3M's Rinse-And-Repeat Model Serving It Well

3M (NYSE:MMM) has traditionally not been the go-to name for playing industrial/economic recoveries, as the company's more conservative approach typically makes it more of a bear market favorite. CEO Inge Thulin has subtly changed a lot about this company, though, and it may be the case that this company is moving more toward an "all seasons" performer than is commonly thought.

In any case, 3M has done a little better than I expected since my last update, with the shares outperforming peers like Honeywell (NYSE:HON), Illinois Tool Works (NYSE:ITW), Danaher (NYSE:DHR), and General Electric (NYSE:GE). 3M shares are not cheap by any conventional sense of that word, but the shares do appear priced for a mid-to-high single-digit total return and the company's deployable capital and focus on continuous incremental improvement both argue in its favor as a holding.

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3M's Rinse-And-Repeat Model Serving It Well

K2M On Track, Gaining Share, And Continuing To Disrupt

Spine care company K2M (NASDAQ:KTWO) isn't going to be the easiest stock to own, as I expect investors to overreact to quarterly revenue trends and guidance, and I fully expect some bumps in the road as the company continues to launch and grow a portfolio of disruptive technologies for the spine care market. I also expect ongoing growth, though, as the company out-innovates its larger rivals, takes share, and ultimately leverages that into solid profits.

The shares are up about 20% since my last update, sandwiching the company between the outperforming Globus (NYSE:GMED) and underperforming NuVasive (NASDAQ:NUVA) over that time. Trading in the low $20s, the shares still look a little undervalued on the basis of medium-term revenue growth and margin outlook and look relatively appealing up to around $25. Although that doesn't leave a tremendous amount of upside from today's level, I would not be surprised if K2M outperformed, and I would keep this name in mind if the company's early May earnings report sees an overdone negative reaction.

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K2M On Track, Gaining Share, And Continuing To Disrupt

ABB Fills A Gap, But Has More Work To Do

At a 52-week high, ABB (NYSE:ABB) has nevertheless remained a relative underperformer next to peers like Siemens (OTCPK:SIEGY), Rockwell (NYSE:ROK), and Schneider (OTCPK:SBGSF), as investors fret over ABB's heavy exposure to end-markets like power gen, oil/gas, and mining and some of the gaps in its business coverage relative to its peers. Management has recently shown that it is willing to get back to M&A, though, and there is some relative undervaluation that may appeal to investors.

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ABB Fills A Gap, But Has More Work To Do

The Good Times Get Better For Advanced Energy Industries

I last wrote about Advanced Energy Industries (NASDAQ:AEIS) in September and said, "I don't think the semi-cap cycle has peaked, so growth/momentum investors may still find more room to run with Advanced Energy." The shares have shot up another 60% since then, outperforming other semiconductor equipment stocks I've liked, including MKS Instruments (NASDAQ:MKSI).

This performance hasn't been just hype and hope, as Advanced Energy has been outperforming its own guidance and seeing solid evidence that opportunities tied to new chip architectures, advanced packaging, and non-chip markets like OLEDs are converting to actual orders and revenue. Bulls may argue that these drivers will lead to a substantially greater addressable market and a longer up-cycle, and I don't necessarily disagree.

Likewise, Advanced Energy has plenty of room to grow outside of its core semiconductor market(s). All of that said, I can't make a quantitative value argument here, so these shares really only seem appropriate for investors who want to take on the risk that the good times can still get meaningfully better before valuations come back to a lower orbit.

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The Good Times Get Better For Advanced Energy Industries

Guangshen Railway Has Potential, But A Lot Rides On Reform

China's Guangshen Railway (NYSE:GSH) is a rare listed Chinese rail asset and it owns high-quality assets in Guangdong, but the nature of the Chinese rail market takes a lot of important strategic options out of management's hands. The state-owned China Railway Corporation (CRC) is getting more realistic about market-based reforms, though, and that has created some credible optimism regarding fare pricing power and the possibility of asset injections/acquisitions for Guangshen in the not-so-distant future.

Guangshen Railway's shares have done alright over the last year, but a lot of that appears predicated on those reforms that may allow the company to meaningfully increase its ticket prices. Absent those reforms, the company is likely going to find it hard to drive strong revenue growth due to competition with its Guangzhou-Shenzhen line, though an expansion of its railway operation services offers above-average revenue growth and good returns on capital (albeit less impressive margins). Guangshen's shares don't look remarkably undervalued, but with two-for-one potential profit leverage on fare hikes, slight undervaluation today and meaningful upside in a bull-case scenario merit a closer look.

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Guangshen Railway Has Potential, But A Lot Rides On Reform

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

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?

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

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

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