Monday, May 30, 2016

Seeking Alpha: Rudolph Technologies Riding Powerful New Chip Trends

The semiconductor industry is a tough place to play, but the semiconductor equipment industry is even worse, as the cycles swing even higher and lower, and as the timing of orders is difficult to predict (and can have huge impacts on the stocks in the meantime). What's more, you're talking about an industry where the key customers are keenly focused on trying to improve their own free cash flow, leading to a "do more with less" philosophy with equipment than can pressure suppliers.

What's the best defense? A good offense, or in this case, compelling technology and products that offer end users real advantages in throughput, production costs, and/or total cost of lifetime ownership. Rudolph Technologies (NYSE:RTEC) is trying to bring new technology to areas like advanced packaging, inspection, and metrology and use it to leverage real growth in new packaging technologies and RF and MEMS production.

While I'm an owner of Ultratech (NASDAQ:UTEK), a Rudolph competitor, I do think Rudolph's valuation is interesting. Product acceptance/adoption, order timelines, underlying demand for chips, and competition are all real issues (and difficult to forecast in their own right), but I believe mid-single digit revenue growth over the long term and peak margins in the mid-to-high 20%'s can justify a fair value in the mid-to-high teens today, with upside into the $20s if things go well.

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Rudolph Technologies Riding Powerful New Chip Trends

Seeking Alpha: Manitex Prioritizing The Right Things During The Downturn

I think it is fair to say that Manitex (NASDAQ:MNTX) was too ambitious and too aggressive when breakneck North American onshore energy expansion fueled an unsustainable demand for cranes. Management significant stretched the balance sheet in the interests of empire-building, expanding into non-core areas like trailers and liquid storage tanks. When the cycle turned, Manitex found itself with a lot of debt, not a lot demand, and questionable synergies between the units.

All of that can certainly explain why the stock has been hammered worse than other lifting equipment companies like Terex (NYSE:TEX), Manitowoc (NYSE:MTW), Manitou, and Palfinger since 2014, but it doesn't necessarily make the shares untouchable now for aggressive investors. Management has pivoted from a growth-by-acquisition model to more of a value-creation model, with a stronger focus now on cost control/reduction, cash flow generation, and sustainable growth in high-potential businesses like knuckle cranes and the ASV product line.

I'm not as bullish on a meaningful rebound in the North American energy market as I once was, but I don't think it will much worse and I think construction (residential, commercial, and civil) can be a driver for this business. I don't see Manitex struggling to pay its interest, and I do believe further debt reduction efforts can unlock some value. My current estimates call for long-term revenue growth in the mid single-digits and peak FCF margins in the mid-to-high single-digits, supporting a fair value of $7.50 that could go higher if/when energy really recovers and/or management shows that it can build its knuckle crane and ASV operations into disruptive players.

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Manitex Prioritizing The Right Things During The Downturn

Seeking Alpha: PRA Group Struggling To Adapt To A New World

A lot has changed for PRA Group (NASDAQ:PRAA) over the last few years. The company has become one of the largest collectors of defaulted credit card receivables at a time when supply has been reduced by the absence of three of the largest sellers of charged-off receivables. The company has also seen a decidedly harsher regulatory environment, as new rules and ample uncertainties have dramatically changed how lenders approach the sale of charged-off receivables and how operators like PRA Group and Encore Capital (NASDAQ:ECPG) can go about collecting them.

The net effect to PRA Group has been a marked decline in reported profits, cash flow, return on equity, and forward growth expectations. Whereas management once boldly projected 20% ROEs into the future, the market is now pricing in a long-term ROE closer to 14% and management's own projections call for a mid-single digit GAAP growth rate without a more conducive operating environment. While I think PRA Group remains undervalued, my expectations have shrunk significantly, and there are outsized execution risks both for getting the U.S. business back on track and getting real value out of the increasingly expensive-looking move into Europe. There may yet be value here, but this is another example of trying to make money the hard way.

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PRA Group Struggling To Adapt To A New World

Seeking Alpha: Accuray Still Stuck In Med-Tech's Twilight Zone

What do you do with a company that isn't growing anywhere near fast enough to be a growth stock, doesn't have the margins or cash flow to be a value stock, but has enough innovation and market potential to still be a disruptive factor in the industry? Unfortunately for Accuray's (NASDAQ:ARAY) shareholders, while the company has definitely been making progress, the pace of that progress keeps it stuck in an underwhelming valuation range, and there are still considerable doubts about whether it can take the sizable step forward it needs to be a long-term viable third player in its market.

I continue to approach Accuray with what I consider to be optimistic skepticism. I think the company has good technology and has really been focusing on addressing the past and current deficiencies of its systems. That said, this is a slow-growing market with a huge entrenched competitor and it is far from clear whether Accuray can establish a big enough market share footprint to drive the margins it needs to create long-term shareholder value. I think a fair value around $7.50 to $8.50 is fair today, with underlying upside if the company can demonstrate its ability to get and hold a double-digit market share before 2020.

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Accuray Still Stuck In Med-Tech's Twilight Zone

Monday, May 23, 2016

Sorry Again!

I want to apologize again for those who come to this page on a regular basis - I've been horrible about posting timely updates. I don't want to make excuses for this, but the "why" basically comes down to the fact that I was in the habit of making updates at night, and now my nights are a lot busier taking care of various errands and chores. But I'm going to try to be better about it.

Seeking Alpha: BRF S.A. Not So Appetizing Yet For Nervous Stomachs

When I last wrote about BRF S.A. (NYSE:BRFS), I warned that investors were likely in for a bout of elevated volatility - a prediction that, when made in reference to almost any Brazilian company, is a little like predicting that jumping into the ocean will make you wet. The shares have indeed jumped around since that last article and the shares have underperformed not only the Bovespa, but other Brazilian food players like Marfrig (OTCPK:MRRTY), JBS (OTCQX:JBSAY), and Minerva (OTCQX:MRVSY).

Whether BRF shares are a good idea now rests in large part on your time horizon. The company is doing a lot of smart things - relaunching a complementary value-priced brand in Brazil, prioritizing higher-margin processed/packaged foods, and using M&A to acquire local production and distribution to capture more value from international sales. Along the way, though, there have been frequent management shake-ups and there is still a lot of volatility in the business model due to commodity inputs, protein prices, currency, and so on.

I do believe that BRF can eventually achieve its goals of becoming more like Hormel (NYSE:HRL) or Nestle (OTCPK:NSRGY) and achieving EBITDA margins in the high teens or even 20%, and I do like the company's efforts to improve ROIC in recent years. That said, getting volume growth going again is a clear must-do and investors can certainly be forgiven for thinking that BRF is too risky and too volatile to mess with today. I believe the fair value for the ADRs is still above $17, but it's going to take a healthier, or at least more stable, environment in Brazil for these shares to do meaningfully better.

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BRF S.A. Not So Appetizing Yet For Nervous Stomachs

Seeking Alpha: Uncertainties And Wait Times Not Helping Neurocrine Biosciences

These aren't easy times for biotech, but that's not exactly news to investors in that sector. Neurocrine Biosciences (NASDAQ:NBIX) has gotten caught up in the sector-wide funk, though the shares have declined less since my last update than the biotech indices.

Neurocrine still looks promising to me. There are significant uncertainties about potential pricing for the company's lead drugs, not to mention the amount of effort that will have to go into building prescription-driving awareness. That said, this is still a company with multiple compounds with $1 billion-plus revenue potential that have largely proven their efficacy and safety in clinical trials. With the shares possibly undervalued by 50% or more, I would suggest this is still a worthwhile stock to consider for aggressive investors willing to put up with the risks and long waits that go with biotech.

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Uncertainties And Wait Times Not Helping Neurocrine Biosciences

Seeking Alpha: When The Dust Settles, Microsemi Should Continue To Stand Out

Microsemi Corp. (NASDAQ:MSCC) hasn't done that well since my last update on the company. While the shares were at least up in that intervening period, they've underperformed the PHLX Semiconductor Index by a little and particular names like Texas Instruments (NASDAQ:TXN), Semtech Corp. (NASDAQ:SMTC), and Silicon Labs (NASDAQ:SLAB) by a whole lot more. To a limited extent, maybe this is just "Microsemi being Microsemi" - I've owned and/or followed this name for a long time, and it always seems to zig when others zag. On the other hand, investors may be legitimately concerned about the level of debt the company has to manage now as well as the uncertainties regarding revenue, margins, and cash flows as the company moves through its initial stages of integrating PMC-Sierra.

My post-earnings model adjustments lead to a lower fair value, which is bad, but I still believe the shares are undervaluing what can be a strong mid-teens FCF growth story for many years to come. With a fair value range from the high $30s to the low $40s, I still think these shares offer enough upside for investors to consider.

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When The Dust Settles, Microsemi Should Continue To Stand Out

Seeking Alpha: Lundbeck Continues To Rebuild Its Reputation

It may be good advice to not look a gift horse in the mouth, but it's also a pretty good idea to not get overly excited about unreliable financial performance drivers. I'm still generally bullish on Denmark's H. Lundbeck A/S (OTCPK:HLUYY, LUN.CO) (or "Lundbeck"), but my enthusiasm is tempered by revenue beats that are coming largely from declining businesses, difficult marketing environments for key drugs, and a pipeline that may be hard-pressed to drive a lot of near-term pop.

I want to make it clear that I'm talking about the difference between tapping the brakes and diving out of the car entirely. I still think Lundbeck is a worthwhile idea as a long-term holding, but I think the sentiment has shifted from unduly (if not absurdly) negative a year or so ago to perhaps a little too positive in the near term. I still believe $38-42 is a reasonable fair value range for the ADRs, with potential upside from high-risk clinical programs where the value is presently heavily discounted, but I'm a little less excited about the near-term outperformance potential from the core drug business.

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Lundbeck Continues To Rebuild Its Reputation

Seeking Alpha: Ultratech Still Predictably Unpredictable, But Orders Are Improving

Ultratech (NASDAQ:UTEK) is never going to be Honeywell (NYSE:HON) or Coca-Cola (NYSE:KO), so if you're looking for a consistent, predictable company without a lot of quarter-to-quarter surprises, please look elsewhere. What Ultratech does offer, though, is leverage to what looks like an improving semiconductor order cycle, as well as leverage to specific drivers like advanced packaging for logic chips, 3D metrology, and perhaps the ongoing move to smaller FinFET nodes.

These shares have done pretty well since my last write-up, with Ultratech's roughly 20% move ahead of the SOX Index (up about 12%), though not as strong as the 25% move at Applied Materials (NASDAQ:AMAT) and Rudolph (NYSE:RTEC). Valuation remains tricky; if the company could regain the 20%-plus operating margins and 15%-plus FCF margins of prior upswings, there would still be upside, but UTEK faces a lot of competition in its key markets, and there are legitimate questions about its ability to execute.

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Ultratech Still Predictably Unpredictable, But Orders Are Improving

Sunday, May 15, 2016

Seeking Alpha: Good Performance Helps Ease Some Of The Tension At Wright Medical

Wall Street hates uncertainty and there are still a lot of unknowns at Wright Medical (NASDAQ:WMGI). The full cost of the company's hip litigation has yet to be determined and there are still outstanding questions regarding the adoption of the Augment biologic product, competition from the likes of Stryker (NYSE:SYK), and management's ability to successfully integrate Tornier and become a strong extremity-focused specialty orthopedics company.

Good performance can help ease some of those concerns, and Wright Medical's first quarter results were good. There's still an above-average level of skepticism regarding smaller med-tech in the market, and that keeps Wright Medical shares priced at a discount. Given the growth prospects for the existing product portfolio and the opportunities to leverage further product development, these shares are worth a look from more aggressive investors.

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Good Performance Helps Ease Some Of The Tension At Wright Medical

Seeking Alpha: Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

In some respects, Commercial Vehicle Group (NASDAQ:CVGI) is seeing results from its protracted turnaround attempts - the company's gross margins have improved, there is a credible plan in place to reduce operating costs further, and management seems to be well aware of the need to carefully manage its manufacturing footprint to preserve margins. On the other hand, 2016 is likely to be a horrible year for Class 8 truck orders (and particularly the linehaul trucks that offer the most content and best margins), and the company's long-standing efforts to diversify into off-highway markets still haven't borne much fruit.

Although I think Commercial Vehicle's shares remain undervalued on the basis of the cash flows that the company can generate, I don't know how anyone could have a lot of confidence regarding the likelihood that it will generate those cash flows - and a significant industry down-cycle is not often the time to take big swings on risky ideas. So while I do suggest that investors looking for risky deep-value turnarounds could/should dig into this story, and I will continue to hold on to my tiny position, this is most definitely an example of trying to generate alpha the hard way (something that, in keeping with my sloth-like torpor, I generally avoid).

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Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

Seeking Alpha: Lexicon Moving Forward, But Nobody Really Seems To Care

Years of disappointment and misleading guidance from prior management put Lexicon Pharmaceuticals (NASDAQ:LXRX) in a deep hole with respect to Street sentiment, but the company's execution is helping it slowly dig its way out. This year (2016) should see the company get its first product approved by the FDA, as well as key pivotal data on the Type 1 diabetes program.

While I'd certainly count myself in the camp of "long-suffering investors", I'm still generally more bullish on Lexicon than the sell-side. I believe sales of the company's lead drug telotristat etiprate can total more than $500 million at peak, supporting a fair value above today's price on its own. There's considerably more room for debate about the potential (and potential value) of Lexicon's Sanofi-partnered (NYSE:SNY) diabetes program, not to mention Lexicon's future R&D development plans, but these shares look like a risky play with an interesting skew to outsized potential gains.

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Lexicon Moving Forward, But Nobody Really Seems To Care

Sunday, May 1, 2016

Seeking Alpha: Semtech Needs To Translate Expected Growth Into Shareholder Value

It is hard to argue that Semtech (NASDAQ:SMTC) has historically served its investors particularly well. The 10-year performance of the stock (up about 25%) lags not only the PHLX Semiconductor Index by a meaningful amount (the SOX is up more than 70% over the past decade) and the Nasdaq, but other chip companies like Microsemi (NASDAQ:MSCC), Integrated Device Technology (NASDAQ:IDTI), and Texas Instruments (NASDAQ:TXN), and the five-year comps are even worse.

What's more, the internal value creation isn't impressive at first blush either, with tangible book value per share down almost 75% since 2007 (a CAGR of around negative 13%). Gross margins have been generally healthy over that time and free cash flow has always been positive, but metrics like operating margin and ROIC are less exciting.

I'm not looking to bury Semtech, as I do think the company's technology for enterprise datacenters, wireless communication, sensors, and power management can grow the business. Moreover, there would seem to be opportunities to improve operating leverage through tighter management of SG&A and R&D expenses.

When it's all said and done, though, I believe the semiconductor industry is transitioning away from a valuation philosophy of "as long as you grow, it's all fine" to one more centered around margins and value creation. With that, I believe it is very important for Semtech to not only show solid revenue growth trends, but also that it can translate that growth into long-term shareholder value.

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Semtech Needs To Translate Expected Growth Into Shareholder Value

Seeking Alpha: Buoyed By Better Sentiment, Can Commercial Metals Keep It Going?

The past couple of years have been rough ones for the steel sector, but stock prices have improved pretty noticeably in recent months on optimism that improving conditions in the market aren't yet another false start for the long-predicted recovery. Relatively speaking, Commercial Metals (NYSE:CMC) has held up all right - the shares haven't been as strong as those of Steel Dynamics (NASDAQ:STLD), but they've done quite a bit better than those of Gerdau (NYSE:GGB) and U.S. Steel (NYSE:X), while also outperforming AK Steel (NYSE:AKS) and Nucor (NYSE:NUE) over the past year.

Can they keep it going? This fiscal year should be the low point of the current cycle and the outlook for non-residential construction is still positive, but there's a lot of capacity out there, the dollar is still pretty strong, and competition from imports (Turkey in particular in the case of Commercial Metals) is still a risk. Although the rally in the shares makes it harder to call them a bargain today, it's worth remembering that cyclical recoveries are a lot like the declines - they tend to go further, faster, than you might initially think.

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Buoyed By Better Sentiment, Can Commercial Metals Keep It Going?

Seeking Alpha: The Tricky Case Of Helen Of Troy

It's been a while since I've written on Helen Of Troy (NASDAQ:HELE). While I've long liked the company's growth-by-acquisition strategy in the consumer goods space, I wasn't a fan of former management and that relegated it to my "I'll never buy it, so why bother?" bucket. Better management has been in place for about two years now, though, and I think the company's underlying strategy is stronger.

The trouble for me, as is so often the case, is with the valuation. I have no problem acknowledging that Helen of Troy should be valued beyond its organic growth capacity (likely low-single digits on revenue, mid-single digits on cash flow), as the company generates free cash flow and rolls that into acquisitions that grow the business and generates more cash flow (which, in turn, can be reinvested back into acquisitions...). Likewise, it doesn't bother me that much that tangible book value is negligible given all of the goodwill and intangibles from the deals.

The problem is that even if I assume significant improved free cash flow margins in the future (in the low teens), it will take around 8% to 10% annual revenue growth to support a fair value at or above $110 and that seems ambitious. Likewise, such a fair value requires a mid-teens forward EBITDA multiple and I just don't think that's particularly attractive given what I expect will be high single-digit annualized EBITDA growth over the next three to five years.

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The Tricky Case Of Helen Of Troy

Seeking Alpha: Grainger Seems To Be A Little Confused

I don't criticize a company like Grainger (NYSE:GWW) (or "W.W. Grainger") lightly. You don't get to be the second-largest MRO distributor in the country by accident, nor are many years of 20% or near-20% ROICs the sort of results that a company just blunders into by accident. What's more, Grainger is very well-diversified across customer and product types, with room to take share and add incremental product categories.

All of that said, I can't get comfortable with the valuation or the strategic direction. It seems to me that Grainger has either not been really thinking through some of its growth initiatives over the past few years or has shown a startlingly low amount of patience with them. Moreover, for Grainger to look cheap in my models there either has to be double-digit annualized FCF growth from here or a lower discount rate that I just frankly wouldn't find acceptable for a cyclically-exposed company in a highly competitive space.

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Grainger Seems To Be A Little Confused

Seeking Alpha: ABB Holding The Line In A Tough Market

ABB (NYSE:ABB) didn't report a great quarter in many respects, but the overall performance of this Swiss automation and power equipment giant was pretty solid against a rough backdrop. Although it looks like the first quarter reports from the industrial sector will deflate some of the more bullish expectations for a sharp recovery during 2016, it also looks as though the doomsday scenario isn't as valid as it was back in January (when many of these stocks hit their lows).

Given the solid rebound off those lows, ABB looks like an okay stock idea. The performance of Honeywell (NYSE:HON), Rockwell (NYSE:ROK), and Emerson (NYSE:EMR) has reduced the attractiveness of those stocks as well, though, and ABB does look like more of a relative bargain.

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ABB Holding The Line In A Tough Market