The Amphenol Machine Rolls On

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

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

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The Amphenol Machine Rolls On

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

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

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

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

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

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

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


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

Omron Doing A Lot Of The Right Things

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

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

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Omron Doing A Lot Of The Right Things

Timken Looking Forward To Leveraging A Big Transformation

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

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

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Timken Looking Forward To Leveraging A Big Transformation

ESCO Technologies A Tough Mix Of Potential And Past Performance

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

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

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ESCO Technologies A Tough Mix Of Potential And Past Performance

First Bancorp Looking To Leverage New Opportunities

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

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

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First Bancorp Looking To Leverage New Opportunities

THK Struggles To Translate A Great Business Into Great Financials

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

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

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THK Struggles To Translate A Great Business Into Great Financials

Hancock Holding Seems Richly Valued For What It Offers

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

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

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Hancock Holding Seems Richly Valued For What It Offers

CAE Taking Aim At Much Larger Markets

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

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

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CAE Taking Aim At Much Larger Markets

Green Shoots May Be On The Way For Applied Industrial Technologies

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

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

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Green Shoots May Be On The Way For Applied Industrial Technologies

Ameresco Making Headway, But It's Not Easy

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

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

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Ameresco Making Headway, But It's Not Easy

Rexnord Still A Work In Process

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

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

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Rexnord Still A Work In Process

Carlisle Companies Taking A Familiar Road To Growth

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

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

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Carlisle Companies Taking A Familiar Road To Growth

Flush With Capital, Beneficial Looking To Build Value For Shareholders

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

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

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Flush With Capital, Beneficial Looking To Build Value For Shareholders

Watts Water Pursuing Multiple Avenues Of Self-Improvement

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

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

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Watts Water Pursuing Multiple Avenues Of Self-Improvement

Paragon Commercial Looking To Drive Growth From A Highly Focused Model

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

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

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Paragon Commercial Looking To Drive Growth From A Highly Focused Model

Carolina Financial Committed To Ambitious Growth

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

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

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Carolina Financial Committed To Ambitious Growth

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

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

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

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

Flowserve Dog-Paddling While Waiting For Orders To Recover

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

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

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Flowserve Dog-Paddling While Waiting For Orders To Recover

With Watsco, It's About Quality Versus Value

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

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

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With Watsco, It's About Quality Versus Value

Federal Signal May Find Rising Expectations Hard To Meet

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

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

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Federal Signal May Find Rising Expectations Hard To Meet

Trade Turbulence Adds A New Element To The Unifi Story

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

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

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Trade Turbulence Adds A New Element To The Unifi Story

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

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

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

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

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

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

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

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

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

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

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

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

A Tough Macro Environment Is Masking Some Improvement At PolyOne

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

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

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

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

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A Tough Macro Environment Is Masking Some Improvement At PolyOne

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

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

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

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

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

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

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

Safran Building Toward Better Days

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

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

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

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Safran Building Toward Better Days

Washington Federal Hoping A New Model Can Drive More Growth

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

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

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Washington Federal Hoping A New Model Can Drive More Growth

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

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

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

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

Umpqua Seems Short Of Growth Drivers

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

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

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Umpqua Seems Short Of Growth Drivers

Fortive Could Be A New Industrial Star

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

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

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Fortive Could Be A New Industrial Star

Glatfelter Needs To Rejuvenate Volume Growth

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

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

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Glatfelter Needs To Rejuvenate Volume Growth

Capital City Bank Needs Scale To Leverage A Good Deposit Franchise

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

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

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Capital City Bank Needs Scale To Leverage A Good Deposit Franchise