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