Monday, April 25, 2016

Seeking Alpha: Roche Still Waiting For The Big Push

Although Roche (OTCQX:RHHBY) hasn't been a terrible stock over the last three years, it's hard not to look at the performance of companies like Bristol-Myers (NYSE:BMY), Merck (NYSE:MRK), and Amgen (NASDAQ:AMGN) with some envy. In the case of the first two peers, Roche has been slower to get into the immuno-oncology game, as both Bristol-Myers and Merck have seen good initial successes with their PD-1 antibodies (and, in the case of Bristol-Myers, its CTLA-4 antibody as well). Roche has also had to withstand more than a little concern and skepticism regarding the company's ability to defend its lucrative oncology franchise from impending biosimilar competition and growing worries about pricing.

I do continue to believe, though, that Roche has an attractive future. While the company was somewhat late to the game in immuno-oncology, the company is bringing a lot to bear in terms of numerous combo therapy candidates. The company is also seeing some traction in its non-oncology franchise, with encouraging results in multiple sclerosis and hemophilia. Biosimilar competition and price resistance remain real risk factors, but I believe Roche's pipeline can support long-term free cash flow growth in the high single digits and a fair value in the mid-$30s.

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Roche Still Waiting For The Big Push

Sunday, April 24, 2016

Seeking Alpha: Denso Needs To Diversify To Maximize Its Opportunities

As one of the biggest auto component suppliers in the world, Denso's (OTCPK:DNZOY) (6902.T) basic operating environment isn't all that much different than that at Continental AG (OTCPK:CTTAY), Valeo (OTCPK:VLEEY), Bosch, Delphi (NYSE:DLPH), BorgWarner (NYSE:BWA) and so on. Major trends like electrification, fuel efficiency/emissions, and driver assistance loom large when considering Denso's future growth. On the other hand, Denso's reliance on Toyota (NYSE:TM) is a notable difference, and I'm not sure Denso has shown it has the products/technology to clearly stand out from the crowd - at least in the initial launch windows for many of these technologies.

Given its different product, customer, and technology exposures, I'm expecting less revenue growth from Denso than I am from BorgWarner, Continental, Delphi, and Valeo over the long term, but that's not to say I don't like the company and a long-term revenue CAGR of 5% isn't exactly soft by auto supplier standards. I do expect some margin uplift as Denso moves beyond significant start-up/launch expenses, but improving its gross margin and free cash flow efficiency would be a welcome positive driver. Denso looks undervalued enough to consider, but I can't call it my favorite name in the sector on the basis of underlying company quality.

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Denso Needs To Diversify To Maximize Its Opportunities

Seeking Alpha: Delphi Automotive Poised For Growth, And Wall Street Knows It

Like so many other companies in the auto parts and components space, Delphi Automotive (NYSE:DLPH) hasn't had the best run of performance over the past year. While the sector has rebounded off January lows, Delphi (like Continental AG (OTCPK:CTTAY), Denso (OTCPK:DNZOY), and Valeo (OTCPK:VLEEY)) has gotten dinged on weaker guidance in 2015 and forward-looking concerns about the health of the auto markets in Western Europe, North America, and China.

Like those aforementioned names, Delphi has some appealing leverage to the major growth drivers in the auto space - growing electrification of vehicles, more efficient internal combustion engines, and growing adoption of driver assistance technologies. I believe that these trends can push the company to double-digit long-term cash flow growth, but more of that potential seems to be factored into the price relative to Valeo.

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Delphi Automotive Poised For Growth, And Wall Street Knows It

Seeking Alpha: Continental AG Revving Up For The Next Wave In Autos

If success in a business was always linked to size, Continental AG (OTCPK:CTTAY) would be an easy pick in the auto parts/components space, as this is the third-largest supplier in the world and the second largest in Europe. The auto sector is seeing a lot of change, though, as OEMs have to produce more efficient, less polluting cars to stay in compliance with evolving regulations and the adoption of more electrical and hybrid technologies is likely to lead to disruption across the market.

I believe Continental is well placed to benefit from this transition and to maintain its strong position in the market. It also doesn't hurt the story that the company's tire business is quite profitable and a market share gainer. I think Continental's size does limit its future growth prospects somewhat and the valuation isn't quite as compelling as I'd like to see.

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Continental AG Revving Up For The Next Wave In Autos

Seeking Alpha: Even After A Strong Run, Valeo Not Getting Its Full Due

Valeo (OTCPK:VLEEY) has been a trooper since I last wrote on this large auto parts supplier, with the ADRs up more than 20% and meaningfully outperforming peers like Continental (OTCPK:CTTAY) (up slightly), Denso (OTCPK:DNZOY) (down 10%), and BorgWarner (NYSE:BWA) (down 40%). Better yet, the story seems to be getting better and better, as the company is seeing strong order growth and management has laid out a technological/product platform vision that really seems to fit where OEMs are going with passenger vehicle designs and features.

I'm still bullish on Valeo and I've bumped up some of my modeling assumptions since the last time I talked about the company. I think long-term growth of 6% to 7% is a little aggressive (likely to be more than double the underlying growth rate in unit production) but do-able. Likewise, I'm a little concerned that mid single-digit FCF margins could be ambitious given the company's history, but I think leveraging past R&D investments and standing out from the crowd in terms of product features and market share can support it.

Investors should note that Valeo's ADRs have only so-so liquidity, so the local shares might be a better option for investors willing to go that extra step.

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Even After A Strong Run, Valeo Not Getting Its Full Due

Wednesday, April 20, 2016

The Beginning Of The End

Despite the best efforts of all involved, it looks like my wife's treatments will be coming to an end and hospice will be the next step.

We went to the cancer center yesterday to investigate some problems she's been having (most notably fatigue and trouble breathing). After ruling out a pulmonary embolism and/or pneumonitis, the cause of the breathing issues became obvious - the tumors in her liver (one in particular) has grown to a point where it is taking up the space the lungs need to inflate; she's down to about 50% in one lung and 75% in the other.

The largest tumor is now almost the size of the small lobe of a healthy liver. It's never a good thing when an experience oncologist says something like "I haven't really seen anything like this...".
Because she had an immunotherapy infusion already scheduled for this week and it won't do her harm, we're going to go ahead and do that. If there isn't evidence of improvement in 7 to 10 days, it'll be hospice. There's a theoretical > 0% chance that this second infusion will start making a difference, but that's not the expectation of her doctor (or us).

It's a morbidly fascinating experience to hear the oncologist talk about how she cannot believe my wife is still able to walk and talk as well as she can, let alone that she's not in agony. Apparently most people with her level of disease would be in severe pain. Much as I'm happy for her that she hasn't had that experience, it's tough to see someone fight so hard against an enemy they can't beat.

So, we're probably down to a few weeks or months. I'll still be writing here and there, but likely more erratically than in the past. I have appreciated all the kind words and support I've gotten from readers through this, and I know it has meant a lot to her. Thank you so much for that.

And a little lecture/PSA - please take as good of care of yourself as you can manage. My wife's oncologist believes that she's doing as well as she is (pain-wise and function-wise) because she was in pretty good shape beforehand. She wasn't a healthy living nut or anything, she just ate reasonably, tried to be active, and avoided stupid stuff. Please do the same - it may save you a lot of pain later.

Sunday, April 17, 2016

Seeking Alpha: AES Tiete Very Attractive, But Very Hard To Own

It's a real shame that when AES (NYSE:AES) restructured the ownership of AES Tiete (TIET11.SA) it chose to cancel the ADR program. AES Tiete may not only be one of the most interesting assets within AES, but it is one of the more interesting and differentiated Brazilian electrical utilities. While it is technically possible for individual American investors to own shares traded in Brazil, it is not easy - not only can it be challenging to find a broker, there are language barriers to consider and serious issues of convenience and hassle. To put it another way, I periodically approach brokers about the possibility of opening an account and more than once the response has been along the lines of "which company do you like so much that you want to do all of this?"

All of that said, I think AES Tiete looks to be about 25% undervalued today, with a very clean balance sheet and strong upside to a long-term recovery in Brazilian electricity prices. For those who can buy Brazilian equities, I'd definitely recommend a closer look. For those who can't, maybe it's worth a spot on a watch list on the off chance that AES makes ADRs available once again.

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AES Tiete Very Attractive, But Very Hard To Own

Seeking Alpha: Tractebel Offers Accessible Leverage To Future Growth In Brazil

Even though Brazil's economy is likely still looking at a few more rough quarters, investors are starting to come back to this beaten-up emerging market. Shares of the iShares MSCI Brazil Index (NYSEARCA:EWZ) are up 6% over the last five days, 12% over the last month, and 38% year-to-date. Brazil's utility sector has been invited along for the ride, with CEMIG (NYSE:CIG) and CPFL Energia (NYSE:CPL) modestly exceeding that performance and COPEL (NYSE:ELP) trailing slightly. Tractebel (OTCPK:TBLEY), my subject for this article, hasn't been quite as strong year-to-date (up around 27% as of this writing), but the shares have notably outperformed all of those comps (by 10% to 45%) over the past year.

While I lament that AES Tiete (TIET11.SA) (one of the best performers of the group) is not really accessible to American investors, Tractebel isn't a bad consolation prize. Like Tiete, CESP (OTCPK:CESDY), and CPFL Renovaveis (which has outperformed Tractebel over the last year), Tractebel is a pure generation company and offers investors a way to play recovering economic growth in Brazil and higher future electricity prices. The shares don't look like a big bargain today, and there's likely more money to be made in riskier names more leveraged to an improving economy and lower interest rates, but they're still a little undervalued and maybe worth a closer look from U.S. investors.

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Tractebel Offers Accessible Leverage To Future Growth In Brazil

Seeking Alpha: Despite Improving Conditions, It's Hard To Call Sabesp A Value Stock

In the "one of these things is not like the others" game, Companhia de Saneamento Basico do Estado do Sao Paulo, or SABESP (and/or "Sabesp") (NYSE:SBS) is definitely different than other liquid Brazilian utility stocks like CEMIG (NYSE:CIG), COPEL (NYSE:ELP), and CPFL Energia (NYSE:CPL) - Sabesp is a water and sewage utility, not an electricity generation/distribution company. In fact, Sabesp is one of the largest water and sewer providers in the world, and it is well positioned to grow with Brazil's growing population and expanding infrastructure needs.

The problem with Sabesp is making the numbers work for a bullish investment case. The local shares are up more than 40% over the past year, trouncing not only the electrical utilities but also other water/sanitation companies like Copasa and Sanepar. Some of this outperformance is understandable, as the company's reservoir situation has improved significantly and the company is looking forward to stronger regulated earnings power. That said, if nearly 8% long-term revenue growth projections and mid-teens FCF margins isn't enough to drive a compelling fair value (never mind the risk of a debt load that is about 50% foreign currency-denominated), how much value can be here?

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Despite Improving Conditions, It's Hard To Call Sabesp A Value Stock

Seeking Alpha: CPFL Energia One Of The Best ... And Priced Like It

It's tough out there for Brazilian utility companies, both in real-world market terms and the significantly fuzzier world of investor sentiment, and CPFL Energia's (NYSE:CPL) market performance would seem to lend more support to the notion that when times get tough enough, even the best get pulled down.

CPFL Energia has fared better than CEMIG (NYSE:CIG), COPEL (NYSE:ELP), Light (OTCPK:LGSXY), and Alupar over the past year with a roughly 3% decline in the local shares (and a 15% drop in the ADRs), and has lagged only Energias among the integrated distribution ("disco")/generation-transmission ("genco" and "transco") players in Brazil's electrical utility sector. Even so, it's been a rough stretch in the neighborhood as turbulence in the power industry, weakness in Brazil's economy, and a crisis of confidence in the equity and credit markets have done their damage.

As a company, I really like CPFL Energia. The debt level is high, but then so too is the near-term cash generation to cover it, and I believe there is a wide range of potential growth opportunities for the company. That said, everybody seems to agree that CPFL Energia is a well-run company and you don't often find bargains where there's that level of concordance.

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CPFL Energia One Of The Best ... And Priced Like It

Seeking Alpha: COPEL Will Take Its Licks In 2016, But The Future Is More Promising

There are valid reasons for Brazilian utilities to still be trading well below past valuation levels. Electricity demand continues to fall in the weak economic climate, spot generation prices have plunged, and interbank interest rates in the mid-teens really hurt an industry that relies on debt for a substantial percentage of capital. Add in the risks that go with heavy state ownership, and I can understand why COPEL (NYSE:ELP) has been weak, falling about 14% from my last update on the company.

I believe this integrated generation, transmission, and distribution company is undervalued today. Management has made some bad decisions and let investors down with its execution recently, but the shares seem to assume a level of future pricing that just doesn't make sense to me. While there are near-term risks from weak spot prices and a mid-year rate review, I believe the shares are undervalued below $11/ADR.

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COPEL Will Take Its Licks In 2016, But The Future Is More Promising

Thursday, April 14, 2016

Seeking Alpha: CEMIG Still Under Substantial Pressure

Readers didn't agree with me, but my cautious outlook on CEMIG (NYSE:CIG) back in May of 2015 was warranted, as the ADRs are down more than 50% from that point and that's after a 100% move from the January lows. This isn't just a Brazil problem, either, as COPEL (NYSE:ELP) has declined about 25% while CPFL Energia (NYSE:CPL) and Eletrobras (NYSE:EBR) are down around 10% to 15% over the same period.

Unfortunately, I don't see things getting substantially easier for CEMIG anytime soon. There is still the possibility of the company winning a favorable outcome on its concession dispute with the government over three hydro plants, but that doesn't change management's long track record of poor investment decisions or the company's high debt load. Add in ongoing service quality issues and weak demand for power, and it's not a pretty set-up.

I think today's price already factors in CEMIG keeping the disputed plants, albeit on terms that will require compensation back to the government. I do believe that the company can grow from here, but I'm concerned that the balance sheet will keep the company on the sidelines of consolidation (or involve them as net sellers) and I worry about the near-term liquidity crunch. If CEMIG can get its house in order, though, the upside would be large and few companies in Brazil's energy space would have more to gain if Brazil's credit market improves and interest rates ease up from recent levels in the mid-teens.

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CEMIG Still Under Substantial Pressure

Wednesday, April 13, 2016

Seeking Alpha: GOME Still Looking To Adapt To China's Evolving Retail Market

It's been a tough year for GOME Electrical Appliances (OTCPK:GMELY) (0493.HK). Although I thought the shares were fully valued when I last reviewed this large Chinese electronics retailer, I didn't think a nearly 50% plunge in the Hong Kong shares was in store. Even allowing for the generally dismal performance of the Hang Sang and the H-Shares Index (down about 27% and 40%, respectively), GOME has been an underperformer, and that's even more apparent given that rival Suning (002024.SZ) has fallen only about 10% over the same period.

Weakness in China has definitely shown up in GOME's results, as same-store sales grew just 2.3% in fiscal 2015 - not only missing the company's earlier target of 3%, but continuing the slowdown from 5% growth in 2014 and high single-digit growth in years prior. While some of this is due to the economic challenges in China today, some of it is also due to the saturation of the major Chinese cities where GOME operates and the ongoing penetration of online commerce.

GOME continues to build out its own online efforts, but an alliance between Alibaba (NYSE:BABA) and Suning is a threat that shouldn't be ignored, and there are no guarantees that the company's efforts to bulk up its logistics offerings will help as much as advertised. Acquiring the unlisted parent company stores should help, though, as it significantly increases the company's presence in faster-growing Tier 2 cities and creates more logistical and operating synergy opportunities.

Although GOME shares look as though they could be meaningfully undervalued, that is true of a lot of Chinese equities today and there are clearly no guarantees that the macroeconomic environment in China cooperates. I'd also note that GOME's U.S. ADRs trade only very infrequently and investors are far better off trying to buy the Hong Kong-listed shares (something most larger brokers can and will facilitate at a reasonable price).

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GOME Still Looking To Adapt To China's Evolving Retail Market

Seeking Alpha: The Excruciating Wait At GenMark Drags On

When I last wrote about GenMark Diagnostics (NASDAQ:GNMK) in October of 2015, I said things like "barring another significant delay" and "can ill-afford further disappointments on the commercial timeline" with respect to the value to be gained from the ePlex system. Well, to pull a page from the writers of clickbait, "you'll never guess what happens next..."

Yep. More delays. Instead of getting the ePlex on the market in Europe before year-end of 2015 and on the U.S. market in mid-2016 (ahead of the key flu season), European commercialization has slipped out of the first quarter of 2016 and U.S. approval may not come until November or December of this year - which will mean that the company misses the large U.S. flu season almost entirely.

This isn't the end of the line for GenMark, but I can wholeheartedly understand why it may be past that point for the patience of many investors. These seemingly endless delays have given GenMark's prime rival (bioMerieux (BIM.PA)) the opportunity to get more of its own devices into the field and it also increases the future dilution GenMark is likely to experience as it incurs more cash outflows during the earlier commercialization process. There does still seem to be value here, but it the numerous disappointments mean that it takes a nearly masochistic level of patience to see that value come to fruition.

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The Excruciating Wait At GenMark Drags On

Seeking Alpha: ARC Document Solutions Struggling For Real Traction

While ARC Document Solutions (NYSE:ARC) has reported three straight years of higher free cash flow, the underlying performance trends in the business haven't been as encouraging. It doesn't seem to be leveraging a better commercial construction environment, and it looks as though the company is likely to struggle to make a real dent in the managed print services opportunity. While archiving has been growing for ARC, I believe the company is going to have a hard time making real competitive inroads into this market.

It's tempting to say that the worst is over. The shares have bounced off their low, the short interest is pretty small, commercial construction activity looks okay, and the shares seem to trade at low multiples to book, EBITDA, and revenue. That said, I'm concerned that the company is going to continue to struggle to find real traction with its projected growth drivers, and I don't see enough evidence yet to be very positive on this name as a dumpster-diving candidate.

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ARC Document Solutions Struggling For Real Traction

Seeking Alpha: GEA Group Looking To Milk Food And Beverage For All They're Worth

Within the industrial and process automation space, there's usually a pretty significant divide between the giants like Siemens (OTCPK:SIEGY), Honeywell (NYSE:HON), Emerson (NYSE:EMR), ABB (NYSE:ABB), and Rockwell (NYSE:ROK) and the much smaller (often private) companies that generate less than $1 billion in revenue and tend to focus on particular end-markets or product categories (like sensors, controls, valves, and so on). That makes Germany's GEA Group (OTCPK:GEAGY) a rare commodity - a publicly-traded company in the automation space that, although not small at over $5 billion in revenue and $9 billion in market cap, is nevertheless highly specialized and a notably different sort of business.

I like GEA Group's focus on the food and beverage industry, as I expect growth in dairy, processed, and packaged food products will outstrip population growth and generate a solid underlying level of demand for the company. I also like the company's efforts to address its cost structure and generate margins in the double-digit range that the large players routinely produce.

What I don't like is the valuation. The perceived advantages of the company's focus on the more stable food/beverage segment are already reflected in the valuation, as well as some buyout potential. With discounted cash flow, ROE/P/BV, and margin/EV/rev all suggesting a fair value in the mid-to-high $40s, this is a name worth monitoring but it is hard to argue for it is a compelling buy candidate today.

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GEA Group Looking To Milk Food And Beverage For All They're Worth

Monday, April 11, 2016

Seeking Alpha: MSC Industrial May Be Getting Ahead Of Itself

I like MSC Industrial (NYSE:MSM), one of the largest industrial distributors in the country, but that doesn't mean I think it's worth paying any price to own. The shares have done pretty well since my last update, but then so have other distributors like Grainger (NYSE:GWW) and Fastenal (NASDAQ:FAST), as well as Kennametal (NYSE:KMT), a large manufacturer of metalworking tools and a significant MSC supplier. Some of this optimism makes sense as a reaction to the significant pessimism around industrial companies around the turn of the year, as well as the recent upward trends in the Purchasing Manager's Index and Metalworking Business Index.

Management didn't have a lot to say on the call that I considered encouraging, but I do believe that 2016 is still likely to be the low point for the company in terms of revenue performance, and management is doing well with margins. I still believe that MSC can deliver long-term growth of 5% on the top line and around 10% in FCF, but that means the shares are more or less fairly valued today.

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MSC Industrial May Be Getting Ahead Of Itself

Seeking Alpha: K2M Gaining On Entrenched Rivals In An Overlooked Space

All of the smaller players that have done well in spine care - NuVasive (NASDAQ:NUVA), Globus (NYSE:GMED), LDR Holding (NASDAQ:LDRH), and K2M (NASDAQ:KTWO) - have done so largely on the basis of being more nimble and more innovative than entrenched competitors like Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT). Although the market hasn't been showing a lot of love to the riskier small med-tech names of late, K2M looks like a name for more aggressive investors to investigate.

K2M has established itself as a viable rival in the complex spinal deformity market (scoliosis, trauma and tumor) and has had some success already in transferring its innovative technologies to the minimally invasive (or MIS) and degenerative spine care markets. Although this company needs to work on its margins and may not generate the sort of eye-popping revenue growth that some growth investors demand, I believe the shares look undervalued on the assumption of long-term growth in the low double-digits.

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K2M Gaining On Entrenched Rivals In An Overlooked Space

Seeking Alpha: Conmed's Renewed Quest For Growth

Turnaround stories can pay handsomely in the med-tech space, and CONMED (NASDAQ:CNMD) has certainly been doing a lot of the right things since activist investors catalyzed a major shake-up in 2014. Not only has the board of directors changed, but the company brought on former Stryker (NYSE:SYK) executive, Curt Hartman as CEO and has named several new executive vice presidents.

More importantly to me, the company has not tried to take any shortcuts or resort to flashy serial M&A to mask the turnaround process. Hartman has instead focused on establishing a better sales and commercialization infrastructure and driving better execution there, as well as longer-term improvements in product development. That's not to say there hasn't been M&A - the SurgiQuest deal was the first notable transaction in a long time and it seems like a very interesting business to own.

The problem I have is which valuation metrics to follow and just how much credit to give for these self-improvement efforts. Like many smaller med-techs, CONMED doesn't look appealing on FCF unless the company can drive GAAP operating margins into the high teens - something that is not impossible, but not easy either. The value proposition is better in EV/revenue terms, but it's going to be hard for CONMED to make real progress unless it can establish itself as more than a peripheral player in its core markets.

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Conmed's Renewed Quest For Growth

Seeking Alpha: Bludgeoned By Energy, China, And Consumer Electronics, Materion Waiting For The Rebound

When good execution runs into bad market headwinds, it's usually the headwinds that determine the course of the company and that has been the case for Materion (NYSE:MTRN). Although there are a lot of attributes in Materion's favor - including its unique mine-to-mill integration, its strong market share and its demonstrated capabilities in developing new advanced materials and alloys - the company's exposure to weak markets like oil and gas and unimpressive FCF margins and returns on capital are more problematic.

I do believe that Materion will eventually see a recovery in the oil/gas sector and that growth in end markets like defense, aerospace, autos and high-end smart phones can drive revenue growth. I also believe that mid-single-digit FCF margins are attainable as the company leverages more high-value product introductions. While Materion does look undervalued now, this company has never shown the year-in, year-out excellence that I'd like to see from a potential long-term holding.

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Bludgeoned By Energy, China, And Consumer Electronics, Materion Waiting For The Rebound

Friday, April 8, 2016

Seeing Alpha: Ternium Toughing It Out Amid Weak Prices

With both steel stocks and Mexican stocks showing some decent performance since the lows earlier this year, last year's call on Ternium (NYSE:TX) doesn't feel quite so horrible. Although shipments grew 2% in 2015 and Ternium remains well-placed to take advantage of growth in both auto production and infrastructure spending in Mexico, weak steel pricing due in part to Chinese competition pushed prices down by double digits.

On the positive side, Ternium still generates relatively attractive EBITDA per ton and the Mexican government has taken steps to reduce the imports of Chinese steel. In addition to leveraging Mexico's growing auto sector and benefiting from infrastructure spending, Ternium is positioned to take some advantage of the eventual recoveries in Argentina and Brazil. The timing of those improvements is quite uncertain though, as is the outcome of a long-running dispute with Nippon Steel & Sumitomo Metal (OTCPK:NSSMY) over the Usiminas (OTC:USNMY) steel company, and there is no certainty that steel prices will stage (and hold) any meaningful long-term price recovery. Even so, long-term revenue growth in the range of 3% to 4% and mid-single-digit FCF margins can still support a fair value around $20
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Ternium Toughing It Out Amid Weak Prices

Seeking Alpha: Gerdau A Study In Risk Versus Opportunity

Brazilian steel giant Gerdau (NYSE:GGB) has seen its ADR share price double in the last month and a half, helped by better currency and the prospect that the political mess in Brazil may be heading toward a resolution that will allow those who remain in charge to start tackling the significant economic challenges facing the company. There has also been more optimism lately on steel, as the U.S. passed a highway bill and has been taking on low-priced imports through tariff actions, and as the Chinese may actually be serious about shutting down a meaningful amount of capacity.

I know readers don't want to see a cop-out like "valuing Gerdau is really hard right now," but it is the truth. A significant chunk of the negative movement in my fair value from last year can be tied to the movement in currency that sapped the value of the company's real-dominated cash flows and increased the debt burden, but there's no certainty that reverses. Likewise, while Brazil has significantly under-invested in infrastructure and has a low level of steel consumption that suggests very large growth potential, there's no guarantee that happens in what I'd consider to be a reasonable investment time frame.

I do believe these shares are undervalued, but management has made some questionable moves. That only adds to the already risky macro picture. There could be money yet to be made here, but this is making money the hard way.

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Gerdau A Study In Risk Versus Opportunity

Seeking Alpha: Innospec Muddling Through Better Than Most

Small specialty chemical company Innospec (NASDAQ:IOSP) continues to operate pretty strongly despite headwinds that would (and have) smacked other companies hard. Back in May of 2015, I thought the valuation was a little iffy and that it would be best to wait for a pullback; the shares did pull back into the low $40s in late summer before an impressive run to almost $60. Then the weight of weakness in the oilfield really hit the stock, sending the shares back down almost where we started from back in May of 2015.

It's probably too much to hope that Innospec sees its oilfield chemicals business return to growth this year, but the business has remained profitable and likely will stay so long as conditions don't worsen (another oil price pullback to old lows). Meanwhile, I think the fuel additives business will continue along while the performance chemical business grows nicely with strong volume growth driven by the personal care segment. With a clean balance sheet, and a stated desire to do more deals, I'm tempted to look past what will be a tough 2016 and pick at these shares now that they once again appear undervalued.

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Innospec Muddling Through Better Than Most

Seeking Alpha: Gordmans Stores Remains In An Unsustainable Structure

Credit where it's due - Josh Arnold was not only negative on Gordmans Stores (NASDAQ:GMAN) back in 2015, he was short the shares and that was absolutely the right call. While I had thought new management would move quickly to address a seriously out-of-whack cost structure, results over the past year suggest that the cost structure is liable to remain stubbornly too high relative to peers and the company's gross margin, and nothing in the same-store sales trend suggests that "growing out of the problem" with more operating scale is a valid or viable plan.

Gordmans should be able to survive for a while, but I don't see a probable path to prosperity given what appears to be a sticky high cost structure. Given that this company would have to cut its SG&A spending almost in half to be in line with its peer group and that operating margins are unlikely to climb above the mid-single-digits on a sustained basis, I've come to realize much too late that this company is likely to continue struggling. If there's a bright side, it's that expectations have been beaten down and there's a sizable short interest - if the company were to report a surprisingly strong quarter, the shares could pop on covering - but that's not the underpinning of a long-term story.

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Gordmans Stores Remains In An Unsustainable Structure

Seeking Alpha: Core-Mark Holding Delivering To Customers And Shareholders

While Core-Mark (NASDAQ:CORE) has had some operational challenges, this leading convenience store-focused distribution company has continued to execute well on balance and expand its addressable market. With the shares up about 25% from my last update and up about 115% from my first article (versus a 14% improvement in the S&P 500), it's hard to say that the company's progress has not been suitably rewarded by the Street.

This year (2016) should be a big one for Core-Mark as it begins to service new agreements with Murphy USA (NYSE:MUSA) and 7-Eleven, and I wouldn't rule out the possibility of an acquisition that expands the company's distribution capabilities in either the Midwest or the Southeast (if not both). The "but" here is valuation - the shares trade at around 13x the average sell-side estimate for 2016 EBITDA, and it takes some pretty significant margin improvement assumptions to drive a significantly higher fair value from here.

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Core-Mark Holding Delivering To Customers And Shareholders

Seeking Alpha: AGT Food And Ingredients May Need Some Time To Digest Its Gains

One of the toughest things to do with a successful stock is to decide when enough is enough and a stock has overshot its mark. AGT Food and Ingredients's (OTCPK:AGXXF)(AGT.TO) shares have risen another third over the past six months, continuing a very healthy run for one of my favorite stocks in the food space. Better still, these gains aren't built on smoke and mirrors - the company has continued to make very real progress with its higher-margin food and ingredient lines and has considerable room to expand from here.

Selling a winner too early can be painful, and I don't think AGT is ridiculously overvalued. Rather, I just don't think it's notably undervalued anymore and that transitions it more to a hold (or maybe a "sell if you need the cash for something cheaper") in my view. I do believe that the company can generate long-term revenue growth in the mid single digits or higher, but I have a hard time seeing how the FCF margins ever go much past the mid single digits; even the specialty food/ingredients business is likely to be a sub-10% FCF margin business over the long term.

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AGT Food And Ingredients May Need Some Time To Digest Its Gains

Sunday, April 3, 2016

Seeking Alpha: Excellence Rewarded With Avago

I've been pretty bullish on both Avago and Broadcom (NASDAQ:AVGO) over the years and now that the merger is completed, nothing about this combination has really changed my mind. If anything, watching Avago's management more closely has led me to a greater appreciation of how they see the semiconductor world differently than most and how that informs their management choices. At an overly simplified level, this isn't a company that believes that success will come from pursuing growth for its own sake, but rather that strong margins generated by businesses with meaningful competitive advantages is the real key.

I continue to believe that fair value for the new Broadcom is in the neighborhood of $170, but that there could be some upside to the long-term underlying growth rate of around 5%. As a diversified chip company with tremendous scale and 40%-plus market share in multiple markets, I think Broadcom can still be thought of as a core tech holding, but it may be better to try to add shares when the enthusiasm cools a bit.

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Excellence Rewarded With Avago

Seeking Alpha: Waiting For The Grass To Grow At S & W Seed Company

The wait goes on for S&W Seed Company (NASDAQ:SANW) (or "S&W") to prove its merits as an under-followed player in the ag space. The shares are down another 17% from my last update, about flat over the last year, and down 40% over the past two years. Weak as that may be, S&W has actually outperformed Monsanto (NYSE:MON) since June and over the past year, as there's been a sharper reaction to Monsanto's negative revisions.

Not a lot has changed from a fundamental perspective since last June, though a disappointing harvest in 2015 is going to have near-term repercussions on margins. The key debate around S&W, at least in my thinking, remains whether the company can successfully shift farmers from public/generic seed varieties and share in a larger proportion of the value created by its yield-enhanced and other proprietary alfalfa seed varieties. My low double-digit annualized revenue growth estimate is hardly conservative, but S&W could achieve it with a combination of low single-digit acreage growth and an improvement in value capture from less than 10% to less than 20% - still well below the 25%-plus that Monsanto and DuPont (NYSE:DD) can reliably get from their corn and soybean varieties.

If S&W can do it, and achieve a long-term gross margin above 30% and a long-term operating margin in the mid-teens, a fair value of over $6 still remains in play after a recent dilutive financing.

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Waiting For The Grass To Grow At S & W Seed Company

Seeking Alpha: Braskem Doing Well Despite Brazil's Problems

Finally - a Brazilian stock I can look back on and not feel bad about. Although Braskem (NYSE:BAK) shares have come down hard from a recent top (down almost 20% from a week ago), the shares are nevertheless up about 40% since my last review of the company. Brazilian shares have perked up since mid-January, but Braskem has done quite a bit better than Brazilian shares in general since June, as the company has benefited from lower feedstock prices and the opportunity to leverage a weaker Brazilian currency by importing Brazilian-produced chemicals into the U.S..

Management expects spreads to tighten up in 2016, and Brazil's economy remains weak, but low oil prices are still working in the company's favor. The addition of the company's Mexican plant should boost growth and Braskem seems to be looking toward a period of solid returns on assets (solid, at least, for a chemical producer). Valuation is difficult, as the shares don't look very cheap on a long-term FCF basis but do still seem undervalued on EV/EBITDA, while the role of the company in a widespread corruption scandal centered on Petrobras (NYSE:PBR) remains unknown.

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Braskem Doing Well Despite Brazil's Problems