Sunday, April 23, 2017

With Assets In Place, Orbcomm Ready To Drive Wider M2M Penetration

Satellite-based Internet of Things (or "IoT") datacomm services provider ORBCOMM Inc. (Orbcomm) (NASDAQ:ORBC) has spent the time and money to establish a strong end-to-end industrial IoT infrastructure, underpinned by a dedicated low-earth orbit satellite network. Now it is time for the company to demonstrate that it can sign up, and keep, enough customers in diverse fields like trucking, marine shipping, intermodal, and heavy equipment to deliver on the promise and potential of a high-margin, high-ROIC business model that can have meaningful growth from widespread adoption of industrial IoT.

This is no sure thing. The shares are down a bit over the past year (and up about 50% over the past three years), and recently reported revenue growth has been lackluster - particularly for a company that many believe should be solidly in its "growth phase." That said, the adoption and use of IoT to track mobile assets is still a relatively novel (if not experimental) concept for many of Orbcomm's customers and I wouldn't regard the relatively "missionary" aspect of today's sales process as a permanent issue. What's more, with a strong asset base now in place, I expect Orbcomm to start seeing the benefits of early adopters realizing (and reporting on) the benefits of IoT-based asset tracking and their peers moving to catch up.

If Orbcomm is in fact in the early stages of its adoption curve, there is significant uncertainty when it comes to modeling. I don't think 15x-17x forward EBITDA is unreasonable for a company that should be able to grow EBITDA faster than that over the next three, five, and 10 years; but investors will likely not be patient with the name if hardware sales don't start materializing in a bigger way in 2017.

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With Assets In Place, Orbcomm Ready To Drive Wider M2M Penetration

Ambitious Ashtead Looking To Disrupt Equipment Rental Even Further

Ashtead Group (OTCPK:ASHTY) has already accomplished a lot, as its U.S. equipment rental business Sunbelt dramatically outgrew the underlying market over the last decade or so, expanding more than 4x during a turbulent time for the overall market. Management has more in mind, though, as it believes it can eventually hold mid-teens share of a substantially larger market, as more construction companies turn to rental/leasing and as the company adds stores and bulks up in areas outside of core construction equipment rental.

Although Ashtead shares haven't done all that well year-to-date next to rivals like United Rentals (NYSE:URI) or Hertz (NYSE:HTZ), the shares are still up about 70% over the past year, with the shares up about a third since the U.S. Presidential election. Investors have already assumed a lot in regards to infrastructure stimulus and tax reform, and it is hard for me to argue that the shares are significantly undervalued on a cash flow basis. That said, management has shown an uncanny ability to grow the business and federal stimulus could stretch the company's prospects and create more M&A opportunities.

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Ambitious Ashtead Looking To Disrupt Equipment Rental Even Further

NCI Building Systems Offers More Than A Cycle Play

When I last wrote about NCI Building Systems (NYSE:NCS), I thought the shares looked as though they had some value on the prospects for a continued recovery in non-residential construction, as well as some self-help margin improvements. While the shares are up about a third since then, investors frankly would have done better investing in the S&P 500 or more residential-sensitive names like Louisiana-Pacific (NYSE:LPX) or Trex (NYSE:TREX).

I do have some concerns about what looks like modest share loss over the past couple of years at NCI, but much of that is offset by the potential of the company's expanded insulated panel business, as well as the ongoing progress in margin improvement. Although I expect a more "slow and steady" trend in non-residential construction, and I don't think past data regarding "average" peaks and troughs is all that useful, mid-single-digit growth in revenue and mid-single-digit FCF margins would support a fair value in the high teens today.

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NCI Building Systems Offers More Than A Cycle Play

Monolithic Power On Track To Deliver Exceptional Growth

With healthy margins, very strong relative growth prospects, and large addressable markets, Monolithic Power (NASDAQ:MPWR) checks a lot of the boxes that semiconductor investors like to see. That goes at least some way toward explaining why the shares have been so strong over the last one, three, and five years relative to the semiconductor industry and other power management rivals like Texas Instruments (NYSE:TXN), Maxim (NASDAQ:MXIM), and Infineon (OTCQX:IFNNY).

I like the prospects for the company to gain share in the growing auto semiconductor market, not to mention leveraging new opportunities like brushless motor control and more established opportunities like home appliances and servers. The question is how much an investor is willing to pay for that. It appears to me that the shares are already pricing in long-term revenue growth in the high-teens to low 20%'s, and it's tough to see a lot of incremental upside unless you believe Monolithic is going to significantly outperform expectations and that investors will continue to pay premiums for semiconductor stocks above past norms.

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Monolithic Power On Track To Deliver Exceptional Growth

Ajinomoto Continuing To Shift Toward Growth And Margins

A Japanese processed food company wouldn't necessarily stand out as a prime investment idea, given the sluggish growth prospects in the Japanese domestic market. Ajinomoto (OTCPK:AJINY) is an exception, though, in large part because of the company's efforts to position itself in growing emerging markets and improve the margins in its core Japanese market. Add in the potential for management to further revise and upgrade its non-food businesses and I think there is a credible case for bullishness here.

I'm expecting Ajinomoto to leverage low-single-digit revenue growth into mid-single-digit FCF growth, supporting a fair value about 5% to 10% higher than today's price. The liquidity for Ajinomoto's ADRs is not great, though, and I would encourage investors to consider the Japan-listed shares (2802.T) as a much more liquid option.

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Ajinomoto Continuing To Shift Toward Growth And Margins

Yaskawa Electric Leveraging The Automation Of China

Having established itself as a leader in multiple segments of the Japanese factory automation sector, Yaskawa Electric (OTCPK:YASKY) is trying to repeat its success in China as that country increasingly adopts automation. The company has done well thus far, but the cyclical nature of the industry and its dependence upon customer capex (not to mention forex exposure) have made for choppy share price performance over the past five years.

The shares are now off more than 10% from their recent high and look as though they could be slightly undervalued. I'm not looking for exceptional revenue growth in the coming years, but I do think the company can improve its margins and continue to leverage its strong share in servomotors. If adoption of servomotors, inverters, and robots can spread beyond today's core markets (and if Yaskawa can broaden its horizons in robotics), there could additional upside to sweeten the prospects.

Yaskawa's ADRs are not especially liquid. I would suggest that investors consider the Japan-listed shares instead.

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Yaskawa Electric Leveraging The Automation Of China

Squeezed On All Sides, Tsingtao Needs To Change

China's Tsingtao (OTCPK:TSGTY) is almost certainly the most recognizable Chinese beer brand in the United States and its flagship brand is still the leading single brand in China's large beer market, but that hasn't translated into much success lately for the company as a whole. Tsingtao has struggled to develop a cogent corporate strategy over the last five years, and the end result has been a weakening position in the attractive, growing premium categories as well as little traction in the mass-market/volume segment, not to mention steadily weakening margins.

While Tsingtao could be fixed, it is unclear to me if it will be. After two strong and successful management regimes, the approach of this management team seems muddled, unfocused, and not up to the challenges of competing with strong local rival China Resources Beer (OTCPK:CRHKY) (or "CRB") nor Anheuser-Busch InBev (NYSE:BUD) (or "ABI"). The shares are not dramatically mispriced, and Carlsberg's (OTCPK:CABGY) rumored interest in Asahi's 20% stake is encouraging, but it's hard to work up much enthusiasm for anything more than the potential of what a better-run Tsingtao could be.

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Squeezed On All Sides, Tsingtao Needs To Change

NewMarket Needs To Find New Markets To Drive Growth

NewMarket Corp. (NYSE:NEU) is an unusual company in many respects. A strong player in additives for lubricants and petroleum-based fuels, it has an enviable track record for EBITDA margins, cash flows, and returns on capital when compared to other specialty chemical companies. The company has been fairly generous about return capital to shareholders, but a lack of stock splits has led to a high absolute share price and somewhat thin trading volume, as well as minimal sell-side coverage. What's more, while NewMarket is good at what it is and generates healthy cash flow, it has taken a different path from many of its specialty chemical peers that have been looking to deploy their cash flow into diversifying acquisitions.

I like how NewMarket operates, and I think the expansion of the company's presence in Asia will improve the company's top line growth prospects. That said, I still don't believe the overall top line growth outlook is all that good, and the share price already seems to anticipate quite a bit of cash flow growth.

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NewMarket Needs To Find New Markets To Drive Growth

Monday, April 17, 2017

Methanex - Long-Term Opportunity, Or Musical Chairs?

Companies/stocks like Methanex (NASDAQ:MEOH) will earn you some early gray hairs. Methanex has long been the world leader in methanol production, with market share more than double its nearest competitor (depending upon how you treat state-owned businesses). What's more, while methanol prices and revenue have been endlessly volatile over the years, the company has always managed to generate positive EBITDA, nearly always managed to generate operating income, and typically generated positive cash flow, as well as strong returns on capital in the good years.

The problem is that this is a tough business in which to earn any sort of consistent return. Revenue actually shrunk over the last decade and EBITDA margins have swung between 5% and 30%, with long-term book value per share growth of just 3%. Looking ahead, demand for methanol in applications like fuel blending, biodiesel, and methanol-to-olefins, as well as growth in coatings, sealants, and other downstream markets, should be healthy, but I expect that state-owned enterprises in areas like the Middle East and China will be willing to add capacity in response.

Methanex's valuation is not so compelling to me, but historically these shares have done well in times of rising methanol prices. Hence the "musical chairs" part of this article's title - while I think supply curtailments and growing demand from applications like MTO can support higher spot prices (and strong cash flows for Methanex) from here, it won't go on forever and this is not a long-term buy-and-hold type of stock.

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Methanex - Long-Term Opportunity, Or Musical Chairs?

Suntory Needs To Optimize Japan And Expand Its Growth Opportunities

In contrast to Kirin (OTCPK:KNBWY), which I wrote about the other day, Suntory Beverage & Food (OTCPK:STBFY) ("Suntory") has a more promising record of managing its non-alcoholic beverage businesses and realizing value from its foreign investments. Nevertheless, while Japan's sluggish beer market isn't a concern here (Suntory Beverage & Food is a subsidiary of Suntory Holdings and doesn't participate in alcoholic beverages), Japan's non-alcoholic beverage market isn't offering much growth potential either, and Suntory will need to maximize its profitability here while exploring better growth opportunities outside Japan.

I believe management will succeed in these efforts, but there are ample risks and uncertainties regarding timing and magnitude. Suntory is already investing to develop market opportunities in Africa, but the company hasn't yet done much with China, India, or Latin America. While I'm looking for the company to generate low single-digit growth due to its heavy reliance on developed markets like Japan, Australia, and Western Europe, that is still sufficient to support a fair value about 10% above today's price.

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Suntory Needs To Optimize Japan And Expand Its Growth Opportunities

Kirin's Self-Improvement Amply Rewarded

Up more than a third over the past year (and around 30% over the past two years), Kirin (OTCPK:KNBWY) has outperformed peers like Asahi (OTC:ASBRY), Sapporo (OTC:SOOBF), and Suntory (OTCPK:STBFY) as management has made several moves to improve several underperforming segments of the business, including the sale of the long-struggling Brazilian operation to Heineken (OTCQX:HEINY). Now the question is what Kirin management can do to stimulate growth when its core market(s) offer minimal underlying growth at best and acquisition prices are steep.

Kirin shares deserved their run, but management needs to prove that it can deliver more than low single-digit FCF growth in the future. Although the underlying growth assumptions are not very high here, and the shares are undervalued on the basis of established industry M&A premiums, Kirin's best growth opportunities hinge upon the company executing well in precisely those places where it has struggled, and that's a little too aggressive for my comfort today.

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Kirin's Self-Improvement Amply Rewarded

InterXion's Data Center Opportunity Is Exciting, But The Valuation Is Demanding

Cloud adoption is accelerating in Europe, and InterXion's (NYSE:INXN) portfolio of high-quality carrier/cloud-neutral interconnection-focused data centers across major markets is a high-value asset. Utilization is healthy, margins are improving, and the company is looking down an attractive growth runway. It also doesn't hurt that InterXion is an attractive, "gettable" standalone asset that could attract M&A interest.

The "but" for me is that I struggle to find the value in the shares at this price. I won't necessarily disagree that InterXion could be taken out at a price above today's level and still make sense for the buyer, but I hate relying on M&A-based valuations as my primary valuation method. Looking at other approaches like EV/EBITDA and discounted cash flow, though, suggests that the market is already more than up to speed on the potential here, and I believe InterXion will have to produce double-digit long-term revenue growth to drive a higher price.

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InterXion's Data Center Opportunity Is Exciting, But The Valuation Is Demanding

Repeated Strategic Blunders And Regulatory Risks Weighing On Centrica

Contrary to what some seem to believe, utilities aren't foolproof toll-taking businesses that can be run on autopilot, but the U.K.'s Centrica (OTCPK:CPYYY) has committed a lot of unforced errors along the way. Although the company has done a good job of improving customer service and developing retail customer retention efforts, the company's foray into upstream oil and gas has destroyed value, and the company's efforts to generate growth from businesses like connected homes and distributed generation are uncertain at best. Making matters worse, aggressive pricing actions from competitors in the U.K. market has the government talking about taking a harder line on regulation and implementing more price controls.

Centrica offers a yield above 5%, and the company's cash flow should continue to grow from here (albeit slowly). With upstream capex now significantly de-prioritized, more of that cash could be directed towards shareholders once the company goes a little further with deleveraging. The shares look poised around fair value, with the potential of the growth opportunities balanced by the regulatory and competitive risks.

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Repeated Strategic Blunders And Regulatory Risks Weighing On Centrica

Can Rakuten Maintain Leadership ... And Will It Matter?

Market leadership is all well and good, but if you can't make much real money from it, that leadership really doesn't get you very far over the long term. With Amazon (NASDAQ:AMZN) and Yahoo! Japan (OTCPK:YAHOY) putting pressure on Rakuten (OTCPK:RKUNY) in its core e-commerce business, Rakuten has had to respond with more aggressive marketing and promotions. At the same time, though, management is trying to be more disciplined and more demanding with its numerous ancillary operations, and the company has a credible shot of driving meaningful growth in its credit card business.

Modeling Rakuten offers a few more challenges than normal, as Amazon can be a brutally competitive player. While Rakuten would seem to offer about 10% upside from here on the basis of growth opportunities like Ebates, Viber, and its card business and improving profitability in its core Rakuten e-commerce business (Rakuten Ichiba), bulls need to at least consider the risk that Amazon and Yahoo! Japan compete so aggressively that meaningful profit growth in the core business proves elusive.

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Can Rakuten Maintain Leadership ... And Will It Matter?

Tuesday, April 11, 2017

Orion Needs To Leverage Infrastructure Opportunities To Drive More Consistent Results

Consistent performance has been elusive for Orion Group (NYSE:ORN), even though the company has hard-to-match capabilities in marine construction and a solid concrete construction operation in Texas. To some extent, this is not all Orion's fault, as a lot of the company's business depends upon government budgeting and allocation decisions and the company is vulnerable to very competitive (if not irrational) bidding behavior from its rivals. While the shares have done quite well over the past year compared to other construction and dredging operators like Great Lakes Dredge & Dock (NASDAQ:GLDD) and Granite Construction (NYSE:GVA), the five-year performance record is not especially strong.

Orion looks undervalued, but that undervaluation comes with the underlying cost of a lot of risk and uncertainty. I expect a supportive funding environment for the maintenance of commercial waterways, as well as coastal restoration projects, and I think growth in the cruise sector and terminal demand will support the construction operations, while Texas remains a growth market for the concrete construction business. That said, winning and executing bids should not be taken for granted and this isn't a "widows and orphans" type of opportunity.

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Orion Needs To Leverage Infrastructure Opportunities To Drive More Consistent Results

Having Lagged Its Peers, BR Malls Should Have Self-Driven Upside As Brazil Recovers

In the "location, location, location" world of real estate, BR Malls' (OTCPK:BRMSY) leverage to middle class (and "middle-high") consumers hasn't worked as well of late, as the Brazilian consumer continues to experience challenging times. While conditions seem to be past the worst in Brazil, the economy isn't roaring back, and BR Malls is seeing weak same-store sales and rising delinquencies.

I'm encouraged by the company's efforts to target operating costs during the downturn, and BR Malls has done well on this metric relative to Multiplan and Iguatemi, despite worse declines in same-store sales. Looking ahead, the company continues to have a sizable operating footprint that gives its leverage to a consumer recovery, not to mention a substantial land bank that can be developed into revenue-generating leased space. In addition, I expect improving sentiment to reignite interest in the Brazilian real estate sector, allowing BR Malls to get back to its preferred strategy of turning over its portfolio and monetizing more mature assets where it has less opportunity to create value.

While I do believe BR Malls shares are undervalued, the liquidity on the ADRs is sub-optimal, so these shares aren't appropriate for all investors. Additionally, while considering the Brazil-listed shares is certainly an option for some readers, trading in Brazil is still inconvenient for most American individual investors.

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Having Lagged Its Peers, BR Malls Should Have Self-Driven Upside As Brazil Recovers

Ageas Looks Undervalued On Its Core Earnings Power, With Capital Available To Support More Growth

As the insurance markets in Europe get back to normal after the various financial crises, not all of the participants have benefited equally. In my view, AXA (OTCQX:AXAHY) and Allianz (OTCQX:AZSEY) moved faster to reposition themselves for the new market realities, and I believe that's at least part of the reason why their shares have outperformed Belgium's Ageas (OTCPK:AGESY) over the past three years (as well as the past year). Nevertheless, I think Ageas has gone a long way toward stabilizing and repositioning its business, and I think the company is poised to benefit from better rates in life insurance and growing opportunities in Asia.

Ageas has surplus capital, and I expect that capital will go toward M&A or back to shareholders. I don't expect exceptional profit growth or return expansion from Ageas, but mid-single-digit growth is enough to support a fair value more than 10% above today's price, and I believe that the businesses will continue to support a healthy dividend payout to shareholders. Investors should note that the ADRs are not especially liquid, so buying the Belgium-listed shares (AGS.BR) may be a better option for some investors.

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Ageas Looks Undervalued On Its Core Earnings Power, With Capital Available To Support More Growth

Shin-Etsu Chemical Leading Its Peers For Good Reasons

Large chemical companies with mid-teens operating margins aren't very common, but Japan's Shin-Etsu (OTCPK:SHECY) has managed it for some time and that has helped the stock outperform both the Nikkei and the S&P 500 over the last five years. With leading positions in PVC, silicones, and multiple markets serving the semiconductor space, I believe Shin-Etsu is looking at a relatively favorable revenue and margin outlook for at least the next few years.

With both the Tokyo-traded shares and the ADRs up around 70% over the last year, a lot of the positives about this company are in the stock. That said, the shares don't look particularly expensive on a DCF basis and improving conditions in the wafer market could drive some near-term upside. I'd rather see a better entry price, but Shin-Etsu's all-around quality argues for a spot on a watch list, and I wouldn't be in a rush to sell if I owned the shares.

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Shin-Etsu Chemical Leading Its Peers For Good Reasons

Strong Share, A Recovering Market, And Margin Leverage Supporting Masonite's Outlook

For all of the too clever by half ticker symbols, Masonite's (NYSE:DOOR) is pretty straightforward - it makes doors, it makes a lot of doors, and it more or less makes only doors. A virtual duopolist in the North American interior doors market, Masonite is taking advantage of improving housing markets (both new construction and remodeling) and looking to boost margins on a richer product mix and improving utilization.

Masonite shares have outperformed the S&P 500 over the past year and are quite popular with the sell-side community. Nevertheless, I think there could still be upside here if the company can leverage mid-single-digit revenue growth into double-digit free cash flow growth.

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Strong Share, A Recovering Market, And Margin Leverage Supporting Masonite's Outlook

Iteris Expecting Big Things From Big Data

Investors who've been around a while know to be skeptical when established companies attempt to pivot their business toward hot new trends. It has happened many times in biotech, it happened with the rise of e-commerce and cloud/SaaS, and it's happening again with ag tech as concepts like data analytics and Internet of Things are applied to this huge market.

That doesn't mean that investors should automatically dismiss Iteris (NYSEMKT:ITI). After all, well-run companies are supposed to figure out how to apply their existing know-how and expertise into emerging and adjacent sectors to grow their business. But it does at least argue for investors to approach this name somewhat cautiously for now.

If Iteris can build real share in its addressable segment of ag analytics and achieve the sort of margins and cash flow that other companies have managed with a SaaS model, a double-digit fair value is not unreasonable. On the other hand, if the company cannot make a dent in the ag market over the long term (and/or the market fails to emerge as expected) and the traffic business performs more or less as it has in the past, a return to the low single cannot be ruled out.

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Iteris Expecting Big Things From Big Data

Wednesday, April 5, 2017

Will Precision Ag Take American Vanguard To A New Level?

For what it is, American Vanguard (NYSE:AVD) is a good company. This small agricultural chemicals company does not have the R&D resources to compete with companies like Syngenta (NYSE:SYT), Bayer (OTCPK:BAYRY), or BASF (OTCQX:BASFY) in novel crop protection ingredients, nor the scale to compete with companies like ChemChina in large-scale generic crop protection, but it does have a solid record of acquiring and marketing niche products for an array of row crops, fruits, vegetables, and cotton.

The challenge I have with American Vanguard is when the market runs ahead of itself by overestimating what the company can be, as has happened in the past when investors thought the corn boom established a "new normal" for sales or when Zika would lead to a major sales opportunity for its mosquitocide. Now I have similar concerns about SIMPAS, the company's entry into precision agriculture. While the SIMPAS system seems legit, I think the sales effort will be challenging, and I think the company will always be challenged by its lack of proprietary R&D capabilities. As I think $15 to $17 is a reasonable estimate of fair value, I don't see all that much upside today.

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Will Precision Ag Take American Vanguard To A New Level?

Exact Sciences Leveraging Coverage Wins And Volume Growth

Small-cap diagnostics company Exact Sciences (NASDAQ:EXAS) has had quite the run since I last wrote up the company. While I thought the Street was too negative on the prospects for insurance coverage and uptake/usage of the company's Cologuard colon cancer test, I didn't expect the shares to shoot up over 350% in only about a year.

Exact Sciences remains a controversial name, and with a short interest close to 34%, I expect the debates about the company and the shares to remain heated. Nevertheless, the company's direct-to-consumer TV campaign has stimulated volume, and the company's now up to about 80% of eligible/targeted lives covered by insurance. Ongoing uncertainty about health insurance laws in the U.S., usage trends, and cost-benefit analyses will keep the volatility simmering, but the company does now at least have a credible pipeline beyond Cologuard to debate.

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Exact Sciences Leveraging Coverage Wins And Volume Growth

H.B. Fuller Benefiting From Addressable Market Expansion

As the second-largest participant in the relatively fragmented adhesives market, there are certainly some positive characteristics to H.B. Fuller (NYSE:FUL). Fuller has historically been good at "sticking to its knitting" and focusing its resources on those markets where it had a strong position, and the company should be able to achieve meaningful operating margin improvements in the next few years from greater manufacturing and operating efficiency. Better still, the company's more recent turn towards engineered adhesives gives the company better exposure to some of the more attractive growth markets within adhesives.

Although Fuller's shares have lagged the local market performance of its major competitors (Henkel (OTCPK:HENKY), Sika (OTC:SXYAY), and Arkema (OTCPK:ARKAY)), it's hard to call the shares undervalued, as the price already seems to discount high single-digit/low double-digit growth in free cash flow and EBITDA. On the other hand, industry M&A has established a double-digit multiple on EBITDA as "reasonable" and H.B. Fuller's pivot toward faster-growing segments of the adhesives market could deliver better results than presently expected. On balance, I think Arkema is a more interesting pick today, but H.B. Fuller would be worth reconsideration on a pullback.


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H.B. Fuller Benefiting From Addressable Market Expansion

Sunday, April 2, 2017

Integra's Transformation Starting To Show Results

Mid-cap med-tech Integra LifeSciences (NASDAQ:IART) has been an odd stock over the years as the company has shifted its focus many times and struggled to generate the sort of revenue growth and margin leverage that the market typically demands from smaller med-techs. With that, the shares have lagged the broader medical device sector over the last decade, as well as larger names like Stryker (NYSE:SYK).

It looks like Integra has hit on a better mix in recent years, though, as revenue growth and margins have improved. While Integra isn't leveraged to the most attractive growth markets, the acquisition of Johnson & Johnson's (NYSE:JNJ) Codman neurosurgery business will improve margins and meaningfully improve the company's overseas sales and distribution capabilities. Although the high teens FCF growth I expect from Integra isn't enough to support an attractive fair value, the company's improving margin outlook argues for a richer multiple and some upside in the shares.

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Integra's Transformation Starting To Show Results

Butterfield's Profitable Banking And Trust Operations Overshadowed By Regulatory Concerns

For a lot of reasons, Bank of N.T. Butterfield & Son (or "Butterfield") (NYSE:NTB) is an odd bank. It's the only publicly-traded pure-play on banking in Bermuda and the Cayman Islands, it has uncommonly high market share, and it operates with uncommonly low risk-weighted assets. It also has a very healthy trust business and quite a bit of capital, not to mention above-average asset sensitivity.

Perhaps odder still is that this bank actually looks undervalued. Although I think it will be a challenge for Butterfield to deliver meaningful loan growth, the interest sensitivity and fee-generating businesses should generate revenue growth and good expense leverage. While compliance, regulatory, and oversight risks are real, even with an elevated discount rate, these shares look potentially undervalued today, with a solid dividend kicker as well.

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Butterfield's Profitable Banking And Trust Operations Overshadowed By Regulatory Concerns

Aramark Needs To Deliver Better Growth And Improve Margins

Food, facility, and uniform services company Aramark (NYSE:ARMK) has been a laggard for some time, with the shares trailing its closest peers Compass Group (OTCPK:CMPGY) and Sodexo (OTCPK:SDXAY) over the last few years. This underperformance has come as the company has found it difficult to meet its growth targets, and there is still some skepticism as to whether management will succeed in driving meaningful expense reductions.

I do think the company can and will do better both in terms of revenue growth and margin improvements, and the mid-teens FCF growth that I model would support around 9-10% total return potential. That's a little shy of my typical return goal, and I would like a little more upside relative to the risk of ongoing underperformance relative to the likes of Compass. That said, Aramark does serve sizable markets that can support mid-single-digit revenue growth, and some of the company's early IT-driven cost-reduction efforts do seem to be working, so I can't completely dismiss the bull case.

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Aramark Needs To Deliver Better Growth And Improve Margins

Proofpoint Growing On The Back Of Human Error

In college, I had a friend whose father was an aeronautical engineer and who liked to say that whatever improvements they could make in terms of avionics and flight control systems, they couldn't do as much about "the squishy pink thing at the front". In other words, human error is always a factor in complex systems, and that applies to network security as well. While firms like Palo Alto (NYSE:PANW) and Check Point (NASDAQ:CHKP) do a lot to secure enterprises from an array of threats, companies are still vulnerable to an employee clicking on a malware attachment or inadvertently (or deliberately) sending out privileged information.

That's where Proofpoint (NASDAQ:PFPT) comes in. This company has developed a suite of cloud-based products to help protect enterprises from email-based threats, targeted attacks, and data loss, as well as assist in archiving and governance. These shares are not cheap, not even on the basis of growth stock norms, but the company is gaining share, expanding its addressable market, and starting to see margin leverage.

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Proofpoint Growing On The Back Of Human Error

MKS Instruments Leveraging Its Strengths And Pursuing New Opportunities

In a relatively expensive market, I don't expect to find many bargains and such is the case with MKS Instruments (NASDAQ:MKSI). That said, this manufacturer of components and subsystems for the semiconductor equipment industry doesn't look overly expensive and management has a good recent track record with respect to revenue and margin performance versus sell-side expectations.

The unpredictability of the semiconductor equipment cycle is basically a permanent risk factor, but the acquisition and integration of Newport should expand the company's opportunities within its core semiconductor market, as well as deliver new opportunities outside this notoriously cyclical sector.

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MKS Instruments Leveraging Its Strengths And Pursuing New Opportunities

Power Integrations Looking To Grow Share In Growing Markets

Admittedly, the power components segment of the semiconductor market isn't the most exciting, and Power Integrations (NASDAQ:POWI) doesn't have the best performance record relative to the PHLX Semiconductor index over the years. That said, the company has managed to grow revenue relatively consistently and generate decent returns on capital despite erratic margins.

Looking ahead, there are definitely opportunities for Power Integrations to drive more growth. The company is under-exposed to industrial markets like industrial controls and drives, automation, inverters, and electric/battery-powered tools and vehicles, but new products should drive share growth. Growth markets like rapid charging and LED drivers also provide attractive opportunities for this small cash-rich company.

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Power Integrations Looking To Grow Share In Growing Markets

Thursday, March 23, 2017

Qualys Has To Execute Better To Live Up To Its Multiple

Potential is a tricky thing. There's no question that significant growth potential can fuel the valuation on software stocks like Qualys (NASDAQ:QLYS), but failure to execute on that potential can bring about sharp corrections and high levels of volatility. Qualys has had its challenges on the execution front over the years, but the roughly 35% increase in the share price over the last year leads me to think that investors are back to focusing on the potential, as the company looks to leverage sizable ongoing cross-selling opportunities, new product launches, and an improved go-to-market strategy.

While the opportunity is there, at least in terms of dollar volume of addressable market, I think a 5x EV/revenue multiple on 2017 is an ample reflection of that opportunity, particularly for a company that has had something less than a history of seamless execution. While the company's SaaS approach has its advantages and the Internet of Things (or IoT) is a credible opportunity, the valuation is a challenge for a company that I don't see as bringing game-changing technology into the security space.

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Qualys Has To Execute Better To Live Up To Its Multiple

PTC Looking To IoT To Drive The Next Leg

Like fellow CAD/PLM software developer Dassault (OTCPK:DASTY), PTC (NASDAQ:PTC) has almost always looked expensive by conventional valuation metrics, but the shares have nevertheless outperformed the market over the last decade as the company has built a strong business on the back of its CAD and PLM software offerings. Now, as the industrial world embraces the next wave of automation, PTC is looking at its suite of Internet of Things (or IoT) offerings to drive the next wave of growth.

PTC is on strong footing in the emerging industrial IoT space with its partnerships with the likes of GE (NYSE:GE) and Amazon (NASDAQ:AMZN), and the market potential is there. PTC shares could still have double-digit annualized upside from here if the company can deliver high single-digit revenue growth and high teens FCF growth, but it is not as though those are conservative assumptions for a company whose underlying demand is still tied to cyclical industries. I would also note that M&A potential is a potential floor here, as even with the high multiples there would likely be several interested parties in a bid for PTC.

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PTC Looking To IoT To Drive The Next Leg

Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

The third-party logistics (or 3PL) industry is huge, with some estimates of the addressable opportunity ranging from $160 billion to $190 billion just in the United States. Radiant Logistics (NYSEMKT:RLGT) isn't targeting all of that, or at least not yet, but the company's operations in truck and intermodal brokerage and freight forwarding do cover around one-half to two-thirds of the potential market. Radiant is still a relatively small player in comparison to companies like C.H. Robinson (NASDAQ:CHRW), XPO (NYSEMKT:XPO), Landstar (NASDAQ:LSTR), and Echo (NASDAQ:ECHO), but the company's growth-by-acquisition strategy has been used successfully many times over in this space and its addressable markets remain very fragmented.

At this point, it looks to me like the Street may be too skeptical about Radiant. While there have been recent challenges from soft demand and excess capacity, those circumstances seem to be improving. Uncertainty about U.S. trade policy is another risk factor, as is the possibility that the company will overpay for future acquisitions and/or struggle to integrate them. Recognizing those risks, I still believe there are meaningful opportunities here as the business scales up, and I think the shares look pretty interesting below $6/share.

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Radiant Logistics Applying A Familiar Model To A Fragmented, Growing Sector

Signature Bank Has Its Challenges, But The Valuation Is More Interesting

While Signature Bank (NASDAQ:SBNY) went along with the banking sector in its post-election run, the prior underperformance up to that point means that the trailing twelve-month appreciation in the stock is only about 10% - well below the performance of many bank stocks. As is often the case when former high-flyers start underperforming and/or trading at reasonable (or at least more reasonable) multiples, it's definitely worth asking if there's opportunity.

In the case of Signature, I'm cautiously optimistic. I believe the company can maintain a mid-teens earnings growth rate, and that supports a fair value a little bit above today's price. I'd also note that the company's combination of growth and returns on capital suggests that it's undervalued on a TBV basis. While weak trends in the taxi medallion portfolio and possibly slower multi-family lending should be watched and the shares aren't a clear-cut bargain, the stock could have some relative appeal compared to other banks (many of which are quite richly valued now).

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Signature Bank Has Its Challenges, But The Valuation Is More Interesting

Tuesday, March 21, 2017

UCB Needs Clinical Success To Drive Upside

Not unlike Denmark's Lundbeck (OTCPK:HLUYY) (LUN.KO), which I own, Ipsen (OTCPK:IPSEY), and Almirall (OTC:LBTSF), UCB SA (OTCPK:UCBJY) (UCB.BR) is an interesting mid-cap European pharmaceutical company that gets relatively little attention from U.S. investors, even though UCB generates close to half of its revenue in the U.S. Part of the issue is likely the low liquidity of the ADRs, and I would suggest that investors who are considering UCB look at the European shares instead.

I think UCB's price today is interesting for investors who can take on higher-than-average risk. Unlike Lundbeck, which doesn't have an especially robust early-stage pipeline, UCB has numerous NMEs in trials, and clinical data read-outs in 2017 should help frame some of the long-term opportunity. What's more, the company is approaching the release of very significant Phase III data on romosozumab (or "romo") in osteoporosis and strong data on non-vertebral fractures could be a meaningful driver. Success with romo and those high-risk Phase II read-outs could drive another $5 to $8 per share in value.

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UCB Needs Clinical Success To Drive Upside

Self-Improvement Not Quite Enough For Innophos

Innophos (NASDAQ:IPHS) has come back strong from an awful 2015, with the shares up more than 90% over the last year after a nearly 50% drop in 2015 brought about by a run of weak performance tied to iffy demand and more import competition. New management is targeting common-sense drivers for internal self-improvement, but the company's end markets remain soft and pricing is still weak. While I do think there is room for meaningful margin improvement from here, it's hard not to see today's price as an ample reflection of those expected improvements.

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Self-Improvement Not Quite Enough For Innophos

INC Research Looks Like A More Focused, Higher-Risk CRO Option

As I said in a recent piece on PRA Health Sciences (NASDAQ:PRAH), there's a lot to like about the contract research organization (or CRO) sector as trial complexity increases, R&D budgets continue to grow, and drug companies look to shift toward their specialties and more variable-expense models. Within this competitive space, INC Research (NASDAQ:INCR) has looked to stand out with an intense focus on Phase II-IV support, a greater skew towards smaller companies, and a more intense focus on a few specific therapeutic indications.

Whether this differentiated strategy will work is (and/or how well), in my mind, the key question for the stock. What INC Research is doing makes sense, but it's a riskier strategy given how much spending is accounted for by larger companies and the reliance of smaller companies on market-based funding. Performance has been more erratic here of late, with soft trends in new bookings (although the company tends to be conservative here). That said, if INC can navigate through this tough stretch and drive long-term revenue growth in the high single digits, with FCF growth in the double digits, the shares look undervalued below $50.

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INC Research Looks Like A More Focused, Higher-Risk CRO Option

Lonza Tied To Attractive Markets

Lonza (OTCPK:LZAGY) has done well since I last wrote about this Swiss specialty chemicals company, with the shares up 100% as the company has continued to see solid performance in both its pharma/bio and specialty chemical operations. While the acquisition of Capsugel is a big one, the expansion into finished oral doses (hard capsules) for the pharma/consumer health industries makes sense and should add value despite a hefty price tag.

Lonza's shares are a so-so value proposition, and there are risks that Capsugel's expense structure won't offer as many synergy opportunities as hoped. That said, the growth opportunities in biologicals, ADCs, advanced pharmaceutical ingredients, cell therapies, nutriceuticals, and hygiene are significant and can support today's valuation.

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Lonza Tied To Attractive Markets

Wolseley Needs To Focus On What It Does Best (U.S. Distribution)

It's hard to find fault with Wolseley's (OTCQX:WOSYY) (WOS.LN) recent performance. The UK shares are up more than 30% over the past year, outdoing peers like HD Supply (NASDAQ:HDS) (up almost 28%), Home Depot (NYSE:HD) (up around 13%), Lowe's (NYSE:LOW) (up about 11%), and Watsco (NYSE:WSO) (also up about 11%), not to mention others like Travis Perkins (OTCQX:TPRKY). Helping the cause has been strong growth in the U.S. business, with like-for-like growth steadily in the mid-single digits despite deflationary pressures, as the company continues to grow share.

There are certainly more ways for Wolseley to improve. Fixing, or better still selling, the businesses outside North America would likely be a good long-term move, and give the company some extra capital with which to pursue growth initiatives in the U.S. like expansion into adjacent distribution/MRO markets. What's more, the remodeling market should continue to support growth while a recovery in the industrial sector will be a welcome tailwind. The hang-up, as is so often the case, is with valuation. While the shares don't seem unreasonably priced on an EV/EBITDA basis, the free cash flow outlook is not as strong, and it's hard for me to regard this as much more than a hold.

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Wolseley Needs To Focus On What It Does Best (U.S. Distribution)

The Expectations For West Pharmaceutical Look Hard To Meet

I'm accustomed to finding a lot of companies/stocks with the basic pattern of "love the company, not comfortable with the valuation on the stock," but West Pharmaceutical Services (NYSE:WST) dials that up to 11. I really like the company's strong share in biologics delivery systems/components, its overall share in components and systems for injectable drugs, and its leverage to higher-margin, higher-growth proprietary products serving a market that I believe is set for good volume growth for the long term. What I don't like is that it would appear that not even long-term annualized FCF growth in the mid-teens or a 15x forward EBITDA multiple is enough to drive a fair value above today's price.

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The Expectations For West Pharmaceutical Look Hard To Meet

Catalent's Price Is A Little Hard To Swallow

It's frustrating to find a company/stock combination where you really like the basic business and where the stock has underperformed, but where the shares also still look too expensive. Such seems to be the case with Catalent (NYSE:CTLT). I like the pharmaceutical contract manufacturing business, and I like Catalent's strong leadership across multiple formulation technologies and its efforts to grow the biologicals business, but it is hard to model a credible outlook that leads to the conclusion that the shares are too cheap today.

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Catalent's Price Is A Little Hard To Swallow

Thursday, March 16, 2017

PRA Health Sciences' Special Mix Could Have More To Offer

It's hard enough to find undervalued stocks today, and a stock that is already up more than 40% over the last year and within a few percentage points of its 52-week high is not initially the most promising candidate. To be sure, PRA Health Sciences (NASDAQ:PRAH) is not conventionally cheap on backward-looking multiples and there are valid concerns that the CRO market could be in for a harder stretch as biotech funding dries up and Big Pharma pushes another round of consolidation. On the other hand, PRA's strong foundation in clinical trial management and its growing capabilities in strategic outsourcing and data/analytics shouldn't be ignored, and I believe there are opportunities here for the company to outgrow its addressed market.

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PRA Health Sciences' Special Mix Could Have More To Offer

Zoetis: A Well-Loved Leader

A company with leading share in almost every relevant segment of a $24 billion market, strong margins, and strong barriers to entry arguably should trade at healthy multiples, so I can't say that the valuation of Zoetis (NYSE:ZTS) comes as much of a surprise. What's more, the company isn't done growing and expanding, as the company can still target share growth in Europe, market growth in emerging markets like China, margin improvement, and expansion into adjacent markets/products. Even so, the valuation gives me pause, as I believe it already factors in strong growth and over $2.1 billion in free cash flow in 2026.

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Zoetis: A Well-Loved Leader

Even With Strong Growth Prospects, Advanced Disposal Services Looks Pricey

Solid waste stocks have enjoyed a good run of late, and Advanced Disposal Services (NYSE:ADSW), the latest entrant into the publicly-traded group, has gone along for the ride. The enthusiasm isn't unreasonable on the surface, as ongoing growth in housing, economic growth, reflation, and the prospect for a less environmentally-focused administration all support a generally favorable outlook for the industry.

For Advanced Disposal in particular, there are also company-specific drivers that support a bullish growth outlook, including the prospect for further accretive M&A. All of that said, the valuation here seems more than healthy to me, particularly given the company's vulnerability to higher rates and the possibility that interest deductibility may go away in the process of corporate tax reform. While I do like the outlook for growth and expanding margins, I can't get comfortable with paying a double-digit multiple on forward EBITDA nor assuming ongoing double-digit FCF growth on a long-term basis.

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Even With Strong Growth Prospects, Advanced Disposal Services Looks Pricey

Monday, March 13, 2017

KMG Chemicals Underfollowed But Not Unloved

Knowing when to exit a successful position is one of the hardest things in investing; good companies have a way of surprising you, and the market is often willing to reward excellence with higher multiples than the fundamentals might otherwise support. So while I thought KMG Chemicals (NYSE:KMG) was fairly valued a couple of years ago when I last wrote about this small specialty chemical company, I can't say I'm all that surprised that the shares are up another 25% or so since then (doubling the S&P 500 and doing pretty well against a grab-bag of other specialty chemical names).

Unfortunately, I find myself in a familiar position with the shares. I don't doubt that management can and will find more value-adding M&A opportunities, but the shares already seem to factor in positive developments from here. While I think a credible argument can be made for a fair value near $40, that really doesn't leave much upside for a company that I think will find organic revenue growth somewhat challenging to achieve.

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KMG Chemicals Underfollowed But Not Unloved

Kraton's Story Is A Little Complicated, But Can Still Offer Some Value

It's been a while since I last wrote on Kraton (NYSE:KRA), but I had some valuation issues and thought there might be opportunities to buy the shares at lower prices. Those opportunities did in fact materialize (there have been at least three meaningful pullbacks) and the shares have recently been quite a bit stronger - up over 60% in the past year despite multiple negative revisions and challenging input cost developments.

Kraton could still offer some upside here, but management has to execute. Efforts to shift the company toward higher-value applications have delivered mixed results, and the size of the Arizona Chemical deal is such that strong execution/integration is an absolute must. I do like the increasing diversification of the business, though, as well as its exposure to non-hydrocarbon inputs and relatively attractive markets like construction/infrastructure, medical, and adhesives. With the company potentially on a trajectory toward 20% EBITDA margins and meaningful improvement in free cash flows, $30 looks like a pretty reasonable fair value.

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Kraton's Story Is A Little Complicated, But Can Still Offer Some Value

Beijing Enterprises Can Unlock Value With More Consistency And Execution

Not all investors are comfortable with state-owned conglomerates like Beijing Enterprises Holdings (OTCPK:BJINY) (0392.HK) and that's okay. These companies can be opaque and complex, and managements will make capital allocation decisions that, at a minimum, aren't in the short-term best interests of shareholders. That said, Beijing Enterprises Holdings (or BEH) may be worth a closer look, as the company's foundation in gas distribution should offer ongoing growth and cash flow potential, while the water and waste businesses likewise can benefit from utility demand growth in China.

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Beijing Enterprises Can Unlock Value With More Consistency And Execution

Santen - An Overlooked Play On An Overlooked Space

Ophthalmology doesn't really get much attention from most drug companies, and I suppose I can't blame them - the entire global market is estimated to be worth around $25 billion in 2017 while Celgene's (NASDAQ:CELG) cancer drug Revlimid annualizes close to $8 billion in sales alone. In other words, relative to the opportunities in disease categories like cancer and auto-immune, it's not necessarily a huge moneymaker. Nevertheless, just because the space doesn't have broad appeal doesn't mean that there aren't money-making opportunities, and I think you could argue that the avoidance of the area works in the favor of companies like Japan's Santen Pharmaceutical Co. Ltd. (OTCPK:SNPHY).

While Santen's U.S. ADRs have decent liquidity, I don't think many investors pay much attention to this company, even though it is one of only three companies in the world with a full range of ophthalmic drugs. With the company holding strong share in Japan and China, building its business in the EU, and about to enter the U.S., I believe Santen could be looking at some meaningful growth opportunities in the coming years that aren't fully reflected in the share price.

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Santen - An Overlooked Play On An Overlooked Space

Thursday, March 9, 2017

Electrolux Can Do Better From Here

At first glance, there's a lot not to like about Electrolux (OTCPK:ELUXY). While this international appliance maker is competitive with companies like Whirlpool (NYSE:WHR), BSH Hausgeräte and GE's (NYSE:GE) former appliance business in terms of market share, the company's margins have been underwhelming and the company has also seen lackluster (or worse) performance in businesses like small appliances and markets like Brazil in recent years. Worse still, a transaction with GE that was supposed to significantly increase its North American business, improve its product breadth and drive margin synergies was turfed on anti-trust concerns (with Haier (OTCPK:HRELY) benefiting).

And yet, I think there are solid reasons to consider these shares. I don't think Electrolux can get to Whirlpool's double-digit North American margins, but it doesn't have to; just a couple of points of margin improvement overall would make a difference. What's more, the company has a clean balance sheet and a lot of M&A options in both its core appliance and professional equipment businesses. If I'm right about Electrolux being able to generate a 6% to 8% EBITDA and FCF growth on the back of okay top-line demand, a slow recovery in Brazil and better operating margins, 10% to 15% undervaluation seems reasonable, with a decent dividend as a bonus.

Electrolux's ADRs aren't always as liquid as an investor might want, so readers may want to consider the shares listed in Sweden as a more liquid option.

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Electrolux Can Do Better From Here

While Performing Well, The Expectations Around Agilent Are High

I was skeptical about Agilent's (NYSE:A) prospects for outperforming its peers back in the summer of 2015, but since then, Agilent shares have comfortably outperformed peers like Waters (NYSE:WAT), Thermo Fisher (NYSE:TMO), PerkinElmer (NYSE:PKI), Bruker (NASDAQ:BRKR), and Shimadzu with a 30% run that has also handily beaten the S&P 500. Management has done a better job than I'd expected of improving margins and streamlining/refocusing the business, and Agilent has also done better than I'd expected in the pharma space on the back of a strong liquid chromatography product cycle.

At the risk of sounding like a broken clock, the valuation on the shares still concerns me. The new (and improved) Agilent has been generating FCF margins in the mid-teens and while I think management can deliver upside on operating margins and asset efficiency, I'm not sure that meaningfully exceeding 20% FCF margins is highly likely. So while I do think Agilent is a good company in the life sciences tools space (and performing well), it's hard for me to get comfortable with a valuation that already assumes double-digit long-term annualized free cash flow and/or a forward EV/EBITDA multiple more than twice the likely growth rate over the next three to five years.

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While Performing Well, The Expectations Around Agilent Are High

Wednesday, March 8, 2017

Schneider Electric Looking To Earn Back Some Investor Love

Schneider Electric (OTCPK:SBGSY) has made a series of moves over the years to position itself as a leading player in automation and control, low and medium-voltage products, and electrical distribution, but it hasn't done shareholders all that much good. Relative to ABB (NYSE:ABB), Rockwell (NYSE:ROK), and Siemens (OTCPK:SIEGY), Schneider shares have been laggards over the past few years and the company has seen erosion in both margins and returns on capital.

I believe energy efficiency and automation are trends that are simply not going to go away in the coming years, and I think Schneider is well-positioned to reap benefits from them. That said, I can understand why investors are nervous about management's capital allocation priorities and its ability to drive meaningful improvement in financial operating metrics. While Schneider is not my top pick from either a valuation or quality standpoint, there does seem to be a potential opportunity here at this price that investors may want to consider.

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Schneider Electric Looking To Earn Back Some Investor Love

Restructuring The Business Could Unlock Meaningful Value For Fujitsu

As I wrote about Fujifilm (OTCPK:FUJIY) last week, that company is a relatively rare example of a Japanese conglomerate that has moved reasonably quickly to transform itself in response to changing market realities. If Fujifilm is the "after" picture, Fujitsu (OTCPK:FJTSY) is more like the "before" picture, as weak profitability in its manufactured products continues to weigh down the margin and cash generation potential of its more competitive services operations. Fortunately, management is not blind to these realities and has already initiated a process to transform the business away from its legacy hardware operations.

As of now, the Street isn't buying the notion that Fujitsu will move itself away from low-to-no profit businesses like PCs, phones, servers, and chips and re-base itself around IT services. Even though I believe the business restructuring efforts will likely lead to no net long-term revenue growth (as growth in the IT services business is canceled out by sales and divestments), I think lifting the burden of these lower-margin businesses will allow for FCF margins to improve into the low-to-mid single digits, supporting a fair value more than 25% higher than today's price.

Readers should note that Fujitsu's ADRs are not particularly liquid. With that said, I would suggest investors consider buying the Japanese shares (6702.T); most of the better brokers now support international trading and the hassle/costs are not too onerous.

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Restructuring The Business Could Unlock Meaningful Value For Fujitsu

Tuesday, March 7, 2017

A Growing Specialty Mix And Improving Acrylics Bode Well For Arkema

France's Arkema (OTCPK:ARKAY) (AKE.PA) is far from unusual in trying to shift away from commodity chemical businesses in favor of specialty businesses with higher margins and less competition, but the company has nevertheless done a good job of making that shift. I believe that at least 70% of the company's earnings can now legitimately be said to come from specialty businesses, and it has the opportunity to buy its way toward an even richer mix.

In addition to the better growth and margin potential of specialty businesses like adhesives and sealants, Arkema's commodity acrylics business could be looking at a cyclical improvement in the coming years. Looking at the cash flow potential of the business, the shares look as though they could be 5% to 10% undervalued, which I believe is enough in this market to merit a closer look. I would note that Arkema's U.S. ADRs aren't as liquid as an investor might like though, and so I'd suggest at least considering the Euronext-listed shares.

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A Growing Specialty Mix And Improving Acrylics Bode Well For Arkema

Sunday, March 5, 2017

Fujifilm's Long Transformation Process Heading In The Right Direction

Japanese companies used to have a well-deserved reputation for being stodgy; while concepts like just-in-time inventory were adopted relatively quickly, many companies have allowed themselves to become lumbering conglomerates that are slow to jettison operations with poor future prospects for growth or economic returns.

That's not so true with Fujifilm (OTCPK:FUJIY), as this company has launched two significant transformations in the past two decades - one designed to give the company life after the decline of photographic film and a more recent one intended to offset weakening prospects for office equipment. Fujifilm is arguably underrated for its healthcare business and it is this part of Fujifilm that has the best prospects for taking the business forward. Although success in drug development is by no means assured, even modest expectations would seem to support a fair value 10% higher than today's price.

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Fujifilm's Long Transformation Process Heading In The Right Direction

For Vinci, Strong Concessions Can Backstop A Contracting Recovery

France's Vinci (OTCPK:VCISY) (SGEF.PA) is a bit of an odd company in a few respects. Its contracting business is overwhelmingly large in terms of its revenue contribution, but it generates less than a third of the company's income, and the shares of this contractor and concession operator often seem to behave more like a bond than equity. It's also very much a France-centric company in terms of its revenue and earnings base, but most of its growth potential lies outside France and outside Europe.

Those quirks aside, I think this is an interesting name to look at right now. Close to 70% of the company's operating income is in high-margin, low-risk concession businesses that should continue to grow and that are supported by long-term contracts. What's more, the other 30% should see improving operating conditions as the French government moves forward with significant building projects and as industrial and energy markets recover around the world. With a double-digit annual total return potential and a roughly 3% dividend, I think Vinci merits further due diligence.

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For Vinci, Strong Concessions Can Backstop A Contracting Recovery

Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

Commercial aviation engine suppliers make up a relatively small world, as there are really only a half-dozen companies in North America and Europe that offer competitive solutions, and most of those don't compete across the board. Rolls Royce (OTCPK:RYCEY) is a name that is probably best known for a business it's not even in (the luxury car business is owned by BMW (OTCPK:BMWYY)), but this is the third-largest aircraft engine maker and a significant player in the markets for widebody and business/regional engines.

This is an interesting time for Rolls Royce, as the company is about to see new widebody programs ramp up (which isn't actually that good for margins), older programs wind down (which is bad for margins), and likely not much progress in non-aviation areas like marine. What's more, there are well-publicized challenges with widebody aircraft these days, as many operators are turning to more efficient, more capable next-gen narrowbody planes instead.

Although the next couple of years are likely to remain challenging, and an accounting change will hammer reported earnings (but not cash flow), I believe there's an argument to be made that Rolls Royce shares are priced to generate double-digit total returns from here.

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Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

Meritor Pursuing Bold Goals As Markets Bottom Out

There's a marked contrast between the passenger and commercial vehicle sectors now, with ample worries that the former is peaking and growing hopes that the later is bottoming out. As a commercial components player, the prospect of improving market conditions is bullish for Meritor (NYSE:MTOR), although 2017 is likely to still be a challenging year.

What's more interesting about Meritor is the bold targets that management has laid out for growth over the next few years, including 20% outperformance relative to the underlying markets. Although I don't believe Meritor will get there without M&A (which I don't model), it has been building a much better track record for itself in recent years, and I don't dismiss the possibility that the company will do better than expected. That said, today's price already seems to assume meaningful improvement at the company, and it may make more sense on a risk/reward basis to wait in the hopes of temporary disruptions or disappointments creating a more opportune entry price.

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Meritor Pursuing Bold Goals As Markets Bottom Out

Wednesday, March 1, 2017

Valley National's Slow Climb Back Up The Mountain

Banks that rely on spread income, and particularly those with expensive funding sources, have had their challenges in recent years and that includes Valley National (NYSE:VLY). On the plus side, this conservatively-run bank has a well-deserved reputation for strong underwriting and a willingness to turn over rocks and sift through the couch cushions to find ways to cut costs without compromising the long-term viability of the franchise. What's more, this company has shown that it can (and will) do deals, and it pays a healthy dividend relative to its peer group.

In this new operating environment for banks, "fairly valued" is the new cheap, and Valley National doesn't look all that overpriced to me. That said, the company is not exactly flush with capital at the moment, and I think it's fair to be concerned that future M&A could be more dilutive. Likewise, I have some concerns about the bank's positioning with respect to its loan book and its capital, but tailwinds like a lower tax rate and a less stringent regulatory environment could both help.

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Valley National's Slow Climb Back Up The Mountain