binary

By and large, I think investors do well to stay away from binary investment outcomes where the stock is liable to be a big winner or a big loser, with not much ground in between. That may be an unfair assessment of Spain's Talgo (TLGO.MC), but the success of the company (and its shares) rests upon securing multiple high value rail bids, bids that Alstom (OTCPK:ALSMY), Bombardier (OTCQX:BDRBF), CAF, CRRC, and Siemens (OTCPK:SIEGY) will be competing for as well.

Talgo certainly has some technology in its favor, but companies like Alstom, Bombardier, and Siemens didn't build multibillion-dollar order books on the basis of blatantly inferior offerings.
I've tried to value Talgo on weight scenario basis that incorporates high win-rate, low win-rate, and moderate win-rate scenarios. Altogether, I come up with a fair value of EUR 6.70 per share today, and most of my bearish scenarios produce fair values in the EUR 3 to EUR 4 range, versus a current share price of EUR 4.50.

Readers should note that there is no ADR available for Talgo, so any investors who wish to purchase these shares will have to do so on the Madrid Stock Exchange (Bolsa de Madrid). Most of the larger brokers can and will handle these trades, but investors certainly need to ask themselves whether the added risk and hassle is worth it.

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Talgo's Rail Opportunity Looks Frustratingly Binary

Sunday, January 24, 2016

Seeking Alpha: BB&T A Little Poky, But Can Build From Here

The overall theme for most bank earnings reports this quarter has been "good enough, but not great", but BB&T (NYSE:BBT) broke from the pack a bit in the wrong way. BB&T's results were a little light, as weaker fee income weighed on revenue and drove a slight operating profit miss. Management was a little more upbeat about 2016 than fourth quarter results might have suggested, though, and there is scale to accelerate lending and drive operating synergies from the company's recent acquisitions.

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BB&T A Little Poky, But Can Build From Here

Seeking Alpha: Wells Fargo Well-Positioned And Willing To Deploy Capital

While JPMorgan (NYSE:JPM) shrinks its balance sheet and expands its lending, BB&T (NYSE:BBT) works to integrate its M&A binge, PNC Financial (NYSE:PNC) works on improving its branch network, and Citi (NYSE:C) continues to run off past bad debts, Wells Fargo (NYSE:WFC) is keeping busy too. Not only has the company adjusting its rate sensitivity down a bit, the company has struck three deals with General Electric (NYSE:GE) to acquire commercial real estate loans, a railcar leasing business, and a sizable commercial lending and leasing operation that includes distribution and vendor financing and asset-based middle market lending.

Wells Fargo looks pretty attractive to me right now. Not only is the business simple enough to avoid the steeper G-SIB surcharges that will apply to JPMorgan and Citi, but there's a very attractive mix of commercial and consumer lending, a leading mortgage and auto lending business, growing card loans, and fee-generating businesses like the expanded leasing operation. I suppose I could ask for better reserves and faster NPA resolution, but those aren't huge negatives to me. This next year may not be the best in terms of reported results, but I believe Wells Fargo is well-placed for growth over the next three to five years and attractively priced below $60.

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Wells Fargo Well-Positioned And Willing To Deploy Capital

Seeking Alpha: Regions Financial Has Capital To Spare, But What About Quality?

The fact that the shares of Regions Financial (NYSE:RF) are only up about 15% since mid-2011 doesn't tell you everything you need to know about this Southeastern regional bank, but its relative performance next to the likes of BB&T (NYSE:BBT), SunTrust (NYSE:STI), and Wells Fargo (NYSE:WFC) does underscore some of the issues of this asset-sensitive bank over the past few years.

Although management has outlined a credible plan to reduce expenses and has ample capital to deploy, I'm still concerned about the underlying credit quality of the bank and its ability to earn its cost of equity. On the other hand, those concerns appear to be more than accounted for by the share price. If the U.S. economy stays healthy enough to support higher rates and the economy in the Southeastern U.S. stays healthy enough to support Regions' loan book, the rewards here could be significant when compared to what most other banking stocks are offering in terms of prospective returns.

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Regions Financial Has Capital To Spare, But What About Quality?

Seeking Alpha: With The Pullback, Silicon Labs' IoT Opportunity Looks More Interesting

There aren't many sectors doing especially well right now in the stock market, so the pullback in semiconductor stocks isn't exactly surprising, let alone unique. As about a quarter of the industry's revenue comes from industrial markets, and meaningful amounts come from computing, consumer devices, and phones, it is not so surprising that investors are worried about the outlook for 2016 even though multiple semiconductor CEOs have opined that the slowdown will be briefer and shallower than past downturns.

This brings me to Silicon Labs (NASDAQ:SLAB). The shares of this microcontroller, sensor, and RF chip company have fallen around 15% since my last update, more or less matching the decline in Microchip Technology (NASDAQ:MCHP) and outperforming NXP Semiconductors (NASDAQ:NXPI) over that period. While the company has definitely had some challenges with more commoditized competition in segments like TV tuners, the company's Internet of Things (IoT) business continues to grow nicely.

Valuation is still mixed, though the shares are now below both my cash flow and margin/revenue-based fair values. IoT is still a somewhat sexy topic in the chip space, and the company's combination of MCU/sensor/RF capabilities and relatively high operating expenses (fueled by aggressive R&D spending) could generate some potential M&A interest. Although there are other chip companies I like better (including Microchip and Microsemi (NASDAQ:MSCC)), I won't pretend that Silicon Labs is trading at a more attractive level if you believe in the long-term potential of IoT applications.

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With The Pullback, Silicon Labs' IoT Opportunity Looks More Interesting

Thursday, January 21, 2016

Seeking Alpha: PNC Financial Still Biding Its Time

Caught up in the overall mass-selling of recent times, I wonder if PNC Financial (NYSE:PNC) also has a bit of an identity problem with investors. It's most definitely not a growth-oriented bank right now like Wells Fargo (NYSE:WFC), BB&T (NYSE:BBT), or Regions Financial (NYSE:RF), as management is taking a conservative view of lending growth and spending designed to transform the branch business model limits operating leverage. It's also not a rock-solid "come hell or high-water" story like U.S. Bancorp (NYSE:USB) where investors can rest relatively easy that the bank will always have a seat when the music stops playing.

While this almost indiscriminate sell-off has created a lot of bargains in the banking space, I'm still not all that enamored of these shares. The valuation is just okay on a relative basis and I think the company's middle-of-the-road asset sensitivity, underwriting history, and operating efficiency doesn't really argue for the stock as a must-buy.

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PNC Financial Still Biding Its Time

Seeking Alpha: U.S. Bancorp Still The Relatively Defensive Option

Since the middle of 2015, and particularly in the last month or so, investors have become more concerned about the health of the economy and the prospects for real growth in 2016. If that "lower for longer" scenario pans out, investors may want to take another look at U.S. Bancorp (NYSE:USB).

Much has been written (some of it by me) on the positive quality attributes of this large almost-national bank - the company's cost control is top-notch, as is the quality of the underwriting, and the bank has lucrative fee-generating businesses that chip in a substantial portion of revenue. U.S. Bancorp is also comparatively less asset-sensitive than peers like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan (NYSE:JPM), let alone smaller players like Zions (NASDAQ:ZION) and Regions (NYSE:RF), and if the economy slows in 2016 this bank will like fare better.

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U.S. Bancorp Still The Relatively Defensive Option

Seeking Alpha: JPMorgan Performing Well, But Credit Risk Back In Play

Not a lot is supposed to change in a month when you're talking about bank stocks, but it has been anything but an ordinary stretch since I last wrote about JPMorgan (NYSE:JPM). In those three weeks, the U.S. Big Four banks (JPMorgan, Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Wells Fargo (NYSE:WFC)) have seen their shares fall around 10% to 20% on increasing worries about the health of the U.S. economy, the prospect for higher credit losses, and the uncertain outlook for rates.

There's definitely an interesting dichotomy between what banks are saying (good loan demand from businesses, generally good credit developments outside of energy) and what a lot of manufacturing / industrial companies are saying, and that ups the risk for 2016. As an asset-sensitive bank, JPMorgan should be able to generate better margins and returns as rates rise, but those increases may take a little longer to materialize. In the meantime, the bank continues to do a good job of shrinking its balance sheet, reducing its G-SIB burden, reducing costs, and pursuing revenue streams outside of banking. I still believe these shares should trade closer to $70, and with the declines in the stock it is a more interesting buy candidate than just a month ago.

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JPMorgan Performing Well, But Credit Risk Back In Play

Seeking Alpha: Parker-Hannifin: Good Company Meets Bad Markets

Parker-Hannifin (NYSE:PH) isn't a flawless company, but this leader in motion and process control has a pretty solid record of generating attractive full-cycle margins. What's more, the company is uncommonly diversified across its end-markets and generally eschews splashy moves in favor of just consistently doing a good job.

Unfortunately, Parker-Hannifin is caught up in a global butt-kicking of industrial equities and the company is facing a lot of demand weakness across its many markets. I believe that the company can generate long-term growth of over 3% and that the shares are probably too cheap today, but investors considering buying on this pullback have to have patience and a long-term vision to offset the near-term risks that weakness in oil/gas, off-road vehicles, and general manufacturing will get even worse before turning around.

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Parker-Hannifin: Good Company Meets Bad Markets

Seeking Alpha: Illinois Tool Works Is A Growth Story Now

Before hardcore Illinois Tool Works (NYSE:ITW) investors light the torches and sharpen the pitchforks, I'll explain the title right away; my view on this industrial conglomerate is that the biggest swing factor in the company's stock market performance in the next one to three years is going to be the amount of organic revenue growth that it can generate. ITW has done a good job of boosting margins through streamlining, and management is quite willing to divest commoditized businesses, but its projections call for the company to perform on a level that has historically been out of reach.

I do believe we're in the middle of a promising buy-the-dip opportunity for a number of industrials, but I can't make the numbers work for Illinois Tool Works today. I believe management can generate mid-teens FCF margins on a sustained basis (a marked improvement over the past 10 years), but I just don't see enough organic revenue growth to drive an exciting fair value today.

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Illinois Tool Works Is A Growth Story Now

Seeking Alpha: Atlas (Copco) Sneezed

How best to frame what has happened to Swedish industrial conglomerate Atlas Copco (OTCPK:ATLKY) in the six months since I last wrote about it? The roughly 25% drop in the ADR share price goes well beyond an Atlas Shrugged reference … we're talking full-on sneezing if not a pulled hamstring.

Some of this share price decline seems reasonable to me. First, Atlas has often carried a pretty healthy valuation and that's harder to support in a virtually no-growth environment. Second, the outlook for mining is feeble at best, while the "general manufacturing" segment served by the company is looking quite weak indeed and particularly so in the U.S. and China.

If you believe in buying good companies going through hard times not of their making, this is a good time to look further into Atlas Copco. There's definitely downside risk if a mild manufacturing recession for 2016/2017 proves more serious or longer in duration, but that's how it goes with "buy the dip" opportunities - there's almost always some reason for that dip.

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Atlas (Copco) Sneezed

Wednesday, January 20, 2016

Seeking Alpha: Ingersoll-Rand Better Valued, But Not Better

It has been a while since I've liked Ingersoll-Rand (NYSE:IR), as I believe the shares have been buoyed by quite a bit of faith around the Street in the company's restructuring efforts. This skepticism has kept me on the sidelines, and with the shares down around 20% from the time of my last article, I can't say as though I've missed out on much.

The startling weakness in global equity markets since the start of the year and in industrial stocks, really, since the middle of 2015 has created some bargains provided that 2016 isn't the start of another deep or prolonged recession. I still have a lot of quality-based issues with Ingersoll-Rand - the company is a strong player in HVAC, but I don't believe the company is doing much to shrink the gap with Atlas Copco (OTCPK:ATLKY) in industrial and there's still a lot of work to be done on margins. At this price, though, I don't think so much benefit of the doubt is baked into the price and patient investors could see some upside from here.

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Ingersoll-Rand Better Valued, But Not Better

Seeking Alpha: Not All's Well At Honeywell

American industrial conglomerate Honeywell (NYSE:HON) has a lot of positives going for it - the company is leveraged to several markets that look relatively healthy going into 2016, management has credibility when it comes to margin improvement efforts, and the balance sheet is in pretty good shape. That said, investors are bailing out of industrials left and right, and Honeywell shares have fallen about 10% from my midyear update. What's more, the health of key markets like aerospace, construction, and auto aren't exactly guaranteed and industrial markets look to be in for a weak run.

Between the prospects for a recession in manufacturing in 2016 and management's relatively conservative guidance for the year, I suppose I can understand why fund managers aren't eager to hold Honeywell right now. Nevertheless, I think this may well be a case where individual investors can benefit from not having that need to respond/report to clients with hair triggers; buying a dip usually means you're buying into trouble, but unless you think the world is in for a really bad stretch, I think this is the sort of opportunity that investors can exploit to get Honeywell shares at a more attractive price.

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Not All's Well At Honeywell

Seeking Alpha: Fastenal Battered Down By The Industrial Recession

Something is definitely wrong in the U.S. manufacturing sector, and it is showing up in the results of Grainger (NYSE:GWW), MSC Industrial (NYSE:MSM), and Fastenal (NASDAQ:FAST). While Fastenal hasn't fared too badly on a relative basis since my last report on the company, the shares nevertheless have fallen about 12% in the last six months. As is par for the course, Fastenal seen its growth rate hold up better than those of Grainger and MSC Industrial, but expectations have come down pretty significantly in response to slowing manufacturing activity.

Fastenal isn't exactly cheap, but it's about as close as the stock ever gets. Further weakness in industrial activity could push these shares down even further in 2016, but I like the company's prospects for high single-digit long-term revenue growth. I expect the company to continue to gain share in the industrial distribution space through its extensive store base, its vending efforts, and its growing efforts in onsite management and e-commerce.

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Fastenal Battered Down By The Industrial Recession

Seeking Alpha: Microchip Technology And Atmel The Right Match

It's been a while since I've written on Microchip Technology (NASDAQ:MCHP), mostly because I have thought this well-run MCU and analog chip company was pretty fairly priced in the market and didn't offer all that much opportunity. While some in the peanut gallery didn't like it when I last wrote in May of 2014 that I preferred Atmel (NASDAQ:ATML) (a smaller, less well-run MCU player), Microchip is down about 14% over that period while Atmel has fallen less than 4%.

Now these two players are looking to tie themselves together permanently. Although I've thought for a while that Atmel could be a M&A target, I was surprised to see Dialog (OTC:DLGNF) step up given the questionable synergies. Dialog shareholders weren't too pleased either, and the erosion in value of Dialog shares kept a window of opportunity open for Microchip. Together, Microchip and Atmel will be the #3 MCU company in the world (trailing Renesas (OTCPK:RNECY) and NXP Semicondcutors (NASDAQ:NXPI) after its deal for Freescale), and Microchip will have a very fertile opportunity to drive margin synergies.

While the merger is not a done deal (so there is risk to deal closure), I believe Microchip's fair value climbs into the low $50's with Atmel in hand. Buying any stock feels like a bold move right now, but I believe Microchip has a strong record of driving cost savings from acquired properties (a primary driver of value in this deal) and a strong record of overall operating execution.

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Microchip Technology And Atmel The Right Match

Tuesday, January 19, 2016

Seeking Alpha: Assa Abloy Has Growth Locked Up

Assa Abloy (OTCPK:ASAZY) has a lot of the traits that investors looking for high-quality companies ought to prize. The company generates good returns on capital and consistently generates good cash flow from its revenue base. It also has a market leadership position, but operates in a market that still leaves it ample room to expand and grow. While the organic growth rate has been pretty dismal over most of the past decade, the severe disruptions to the construction markets in Western Europe after the collapse of the credit bubble certainly created some headwinds.

The problem (and if there was ever going to be a Stephen Simpson Seeking Alpha drinking game, this is where you'd take a shot) is valuation. Even amidst the crapalanche that is the year-to-date global equity market, Assa Abloy isn't cheap enough for me. Assa Abloy is almost never cheap, and I won't argue that it should be; it's a well-run company with great share. What's more, North American and Western European non-residential and residential construction look like good markets to be in for 2016. Nevertheless, I just can't connect the dots and come up with a valuation that makes me a willing buyer at today's price.

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Assa Abloy Has Growth Locked Up

Wednesday, January 13, 2016

Seeking Alpha: Rockwell Automation Punished For Being Mortal

When your biggest complaint about a stock is the valuation, that's a pretty clear signal you're looking at a good candidate for the watch list and future buy-the-dip-opportunities. I have long respected Rockwell Automation's (NYSE:ROK) position in the automation space and its strong presence in controls (especially PLCs). What I haven't liked as much has been the valuation, but the apparent realization among the sell-side and institutional investors that Rockwell is still a cyclical company appears to have created a window of opportunity.

The problem with buying the shares of a good company like Rockwell during a downturn is that you never really know how bad the decline will be. I believe the long-term drivers for automation are still very strong and that Rockwell's long-term future looks bright, but that doesn't mean that the shares couldn't see $80 again if conditions in markets like auto OEMs get really bad and margins decelerate further. If you're in a position to take the risk of short-term pain for long-term gain, though, I think this is a good time to consider these shares.

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Rockwell Automation Punished For Being Mortal

Seeking Alpha: Celldex Therapeutics Down, But Definitely Not Out

It's been a rough six months for biotech in general, but Celldex (NASDAQ:CLDX) has been hit worse than most. The shares are down almost 50% over the six months that have passed since I last wrote about the company. Given the large move down after the company announced it wouldn't be pursuing early approval for Rintega, it's clear that investors were disappointed they'd have to wait at least a year longer to see the drug hit the market. I also wonder if some investors starting feeling some "immuno-oncology fatigue" and began worrying that some of Celldex's approaches (including a cancer vaccine and an ADC) might be out of step with the hotter prospects in the developing IO field.

This plunge in the share price looks like an opportunity. It certainly may be true that the biotech boom is over, and that valuations across the sector are going to come under even more pressure. Outside of that, though, I believe Celldex has a solid, deep, and undervalued pipeline that could generate well over $1 billion in annual revenue down the road.

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Celldex Therapeutics Down, But Definitely Not Out

Tuesday, January 12, 2016

Sorry for the delayed posts

Sorry that it took me so long to post some articles from last week. No good excuse ... just a combination of little factors that conspired against me. It's a conspiracy, I tell ya!

Seeking Alpha: MSC Industrial Managing The Downturn

What do you do when your core market is contracting at a mid-teens rate? If you're MSC Industrial (NYSE:MSM) you double down on the things you can control - including tight expense control, good customer service, and expansion outside of that weak core. Those moves appear to be serving this leading metalworking MRO distributor reasonably well, as the company produced a set of fiscal first quarter results that were a bit better than expected.

I continue to believe that MSC Industrial has better days ahead. Weak markets are often an opportunity for stronger players to gain share, and while this oil/gas-driven manufacturing contraction is likely to continue through much of 2016, it won't last forever. I continue to believe that MSC Industrial can pair mid-single digit long-term revenue growth with double-digit FCF growth, supporting a fair value above $70 today.

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MSC Industrial Managing The Downturn

Seeking Alpha: Monsanto Making Do, But It's M&A That Everyone Seems To Want

Given the recent announcement of the intention of DuPont (NYSE:DD) and Dow (NYSE:DOW) to combine their operations and Syngenta's (NYSE:SYT) apparent increased willingness to at least consider M&A offers, the question of consolidation in the ag business seems to have rendered Monsanto's (NYSE:MON) near-term performance largely moot. Given the weakness in the ag sector, and ongoing softness in corn prices, that might not be such a bad thing.

I continue to believe that Monsanto is a solid long-term holding in the ag space. The stock is modestly undervalued and carries less operating risk than many cheaper-looking ag stocks. I also continue to believe that Monsanto will find a seat in this game of ag musical chairs, but there is definitely a risk that Monsanto either has to settle for something less than its first choice (or second...) or pay more than it would like to.

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Monsanto Making Do, But It's M&A That Everyone Seems To Want

Seeking Alpha: First Cash Financial Makes Its Move

As I have written on many occasions, one of the larger unmet expectations among First Cash Financial Services' (NASDAQ:FCFS) investors and analysts has been the lack of a big acquisition in Latin America to take the company beyond its very successful operations in Mexico. While management has now in fact made a big acquisition outside of the U.S., it is not exactly the strong entry into a large new market that some investors wanted.

Acquiring more stores in Mexico should round out the company's business from a geographical perspective and significantly accelerate the achievement of the company's desired footprint. The incremental expansion into Guatemala and El Salvador is nice, but not really game-changing. The paucity of detail that First Cash provides makes modeling challenging, but I believe this deal does improve the fair value by about 4% to 10% relative to my prior expectations.

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First Cash Financial Makes Its Move

Seeking Alpha: Hurco's Tiny Boat Facing Choppy Seas

I don't envy the job facing Hurco's (NASDAQ:HURC) managers today. I believe that this small industrial company remains a very overlooked manufacturer of high quality high-spec machine tools, but that is a very tough business to be in these days. As I've written in past pieces on companies like MSC Industrial (NYSE:MSM), demand for cutting and metalworking tools has plunged in the U.S. during this industrial slowdown and demand appears to be even worse in Asia.

I still believe that patience will pay with the stock. The company has released an interesting new control console (Max 5) and the acquisition of Milltronics and Takumi meaningfully expands both the company's product lines and geographic exposures. A machine tool company is a quintessentially cyclical company, but Hurco does look undervalued to me today.

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Hurco's Tiny Boat Facing Choppy Seas

Seeking Alpha: PCTEL Struggling To Grow

About a year ago, I thought PCTEL (NASDAQ:PCTI) could be an interesting overlooked opportunity if the company could take advantage of its growth opportunities in WLAN, fleet management, train control, and LTE build-outs. Unfortunately, those opportunities really haven't materialized, and the company has seen organic revenue weaken considerably, taking margins along for the ride.

With the shares down almost 40% since my last piece, a lot of damage has already been done. Looking ahead, the market seems to be anticipating very little revenue growth and/or no margin leverage. That is probably an overly grim assessment, but it is very difficult for me to look at this company's history of poor revenue growth, weak margin leverage, and poor returns on invested capital and say that investors should make the leap of faith that PCTEL will return to growth. The potential may be there, and management has a commendable record of returning capital to shareholders, but I can't see a reason to own until there is at least stability in the organic revenue trajectory.

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PCTEL Struggling To Grow

Thursday, January 7, 2016

Seeking Alpha: Synergy Pharmaceuticals Looks More Interesting Today

I can't really complain with how the Synergy Pharmaceuticals (NASDAQ:SGYP) story has developed. When I last wrote about the stock in April, I calculated a fair value of just under $6 with the shares trading at around $4 at the time. Since then, the shares have moved up $1 (up about 25%), though there was a big move up to $10 in the meantime as investors reacted very positively to strong Phase III data on the company's lead drug.

Since then, I think reality has set in and dragged the shares down with it. Medically significant constipation (by which I mean a condition that is persistent and not quickly relieved with OTC options) has proven to be a challenging market for Allergan (NYSE:AGN)/Ironwood (NASDAQ:IRWD) and Sucampo (NASDAQ:SCMP)/Takeda (OTCPK:TKPYY), as these companies have had to push direct-to-consumer campaigns to drive awareness. I likewise believe that investors had inflated expectations of an acquisition, and impatience with that process has disappointed some shareholders (or former shareholders).

I do believe that Allergan et al are slowly chipping away at the awareness issue, and that by virtue of its solid efficacy and better tolerability, Synergy can reap the benefits of these early market-building exercises. My fair value estimate has nearly doubled as the successful Phase III results for plecanatide significantly de-risked the value and I believe the company's efficacy/safety trade-off can gain more share than I previously assumed. I do see meaningful risk of further dilution as the company will need to raise funds to build a marketing effort, and investors will likewise have to wait to see whether a lower-dose version of linaclotide can better balance the tolerability issues.

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Synergy Pharmaceuticals Looks More Interesting Today

Seeking Alpha: LDR Holdings Has To Reestablish Its Growth Cred

Sometimes it's more that a company missed than by how much they missed. Take the case of small-cap spinal care company LDR Holdings (NASDAQ:LDRH). The market reacted very badly to the company's October third quarter pre-announcement, even though the magnitude of the miss was just 2% relative to the Street's expectations. Institutions hate to see a revenue miss so early into the launch of a major product (the Mobi-C cervical disc, in this case), though, and with so much of the value tied to revenue and profit targets far in the distance, even a small course correction can lead to a much bigger correction in the share price.

When I last wrote about LDR Holdings, I noted that this was a high-risk situation and those risks have certainly manifested themselves with the shares down about a third in the past three months. I still do believe that insurers are going to get on board with two-disc procedures and that greater adoption of LDR Holdings' less-invasive technologies can drive long-term revenue growth in the mid-teens. The decline in the share price has pulled the stock below my DCF-based fair value and that's pretty rare for a growth med-tech. There are still definitely risks here, as investors are going to be very sensitive to any sign of further disappointment in growth, but for investors who can take the risk this is a name worth some due diligence.

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LDR Holdings Has To Reestablish Its Growth Cred

Seeking Alpha: Novadaq Doing The Heavy Lifting

As expected, 2015 was a challenging year for Novadaq (NASDAQ:NVDQ) in many respects. The company had to manage the transition from a partner-based marketing model to a direct model, as well as a growing transition from a lease-based model to a capital sales model. The company has also seen more companies throw their hat into the surgical fluorescence imaging ring, most especially Stryker (NYSE:SYK).

For all of that, though, I believe the company has done a good job of managing its sales transition. Management has improved its communication with the Street and underlying procedure volume growth looks okay. There's definitely a lot of work left to do in terms of building the market and establishing a powerful sales trajectory, and these shares are priced pretty aggressively. I still believe that there is a money-making opportunity in Novadaq shares, but there are a lot of uncertainties here and the market will not be forgiving if the sales momentum stalls.

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Novadaq Doing The Heavy Lifting

Wednesday, January 6, 2016

Seeking Alpha: Neogen Flexing Its Operational Excellence

If you want to argue that valuation doesn't matter, you could certainly do worse than to highlight Neogen (NASDAQ:NEOG) as a prime example. Seemingly always expensive, Neogen has nevertheless leveraged its proven model to generate mid-teens annualized revenue growth over the last decade and nearly 20% operating income growth. Then again, maybe valuation does matter - if you had bought in five years ago, you'd be sitting with a double, but that's true for IDEXX (NASDAQ:IDXX) too, and you would have done even better with Illumina (NASDAQ:ILMN), Thermo Fisher (NYSE:TMO), or MWI Veterinary Supply (NASDAQ:MWIV). Even 3M (NYSE:MMM) (and yes, we're really stretching the notion of comparable here) would have given you a 70% return before dividends over the past five years.

So, what to do about this stock? I love Neogen's business, and I think the company has a lot of room to grow with its allergen, toxin, and antibiotic tests, its food safety products, and its genetics/bioinformatics business. I also think the company's time-tested acquisition strategy can be applied again and again to grow the business, particularly outside the U.S.

But trees don't grow to the sky, and how much growth should investors expect? Growing revenue at a double-digit annualized rate for the next decade would be fantastic for most companies, but even a 20% 10-year FCF growth rate only gets you to about a $60 fair value in my model. My concern, then, is that Neogen can remain an operationally superb company but one whose share price performance could lag as those multiples start to come down.

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Neogen Flexing Its Operational Excellence

Seeking Alpha: Conatus Has A Clearer Path, But It's Long And Uncertain

The past year was a tough one for companies focused on treating liver disease, but Conatus (NASDAQ:CNAT) had an especially bad year. The shares fell almost 60% as investors grew increasingly concerned about the company's drug emricasan, particularly with respect to just how reliable or meaningful the data collected so far are with respect to real-world efficacy.

Emricasan seems to have clinical activity, but it is still very much an open question as to whether it is effective enough to halt the progression of cirrhosis and spare people with this life-threatening condition a liver transplant or worse. Unfortunately, investors are in for a relatively long wait before more clinical clarity is achieved, and in the "time is money" world of biotech, Conatus investors are likely looking at substantially more dilution before a clinical approval is attainable.

If Conatus can demonstrated a place for emricasan in even just a single-digit percentage of cirrhosis patients, it is not hard to arrive at over $2 billion in peak revenue and even a huge amount of anticipated dilution would still support a fair value above $6 today. That said, Intercept (NASDAQ:ICPT) and Genfit (OTCPK:GNFTF) have proved quite a bit more with their drugs and are undervalued in their own right. It is certainly possible that the success of Intercept/Genfit and/or other companies targeting liver disease will shrink the pool of eligible patients for emricasan, but frankly the biggest issue today is establishing whether or not the drug is effective and which patients stand to benefit the most.

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Conatus Has A Clearer Path, But It's Long And Uncertain

Tuesday, January 5, 2016

Seeking Alpha: Intercept Pharmaceuticals Weighed Down By A Troubling Trifecta

Once a darling of the biotech space, Intercept Pharmaceuticals (NASDAQ:ICPT) has seen investors flee from the shares in droves, pushing it down close to 50% from my last article on the company and leading to a significant underperformance to its primary NASH-driven comparable Genfit (GNFT.PA) (OTCPK:GNFTF), which has fallen almost 20% over the same time period.

Investors have had a lot to mull over since the beginning of summer. Both Intercept and Genfit have produced mixed clinical trial results that have required further explanations from management, and both are subject to the questions and risks over pricing for drugs that could be given to millions of patients. More specific to Intercept, there are valid concerns now about safety, efficacy, competition, and market potential for its lead drug, and investors aren't happy about the uncertainty.

I still believe that Intercept's lead drug OCA is active and safe in primary biliary cirrhosis (PBC) and likely to demonstrate approval safety and efficacy in nonalcoholic steatohepatitis (NASH). I also believe, though, that there are meaningful questions about true market potential and that Genfit could be a more significant competitor (albeit not necessarily on an apples-to-apples basis).

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Intercept Pharmaceuticals Weighed Down By A Troubling Trifecta