Tuesday, August 15, 2017

BRF Has A Lot Of Work Ahead To Rebuild Credibility

The nearly 25% drop in BRF's (BRFS) share price over the past year is hardly the worst part of the story; I think you could argue that the market has been relatively merciful all things considered. While I've often noted (and lamented) BRF's above-average cyclicality, I thought management had a strategy in place that would see ongoing global growth in processed/packaged food lead to more sustainable results. I was wrong on many accounts, as the company's strategy is still unclear and inconsistently managed.

I do still believe BRF has a lot of potential, but “potential” is a word that has brought many investors to sorrow. Results should improve in the second half of the year, but management has a lot left on the “to do” list – including showing that they can manage the Brazilian business to generate growth and margins and that they can make the international operations less dependent upon commodity products. There is still upside into the high teens, but BRF management has a lot of work to do to rebuild the trust that would justify such a fair value today.

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BRF Has A Lot Of Work Ahead To Rebuild Credibility

Shifting Perceptions Around Allison Transmission

When I last wrote about Allison Transmission (NYSE:ALSN) in September of 2016, I thought the shares had decent appeal as a buy-and-hold ahead of a recovery in commercial trucks, an eventual recovery in energy, and ongoing growth in commercial automatic transmission penetration rates outside of North America. The shares have exceeded my expectations since then, up about 35%, as companies like Allison and Cummins (NYSE:CMI) have benefited from improving build rates in commercial vehicles.

At today's valuation, I'm more nervous about making a “buy” call. Allison has been logging nice beat-and-raise quarters, and I think Allison's management is quite good. What's more, energy and defense are still barely contributing to results right now and should offer more in the next few years, while OUS adoption of automatic transmissions remains a long-term driver. The “but” is the prospect of accelerating timelines for the adoption of electric vehicles in the commercial space – attention on this market has increased to a point where Cummins, Daimler, Volvo, Navistar (NYSE:NAV), and even typically-conservative PACCAR (NASDAQ:PCAR) have all come out with commentary on their plans/roadmaps for future EV's. Actual adoption of EVs in commercial applications like refuse hauling, metro transit, and straight Class 8's is likely to take many years, but I'd be careful paying up for a cyclical company that could be facing meaningful market erosion within the next decade.

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Shifting Perceptions Around Allison Transmission

Management Unreliability Has Soured The GEA Group Story, But Value Remains

Eighteen months or so ago, I thought GEA Group (OTCPK:GEAGY) (G1AG.DE) looked fully valued despite the long-term attractiveness of a leading company in the food/beverage automation and equipment market. Since then, confidence in management has soured due to an extended period of underperformance and questionable moves like a substantial guidance reduction only a couple of weeks after the 2016 Capital Markets Day. 

GEA Group's dairy processing end-market, which is responsible for around 20% of sales, is likely to struggle for another year or so, but farming, food/beverage, brewing, pharmaceuticals, and industrial markets (including oil/gas) are looking better. What's more, an activist investor is now involved in the shares, which may put a little more pressure on management to up its game. 

I do have some worries about recent cost overruns on new projects and self-inflicted inefficiencies, but I believe the food and beverage markets are attractive long term and I believe GEA Group can get back to double-digit returns on capital. Even with lower assumptions regarding revenue and margins (versus my last article) and a higher discount rate, these shares now look a little undervalued and worth a look from patient investors. 

Investors should note that GEA Group's ADRs don't offer optimal liquidity, so those investors willing and able to trade on foreign exchanges may want to consider buying GEA Group shares on its home exchange.

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Management Unreliability Has Soured The GEA Group Story, But Value Remains

Sunday, August 13, 2017

How Much Better Can Lundbeck Get?

One of my core investment principles is to be slow to sell the shares of companies that have proven themselves to be well-run. Not only do the shares of well-run companies tend to garner higher multiples than might otherwise seem fair, these companies also have a knack for outperforming expectations over the long haul. 

All of that said, I am trying to find that boundary between patience, enlightened self-interest, and greed when it comes to H. Lundbeck A/S (OTCPK:HLUYY) (LUN.CO). The management of this Danish drug company has executed a masterful turnaround, and the shares are up around 37% over the past year despite multiple clinical disappointments and a very thin late-stage pipeline. There are still drivers that can support a higher price, and I am reluctant to part company with a well-run business, but at some point, even the best stocks can get expensive.

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How Much Better Can Lundbeck Get?

Another Quarterly Wobble At Multi-Color Ahead Of A Transformative Deal

Some industries make it very difficult to deliver consistent results every quarter, but I don't think that really explains the consistently inconsistent results at Multi-Color (LABL), as wobbles in quarterly growth rates have been blamed on acquisition-related hiccups (even though growth through acquisition has been a core driver for a long time), plant inefficiencies, contract changes, mix shifts, and so on. Multi-Color has likewise had a tough time showing consistent margin leverage, though the choppy trend has still been upward. 

Since my July 7 update, the company has announced the acquisition of Constantia Labels, a transformative deal, and announced another iffy quarter. Management's up-and-down execution increases the integration risks for such a large deal (not to mention the mix shift), but it is worth noting that it will be Constantia's CEO leading the company relatively soon. 

I've more or less made my peace with Multi-Color's inconsistencies, but Constantia doesn't add tremendous incremental value relative to the risk. That said, the shares do look 10% to 15% undervalued now and the company is an under-followed consolidator in a large, fragmented, and relatively recession-resistant industry.

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Another Quarterly Wobble At Multi-Color Ahead Of A Transformative Deal

Real Recoveries Are Flowing Into Parker-Hannifin's Numbers

Despite its reputation as a high-quality short-cycle play, not to mention one with significant self-help potential through business simplification and the integration of CLARCOR, Parker-Hannifin (NYSE:PH) has cooled off a bit since my last update. Although these shares have outperformed Eaton (NYSE:ETN), a fellow player in hydraulics, they've lagged other industrial stocks like Honeywell (NYSE:HON), Emerson (NYSE:EMR), and Illinois Tool Works (NYSE:ITW), as well as the S&P 500.

With fiscal 2017 in the books and improving trends across a large swath of its end-markets, Parker-Hannifin may be worth another look now. I'm worried about the overall health/valuation of the market, and I don't think Parker-Hannifin would be immune to a wide correction, but mid-single-digit revenue growth and mid-to-high FCF growth can support a fair value around $160, suggesting a high single-digit annual return even from these levels.

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Real Recoveries Are Flowing Into Parker-Hannifin's Numbers

Commercial Vehicle Skids On Surprisingly Weak Margins

The North American commercial truck market continues to improve and Commercial Vehicle Group (CVGI) had been having a great 2017 compared to other commercial truck suppliers like Cummins (CMI) and Allison (ALSN). Unfortunately, the company's efforts to restructure its operations (and reduce costs) and the recovery in off-road vehicle markets like construction have combined in an unexpectedly bad way, leading to meaningfully lower margins, a disappointing second quarter report, and a sharp drop in the stock.

The company's issues with its non-truck wire harness business aren't going to go away, and the company's 2017 margins are going to suffer for it. The bad news is that the company is going to miss out on some of the benefits of this recovery, and they're not going to get that money back. The better news is that the truck market is doing better than expected, the company is doing well in construction on a revenue basis, and the company has made good progress with operating cost reductions.

Commercial Vehicle's margin trouble does reduce the short-term fair value and likely will have the stock in the penalty box for a little while, but the decline does make the valuation more interesting again for investors with a longer-term orientation.

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Commercial Vehicle Skids On Surprisingly Weak Margins

Eaton Offers An Interesting Valuation, But A Lot Of Uncertainties

Despite a good overall run in the industrial space, Eaton (NYSE:ETN) hasn't really kept pace, as the shares have actually lagged the S&P 500 over the past year, not to mention peers like Parker-Hannifin (NYSE:PH), Honeywell (NYSE:HON), and Schneider (OTCPK:SBGSY) (Emerson (NYSE:EMR) has more or less traveled in step with Eaton). Eaton management has been relatively less upbeat than some in its peer group, and the company's organic growth has trailed its peer group for a while now. 

Eaton's above average cyclicality is an “is what it is” sort of thing, and I don't believe management is likely to undertake a major restructuring that would see it sell or spin off an entire vertical. Likewise, I don't like large-scale M&A is especially likely. Although the company should be in place to benefit from several improving end-markets, weakness in commercial construction and passenger vehicles is a concern, as well as uncertainty regarding U.S. tax and trade policy. Eaton shares look like a rare undervalued option in the industrial space (assuming 6% long-term FCF growth), but the lagging revenue growth could be a headwind for a while longer.

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Eaton Offers An Interesting Valuation, But A Lot Of Uncertainties

Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

Despite a growing database on the benefits of stereotactic radiosurgery (or SRS) with its CyberKnife system and significant improvements to its mainline Tomo platform, the unfortunate reality is that Accuray (NASDAQ:ARAY) has maintained its reputation as a company that comes up short of its guidance. Although management will hit its 5% gross order growth target for this year, fiscal 2017 will go down as another year where the company underperformed relative to management's initial expectations for the year. 

That's a sour way to begin an article, but the reality is that Accuray shares are down about 10% or so from the time of my last update, and the company continues to struggle to execute and to drive wider adoption of its core radiation oncology platforms. I do believe fair value is close to $6, and that there is considerable upside potential if management can leverage the advantages of its platforms into real sales, but I have been involved in this story for a long time, and it is getting harder to believe that “if” will become a “when”.

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Accuray Looks Undervalued, But A Lack Of Execution Is A Longstanding Problem

FirstCash Management Has Several Opportunities To Execute And Drive Value

When I last wrote about First Cash (FCFS) in October of 2016, I thought the shares offered good value despite some elevated risks. The shares have since risen around 25%, helped in no small part by a stronger Mexican peso and a solid recent trend in consumer health in Mexico.

Looking ahead, there are multiple areas where management could add value, but the move in the share price makes execution on these items much more critical for ongoing outperformance. Organic expansion into Colombia is likely to be measured at first (though management would like to acquire if possible), and the process of wringing synergies from the Cash America deal is not likely going to show much until 2018 at the earliest. First Cash shares should still be able to generate double-digit total annual returns from here (provided the company hits my high single-digit FCF growth target), but this remains a riskier-than-average name with significant exposure to Mexico's economy and currency.

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FirstCash Management Has Several Opportunities To Execute And Drive Value

Manitex Still On Its Bumpy Road To Recovery

Maybe comparisons to Icarus are a little unfair to Manitex (NASDAQ:MNTX) management, but the company has definitely paid a price for its former reliance on the oil/gas sector and using debt to fund a significant M&A expansion program during the U.S. onshore energy boom. Now, though, the company is largely through a stark restructuring effort that has seen management refocus around its core boom truck and knuckle-boom crane product lines.

The shares are about 10% since my last update, boosted by a strong positive reaction to second quarter earnings, but the shares have been pretty volatile in the meantime, with the stock price heading up above $9 earlier this year on optimism around restructuring and market recoveries. While Manitex's core markets remain skittish and volatile, it looks as though older used equipment has been largely absorbed, and the table is set for a return to growth. I don't expect a V-shaped recovery (even if a comprehensive federal infrastructure bill is passed and signed), but I do think Manitex can grow at a long-term rate in the mid-single digits and the shares can still perform as the recovery story unfolds and matures.

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Manitex Still On Its Bumpy Road To Recovery

Saturday, August 5, 2017

Neurocrine Biosciences Off To A Good Start With Ingrezza

As I've said before, quarterly earnings reports from pre-revenue biotechs are of only limited value, though they can provide some worthwhile insights and detail. Neurocrine (NBIX) is technically no longer pre-revenue, though, and the company's first commercial sales of Ingrezza suggest a good start to this important new drug. What's more, Neurocrine management laid out a credible path for ongoing development of Ingrezza for pediatric Tourette's after a disappointing Phase II result earlier this year, not to mention updates on other early-stage clinical programs. While I suppose I'm a little more comfortable with the Ingrezza launch now, I'm not changing any of my basic modeling assumptions, and my fair value remains in the mid-$60s.

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Neurocrine Biosciences Off To A Good Start With Ingrezza

"On Target" Good Enough For Wright Medical Today

Buyout speculation can do good things for a stock's price in the short term, but investors can be fickle with that sort of speculation. Between off-and-on optimism regarding a buyout and a disappointing first quarter, Wright Medical (WMGI) hadn't had the easiest run since my last update. Today the shares are up nicely in the wake of second quarter earnings, though, as investors are apparently a little more comfortable that their worst-case scenarios for the year are less likely to materialize.

The upper $20's to low $30's have long been a tricky place for me with respect to Wright Medical shares. I have no disagreement that these shares could easily fetch more in a buyout, nor that the market will sometimes pay rich multiples for fast-growing med-tech stocks, but core fundamentals-driven valuation seems more comfortably in the high $20's. The second half of this year should see accelerated revenue growth and improving margins, though, so I wouldn't ignore the possibility that earnings momentum draws more positive attention to the shares.

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"On Target" Good Enough For Wright Medical Today

Lexicon Likely Stuck For A Little While

One of the realities of biotech investing is that share prices can linger in no man's land when there's not much news to fire up the imaginations of investors. In the case of Lexicon Pharmaceuticals (NASDAQ:LXRX), a seemingly good initial launch of its first drug Xermelo is being greeted with little more than a "oh, that's nice … what else ya got?" by the market. What's more, with clinical data on sotagliflozin ("sota") more or less in hand for the Type 1 indication and a long wait for Type 2 data and/or FDA action, there's not a lot to really get the excitement going.

Lexicon shares have gone basically nowhere since my last update even though the biotech sector has done pretty well. I don't really see much to blame Lexicon for, as the clinical data that have been presented have been pretty consistent (if not a little better than expected) and the launch of Xermelo has gone well. Even so, with not a lot of mind-changing data on the way soon, it may take some patience to hang on through these doldrums. I continue to believe that Lexicon shares ought to trade in the high $20s on the basis of the value of both Xermelo and sota, but this isn't a biotech with the sort of sizzle that biotech investors often crave.

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Lexicon Likely Stuck For A Little While

ABB Has To Be Better Than This

When you find yourself slipping into the role of an apologist for a company, that's a good time to revisit whether owning the shares still makes sense. Such is the case with ABB (NYSE:ABB), as this European industrial conglomerate has managed to deliver “not good enough” performance for longer than I'd care to acknowledge. ABB's five-year, three-year, and one-year performances have been better than Emerson (NYSE:EMR), but not up the standards set by Siemens (OTCPK:SIEGY) and Rockwell (NYSE:ROK), and Schneider (OTCPK:SBGSY), too, has seemed to have its house in better order of late. Granted, these are blunt comparisons of businesses, but it does support the idea that ABB has room (and need) for improvement.

There are still bullish arguments to support ABB. I believe the company is underway with plans to make its automation business(es) even more competitive, and I think the long-term potential for electric vehicle-related charging and infrastructure equipment is meaningful. Moreover, the company has the liquidity and flexibility to execute meaningful deals if management wishes to go that route. I still believe 3%-4% long-term revenue growth is plausible (although my 5% to 6% FCF growth rate is looking more tenuous), supporting a fair value around $25.

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ABB Has To Be Better Than This

JPMorgan Doing Well In A Still-Challenging Environment

The love affair between Wall Street and JPMorgan (NYSE:JPM) has cooled slightly since my last update on the company, but only slightly, as the shares have risen 7% since mid-January – a little less than the S&P 500 and worse than Citi (NYSE:C) and Morgan Stanley (NYSE:MS), but still better than regional banks like U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC), not to mention banking indices like the KBW Bank Index.

Not everything is going perfectly, as net interest margin leverage is still modest at best across the sector and JPMorgan saw rare underperformance from its trading and i-banking operations. But JPMorgan is posting excellent loan growth and good expense leverage, and still has room to grow across businesses like consumer and business banking, as well as asset/wealth management and other fee-generating services like treasury and payments. With good near-term performance and a credible ramp toward 15% returns on tangible common equity, a share price in the low $90s is not unreasonable and still leaves the door open for high single-digit to low double-digit annual returns.

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JPMorgan Doing Well In A Still-Challenging Environment

Thursday, August 3, 2017

BB&T Enjoying A Little More Of What It's Arguably Due

It hasn't always been easy to be a patient shareholder of BB&T (NYSE:BBT) as market perception and some of management's own decisions have occasionally gotten in the way of the stock's performance. Over the last six months since my last update, though, BB&T has been outperforming many of its peers (PNC (NYSE:PNC) one of the notable exceptions) as the bank seems better-positioned for growth than before and investors come back to appreciate its quality. 

There aren't many bargains among the larger banks, and BB&T is not an exception. BB&T, U.S. Bancorp (NYSE:USB), and PNC all look to me like they are more or less in the same valuation bucket, with Wells Fargo (NYSE:WFC) looking a little undervalued but for good reasons. Should the current administration follow through and deliver on earlier hopes of reduced regulation and taxation for the sector, there could be more upside than I expect, but a fair bit of that already seems worked into the price. I think BB&T is more likely to outperform operationally than many of its peers, but I'd call it more of a high-quality hold with a total expected return in the high single digits.

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BB&T Enjoying A Little More Of What It's Arguably Due

A Year Later, It's Still 'Hurry Up And Wait' For Roche

I try not to spend too much of my writing time on well-known, well-covered names like Roche (OTCQX:RHHBY), but I do own the shares and it has been a year to the day since I've last written on this giant Swiss pharmaceutical company.

I thought the company was more or less in a holding pattern a year ago, and the shares have gone almost nowhere (on a net basis) since then, as positives like the launch and early acceptance of Ocrevus and the promising clinical data on emicizumab/ACE910 in hemophilia has been offset by progress with competitive biosimilars, mixed results from next-gen oncology compounds, and worries about lead immuno-oncology drug Tecentriq.

It's tempting to say, “Roche is Roche… and it'll all just work out in the end.” This is a well-regarded pharmaceutical company with a deep internal R&D effort that has not gone to the same excesses as some of its peers in attempting to cost-cut its way to prosperity. At the same time, we're all still learning as we go when it comes to immuno-oncology, and it is tough to say how Roche will stand against the likes of Merck (MRK), Bristol-Myers (BMY), and many others in the years to come.
I do still believe Roche is undervalued, but major upcoming updates (like Tecentriq in first-line non-small cell lung cancer) in the second half of 2017 and on into 2018 are key to the modeling assumptions that drive the fair value.

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A Year Later, It's Still 'Hurry Up And Wait' For Roche

3M Among The Crown Jewels With A Smudge

This has been an interesting earnings cycle. A lot was expected of the industrial sector, and although the companies largely came through with good reported organic revenue growth and EPS relative to expectations, more often than not the market reactions were negative. That was certainly true for 3M (MMM) which saw rare pricing weakness, minimal margin leverage, and comments from management indicating that price would be traded off for market share in the quarters to come.

3M wasn't undervalued going into earnings, and you could argue that it had been elevated to one of the “crown jewel” holdings in industrials (alongside names like Illinois Tool Works (NYSE:ITW) and Honeywell (HON), among other candidates). While none of what 3M revealed about the second quarter changes my long-term view, it's hard to argue this is a must-own given the implied total return and the option to go with (relatively) cheaper names like Danaher (DHR) or Fortive (FTV).

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3M Among The Crown Jewels With A Smudge

FEMSA Plugging Away With Its Empire-Building

FEMSA (FMX) has gotten tossed around a bit since my last update, as this large Mexican consumer products conglomerate has weathered a rattled Mexican stock market (and currency) as well as more company-specific concerns about volumes and margins. Still, the shares are up a bit over that period and still offer a little upside for patient long-term shareholders. As I said in that prior piece, the valuation isn't at a can't-miss level (or at least for investors with shorter investment horizons), but the long-term potential of this company makes it worth considering on the pullbacks.

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FEMSA Plugging Away With Its Empire-Building

Microsemi Delivering On Its Execution Promises

In my opinion, Microsemi (MSCC) is doing a good job of laying to rest whatever lingering arguments there were from bears that this company is/was “just” a serial acquisition story. Since the large PMCS deal, Microsemi has been executing on its synergy/cost-cutting targets, and the company continues to march toward its long-standing 65/35 gross margin and operating margin goals. What's more, the company is doing a decent job on revenue as well, with new products and market share gains helping to solidify the bull case.

Microsemi shares haven't done very well since my last update (down about 7% and meaningfully underperforming SOX), but then, I did think the share price was demanding back in January and that buyout expectations were a big part of the story. While a buyout of Microsemi is still a possibility (and perhaps even likely depending on your time frame), the quarter-by-quarter execution story isn't going to be so exciting, and particularly so when the company isn't leveraged to buzzy areas of the chip sector today like autos and IoT. With the shares now offering a little upside relative to my fair value estimate, they could be worth a look and particularly so, if the market/shares were to sell off again.

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Microsemi Delivering On Its Execution Promises

Monday, July 31, 2017

Danaher In Some Doldrums

I closed my last piece on Danaher (DHR) by saying that I expected the shares to remain in “buy-side purgatory” for a little while, and so they have. The shares are down about 1% over the last almost-three months, and this latest quarterly update was once again not everything that investors wanted or have come to expect from this conglomerate.

I have lingering concerns that Danaher's “zig when others zag” strategy will have some near-term consequences; Danaher is much more of a life sciences/health care company than in the past, and there really isn't the underlying market recovery “oomph” here that there is in some parts of the “grease and gears” industrial world. That doesn't make Danaher a bad company, though its lagging performance in diagnostics and dental is becoming a little more concerning. Danaher is one of the very few companies in its comp group that seems undervalued (assuming I'm not overestimating future growth), and while the short-term momentum is lacking, the valuation makes it worth another look.

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Danaher In Some Doldrums

Illinois Tool Works Finding It Harder To Clear A Rising Bar

The great post-election melt-up has continued, but the pace seems to be slowing and expectations have risen to a level that many companies are finding more challenging to satisfy. Illinois Tool Works (ITW) has seen its share price rise about 3% since my last update, lagging the S&P 500 only slightly, and keeping pace with most of its large peers (Honeywell (HON), Stanley Black & Decker (SWK), and 3M (MMM)) apart from Dover (DOV).

As I see it, the story on Illinois Tool Works remains more or less the same. The company is unquestionably a high-quality industry conglomerate, but it's not heavily leveraged to recovering markets like oil/gas and important end-markets like autos are slowing. A very strong operator already, I think Illinois Tool Works will be hard-pressed to drive substantial additional restructuring benefits, but management isn't going to stop trying. In a “gotta buy something” market, I suppose Illinois Tool Works isn't the worst idea, but it's hard for me to like the share price outside of a relative value approach.

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Illinois Tool Works Finding It Harder To Clear A Rising Bar

Will Turbulence In Mexico Mean A Bumpy Ride For OMA?

The last year or so has had its ups and downs for Grupo Aeroportuario del Centro Norte (OMAB), also known as “OMA”. The prospect, and then reality, of Donald Trump's victory in the U.S. Presidential election took away almost a third of the stock's value in late 2016 despite healthy traffic numbers, as investors worried that this Mexico-centric airport operator would suffer disproportionately from a change in U.S.-Mexico relations.

Since then, a lot of optimism toward Mexico and Mexican equities has returned, lifting the shares back to within 10% of their all-time high. Still, while I do believe OMA is a well-run airport operator, I don't think an “all clear” is entirely reasonable at this point. Mexico's economy is doing pretty well, true, but rates are rising, there is still political/trade risk with the new U.S. administration, Mexican airlines have been adding quite a bit of capacity, and next year will see a new election cycle in Mexico.

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Will Turbulence In Mexico Mean A Bumpy Ride For OMA?

Nordic Semiconductor's Renewed Growth Has Melted Some Of The Skepticism

It has been an interesting twelve months for Nordic Semiconductor (OTCPK:NDCVF) (NOD.OL), a small Norway-based fabless semiconductor company focused on low-power wireless chip solutions.

During 2016, Nordic Semi had a poor run of quarterly results and saw a peak-to-trough run from the spring of 2016 to the spring of this year that took about 40% off the share price as investors worried about market share losses to rivals like Texas Instruments (TXN) and concerns about whether this small company with a relatively limited line-up could continue to compete effectively with larger players like TI, Dialog (OTC:DLGNF), Qualcomm (QCOM), Microchip (MCHP), Silicon Labs (SLAB), and the many other plays in low-power wireless.

The last two quarters have been stronger, though, and the shares have regained a fair bit of the ground lost in 2016 and early 2017. While wearables and consumer electronics remain tough markets, the company is seeing strong growth in its building/retail business and will be sampling its new low-power cellular IoT chips before the end of the year.

Nordic Semi doesn't look especially cheap on the fundamentals, but that's often the case with growth tech stocks; if Nordic can deliver high-teens growth for a few years and keep its margins up, the shares should continue to rise. That said, investors should note that the U.S.-listed ADRs are not very liquid; investors who can trade on foreign exchanges will find better liquidity on Nordic Semi's home market.

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Nordic Semiconductor's Renewed Growth Has Melted Some Of The Skepticism

Harsco Reaping The Benefits Of Restructuring, Even As Energy Markets Remain Tough

Credit where due – Harsco's (HSC) management continues to deliver on its turnaround plans and this multi-armed industrial company is now looking toward growth again in a few of its businesses. I underestimated the upside that was still left in these shares a year ago; while I thought a fair value in the mid-to-high teens was possible if the company executed well, I didn't think shareholders would get a 50% return in such a relatively short time. Granted, some of that upside has come from the overall market melt-up, but I do believe Harsco has outperformed its targets.

What comes next has a lot to do with macro factors that are outside of management's control. I still believe that traditional steel mills in North America and Western Europe don't have a bright long-term future, but conditions have improved in the near term and Harsco has been turning its attention to other markets like China. What's more, there are opportunities to expand this business, as well as expand and diversify the Industrial segment and drive better margins from the Rail operations. I wouldn't expect another 50% move over the next twelve months, but so far Harsco is proving the point that well-constructed turnaround plans can exceed initial expectations, and particularly so when improving end-markets help the cause.

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Harsco Reaping The Benefits Of Restructuring, Even As Energy Markets Remain Tough

Thursday, July 13, 2017

The Growing Pains At HollySys Are Real, But The Potential Is Worthwhile

Growth is seldom as smooth or easy as investors want it to be, and that has certainly been true with Chinese automation and control systems company HollySys (NASDAQ:HOLI). Competing with the likes of ABB (NYSE:ABB), Honeywell (NYSE:HON), and Siemens (OTCPK:SIEGY) is hard enough all on its own, but HollySys has to overcome the added burden that even other Chinese companies don't really trust domestic suppliers in industrial automation. Making matters worse, HollySys's train control business is largely tied to the unpredictable and inconsistent ordering habits of China Railways Corporation (or CRC).

HollySys shares have fallen about 15% since I last wrote about the company, as HollySys did in fact see the prolonged slowdown in automation and train controls that concerned me then. Although the market took that development badly, my long-term outlook really hasn't changed that much. I continue to believe that as HollySys matures it will deliver revenue growth around 6%-7% and double-digit FCF growth sufficient to support a fair value in the low $20s.

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The Growing Pains At HollySys Are Real, But The Potential Is Worthwhile

Kirby Will See A Challenging 2017, But Better Days May Be Coming

Say what you will about Kirby (NYSE:KEX) and its historically robust valuation metrics, but the shares have at least held up despite operating conditions getting even worse and estimates heading down. Since my last update, the shares are more or less flat despite ongoing industry-wide weakness in barge utilization and pricing, and there may be some tentative signs of bottoming out in two of its key markets.

The Street has historically rewarded Kirby's significant scale and respectable operating history with rich multiples, but there could still be some upside here if 2017-2018 does indeed mark a low point in the cycle. Although Kirby doesn't have as much leverage to potential chemical capex expansion as you might hope, the company should nevertheless benefit from volume growth, while an expanded DES business seems poised to benefit from a recovery in U.S. onshore oil/gas activity.

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Kirby Will See A Challenging 2017, But Better Days May Be Coming

Chart Industries Getting Back On Track

Although it is much too soon that the LNG market opportunity is really coming back, Chart Industries (NASDAQ:GTLS) has been strong over the past year (up almost 40% from the time of my last article). Attributing performance always involves some guesswork, but I believe Chart has done well due in part to optimism over the new administration (as it pertains to tax reform and supporting U.S. energy exports), growing confidence in an industrial recovery, optimism that LNG activity is bottoming out, and at least some recognition of self-help efforts at the company.

Chart Industries appears priced to generate a long-term return in the 9% to 10% range, which isn't bad considering that that leaves some upside from a more bullish “strong LNG” scenario that could potentially add many hundreds of millions of dollars to the long-term revenue outlook. Although management has been sounding more upbeat of late, I'd caution readers that these shares are have been more volatile than average in the past, as the market has swung wildly from optimism to pessimism over the outlook for expanded LNG-related business.

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Chart Industries Getting Back On Track

A Better Story Taking Shape At FormFactor

Leading probe card company FormFactor (NASDAQ:FORM) has had a mixed run since I last wrote about the company in August of 2016. While most companies tied into the equipment side of the semiconductor sector have done well (Applied Materials (NASDAQ:AMAT) is up almost 60% and KLA-Tencor (NASDAQ:KLAC) is up more than 35%), FormFactor's 16%-plus move is less inspiring and particularly so after a 20% decline since early June.

Looking ahead, though, I believe there are some reasons to consider this name. Although I would have preferred to see Cascade's management running this company, the combination of FormFactor and Cascade is still a “stronger together” situation, and I expect the company to log mid single-digit revenue growth on the back of expanding use of advanced packaging and greater demand for chips in mobile and auto applications. FormFactor's ability to execute and generate sustained growth has yet to be proven, but mid-teens operating margins could support a fair value in the low-to-mid teens.

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A Better Story Taking Shape At FormFactor

Multi-Color Needs To Get Back On Offense

Multi-Color (NASDAQ:LABL) has done pretty well since my last update on the company. The shares are about 25% since August of 2016, trailing industry leader CCL Industries [CCL.TO] (OTC:CCDBF) by a few points, but still outperforming indices like the NASDAQ and Russell 3000 in a generally strong tape for smaller companies.

Not all of this performance has been entirely merited by recent performance. While the last quarter (the company's fiscal fourth quarter) was surprisingly strong, that was a welcome relief after several quarters of lackluster performance related in part to difficulties managing growth. What's more, the company has noticeably slowed its growth-by-acquisition strategy to address some of those issues.

Wall Street is forward-looking, and I believe there are credible arguments supporting better results in the future for Multi-Color. Management seems willing (if not eager) to get back to M&A, and it seems as though external compliance and legal costs will no longer be as significant of an issue. What's more, management has been attending to operating efficiency issues, and I believe there is room to take operating margins into the mid-teens over the next 10 years.

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Multi-Color Needs To Get Back On Offense

Thursday, July 6, 2017

With Stryker, One Of The Best Always Seems To Get Better

Med-tech giant Stryker (SYK) isn't going to lead the pack every quarter or every year, but it's hard to argue with the long-term performance of this company. Better still, the company has never been one to rest on its laurels, with management always looking for ways to improve its existing businesses and branch out into adjacent markets.

Stryker doesn't look especially cheap right now, but that's about as surprising as Wednesday following Tuesday given the company's almost four-year run of mid single-digit organic revenue growth, its solid free cash flow generation, and the prospects to improve margins and drive better results from areas like robotics, imaging, neurovascular, and spine. I'm not an enthusiastic buyer at this price, but Stryker's quality gives it a near-permanent spot on my watch list, as the shares do occasionally sell off and come back down into a buyable price range.

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With Stryker, One Of The Best Always Seems To Get Better

New Opportunities Can Continue To Drive The Old Dominion Story

Old Dominion (NASDAQ:ODFL) is a good example of why it pays to keep an eye on good companies even when their share prices/valuations get a little steep. I thought Old Dominion looked interesting last August amid a marked slowdown in the industry (including the company's first year-over-year declines in tonnage in seven years), but the nearly 40% gain in the share price since then was even more than I had expected. While that is a strong performance next to ArcBest (NASDAQ:ARCB) (not to mention truckload carriers Heartland (NASDAQ:HTLD) and Knight (NYSE:KNX)), I will note that both Saia (NASDAQ:SAIA) and XPO (NYSEMKT:XPO) have done better (though XPO isn't a pure LTL trucking company).

Old Dominion is back to what I would call its more typical valuation situation – relatively expensive compared to its likely medium/long-term earnings and cash flow prospects unless you are willing to give a relatively generous premium for its superior quality. In the “gotta own something” world of institutional investing, though, I can appreciate why Old Dominion is popular now, as the company's performance and the stronger underlying recovery are supporting upward estimate revisions. What's more, Old Dominion's established strategic advantages should enable the company to continue gaining share in the competitive trucking space.

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New Opportunities Can Continue To Drive The Old Dominion Story

Air Transport Services Group Seems To Have Found A New Cruising Altitude

“It's different this time” is probably one of the most expensive phrases in the history of investing (although “what could possibly go wrong?” might be a close second), as it often represents a period of peak optimism that lures in investors right before the company/industry snaps back to reality. On the other hand, failing to notice and accept a new fundamental reality can also be pretty expensive, as it means you may stand forever on the sidelines watching a great story go by.

That brings me to Air Transport Services Group (ATSG) – a company and stock that I have liked for some time that may actually be seeing a fundamental transformation in its business. While I liked the shares a year ago, I didn't really expect another 50%-plus move in the shares. The company's bull case has materialized, though, as demand for its freight aircraft has picked up and the company continues to build out its fleet.

And now? Historically, this company has had a hard time earning attractive free cash flow and its EBITDA performance has been erratic. I'm nervous about assuming that the next 10 years will be a radical departure from this, but the company's relationship with Amazon (AMZN) is a major driver of change, and the company's e-commerce venture in China could prove very lucrative. I still consider this a high-risk investment (this type of business tends to have a lot of competition, a lot of debt, and relatively low returns), but a fair value in the low $20's does not seem crazy to me today.

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Air Transport Services Group Seems To Have Found A New Cruising Altitude

Sunday, July 2, 2017

As Company's Rebuild Their Supply Channels, Universal Stainless & Alloy Products Is Coming Back To Life

I thought Universal Stainless & Alloy Products (USAP) looked undervalued back in the fall, but little did I suspect (or expect) that the shares would shoot up more than 80% in only about nine months. While I did expect service centers to look to replenish their inventories in order to be better-positioned for growing aerospace deliveries and recoveries in markets like oil/gas and heavy industry, the market seems to be much more inclined now to believe in a sharper recovery trajectory.

I have shifted my recovery expectations ahead by more than a full year, lifting my fair value estimates, but I'm hesitant to go too far too fast. Expectations for aerospace deliveries aren't exactly swelling right now, and sell-side analysts have been trimming back their expectations for the steepness of the oil/gas recovery. Universal Stainless still has places where it could outperform (better expense control, better mix of higher-value alloys), but these shares have pretty much trounced peers and comparables like Allegheny (ATI), Carpenter (CRS), and Haynes (HAYN) over the last year and its going to take a significant improvement in financial results just to support this level of valuation.

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As Company's Rebuild Their Supply Channels, Universal Stainless & Alloy Products Is Coming Back To Life

Globus Medical Has Wobbled A Bit, But Still On Good Footing

Since I last wrote on Globus Medical (GMED) in March of 2016, “second tier” spine names have enjoyed a good run. K2M (KTWO), which I've liked more than Globus, is up a strong 85% and NuVasive (NUVA) is up more than 60%, but Globus too has rewarded my belief that it was undervalued with a roughly 46% upward move in the shares. What's more, given that Globus didn't exactly cover itself in glory in 2016 with respect to its organic revenue growth performance, I believe at least some of this move is a sector-wide shift toward a more positive view on the spine market and share-takers within that market.

Looking ahead, I don't see Globus as particularly cheap, but that's an increasingly common issue. I think Globus is back on track with respect to performing in line with its guidance, but I do worry that management could be stretching itself a little thin between its core spine business, its foray into robotics, and its new trauma business. I do still see opportunities for Globus to grow and gain share and it's not a bad hold at these levels, but I'd be tempted to wait in the hope of a pullback before building a substantial new position.

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Globus Medical Has Wobbled A Bit, But Still On Good Footing

Global Logistic Properties Could Be Gone Soon

As e-commerce grows, particularly in China, it is leading to significant changes in logistics. This includes demand for warehouses, where only about 20% of the installed base in China is sufficient to serve the needs of modern logistics systems. Global Logistic Properties (or "GLP") (OTCPK:GBTZY) is among the largest developers and operators of warehouses in the world, with a very strong leading presence in China, as well as the #1 and #2 positions in Japan and the U.S., respectively (and a leading, albeit small, portfolio in Brazil).

Once a relatively popular name, GLP shares lost close to half their value from mid-2014 to early 2016 as the Chinese weakened on softer consumer demand and growing supply. The share price started to really recover in late 2016 on news that the company was undertaking a strategic review and now is near a "put up or shut up" point for potential strategic bidders. I would be surprised if management accepted a bid below S$3.10/share, or about $23.65 per ADR - offering the prospect of a decent near-term return. While there is definitely a risk that this review process will not lead to a bid and that investor worries about still-weak conditions in China will lead to another sell-off, I believe the fundamentals can support a longer-term fair value of (or above) S$3.25/$24.50.

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Global Logistic Properties Could Be Gone Soon

Sunday, June 25, 2017

Dialog Semiconductor - Too Good To Be True?

I don't want to like Dialog Semiconductor (OTC:DLGNF) (DLGS.XE). I don't like companies that get overwhelming amounts of revenue from a single customer, or companies with such erratic margins and no clear signs of ongoing improvement. Add in an unfocused/unclear M&A strategy and a U.S. ADR that has unusably low liquidity (the Xetra-listed shares are FAR more liquid and that's the way to invest, if you choose to do so...), and there are plenty of reasons to avoid Dialog.

And yet.

The valuation on Dialog looks a lot lower to me than it should be, even when I apply penalties to reflect the lack of diversification and so on. Even 4% to 5% long-term revenue and FCF growth would offer upside to today's price, and these shares could be meaningfully undervalued - particularly if you believe that the company can reinvest its sizable cash position into value-building M&A. Granted, if Apple (NASDAQ:AAPL) drops Dialog's PMICs then all bets are off with respect to valuation, but investors could do well from here if these renewed worries prove overdone.

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Dialog Semiconductor - Too Good To Be True?

Covestro Benefiting From A Cyclical Surge, But Trouble May Be Looming

Germany's Covestro (OTCPK:COVTY) (1COV.DE) is a pretty interesting story to me. Nobody disputes that this is one of the largest manufacturers of key chemicals like polyurethanes, polycarbonates, and specialty inputs like isocyanates. Nor does anybody dispute the ongoing long-term growth potential in markets like autos, construction, appliances, and furniture, as polyurethane and polycarbonate products offer meaningful performance advantages (insulating ability, weight, etc.).

What is very much in dispute is how much longer the good times can last. Covestro has benefited significantly from higher spreads fueled by good market growth, relatively sluggish recent capacity growth, and outages across the industry. Now, though, a fair bit of new capacity is soon to go online and is threatening to push industry operating rates down to a point where pricing will weaken.

That Covestro will see a cyclical decline seems all but assured, but the timing, depth, and length of the downturn are far less certain. Although the shares look potentially undervalued on the basis of EV/EBITDA, I've seen enough cyclical swings to know that the virtues of Covestro will be forgotten by the market if/when that cyclical decline materializes. With that, I'd rather wait for a pullback below my DCF-based fair value (which does attempt to model some cyclicality) to build a position.

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Covestro Benefiting From A Cyclical Surge, But Trouble May Be Looming

Friday, June 23, 2017

Arch Capital's Cycle-Management Capabilities Serving It Well

Arch Capital (NASDAQ:ACGL) continues to demonstrate why I regard it as among the best of the best insurance companies in the market. While the company's acquisition of AIG's (NYSE:AIG) mortgage insurance business (United Guaranty) was perhaps not universally lauded, I believe investors who understand the dynamics of the mortgage insurance and Arch Capital's strategy here will appreciate the value that it will add in the coming years - particularly as available returns in the primary insurance and reinsurance market are pretty lousy.

Arch Capital shares are up another 20% or so from when I last wrote about the company, beating broader insurance stock indices (like the Dow Jones U.S. Select Insurance Index) and other quality insurers like Chubb (NYSE:CB) and W.R. Berkley (NYSE:WRB) (XL Group (NYSE:XL) has done a fair bit better). The shares certainly aren't cheap on a conventional book value multiple basis, but I do believe and expect that Arch Capital's diversification into mortgage insurance and careful management of its insurance and reinsurance businesses can support high single-digit to low double-digit growth at a time when many other insurers are going to be hard-pressed. Granted, I don't think these shares are undervalued on a discounted earnings basis either, but they're not out of line if you believe in management's guidance and this management team has given investors few reasons for persistent pessimism.

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Arch Capital's Cycle-Management Capabilities Serving It Well

Rational AG Has Significant Growth Potential, But The Market Knows It

Companies with returns on invested capital consistently above 30%, strong market share, and the potential to continue generating double-digit growth are hardly a dime-a-dozen, and I believe Rational AG (OTC:RTLLF) (RAAG.DE) has had uncommonly good results in no small part by maintaining a narrow focus on the foodservice equipment industry. More specifically, Rational AG pioneered the combi-oven concept and continues to focus its energies around a very limited product line-up built around saving space, labor, and operating costs in the commercial kitchen.

There a lot of very important "buts" to consider. First, Rational's ADRs have virtually no liquidity, so investors will have to look overseas (and even there its low share count doesn't lead to a lot of turnover). Second, insiders control the company. Third, the valuation is quite high as investors have rewarded the shares with a generous multiple as revenue has notably accelerated. Still, there is a large market opportunity waiting for Rational outside of Europe, management has shown it can run this business very well, and Rational would be an attractive target if or when those insider owners decided to sell.

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Rational AG Has Significant Growth Potential, But The Market Knows It

PacBio Not Back To Square One, But Definitely Back To A "Show Me" Story

Good news has been hard to find at Pacific Biosciences (NASDAQ:PACB) for a while. Roche's (OTCQX:RHHBY) decision to terminate its agreement with PacBio to develop and market PacBio's technology for the clinical diagnostics market was a major setback in terms of both near-term cash flow prospects and public perception around the value of the technology platform. What's more, with the launch of the Sequel and subsequent reports on its real-world performance, PacBio has once again shown that it struggles to develop and launch systems that deliver the hoped-for performance from Day One.

PacBio shares have fallen close to 60% since my last update on the company, and it I believe the Street has soured too much on the company's prospects in core genomics research. The ongoing improvements in the performance of PacBio's systems should continue to drive adoption, but my fair value estimate of around $6 assumes mid-term revenue growth in the mid-to-high 20%'s and longer-term growth in the mid-20%'s, as well as the ability to earn strong free cash flow on revenue in the $500 million to $600 million range (similar to my expectations for diagnostics company GenMark (NASDAQ:GNMK)). There are absolutely no guarantees that PacBio can hit those targets, nor any guarantees that the markets will grow as hoped or that PacBio's technology won't be supplanted by its rivals. As a high-risk show-me story in an expensive market, though, it is at least worth a look again.

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PacBio Not Back To Square One, But Definitely Back To A "Show Me" Story

Aspen Insurance Not Operating At A Top-Notch Level

Aspen (NYSE:AHL) wasn't my favorite idea in P&C insurance back when I last wrote about the stock in early 2016 (I preferred Chubb (NYSE:CB)), as I thought the apparent undervaluation in the shares was overshadowed by some operational risks. While the shares have climbed about 10% since then, a lot of those operational risks have emerged as bigger issues, and Aspen has underperformed other insurance companies like Chubb and Travelers (NYSE:TRV), as well as the broader Dow Jones P&C Insurance Index (which is up about 25% since I last wrote about Aspen).

Aspen's "build it and they will come" strategy for insurance hasn't worked out yet, and the company has seen both higher adjusted loss ratios and higher expense ratios. The company's underwriting profitability has declined significantly and weak pricing is not going to help matters.

Aspen is shrinking its programs business and taking a harder look at expenses, but shrinking reserve releases and the prospect of claims inflation are worries. While I still believe that Aspen can get to low double-digit ROEs over the long term, and the shares are priced for high single-digit to low double-digit returns, there is still risk to those projections and it's hard for me to get excited about Aspen outside of potential M&A interest.

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Aspen Insurance Not Operating At A Top-Notch Level

Wednesday, June 21, 2017

Geely Still Hard On The Throttle

I've been bullish on Geely (OTCPK:GELYY)(0175.HK) for a while, but China's third-largest domestic car company has surpassed even what I regarded as bullish expectations on my part. The company's new SUV line-up has gone over well with customers, as have new sedans, and Geely's upcoming Lynk brand could take the company to yet another new level. Volume growth continues to blow away underlying market growth in China, sending the local shares up over 100% from my last write-up.

How much further can Geely go? The company's overall share in China is still only around 3%, and its share of domestic brands is still below 10%. Additional sedan launches are slated for this year, as well as significant launches for Lynk in 2017 and 2018.

The health of China's market and the sequential weakness in monthly results are both concerns, as are higher baked-in expectations and the ongoing murkiness in the company's operations vis a vis its parent company. Even so, the company seems to have made meaningful strides in addressing past engineering and marketing challenges and success outside of China could provide an unexpected new driver for growth.


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Geely Still Hard On The Throttle

Innovation And Execution A Powerful Combination For NuVasive

NuVasive (NASDAQ:NUVA) is a case in point as to why I'm a little cautious sometimes stepping away from strong growth stories driven by innovation and strong operational execution, particularly in markets/sectors that don't always have as much of those as they should. While NuVasive had a great run going into my last write-up in October, and did offer investors a brief pull-back, the shares have since climbed another 20% or so on the back of respectable financial performance and strong "in the field" innovation.

Valuation remains problematic. NuVasive is a relatively rare combination of good growth, strong margin leverage, and expanding market share, and I'm not surprised that it has become a popular go-to name in the space. That said, the shares are now pricing in a high teens FCF growth rate that may be hard to surpass. Given the history here of the market swinging too far during both the bad times and the good times, I'd be careful buying near the highs, but I'd certainly reconsider if the sector sells off on another bout of health insurance reform uncertainty and/or a company-specific shortfall in earnings/guidance.

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Innovation And Execution A Powerful Combination For NuVasive

A Refocused FARO Is Looking To Drive Better Results From Its Strong Metrology Capabilities

FARO Technologies (NASDAQ:FARO) gets included in discussions of those companies that could benefit as industrial end-markets become more automated, but the path hasn't been smooth so far. Although FARO has stronger share in industrial metrology products like arms and trackers, and has done well with its market entry into 3D scanners, the share price performance over the last five years has been poor (down more than 20%) while Perceptron (NASDAQ:PRCP), Hexagon (OTCPK:HXGBY)(HEXAb.ST), and Cognex (NASDAQ:CGNX) have done considerably better. This isn't entirely unfair either, as the company's revenue growth has been lackluster (less than 4%) and operating margins have weakened.

The company's interim CEO (and co-founder) has been shaking up FARO's operating plan, with a new focus on six primary verticals and improved expense leverage. I am concerned about the growth that management can expect from the auto and aerospace end-markets, but I believe there are worthwhile opportunities in other industrial metrology markets, as well as 3D scanning. I believe the market is currently pricing in around 10% long-term FCF growth, which seems reasonable, but this is a name worth keeping an eye on, as the shares can be volatile around earnings reports.

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A Refocused FARO Is Looking To Drive Better Results From Its Strong Metrology Capabilities

National Instruments Already Getting Ample Credit For What It Does Well

Although Wall Street often values companies on the basis of their perceived potential in the short term, it's typically a company's ability to execute that determines the long-term rewards for shareholders. That makes National Instruments (NASDAQ:NATI) a tough stock for GARP investors today; while the company's long-term revenue growth hasn't been bad, margin leverage has been elusive and returns on capital haven't been impressive. Making matters more complicated, the company's strong presence in software and its uncommon modular approach ought to be valuable points of distinction.

There are a lot of potential drivers that could lead to meaningful changes in National Instrument's future performance. The company is more aggressively targeting opportunities in semiconductor and wireless test, and the company's capabilities in embedded monitoring and control could leverage meaning growth in industrial IoT, autonomous vehicles, and other "smart machine" applications. Could is a tricky word, though, and a lot of improvement (and/or M&A potential) seems to be in today's share price.

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National Instruments Already Getting Ample Credit For What It Does Well

Can Luxfer Translate Its Skillset Into Real Results?

Leadership is a funny word - you can be the best at something, but if that "something" isn't all that valuable, then it's hard to make real money from that leadership. That's my initial impression of Luxfer (NYSE:LXFR) as I do believe this company has a strong position in specialty metal and metal products (including magnesium alloys/powders, zirconium, and aluminum/aluminum composite cylinders), but that leadership hasn't meant abundant (or reliable) cash flow, nor much in the way of strong market returns over the last five years.

I do expect management to continue to deliver innovation-driven products to the market, and I do think that there are growth opportunities in autos, aerospace, and chemical catalysts; but I'm hesitant to believe that revenue growth will come in much above the mid-single digits for any sustained period of time. The good news is that the Street really isn't expecting much - revenue growth in the 3% to 4% range and FCF margins in the high single digits can support a fair value of close to $14, as can an 8x multiple to my estimate of 2017 EBITDA. Coupled with a dividend yield close to 4% and a balance sheet that is in decent health, these underperforming shares could be worth a look for value and turnaround-oriented investors.

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Can Luxfer Translate Its Skillset Into Real Results?

Recovering Markets And Self-Help Pushing Commercial Vehicle Higher

As a shareholder, I can't complain too much about the performance of Commercial Vehicle (NASDAQ:CVGI) since my last update. With the shares up another 50% or so since late December, Commercial Vehicle has not only outpaced truck manufacturers like PACCAR (NASDAQ:PCAR) and Navistar (NYSE:NAV) but also other truck component stocks like Cummins (NYSE:CMI), Dana (NYSE:DAN), and Meritor (NYSE:MTOR). To be fair, though, longer-term performance track records still do not favor Commercial Vehicle, as the company has lagged many comparable commercial vehicle suppliers due to issues with both growth (in terms of underlying markets, market share, and volume) and margins.

Class 8 orders are growing at double-digit rates again, and many companies in the construction and ag space have pointed to signs of recovery in their respective markets. That all bodes well for Commercial Vehicle, as do ongoing efforts to diversify its customer base, gain share, and penetrate growth markets like India. It is my opinion, though, that a lot of this is reflected in the share price now. I can see some scenarios where a double-digit fair value could come to pass, but I consider that a bull-case outlook at this point. Although I do think the shares are still slightly undervalued, I would view them more as a "strong hold" as opposed to a clear buying opportunity.

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Recovering Markets And Self-Help Pushing Commercial Vehicle Higher

Wednesday, June 14, 2017

Materialise Addresses A Key Step In A Fast-Growing Manufacturing Opportunity

Automated manufacturing is taking on increasing significance across a range of industries, and 3D manufacturing is playing a growing role in that process. Companies like GE (NYSE:GE) have made significant investments into automated 3D manufacturing, and machine tool companies are increasingly integrating additive manufacturing capabilities into more traditional tool workstations. As more companies look to adopt 3D manufacturing for themselves, there will be more demand for software to operate those systems. That is where Materialise (NASDAQ:MTLS) comes in - while the majority of the company's revenue today comes from 3D manufacturing services, the company has a strong position in an important software segment that should drive meaningful growth.

Materialise is a small company operating in an industry that is still early in its development cycle. That's positive with respect to growth potential, but it makes modeling and valuation quite a bit more challenging.

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Materialise Addresses A Key Step In A Fast-Growing Manufacturing Opportunity

IMI Group Working On Self-Improvement Through Still-Challenging Markets

Seemingly every company is looking to streamline its supply chain, improve manufacturing efficiency, and reduce its operating overhead, but the self-improvements at IMI Plc (OTCPK:IMIAY) (IMI.L) are a little more urgent. While declines in the oil/gas, power, petrochemical, industrial automation, and commercial vehicle markets have certainly hurt, IMI also saw some self-inflicted damage from under-investment in capex and R&D, too many non-strategic assets/businesses, and a lack of integration and operational efficiency. Credit, then, to CEO Mark Selway who has been tackling these issues in recent years while also dealing with serious market headwinds.

The opportunities for self-improvement and market recoveries haven't gone unnoticed, as IMI's shares are up about 25% over the past year - less than the likes of Weir Group (OTCPK:WEGRY) and Parker-Hannifin (NYSE:PH), but on par with Rotork (OTCPK:RTOXY) and SMC (OTCPK:SMCAY). My expectations for recoveries in downstream oil/gas and power may be too conservative, but I'm looking for mid-single-digit growth in revenue and FCF from IMI. That supports a mid-to-high single-digit return at today's level, which is not bad on a relative basis but arguably not enough for a company that still has some work to do on the self-improvement front.

Readers should note that IMI's ADRs are not very attractive from a liquidity standpoint, but the London-listed shares offer ample liquidity and most quality brokerages now offer such market access.

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IMI Group Working On Self-Improvement Through Still-Challenging Markets