Wednesday, March 30, 2016

Seeking Alpha: For Nvidia, Execution Is The Best Answer

Credit where it's due - NVIDIA (NASDAQ:NVDA) (or "Nvidia") has executed a lot better over the past year than I thought it would and the shares reflect that. Nvidia's stock has risen close to 70% over the past year, leaving just about everybody in the dust. It is to management's credit that it has driven performance to a point where concerns about the loss of licensing revenue from Intel (NASDAQ:INTC) and still-significant exposure to gaming are secondary relative to the emerging long-term opportunities in markets like virtual reality, data centers, "deep learning" and autos.

Clearly the company will have to maintain its execution edge, and companies like Intel, Advanced Micro (NASDAQ:AMD), and Mobileye (NYSE:MBLY) have their own growth plans that don't include letting Nvidia beat them. I think Nvidia can continue to leverage its expertise in GPUs to grow and diversify the business, but it's hard to call the stock really cheap at these levels unless you believe auto (or other markets) can drive long-term double-digit free cash flow growth from here - a tall order for a company of Nvidia's size, but not impossible.

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For Nvidia, Execution Is The Best Answer

Seeking Alpha: Qorvo Still Tied To Apple's Fortunes, And Now Intel's As Well?

Qorvo (NASDAQ:QRVO) isn't quite a pure-play on high-performance RF chips in handsets, as the company's Infrastructure and Defense Products (or IDP) kicks in about 20% of the company's revenue, but it is close. That didn't work in the company's favor in 2015, as a slowing Chinese smartphone market and issues with top customer Apple (NASDAQ:AAPL) (more than 40% of revenue) led to multiple reductions in guidance and a substantial reduction in the share price - the stock is down close to 40% over the past year and down a similar amount since my last article on the company. Even allowing that many chip companies that depend upon the smartphone space have had their struggles (including Skyworks (NASDAQ:SWKS), Qualcomm (NASDAQ:QCOM), and Cirrus (NASDAQ:CRUS)), Qorvo has stood out as a weak performer.

Valuation seems tricky here. On the positive side, it looks as though the company has a meaningful opportunity to benefit from Intel's (NASDAQ:INTC) participation in the Apple iPhone 7, as Qorvo could generate meaningfully higher content in those phones, mid single-digit revenue growth after FY2016 would seem to support a fair value above $60, and the company has good share in segments like PA modules and switches. On the other hand, Skyworks and Broadcom (NASDAQ:AVGO) are tough rivals, the company needs to do better outside of Apple, and the Intel-related benefits are hardly certain.

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Qorvo Still Tied To Apple's Fortunes, And Now Intel's As Well?

Seeking Alpha: Globus Medical Looks Like An Undervalued Innovator

It has been a while since I've written on Globus Medical (NYSE:GMED). I wasn't thrilled with the valuation back in February of 2014, but I'm surprised the shares are down over that time given reasonable progress with the business. I'm also surprised that the shares are trading at the valuation that they are - 2016 may not be shaping up as an exciting year in terms of revenue growth, and there are risks with the expansions into robotics and trauma, but the shares look undervalued for a company set to generate high-single-digit revenue growth with strong operating margins, good cash flow, and double-digit returns on invested capital.

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Globus Medical Looks Like An Undervalued Innovator

Seeking Alpha: Ongoing Execution Will Be Mellanox's Best Argument Against The Bears

If companies like Nvidia (NASDAQ:NVDA), EMC (NYSE:EMC), and Microsoft (NASDAQ:MSFT) are right about the growth potential in high-performance computing, high-end storage, and data centers over the next three to five years, Mellanox (NASDAQ:MLNX) should do pretty well for itself selling its high-end Infiniband and Ethernet connectivity switches, boards, and cables. Intel (NASDAQ:INTC) remains a looming risk with its integrated Omni-Path offerings, but Intel has had its issues before with overpromising what it could deliver with integration, and Mellanox has a pretty solid hold of the high end of the market.

Matters with Mellanox have developed largely in line with my expectations when last I wrote, as 2015 revenue was about 4% higher than I'd modeled, and FCF was about 7% better. I wasn't overly impressed with the valuation then, and the shares did fall about 25% at the worst point, while a strong recent rally has them close to 10% above where they traded back in May.

At this point, I'm still pretty ambivalent on the valuation; I can see outperformance with EZChip integration and cross-selling driving better results, as well as increased adoption of 100G Infiniband, but data center spending can be volatile, and Intel still has enough credibility to be viewed as a serious threat to Mellanox. Double-digit revenue and FCF growth assumptions support a mid-$50s fair value in my model, which isn't enough to get me excited about it as a new buy.

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Ongoing Execution Will Be Mellanox's Best Argument Against The Bears

Seeking Alpha: Ciena: An Always-Volatile Play On Telecom And Data Center Spending

It seems like the only sure thing regarding Ciena (NYSE:CIEN) is that the shares of this optical networking equipment company will always be volatile. The shares have spent the last five years bouncing between the low teens and high $20s, with that range tightening up to $15 to $25 over the last couple of years. While the growth outlook for the company's 6500 and Waveserver platforms is strong on the basis of telecom/cable and data center spending expectations, Ciena has ample competition from the likes of Huawei, Infinera (NASDAQ:INFN), and Nokia (NYSE:NOK) and healthy margins and cash flows in this sector have never been particularly sustainable.

While Ciena's first quarter results and guidance weren't disastrous, they offer a reminder that the company's business is volatile and hard to predict, and that the Street seems to always hold these shares with one eye firmly fixed on the exit. A fair value in the low $20s and the potential to trade higher than that on "it's different this time!" enthusiasm if/when orders really start rolling in is a reason for more aggressive investors to consider the shares, but the volatility and the prospect of perpetually inadequate ROICs is going to be a bigger stumbling block for value/quality-oriented investors.

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Ciena: An Always-Volatile Play On Telecom And Data Center Spending

Seeking Alpha: NuVasive - Same Opportunities, Same Concerns

Not a lot has really changed for NuVasive (NASDAQ:NUVA). The third-largest spine company in the U.S. by market share, NuVasive continues to take share from larger players on the back of innovative products that offer meaningful advantages in terms of patient outcomes and surgeon convenience. On the other hand, concerns remain about the company's weaker share and lower profits outside the U.S., the company's position in biologics, and the real prospects for meaningful margin improvement in the coming years.

While LDR Holding (NASDAQ:LDRH) looks like a higher risk/reward option, NuVasive and Globus Medical (NYSE:GMED) seem similarly priced in a market that has turned more hostile toward growth med-tech. I don't necessarily think that NuVasive will hit its margin targets (or at least not quickly), but I do believe the company has a solid plan for growing its spine business and using opportunistic M&A to supplement internal innovation. It's not uncommon for the market to run hot and cold on growth med-tech, and I don't know how long this apparent cold cycle will last, but NuVasive is at least worth a spot on a watch list.

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NuVasive - Same Opportunities, Same Concerns

Tuesday, March 29, 2016

Seeking Alpha: Clovis Oncology Trying To Rebuild A Once-Bright Outlook

In a market where biotechs that have done nothing wrong can be down 40% or more from prior highs, you can probably imagine what's happened to biotechs that have disappointed the Street. Clovis Oncology (NASDAQ:CLVS) certainly fits into the latter group, as a surprisingly negative update in November on the efficacy of its lead drug has pushed the shares down almost 75% over the past year and down closer to 80% from my last article on the company.

There are certainly very good reasons to be cautious around Clovis. Neither of its two most advanced drugs will be first to market, and it's unclear if the company can get approval for rociletinib or commercial acceptance even if it is approved. While rucaparib may have a better future, competition and identification of patients most likely to respond could be limiting factors.

In total, the market has probably overreacted to the rociletinib disappointment and that is likely shadowing the valuation of rucaparib as well. This is a consummate "show me" market for biotech, though, and Clovis comes up short of getting gold stars across the board on those attributes that biotech investors prefer. The potential upside here is still worthwhile, but I can't argue that the risk-reward balance is as compelling given the overall carnage in the sector and the option options available.

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Clovis Oncology Trying To Rebuild A Once-Bright Outlook

Seeking Alpha: Brookfield Asset Management Offers Well-Diversified Growth Leveraging Third-Party Capital

Back in June, I thought that Brookfield Asset Management (NYSE:BAM) was well-placed to continue growing its lucrative fee-generating asset management. That process continues to benefit the company, but the market hasn't rewarded the company for that progress. While BAM is an uncommonly complex investment, I believe that complexity is at least somewhat offset by the company's demonstrated ability to successfully deploy capital into a wide range of markets where it can earn solid economic returns. In my view, Brookfield Infrastructure Partners (NYSE:BIP) and Brookfield Property Partners (NYSE:BPY) are more appealing total return candidates today, but they're also riskier.

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Brookfield Asset Management Offers Well-Diversified Growth Leveraging Third-Party Capital

Seeking Alpha: Brookfield Property Partners Seems Undervalued Given Its Demonstrated Skill In Generating Value

The market hasn't been very hospitable towards real estate investments over the last year, with many office-centered REIT shares down by double digits over the past year. While Brookfield Property Partners (NYSE:BPY) is not a REIT, it has nevertheless been caught in the overall downtrend. With office and retail occupancy and lease trends generally healthy across the company's operating footprint, I think the market is undervaluing this company's demonstrated ability to acquire and improve properties, as well as develop value-generating real estate projects. With high single-digit distributable cash flow supporting a fair value around $25, I think this looks like an idea worth a closer look.

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Brookfield Property Partners Seems Undervalued Given Its Demonstrated Skill In Generating Value

Monday, March 28, 2016

Seeking Alpha: Brookfield Infrastructure Looks Undervalued As Long-Term Bargains Emerge

Back in June of 2015, I wrote that analysis and sentiment around Brookfield Infrastructure Partners (NYSE:BIP) had a tendency of falling into the "prisoner of the moment" trap, and I think that remains the case today. The decline in value of these units hasn't been as bad as some (like Macquarie Infrastructure (NYSE:MIC), DP World, and COSCO Pacific), but it does seem as though the market is concerned about the company's modest exposure to energy and its more substantial exposure to commodity-sensitive economies like Brazil and Australia.

I certainly do think that BIP's affection for Australia and Brazil is a risk given the commodity sensitivity, but it's hard to argue with management's basic thesis that Brazilian assets are trading well below their probable long-term value. I would expect more capital recycling efforts to avoid raising capital at a discount to fair value, but BIP management is looking at a big buffet of options, and assets in stressed emerging markets or North American energy infrastructure may be too good to pass up. I've trimmed my long-term growth estimate a bit given the weakness in commodity-driven economies, but I believe a long-term growth rate of 6% in distributable cash flow can support a fair value above $49 today.

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Brookfield Infrastructure Looks Undervalued As Long-Term Bargains Emerge

Thursday, March 24, 2016

Seeking Alpha: A More Appealing Opportunity At Macquarie Infrastructure

Stock market volatility is usually spoken of as a bad thing, but experienced investors know that the ups and downs give them the opportunity to buy or sell at better prices. Given that I don't see anything fundamentally wrong with Macquarie Infrastructure Corporation (NYSE:MIC), I think the stock's 20%-plus decline since my lukewarm call (based on valuation) in early June just may be an interesting second chance opportunity for investors to buy into a solid long-term dividend-centric infrastructure story.

Investors are clearly worried about anything related to petroleum these days, but I think MIC's storage operations are a little more stable. I also believe that MIC will have the opportunity to use its relatively healthy balance sheet and liquidity position to cherry-pick high-quality midstream assets trapped within bad balance sheets. Even if MIC doesn't elect to go that route, further expansion in airport operations and power gen can soak up capital and convert it to future dividend streams. I continue to think that a low-to-mid $90s fair value is reasonable for the shares, with Atlantic Aviation and IMTT driving the overwhelming majority of the cash flow and value.

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A More Appealing Opportunity At Macquarie Infrastructure

Seeking Alpha: Is Everest Re Watering The Weeds?

"Pulling the flowers and watering the weeds," was an expression that Peter Lynch coined to refer to the habit of many companies of neglecting or outright harming their best business so as to give more time, attention and capital to inferior businesses - often in the hopes that those inferior businesses would emerge as new sources of growth. That's probably an unduly harsh assessment of Everest Re's (NYSE:RE) ongoing commitment to grow its Insurance operations, but there's nevertheless a stark contrast between the highly profitable Reinsurance operations and the seemingly always-lagging Insurance business.

I remain unconvinced that Everest Re's insurance operations are going to stage an impressive turnaround, but I'll at least acknowledge a meaningful improvement in the loss ratio would offer some welcome upside to the fair value. As is, I think the shares of this high-quality reinsurance company are modestly undervalued as the company works its way through what could prove to be an extended period of challenging conditions in its core markets.

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Is Everest Re Watering The Weeds?

Seeking Alpha: Endurance Specialty Pushing On Through Soft Markets

Endurance Specialty Holdings (NYSE:ENH) hasn't emerged as a leader of the insurance pack, but it has done okay since my last write-up on the company in June of 2015. With the shares up around 5% (excluding dividends), Endurance has outdone the likes of Aspen (NYSE:AHL) and XL Group (NYSE:XL), but hasn't quite kept up with top-notch players like Arch Capital (NASDAQ:ACGL), RenRe (NYSE:RNR), W. R. Berkley (NYSE:WRB), or Hartford (NYSE:HIG).

In my opinion, Endurance has gotten itself off to a good start with the integration of Montpelier Re (NYSE:MRH), and I like how the company has been repositioning its business and risk exposures in the reinsurance segment. On the insurance side, the company is writing a lot of business and looking to grow in markets like aviation and international casualty. While a drive for scale is understandable, expanding the business in a period of soft rates carries with it some risks to future profits.

The market has established an undesirable trade-off for me within the insurance sector - the stocks I like best aren't very cheap (if cheap at all), and the ones that are undervalued have some risks and "yeah, but..." attached to them. Such is the case with Endurance. I don't think my expectations are all that ambitious (long-term earnings growth around 5%, with a 10% ROE) and the fair value of $67 to $70 holds some appeal, but I can't muster together a rousing Buy case for the stock right now.

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Endurance Specialty Pushing On Through Soft Markets

Seeking Alpha: Struggling Genworth Not Close To Earning Its Cost Of Equity

There are many ways to analyze, evaluate, and value companies and they all have their particular advantages and disadvantages. As a general rule, though, I don't think many investors will argue that in order for a stock to be an attractive long-term investment candidate, the company needs to earn its cost of equity (as opposed to its overall cost of capital). That's a big problem for Genworth (NYSE:GNW), as this struggling insurance company is likely looking at many years of single-digit returns on equity versus a cost of equity that is in the double digits.

Management has lost a lot of credibility and goodwill with its various false starts and head fakes as it has tried to repair its struggling long-term care business and improve its life and annuity operations. The latest plan, centering around an attempt to isolate that troubled LTC business, makes some sense, but successfully executing the plan is far from certain. I think the company can generate the cash it needs to manage its 2018 debt maturities, but the risks to shareholders are mounting and although mid single-digit ROEs can support a fair value that's 40% or more above today's price, more stress to the balance sheet could conceivably wipe out much (if not all) of the value.

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Struggling Genworth Not Close To Earning Its Cost Of Equity

Wednesday, March 23, 2016

Seeking Alpha: BBVA Not Yet Rewarding Patience

Back in June, I wrote that I thought that Societe Generale (OTCPK:SCGLY) looked like the best pick among a four-stock basket of big European banks (SocGen, BBVA (NYSE:BBVA), Santander (NYSE:SAN), and Unicredit (OTCPK:UNCFF)) in need of a lot of self-improvement. While I got that call right, it's hard to call the roughly 17% erosion in SocGen a victory, nor the 30% erosion in BBVA given what I thought was a reasonably attractive (and undervalued) collection of assets that could outperform in more favorable conditions.

As it happens, those "more favorable conditions" haven't really showed up. Spain's economy is improving and overall bad debt levels are declining, but the prospects for better rates have wilted amid prolonged economic doldrums. What's more, bad debt in the energy space has jumped out as the next big challenge to bank's capital levels.

BBVA still looks as though it has potential, but potential can be a watchword for value traps. I'm not so concerned about the company's highly profitable Mexican operations, but there is a real risk that Turkey and Latin America won't grow as quickly as previously expected. Spain has been improving, but weak prospects for rate/spread growth make the recovery process more difficult. Long-term attributable profit growth of 9% can drive a fair value of over $8.50 today, but my former target of around $10.50 requires an average growth rate of over 12% that looks increasingly difficult to reach.

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BBVA Not Yet Rewarding Patience

Seeking Alpha: ING Feeling An Uncomfortable Squeeze

About nine months ago, I wrote the following in reference to Netherlands-based bank ING (NYSE:ING), "... the potential here appears to be among the best in Europe right now."

I was wrong.

While others certainly have done worse (including Unicredit (OTCPK:UNCFF), Deutsche Bank (NYSE:DB), and Santander (NYSE:SAN)), and European banks have performed poorly in general, ING's nearly 25% decline in local terms since that article is quite weak and notably worse than the performance of French banks like BNP Paribas (OTCQX:BNPQY) and Societe Generale (OTCPK:SCGLY) and Austria's Erste (OTCPK:EBKDY), not to mention fellow Dutch (but state-owned) bank ABN AMRO.

ING has taken hits on multiple fronts. Loan growth and spreads in its core Benelux markets haven't been great, and the prospect for rate increases (and higher lending margins) has faded across the banking sector. Investors have also grown more concerned with ING's energy loan book, while more stringent capital ratio rules are going to reduce prospective capital returns (as well as returns on capital).

The conditions in which ING operates are certainly less than ideal, but I do not believe that the book should trade for less than tangible book value. My base case estimates value of the bank at around $15/ADR on long-term earnings growth in the 5% to 6% range (a long-term ROE of 10% to 11%), but if lower-for-long rates, higher loan losses, and weaker returns on capital drive ROEs persistently below 10% for the future, today's price is pretty close to the mark on value.

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ING Feeling An Uncomfortable Squeeze

Sunday, March 20, 2016

Seeking Alpha: AXA Needs To Unlock Growth To Achieve A Higher Share Price

French insurance giant AXA (OTCQX:AXAHY) has been doing what it said it would, but investors have been slow to reward the company for its progress. The shares are down about 3% from my last update, which is better than the performance of peers like Generali (OTC:ARZGF), Aviva (NYSE:AV), and Zurich (OTCQX:ZURVY), and a little worse than Allianz (OTCQX:AZSEY), but investors shouldn't shoot for "no worse than the others" with their investments.

Management has done a good job of reducing expenses and boosting cash flow, and the company's relatively solid Solvency II score is encouraging for further capital distributions to shareholders. On the other hand, high-growth markets like Turkey haven't delivered the hoped-for growth, P&C premium growth has proven challenging, and inflows to both the life and asset management businesses aren't as strong as they need to be.

A key consideration, then, is whether AXA can take the steps necessary to accelerate bottom line growth from the 2% to 3% rate seen in 2015. Today's price is fair if the 10-year adjusted earnings growth averages around 3%. A growth rate of 4% bumps the fair value to $26.50 and a little over 5% a year in adjusted earnings growth supports a target close to $29.50. I believe 5% is attainable, but far from certain, so this isn't a money-for-nothing sort of investment prospect.

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AXA Needs To Unlock Growth To Achieve A Higher Share Price

Seeking Alpha: DBS Group Has Been Beaten Down On Worries About China And Commodities

It has been a rough stretch for Singapore's DBS Group (OTCPK:DBSDY) since I last wrote about this leading ASEAN bank, with the shares down more than 20% and underperforming United Overseas Bank (OTCPK:UOVEY) (down about 19%) and Oversea-Chinese Banking Corp. (or OCBC) (OTCPK:OVCHY) (down 11%). While DBS Group actually hasn't performed that poorly from an operational view, with 2015 earnings pretty much in line with the expectations for 2015 back at the time of that last article, investors have grown increasingly concerned about the rate environment, the slowdown in China, the company's commodity lending exposure, and the prospect of higher loan losses.

While high-quality banks in difficult economies have shown in the past that tough times can definitely exceed management expectations (Brazil's Itau Unibanco (NYSE:ITUB) comes to mind), it seems as though the market is expecting DBS to see its non-performing loans jump from less than 1% today to 5% or more over the next couple of years. Possible? Of course. Probable? I don't think so.

In what I think is a relatively bearish scenario (cumulative 2016-2018 earnings about 5% below the current sell-side expectations), DBS Group's ROE slips below 10% for a few years, but the bank would still grow earnings at a roughly 4% annualized rate over the next five years and closer to 6% over the long term (consistent with a low-double-digit ROE). That would support a fair value of over $52 on the ADRs today. If management is right about its loan growth and credit loss experience (in other words, better than the sell-side expectations and better than that bearish outlook), the fair value moves into the mid-to-high $50s relatively quickly.

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DBS Group Has Been Beaten Down On Worries About China And Commodities

Seeking Alpha: This Compass Still Points To Sizable Distributions

Compass Diversified Holdings (NYSE:CODI) is an unusual investment option in many respects. You can think of it as a holding company or private equity fund trading as a public entity, but what Compass is really about is buying controlling stakes in small to mid-sized businesses with certain quality characteristics and then reaping the cash flow that those businesses produce. While the company does sell businesses from time to time, it's not an active churner of its portfolio and in some ways is maybe a little more like Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) (without the core insurance operations) than a typical private equity fund.

It has been about ten months since I've written about Compass, and the shares are down about 10% over that time (an amount almost covered by the distribution) as the company has seen some underwhelming performance in its portfolio and has put itself in a position where it is not presently covering its distribution. Management has a lot of buying power on hand, though, and I think long-term coverage of the distribution is not an issue. Investors should carefully consider the tax ramifications of owning this (it is a partnership and it distributes a K-1), but I think the shares are undervalued today and hold some appeal for their cash/income-generating qualities.

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This Compass Still Points To Sizable Distributions

Seeking Alpha: Allied World A Confounding Mix Of Risk And Opportunity

Even with the concerns over softening premiums, rising claim inflation, and weaker-for-longer interest rates, the insurance sector hasn't had too bad a time of it. Quality names like Arch Capital (NASDAQ:ACGL), Chubb (NYSE:CB), and W. R. Berkley (NYSE:WRB) have managed to outperform the S&P 500 by 10% to 15% since the time of my last article on Allied World (NYSE:AWH). It hasn't been such a good time for AWH, though, as concerns about weaker underwriting, weaker market returns, and increased reserves have pushed the shares down about 17% since that last article and well below the level of returns of many of its peers.

I have to admit some frustration as to what to do with these shares. I wasn't all that enthusiastic on them back in May, and I do think weak core underwriting results and softening markets are a concern. On the other hand, Allied World has an enviable track record of tangible book value growth and meaningful opportunities to grow both its U.S. specialty and global primary insurance businesses in the coming years. I think $36 to $40 is a reasonable fair value range right now, but these shares could merit a fair value in the mid-$40s if the reserving issues are truly behind them and if management can really maximize the opportunities of its expanded global and domestic primary insurance businesses.

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Allied World A Confounding Mix Of Risk And Opportunity

Wednesday, March 16, 2016

Seeking Alpha: Hartford Financial Services Largely Performing To Plan

Back in June of 2015, I thought that Hartford's (NYSE:HIG) double-digit discount to fair value and its ongoing self-improvement efforts made it a good name to consider in the insurance space. Since then, the shares are up about 6% - which isn't super, but isn't too bad next to Allstate (NYSE:ALL) or AIG (NYSE:AIG). It also hasn't been a smooth ride, as the shares have been knocked back by worries about rising loss frequency in auto insurance and feeble prospects for near-term rate increases.

With the shares up some and the company performing more or less in line with my expectations, the valuation argument doesn't seem quite as compelling. Hartford does still look like one of the more undervalued companies I pay attention to in the property & casualty space, but that undervaluation comes with lower growth prospects and near-term pricing concerns. While I think the shares still make some sense for more value-inclined investors, it's hard to work up a lot of enthusiasm.

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Hartford Financial Services Largely Performing To Plan

Seeking Alpha: Amid Many Challenges, FEMSA Keeps Executing

Nothing's particularly easy these days for companies that have to deal with South America, and likewise there is more than a little uncertainty about the near-term outlook for Mexico. Those are certainly challenges for FEMSA (NYSE:FMX), but the company's solid execution and organic growth continue to move the company forward, and it is clear that management is following a vision for a much larger retailing enterprise down the line.

I can understand why some investors won't want to bother with the currency and economic risks that go with a company operating in Mexico (not to mention Brazil, Chile, Colombia, and Argentina). I believe the rewards are worthwhile, though, and I think FEMSA's fair value is around $105 on the basis of high single-digit long-term growth fueled by the cash-generating Coca-Cola FEMSA (NYSE:KOF) operations and the growing Comercio Retail operations.

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Amid Many Challenges, FEMSA Keeps Executing

Seeking Alpha: Itau Unibanco Doing A Solid Job Of Juggling Chainsaws

I wasn't very keen on Itau Unibanco (NYSE:ITUB) back in June of 2015, as I thought there was more risk than management was acknowledging of the Brazilian economy getting worse and taking credit quality with it. While the shares have staged an impressive rebound from their January lows (up about 66%), the shares are still down about 15% from that last piece as the Brazilian economy has indeed been weaker.

I'm not taking a victory lap on that call - predicting that a Brazilian stock would be weaker over the past year or so has been about as hard as hitting the ocean with a brick. Still, I think management at Itau should be credited for managing the situation as well as they have - the company's non-performing loans are pretty well-covered, and though the next couple of years will likely be sticky, I think the company has been managing this downturn well and will emerge as a strong player in a large economy that is still under-banked.

I think Itau Unibanco's ROE could threaten the mid-teens during this downturn, but I think 20% or higher is still viable down the road. Discounting back my cash earnings estimates gives me a fair value of about $10 today, and while that doesn't look so impressive relative to a $9 price on the ADRs, I use a hefty discount rate (mid-teens) that should account for a lot of the risk.

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Itau Unibanco Doing A Solid Job Of Juggling Chainsaws

Seeking Alpha: Weak Energy Weighing Heavily On Canadian Western Bank

Back in my analyst days, I had a Garfield cartoon pinned to a wall that said "Every time I think I've hit rock bottom, somebody throws me a shovel". It's a good reminder that however bad things look, there's usually some way they can get worse, and that has proved to be the case for Canadian Western Bank's (OTCPK:CBWBF) (CWB.TO) which shares have weakened further from my last update, as energy prices have eroded further and have started to hit Alberta's economy harder.

With that "it can always get worse" mometo mori in mind, it's difficult to hold, or advise holding, a company that is still going through a cyclical decline. Canadian Western is likely to see more pressure on loan growth and credit from here, and I don't think anybody really knows what will happen to Alberta's economy if oil prices stay sub-$40 for an extended period of time other than that it will be bad.

I think there's value here, but it's absolutely true that there is above-average risk. I'm expecting the next five years to see an average ROE at CWB below 10%, with a scant 1% annualized cash earnings growth rate. Over time, though, I think ROE will recover into the low-double digits and earnings will grow at an annualized rate of more than 6%. That suggests that a fair value in the high $20s is still appropriate, but the market is clearly down on this name and the high correlation to oil prices will likely continue to dominate near-term trading.

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Weak Energy Weighing Heavily On Canadian Western Bank

Seeking Alpha: Renaissance Re Taking A Best-In-Class Model Into Uncharted Territory

Renaissance Re (NYSE:RNR) (or "RenRe") has long been respected as one of the best-run reinsurance companies out there. One that can generate ROEs of 20% to 30% in good years and minimize the damage in the bad years when catastrophic events like hurricanes and earthquakes do hundreds of millions (if not billions) of dollars in damages. RenRe has also been a pioneer in using third-party capital arrangements to generate high-margin fees and commissions while giving it maximal flexibility for its underwriting decisions.

Things are different now. RenRe acquired Platinum in no small part to diversify itself more into casualty reinsurance, and this longer-tail business will shift how RenRe earns its money (more earnings from managing the float) and generates its returns. What is also different is the reinsurance market itself, with third-party capital sources now around 20% of the market and pushing rates down more than 40% from prior peaks. I expect RenRe to continue to be one of the best-run insurance companies in the reinsurance space, but I think it's going to be tough for the company to exceed low double-digit ROEs in the future and that makes it hard to see a lot of value in the shares today.

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Renaissance Re Taking A Best-In-Class Model Into Uncharted Territory

Sunday, March 13, 2016

Seeking Alpha: With Demonstrated Execution, Will Aviva Finally Get Some Love?

I can't say my bullish call on British insurance company Aviva plc (NYSE:AV) has been a good one, as the shares are down about 15% from my June 2015 article and only about half of that decline can be attributed to currency. While premium growth in the non-life business has been a little pokey, the life business has grown pretty nicely and the company surprised everybody with a stronger capital position vis-a-vis Solvency II.

Looking ahead, management still has to prove that Aviva can wring operational synergies from the Friends acquisition and take advantage of what management believes will be a growth market in UK savers and a significant cross-selling opportunity. At the same time, delivering on the growth potential of markets like Poland and Turkey is important. I continue to believe that Aviva is a significantly underrated company, and with worries about its capital position likely to diminish, a fair value of nearly $18 makes this a stock to consider.

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With Demonstrated Execution, Will Aviva Finally Get Some Love?

Seeking Alpha: Credicorp Generating Good Results In An Underserved Market

I was pretty down on Credicorp (NYSE:BAP) shares back in May of 2015, as I didn't think the shares offered enough upside to offset the risk. While the company has done pretty well on an operating basis since then, the shares are down about 10% since that last article and have more or less tracked the movement of the Peruvian nuevo sol versus the dollar.

I continue to have mixed feelings about Credicorp. I think this is a pretty well-run emerging market bank, and I like the company's leadership in a growing under-banked market. I don't like the company's heavy reliance on the Peruvian central bank to subsidize the de-dollarization process (moving from dollar-denominated loans and deposits to PEN-denominated), and I have some modest concerns about the level of reserves. I think the shares are about 10% to 15% undervalued even after incorporating a higher cost of capital, so it's not a clear-cut buy to me right now.

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Credicorp Generating Good Results In An Underserved Market

Seeking Alpha: Fifth Third Undervalued, But Where's The Spark?

Reduced prospects for further rate hikes and incrementally greater concerns over credit quality hasn't been good for the banking sector as a whole, but Fifth Third (NASDAQ:FITB) has suffered a little more than average. The shares are down more than 20% since my last update in the summer of 2015, underperforming the S&P Regional Banking ETF (NYSEARCA:KRE) by more than 5%, as well as trailing peers/rivals like PNC (NYSE:PNC), JPMorgan (NYSE:JPM), U.S. Bancorp (NYSE:USB) by slightly larger amounts.

I'm a little concerned about Fifth Third's lackluster performance on net interest margin and expenses, as well as what could prove to be somewhat aggressive reserving should credit quality reverse. None of this leads me to think that Fifth Third is a bad bank, but I find it hard to come up with a reason to own Fifth Third over JPMorgan, BB&T (NYSE:BBT), or Wells Fargo (NYSE:WFC) given what seems to me to be similar levels of undervaluation but fewer drivers for outperformance.

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Fifth Third Undervalued, But Where's The Spark?

Seeking Alpha: Sluggish Investments And Changing Markets Have Hammered FTAI

Back in the summer of 2015, Fortress Transportation and Infrastructure (NYSE:FTAI) looked like an interesting new opportunity in the infrastructure investment space to go alongside more established names like Brookfield Asset Management (NYSE:BAM) and Macquarie Infrastructure (NYSE:MIC). Although there was the noted risk of the difficulty of making cash flow projections based on little more than uncommitted capital and management intentions, there appeared to be attractive opportunities in areas like aviation leasing, port development, and terminal operations.

Unfortunately, those initial projections proved much too generous, and the shares have lost about 40% of their value. Management has moved much slower than I'd anticipated in investing/deploying capital, and the company has seen sentiment around terminal operations shift dramatically in the wake of the severe drop in oil prices and the subsequent slowdown in U.S. onshore production. Now the company finds itself in a position where the distributable funds generated from operations may not fund its dividend in 2016 unless those investments accelerate.

I understand why the market has turned on this name, and I can certainly appreciate less risk-tolerant investors taking the position that this is untouchable until the company makes some meaningful use of that nearly $900 million in investable funds. That said, for more aggressive investors, this could still be an interesting opportunity with both a capital gains and income aspect.

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Sluggish Investments And Changing Markets Have Hammered FTAI

Seeking Alpha: Market Headwinds Slow The Progress At AllianceBernstein

There's a good potential turnaround story at AllianceBernstein L.P. (NYSE:AB), but it is going to take a cooperative market environment and that hasn't been the case lately. The shares have taken a dive since my last update, along with peers like Franklin Resources (NYSE:BEN), Invesco (NYSE:IVZ), Legg Mason (NYSE:LM), and Janus (NYSE:JNS), as market conditions have made it noticeably harder to gather and retain the assets under management (AUM) that fuels the fee-generating model.

AllianceBernstein hasn't made the progress with AUM accumulation or margins that I had hoped for a year ago, but there's still upside here. If management can leverage relatively good actively-managed fund performance into improved AUM, margin leverage could be significant. That said, investors can't afford not to consider the risks that the margin leverage fails to materialize and the company never truly manages to harmonize the Alliance and Bernstein businesses. I still believe that a fair value in the mid-to-high $20s is in play, along with a rich tax-advantaged distribution, but asset managers need relatively healthy markets to make headway.

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Market Headwinds Slow The Progress At AllianceBernstein

Thursday, March 10, 2016

Seeking Alpha: Aspen Insurance Trying To Defy Expectations And Tough Markets

This isn't an easy market for an insurance and reinsurance company that wants to grow, but Aspen Insurance (NYSE:AHL) continues to push a story that calls for above-average premium growth, driving above-average operating leverage. The Street still isn't buying it, as the shares are down a bit from my last article and not particularly well-loved in terms of "Buy" ratings.

It's always fair to question the compromises a company has to make to grow when its peers are struggling to do so, and that's a concern as Aspen looks to grow in a declining market. What's more, I'm a little disappointed in the company's progress with its underwriting profitability. This is still a story where growth could drive impressive performance, but I see more risk to that idea given what's going on in the sector as a whole. I've trimmed back my expectations, particularly for the next couple of years, but if the company can manage mid-single-digit cash earnings growth, a fair value in the high-$40s still makes sense.

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Aspen Insurance Trying To Defy Expectations And Tough Markets

Seeking Alpha: Arch Capital's Superior Model Continuing To Pay Off

Arch Capital (NASDAQ:ACGL) has been one of my favorite insurance companies for a long time, and I greatly admire the company's focus and discipline when it comes to underwriting and capital management. Arch Capital has shown time and again that it will prioritize/deprioritize business units as expected returns dictate and will expand/shrink the business in conjunction with its view of the landscape. I believe that will be a critical differentiating factor as the property & casualty insurance and reinsurance sectors go through what could prove to be a multi-year process of too much capital and weak pricing.

I've generally believed that investors can do better holding somewhat overvalued shares of great companies than cheap shares of lesser companies, and I still believe that about Arch Capital. I can't really get comfortable with Arch Capital as a great idea for new money given the valuation, but I wouldn't recommend investors flee the shares if they already own them.

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Arch Capital's Superior Model Continuing To Pay Off

Seeking Alpha: Celldex Demonstrates That Cancer Is Hard

Monday brought very disappointing news, as Celldex (NASDAQ:CLDX) announced that the second interim analysis of the Phase III study of its lead drug Rintega (rindopepimut) failed to show a survival benefit relative to the control arm (Temodar). As a result, the company is stopping the trial and ending further development of what was expected to be the company's first drug to reach the market.

This is a surprising (if not shocking) result relative to past trial results that showed a consistent survival advantage for Rintega, but the data are what they are. Celldex still has a credibly deep pipeline of immuno-oncology drugs, but it is likely going to take a little while for investors to get over this disappointment and consider Celldex again as an investment.

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Celldex Demonstrates That Cancer Is Hard

Seeking Alpha: With Wright Medical, It Seems Like Something Always A Little Wrong

That's an admittedly grim opening to an article on Wright Medical (NASDAQ:WMGI), but it does feel like this company has been operating under one cloud or another for quite some time. Prior to the hiring of CEO Bob Palmisano, the company was weighed down with an uncompetitive large joints business and an inefficient sales approach. Then there was a protracted wrangling with the FDA over the Augment biological product. Then there was the acquisition/merger with Tornier that, while promising long-term, wasn't the high-premium buyout that some investors had been counting on. Now there is the risk of product liability payouts, potentially dilutive cash-raising moves, and the regular worries associated with competition and the vagaries of the market.

Maybe there always is something to worry about with Wright Medical, but that's true for most companies and it doesn't stand in the way of my thinking that the shares remain undervalued. It will take some pretty strong performance to justify a fair value in the $20s, but I think this company has the technologies, products, and market foci to generate that growth and make this a worthwhile stock over the long term.

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With Wright Medical, It Seems Like Something Always A Little Wrong

Seeking Alpha: Argo Group Making Steady Progress In Improving Its Business

On the whole, insurance is a pretty boring industry for most investors. It's the type of sector where surprises tend to skew to the negative and where management can't really change the business for the better in the scope of a year or two - there's no "one more thing" moment where a company introduces a new product that shifts market share almost overnight and changes the industry. That said, good management and steady self-improvement can do a lot, and the five-year stock returns of Argo Group (NASDAQ:AGII), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are nothing to apologize for, as all of these well-run insurers have outdone the Nasdaq over that time period.

In my view, the story at Argo remains one of steady improvement. The company still needs to "grow into" its expense structure, but the company's underwriting performance remains strong. Weak pricing is a challenge within the property and casualty insurance sector, but Argo's focus on smaller clients helps shield it a bit from pricing pressure, while low reinsurance prices give the company the option to offload some risk at attractive prices.

I've liked Argo for a while now and the shares have done pretty well. I'm not as excited about the valuation, though, as I think it already incorporates a jump to 10% returns on equity in the coming years. To that end, while Argo does trade at a discount to many peers on a price/book value basis, it also generates lower returns and deserves at least some of that discount. I still like this business and the long-term prospects, but I'd probably rather buy Chubb (NYSE:CB) at a discount today than pay full value for Argo.

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Argo Group Making Steady Progress In Improving Its Business

Tuesday, March 8, 2016

Seeking Alpha: Hurco Holding Strong In A Tough, Uncertain Market

Will the real industrial market please stand up? Looking over the various and sundry industrial company reports I've written in recent months, it's very clear that the U.S. manufacturing sector is going through a rough patch, due in large part to very weak demand stemming from the energy sector, as well as weakness in off-highway equipment and growing weakness in commercial trucks. And yet, the market's reaction seems to be "don't worry… it'll bottom soon and then get better", helped I'm sure by at least a few companies that have said exactly that.

As it pertains to Hurco (NASDAQ:HURC), a tiny manufacturer of machine tools, it's a tough environment to model, but I think the company is handling itself quite well. Machine tools will always be volatile and there are no assurances that the company's strategy of expanding into more production-oriented tools will really grow the business. Still, I believe the shares are undervalued if my predictions of mid single-digit FCF growth and 8.5% to 10.5% returns on equity prove reasonable.

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Hurco Holding Strong In A Tough, Uncertain Market

Monday, March 7, 2016

Seeking Alpha: Euronet's Multiple Moving Parts Still Moving Forward

Euronet Worldwide (NASDAQ:EEFT) is an odd collection of businesses, but it's a collection that seems to work - in part, at least, because it's a business built around collecting a small piece of transactions from what I would generally consider to be convenience services. This isn't a flawless business, but Euronet seems to have found its niche and it's one that I think can continue to support a respectable level of growth.

I thought the shares were a little undervalued last time around, and the stock is up a little more than 10% then. Once again, the shares look a little undervalued to me, with that valuation predicated on a long-term slowdown in revenue growth to the mid-single digits. Given the opportunities the company has to expand its ATM network, its ePay business, and its money transfer operations, this could be an interesting name to watch/own for some time.

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Euronet's Multiple Moving Parts Still Moving Forward

Seeking Alpha: Is NCR Still A Sheep In Wolf's Clothing?

NCR (NYSE:NCR) has generally told a good story over the years, pointing to the emerging market growth opportunities in ATMs, the growth offered by branch transformation and increased service offerings in the U.S. banking sector, and the opportunities in retail and hospitality, particularly from software. It hasn't really worked out, though. The company's revenue has been growing modestly on a constant currency basis, and although the company has made strides with its free cash flow generation, the shares are down about a quarter from when I last wrote on them about two years ago.

I don't disagree that there are growth opportunities in the markets that NCR serves that could underpin mid single-digit or higher long-term growth. The problem, in my view, is that companies like Oracle (NYSE:ORCL), VeriFone (NYSE:PAY), Ingenico (OTCPK:INGIY), and Global Payments (NYSE:GPN)/Heartland Payments (NYSE:HPY) have increasingly blurred the lines in the hardware and software spaces within retail and hospitality and I'm concerned that NCR just doesn't have the vision and the portfolio to really leverage those opportunities.

The upcoming Investor Day could be an opportunity for the company to lay out some bold transformative strategies for the company, but I'm very concerned that it'll be more of the same, (a lot of promises, but weak delivery) and I just don't see a reason to mess around with a company that has had numerous opportunities to reestablish its growth credibility.

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Is NCR Still A Sheep In Wolf's Clothing?

Seeking Alpha: Natural Grocers Needs Some Growth Hormones For Store Traffic

Natural Grocers by Vitamin Cottage (NYSE:NGVC) (or "Natural Grocers") may not have the same image issues as Whole Foods (NASDAQ:WFM) (aka "Whole Paycheck") or cause the same consternation with the crunchiest of organic food shoppers - Whole Foods, Sprouts (NASDAQ:SFM), and Fresh Market (NASDAQ:TFM) do all sell some conventional products - but it does have its challenges. In a market where organic/natural food is becoming more and more mainstream, alternative destinations like Trader Joe's, Kroger (NYSE:KR), and Target (NYSE:TGT) continue to represent ongoing threats to Natural Grocers' traffic and growth plans.

These share are down another 20% from where I last left them, which isn't too good next to Sprouts or Whole Foods, but isn't too awful next to Fresh Market or United Natural Foods (NASDAQ:UNFI) (a wholesaler and distributor of organic and natural foods). Unfortunately, weak comps remain a key issue with the company and the stock, as sub-5% comps just don't get the job done in terms of long-term sales per store and margin leverage.

At these levels, I'm getting more interested in the shares. I do believe the disappointing comp traffic growth is a serious threat to the long-term bullish argument, but I also think that Natural Grocers has an attractive and defensible business plan that can still work.

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Natural Grocers Needs Some Growth Hormones For Store Traffic

Seeking Alpha: Aptose Needs To Get Moving

Certain risks are inherent to biotech; the fact that most clinical compounds fail in human testing being foremost among them. Small biotechs have additional challenges, including limited resources when it comes to driving site and trial enrollment and attending to other details. And then there are the "unforced errors" - mistakes and missteps that occur at companies of all sizes, but can hit smaller biotech companies much harder given their typical smaller cash balances and margins of error.

Aptose Biosciences (NASDAQ:APTO) hasn't done a lot since my last update on the company to inspire confidence. Slow progress with a key early-stage clinical study of APTO-253 can be forgiven as an inevitable part of the process, but the subsequent clinical hold due to mistakes that apparently tie back to prior management is not so easily forgiven.

I've cut my fair value estimate roughly in half, as I believe the breakdown in biotech valuations coupled with uncertainties and concerns about the clinical hold and trial progress with APTO-253 will make financing more expensive. I still believe there's a chance that APTO-253 proves to be a worthwhile drug, and the partnership with the Moffitt Cancer Center is interesting, but an already skittish biotech market is not going to be kind to a micro-cap biotech with one lead candidate in early-stage development and a trial that is not currently enrolling. I would note, though, that none of the issues affecting Aptose really speak to the quality or potential of the lead drug (APTO-253) and aggressive investors who can tolerate the volatility and risk shouldn't ignore the story solely for those other issues.

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Aptose Needs To Get Moving

Seeking Alpha: American Eagle Trying To Fly Unfriendlier Skies

I continue to be impressed with the turnaround at American Eagle (NYSE:AEO), but the path ahead doesn't get any easier for this teen retailer. Production innovation, international expansion, and the growth of the "aerie" franchise all offer opportunities for growth, but margin leverage is going to be harder to come by and management will be challenged to prove that the recent run of strong performance is more than just a recovery from past missteps and/or taking advantage of weakness at competitors.

I wasn't all that impressed with the valuation opportunity back in the summer and the shares were down about 20% from that piece until a strong February rebound. I see more value in the shares now, but I do have some concerns that the Street's expectations for growth may be less than reasonable and that the shares could be punished if management "only" does a good job.

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American Eagle Trying To Fly Unfriendlier Skies

Seeking Alpha: Exact Sciences Traveling A Familiar, Tough Road

As I've written in reference to med-tech in the past, sometimes FDA approval is the relatively easy part of the process. Almost every company can talk up the prospects for an experimental drug, device, or diagnostic test (with sell-side analysts dutifully parroting them), but products don't sell themselves and navigating the correct path through patient/doctor education, pricing, reimbursement, and so on is trickier than many investors realize or expect.

When last I wrote about Exact Sciences (NASDAQ:EXAS) I mentioned the risk that the company could get an adverse ruling from the United States Preventive Services Task Force (USPSTF), and that happened. While the initial ruling wasn't a clear-cut "don't use" for the company's Cologuard test, it wasn't the unambiguous positive decision that investors were hoping for and that would have spurred widespread commercial reimbursement in 2016.

Absent a final ruling from the USPSTF, Exact Sciences is in a tough spot. A negative USPSTF determination doesn't prevent private insurers from covering Cologuard, but it gives them an excuse not to and/or to push hard for pricing concessions. While I've remodeled for a slower uptake of the test, a lower ASP, and higher spending, I still arrive at a fair value that suggests meaningful undervaluation. If the company can deliver the expected volumes this year investors may reconsider the name, but if the uncertainty about reimbursement starts impacting that ramp, all bets will be off.

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Exact Sciences Traveling A Familiar, Tough Road