Tuesday, June 4, 2019

Huntington Bancshares Undervalued, But Not Looking Catalyst-Rich

Finding undervalued stocks is one thing, but finding catalysts and drivers that will close that valuation gap is often an overlooked part of the investment process (and a part of the whole “value trap” phenomenon). When I look at Huntington Bancshares (HBAN), I see a basically well-run bank trading more than 10% below fair value. I also see a bank that is forgoing some near-term growth to improve its full-cycle performance.

What I don’t see, though, is what will change investors’ minds about these shares in the near future. Worries about the health of shorter-cycle industrial markets are relevant to this Ohio/Michigan-centric back, as are the ongoing tariff issues with China and Mexico and the uncertain prospects for the USMCA. On top of that, while I think Huntington would/will do better in a banking downturn, the near-term outlook for pre-provision profit growth is pretty average-looking.

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Huntington Bancshares Undervalued, But Not Looking Catalyst-Rich

Apart From Valuation, It's Hard To Find Fault With CyberArk

I've written rather positively about the quality of CyberArk (CYBR) and its growth opportunity before, and that's not going to change here - I continue to believe that CyberArk is an early leader in an exciting growth sector within security (privileged access management) and that it has a large and growing addressable market in front of it. The hang-up I have today is that valuations in software overall, and security, in particular, are pretty high relative to long-term norms. I'd love to own CyberArk at the right price, and I admit that even I'm tempted to throw caution to the wind and just own it, but chasing elevated valuations carries more risk than I need in my portfolio.

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Apart From Valuation, It's Hard To Find Fault With CyberArk

Can Reduced Expectations And A New Product Rebuild Inogen's Premium?

Hyper-growth med-tech valuation exists in its own parallel dimension, and it’s a place where I rarely venture with my own money. To that end, I wasn’t excited about the premium the market was giving Inogen (INGN) a year ago and I haven’t seen much reason to write about it since then. In that time, though, the shares shot up more than 75% before starting a fall that has seen the shares lose more than 80% of their value.

I didn’t think the shares deserved to be trading at $160+ back in May of 2018, let alone nearly $290, but I also don’t think the mid-$60’s is fair now. While I’m not crazy about Inogen’s direct-to-consumer model, the reality is that working through home/direct medical equipment vendors isn’t any easier and there’s a definite market for portable oxygen concentrators given the limitations of air tanks. I do believe competitors like Philips (PHG) and ResMed (RMD) constitute a longer-term threat, but I also believe Inogen can lose some market share and still generate long-term revenue growth in the double-digits and high-teens FCF margins. It’s going to take time for Inogen to win back investor interest, but a new product launch and improved rep productivity should drive improved results from here.

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Can Reduced Expectations And A New Product Rebuild Inogen's Premium?

Tenneco Pounded Down On Weak Execution, High Leverage

I wasn’t all that fond of Tenneco (TEN) when I last wrote about it in the fall of 2018, but even though I had issues with the company’s unimpressive operating performance and weak leverage to vehicle electrification, I didn’t expect the 75% drop in the share price that followed. Management credibility is arguably at an all-time low now, and with weak trends in light vehicle builds and a weakening outlook for many commercial vehicles, Tenneco’s back-end-loaded second half guidance seems perhaps ambitious even with a meaningful revision after first quarter earnings.

It’s tough to reconcile the magnitude of the share price drop with the actual underlying performance (unimpressive as it has been), but net debt is now close to 3.5x expected EBITDA and the spin-out of DRiV has been postponed by at least six months. I can understand why deep-value/contrarian investors may want to give this a look (especially as I think auto/vehicle parts stocks are undervalued as a sector), but I’m concerned about the company’s long-term competitiveness and the fact that net debt now exceeds over a decade of estimated free cash flow in my model.

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Tenneco Pounded Down On Weak Execution, High Leverage

Infineon Scoops Up Cypress

Follow the markets long enough and you'll encounter a few moments that make you think the market is both sentient and messing with you - to that end, Cypress (CY) was on my to-do list today and then I woke up to the news that Infineon (OTCQX:IFNNY) and Cypress had agreed to a $10B buyout. While Cypress shares had done well since my last (bullish) article on the company in early January, this deal is certainly a nice capper on that share price move.

All in all, I think this is a reasonable deal for both parties. While Infineon is paying a rich-looking premium based on current margins, 2019 is likely to be an anomaly that doesn't reflect the real strength of the business. Moreover, I think the financial and operation synergy potentials are significant, and I believe Cypress's MCU and connectivity technologies will be valuable additions to Infineon's portfolio. For Cypress, while the company's growth plan could well have improved the business to a point where it would get this sort of valuation down the line, this deal takes execution risk off the table and gives shareholders a very fair multiple for the business.

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Infineon Scoops Up Cypress

Marvell Executing On A Once-Underappreciated Transformation Strategy

I liked Marvell (MRVL) back in September of 2018, as I thought the Street was too focused on the near-term challenges of integrating Cavium and not enough credit to the transformation underway in the business. While the shares dropped another 20% from that point in time with the SOX, the shares have since rebounded more strongly, and the shares now sit about 20% higher than they were at the time of the last article (while the SOX is down about 4%).

I continue to like the direction Marvell is going. Significant wins in 5G (primarily with Samsung) could translate into more than $700 million of incremental revenue, and the company has been building up its ASIC capabilities such that I believe the company has a chance of emerging as a viable second-source rival to Broadcom (AVGO) in time and shifting more of the business’s center of gravity towards growth markets and away from storage.

What I don’t like so much is the current valuation. Marvell has attractive end-market exposure for the next 12-18 months and looks better-positioned for the near-term growth that Wall Street loves so much, but I think the valuation is a tougher sell now.

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Marvell Executing On A Once-Underappreciated Transformation Strategy

Sunday, June 2, 2019

voestalpine Almost Finished With A Fiscal Year To Forget

I was tentatively bullish on voestalpine (OTCPK:VLPNY) (VOES.VI) back in December, stating, “Although I’m reluctant to play chicken with a freight train and go against such strongly negative sentiment as is dominating steel today, the valuation on voestalpine has me sorely tempted to take a flyer on the assumption that 2019/2020 won’t be as bad as the price seems to be forecasting.”

Although the shares did pretty well for a while thereafter, rising about 20% through early April, the shares have since been pounded (down about 25% from the April highs) on weak carbon steel prices in the U.S. and EU, rising input costs, and growing questions about whether voestalpine’s “high-quality strategy” and focus on value-added products really produces a differentiated full-cycle earnings or cash flow stream.

Steel is very much out of favor, but I’m still tempted by the valuation … and that’s with a below-the-Street opinion on near-term global economic growth and steel prices. With voestalpine shares trading like they were any other steel company, and at least a few 2019 headwinds unlikely to reoccur, I’m once again considering these shares as a potential buy.

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Voestalpine Almost Finished With A Fiscal Year To Forget

Meaningful Progress At Columbus McKinnon Going Seemingly Unnoticed

Columbus McKinnon (CMCO) is a bit of a puzzler to me now. Despite racking up multiple quarterly EBITDA beats in a row and eight quarters of year-over-year gross margin improvement, the shares are about 15% lower than they were last time I wrote about this leading player in material handling, and that was closer to down 25% before a big post-earnings reaction. Granted, industrials haven't done so well over that same period, and there are valid concerns about slowing end-market demand, but I'm still surprised the improvements in the business aren't being better reflected in the share price.

More than a third of Columbus McKinnon's revenue comes from end-markets/sectors that I'm concerned about today, but the company is gaining share and management expects another four points or so of EBITDA margin improvement from fiscal Q4'19 levels. With increased R&D spending going towards automation-enabling product development and my expectation of low-to-mid single-digit long-term revenue growth, mid-single-digit FCF growth, and low-double-digit ROIC, I believe these shares offer meaningful upside even with the risk of a sharper near-term slowdown in the business.

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Meaningful Progress At Columbus McKinnon Going Seemingly Unnoticed

BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

As I’ve written extensively in the past, BRF SA (BRFS) management has a lot on its plate trying to turn around this large Brazil-based poultry and processed food company. After years of ill-advised (or at least unfocused) M&A and scattershot business plans carried out by prior management teams, BRF found itself saddled with debt and an inefficient operating structure, leading to the entry of Pedro Parente and a completely new management team.

While there had been some signs of progress with the turnaround plan, and the outbreak of African Swine Fever in China has been a net positive for Brazilian protein companies, management is now considering a sharp change in strategy by entering into merger negotiations with Marfrig (OTCPK:MRRTY).

On balance, I’m not sure the advantages of a merger with Marfrig outweigh the challenges, but it does at least kick the can down the road in terms of showing results from the turnaround. Moreover, there aren’t going to be too many opportunities like this for BRF. While I continue to believe that BRF could be worth substantially more than its current share price down the road, I’m not sold on the idea that adding more complexity is the best way to build value.

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BRF SA Shifting Gears As It Contemplates A Merger With Marfrig

New Tariffs Create New Headaches For Rockwell Automation

At the time of Rockwell’s (ROK) fiscal second quarter earnings report in late April, I commented that I thought investors would have an opportunity to buy shares in this high-quality automation enabler at a lower price. Since then, the shares have dropped more than 15%, significantly underperforming industrials in general, on growing concerns about a slowdown in the industrial end-markets that make up a large part of the discrete automation market. Now with the prospect of significant tariffs on Mexico on the table, Rockwell is taking another body-blow.

I do believe that Rockwell management is underestimating the risk of a broader slowdown in industrial end-markets, even though I do basically agree with its more bullish medium-to-long-term outlook. With a real risk of a “lower-for-longer” end-market demand situation and now potential pressures from new tariffs, I’m inclined to keep waiting even though Rockwell shares now trade below my estimate of fair value.

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New Tariffs Create New Headaches For Rockwell Automation

Aptose Drifting Ahead Of Real Data From Its Intriguing Clinical Assets

I’ve tried to go to some lengths in the past to emphasize the risks that come with an investment in Aptose Biosciences (APTO) – a small biotech that has only recently seen its two lead compounds go into the clinic. Not only is there the ever-present risk of clinical trial failure (the large majority of Phase I cancer compounds fail) and the meaningful risk of further dilutive financing, but there’s a less-appreciated risk of investor sentiment (boredom, really), as biotechs can drift lower without positive data to keep investors engaged.

I continue to believe that, even with the risks involved, Aptose is a very interesting early-stage speculation. CG-806 could emerge as a hard-to-beat therapy option across a range of hematological cancers, while APTO-253 may prove to be the first effective drug targeting the “undruggable” MYC target, with potential applications outside of hematology.

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Aptose Drifting Ahead Of Real Data From Its Intriguing Clinical Assets

Universal Stainless & Alloy Products Badly Needs To Regain Momentum With Its Premium Alloy Offerings

Despite strong demand growth in end markets like aerospace and oil/gas, specialty alloy producers like Universal Stainless & Alloy Products (USAP) have underperformed the S&P 500 by a wide margin. USAP has been particularly weak, with the stock down more than 45% over the past year versus roughly 20% to 25% declines for Allegheny (ATI), Carpenter Technology (CRS), and Haynes (HAYN), as USAP's progress in boosting its premium mix has stalled out, tool steel demand has shrunk significantly, and margins have underwhelmed on disappointing volumes and price/cost mismatches.

I'm less bullish on USAP reaching/surpassing past gross and operating margin peaks than I was almost a year ago, but USAP's facilities (and particularly its more highly value-added North Jackson facility) are still significantly under-utilized, the backlog continues to grow, and there are still opportunities for USAP to leverage this strong commercial aerospace cycle. On the flip side, USAP has struggled to consistently boost its premium product mix, and the company's competitive positioning compared to Allegheny or Carpenter is less impressive.

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Universal Stainless & Alloy Products Badly Needs To Regain Momentum With Its Premium Alloy Offerings

Carpenter Technology Undervalued And Making Progress, But Where's The Spark?

I’ve had pretty mixed feelings about Carpenter Technology (CRS) for some time. In my last write-up on this specialty alloys company, I thought the shares looked undervalued, but I also thought the company really needed to show some improvement in execution before the Street would get behind it. While the shares did break out over $50 in the interim (up about 25% from the price of that last article), weak nickel prices and concerns about end-market demand have once again weighed on the shares and net-net, the shares are close to where they were at the time of that last article.

I like the progress that Carpenter has made with winning qualifications for its Athens facility, though it will take time for these qualifications to turn into revenue and profits. I also like the investments the company is making in areas like electrification-enabling alloys (including soft magnetics) and powered metals for additive manufacturing, but here again, it will take time for these efforts to really scale up. The good news? The company has a strong backlog but the shares are still undervalued on a historical median EBITDA multiple.

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Carpenter Technology Undervalued And Making Progress, But Where's The Spark?

Acerniox Not Really At 'Can't Miss' Levels

To whatever extent I’m grudgingly interested in steel stocks today, it’s because some of the valuations appear to be pricing in bleak near-to-medium-term scenarios that don’t seem to fit with what is actually going on in the world (and that’s from someone who is pretty bearish relative to consensus). Unfortunately, Acerinox (OTCPK:ANIOY) (ACX.MC) doesn’t seem to offer that same margin of safety today. I continue to believe this is a well-run leader in stainless steel, but steel price momentum looks weak, several end-markets are softening, and the valuation isn’t really pricing in doom, gloom, or boom.

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Acerniox Not Really At 'Can't Miss' Levels

Ternium Beaten Up, But The Quality Is Still There

The six months since my last article on Ternium (TX) have not been kind to the steel sector in general, nor this Mexican steelmaker in particular, with the shares down about 16% and roughly doubling the decline of the sector. While the sector has been pressured by weaker prices, rising costs, and concerns about demand growth in 2019 and beyond, Ternium too has been squeezed by pricing and costs, not to mention weaker-than-expected demand in its key operating regions.

Macro factors remain my biggest worry with Ternium, as construction activity has yet to turn in Mexico and Argentina’s “recovery” is at best looking like a drawn-out process. Improving demand in Brazil should help, but global weakness in the auto industry remains a point of pressure for the company. Given Ternium’s excellent margins (even in comparison to leaders like Nucor (NUE) and Steel Dynamics (STLD) ), longer-term prospects in both Mexico and Brazil, and the valuation, this is still a name I like within the steel sector.

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Ternium Beaten Up, But The Quality Is Still There

Gerdau's Share Price Weakness May Not Be Entirely Reasonable

I was skittish about the near-term performance prospects for Gerdau (GGB) back in early December, and the shares have fallen about 10% since then – modestly underperforming a weak steel sector over that time. Gerdau’s share price performance hasn’t been helped by weaker steel prices in the U.S., nor a slower-to-develop recovery in Brazil, and costs continue to rise in the meantime.

I’m not all that bullish on the U.S. steel sector, but I think Gerdau has significantly upgraded their U.S. operations, and I’m more bullish on the prospects for Brazil’s steel sector over the next few years as the country makes a tentative economic recovery. Like Ternium (TX), I think Gerdau could be positioned to post EBITDA and FCF growth at a time when U.S. steelmakers will have more lackluster results, and a stronger recovery in Brazil could maintain investor enthusiasm for that region. I’m less bullish on Gerdau relative to the sell-side, but below $4/share, I think these shares are worth a look.

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Gerdau's Share Price Weakness May Not Be Entirely Reasonable

Global Payments Scales Up Yet Again

The lucrative and growing payments market is one that increasingly rewards scale, and the leading players are acting accordingly. First Data (FDC) and Fiserv (FISV) are pairing up, as are Fidelity National (FIS) and Worldpay (WP). While not on the same scale, JPMorgan (JPM) is also scaling up, recently announcing the $500 million acquisition of InstaMed to target the fast-growing healthcare payments vertical. Not to be outdone (or left behind), Global Payments (GPN) has announced an acquisition of Total System Services (TSS) that should boost it to around 8% share of the U.S. acquiring market while filling in some gaps in its covered verticals.

Fintech is still hot, and although not every analyst or investor is sold on Global Payments’ strategy of using wholly-owned software offerings to drive customer acquisition and retention for its payments business, the shares seldom trade at much of a discount. Although I don’t think Global Payments is particularly cheap, I believe today’s share price is a relatively fair reflection of the value of the business at this point.

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Global Payments Scales Up Yet Again

Crane Going Hostile In An Effort To Acquire CIRCOR's Under-Managed Assets

Multi-industrial Crane (CR) had indicated before that they were interested in M&A, particularly synergistic deals in the fluid handling and/or aerospace businesses, and now, it’s clear that they’re serious about it. After trying unsuccessfully to engage the board in a friendly negotiated transaction, Crane has gone public with a hostile bid for chronic underperformer CIRCOR (CIR) that I believe offers shareholders more value than they’ll ever see from its current management team.

I don’t know how this story ends, but it’ll be interesting to watch. CIRCOR’s press release confirming the rejection of the deal makes for good comedy, but the reality is that closing hostile deals isn’t so simple. I believe the relatively concentrated ownership of CIRCOR could help apply pressure to the board (GAMCO, Vanguard, Royce, and T. Rowe Price collectively own 45% of the shares), and I believe Crane’s deal is quite fair, but there is no certainty that this deal can get done.


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Crane Going Hostile In An Effort To Acquire CIRCOR's Under-Managed Assets


PacBio Shares Reflect Some Ongoing Worries About The Illumina Deal

Although Illumina (ILMN) reiterated during its first-quarter conference call that it expects its acquisition of Pacific Biosciences (PACB) (“PacBio”) to close around midyear, clearly the market is not wholly sold on that outcome, with the shares trading below $7 as of this writing. While we know that the FTC had a second round of questions for the company on the deal (disclosed by Illumina in conjunction with Q4’18 earnings) and the end of the U.K.’s Competition and Markets Authority Phase I review is coming up, neither PacBio nor Illumina has expressed any real concern that the deal won’t go through, and due diligence has continued to support the idea that the two companies really aren’t competitive in any meaningful sense.

I still believe the deal goes through, but it is arguably prudent to address what happens if the deal doesn’t happen. Assuming that PacBio would be entitled to a full breakup fee, I believe PacBio’s cash would be just barely sufficient, though the launch of the Sequel II and SMRT Cell 8M chip complicates discussions of cash burn. Given that I believe PacBio would be worth around $6.50 on a standalone basis, it’s hard for me to reconcile today’s price with the likely Illumina buyout and even the worst-case scenario of the deal collapsing.

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PacBio Shares Reflect Some Ongoing Worries About The Illumina Deal

JPMorgan Building On Strengths Outside Of Banking

JPMorgan (JPM) is one of the largest, and in my opinion also one of the best-run, banks in the U.S., but core deposit/lending banking operations are only part of the story. JPMorgan also has a significant payments business, and management has made it clear that they view growing this high-margin, high-returns business as a core priority. To that end, the company recently announced its largest deal since the financial crisis, and I expect further investments (both organic and M&A) to grow this business.

Although I continue to believe that core banking has more or less plateaued for this cycle, JPMorgan continues to stand out for the quality of its operations. Looking ahead a bit, I believe the company’s plan to drive organic growth (new branch openings) and leverage its substantial IT investments will drive better-than-average growth and cost leverage. There are bigger bargains in the banking sector today, but in terms of quality and value, I believe JPMorgan’s double-digit discount to fair value still makes it a name worth considering.

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JPMorgan Building On Strengths Outside Of Banking

Lattice's Investor Day Highlights The Separation From The Company's Past

To the extent that a bullish position on Lattice Semiconductor (LSCC) is controversial, at least beyond valuation arguments, it is controversial primarily because Lattice used to be a poorly-run, scattered, low-value-add chipmaker. I’ve written multiple articles on how Lattice has changed (new management, new plan, new priorities, et al), but the company made its own case recently with an Analyst Day that highlighted what’s new and different about Lattice today.

For those who’ve been following the story closely over the last year or so, this Analyst Day was more evolutionary than revolutionary, but management nevertheless provided some interesting detail, particularly with respect to content opportunities, a new design philosophy, and the near-to-medium-term financial model. It wasn’t a home run presentation (there was some disappointment on the operating margin target), but it was a positive in my view and this is still a stock that interests me at the right price.

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Lattice's Investor Day Highlights The Separation From The Company's Past

Wednesday, May 15, 2019

Steel Dynamics Has Near-Term Challenges, But The Valuation Is Getting Interesting

I was “cautious” on Steel Dynamics (STLD) back in January due to the challenges that come with descending from a cyclical peak, but it has still been among my favorite steel names for some time. To that end, I’m a little surprised that it has underperformed the sector since that last article, though another of my preferred names, Ternium (TX), has done even worse, while Nucor (NUE) has done a little better. On the other hand, a quick look at AK Steel (AKS), ArcelorMittal (MT), Gerdau (GGB), or U.S. Steel (X) and you realize it could still be worse.

I still believe this is a very well-run steel company, but I’m also still concerned about the underlying health of the U.S. short-cycle economy, the prospect of weaker demand and prices, and higher conversions costs. If that weren’t enough, there’s also the matter of meaningful U.S. capacity additions in sheet steel over the next few years. I do believe that Steel Dynamics is undervalued and might have some longer-term appeal now (particularly for investors with a more bullish outlook on the U.S. economy), but I do think Nucor has the better product mix for the next 6 to 18 months.

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Steel Dynamics Has Near-Term Challenges, But The Valuation Is Getting Interesting

Follow-Through Is The Next Big Challenge For ams AG

ams AG (OTCPK:AMSSY) (AMS.S) has given investors quite the ride over the last year or so, with the shares still down over 50% over the past year (far below the almost flat performance of the SOX), but up more than 60% since the time of my last article on a better first quarter, strong guidance for the second quarter, and several content wins in the Android smartphone market.

I don’t really expect trading in ams shares to really be any calmer any time soon. Not only are there risks to Apple (AAPL) volumes from the next phone cycle (which will begin later in 2019) and another possible inventory correction, but there’s still uncertainty about exactly which components ams is winning with these Android vendors, not to mention what those volumes will look like. On top of that, there’s still meaningful uncertainty about the pace of the recovery in demand for auto and industrial markets, and oh by the way, also ongoing competitive risks as companies like STMicro (STM), Sony (SNE), and Infineon (OTCQX:IFNNY) try to elbow their way into the 3D sensing market.

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Follow-Through Is The Next Big Challenge For ams AG

ArcelorMittal Lagging On Weaker Markets And Margins

Steel hasn’t been a particularly popular sector over the past three months, with the sector down about 7% or so. Unimpressive as that is, it’s downright aspirational for ArcelorMittal (MT), which has seen its share price drop about 20% over that time, with a significant drop in just the last two weeks. Between uninspiring prices in most of its markets, higher costs, and concerning macro signs, there are plenty of contributing factors to consider.

I’ve said it before and it merits repeating – stocks don’t go up just because they’re cheap. It usually takes some other catalyst, some reason to believe that the tide is going to turn in a more positive direction, to get share prices moving, and that could be problematic for ArcelorMittal in the near term. While I believe management is running the business along generally sound lines, weakness in Europe and emerging concerns about the U.S. market are likely to stick around a bit longer and ArcelorMittal really needs some beat-and-raise quarters coupled with a stronger steel market to change sentiment.

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ArcelorMittal Lagging On Weaker Markets And Margins

Nucor Has The Right Mix And A Better Valuation

I wasn’t a big fan of Nucor (NUE) back in February, and I don’t feel like I’ve missed out on anything with the 10% move down since then. While Nucor remains one of the best operators in the steel business, prices have weakened as I expected and volume hasn’t made up the difference. What’s worse, costs are rising and I think companies in the steel sector may be counting on more volume/demand recovery in the U.S. than the economy can support.

With the downward move the shares are more interesting now. I still prefer Steel Dynamics (STLD) and Ternium (TX) (though the shares of the latter have been quite weak since February), but Nucor does seem to offer some upside on my EV/EBITDA valuation approach, and Nucor should benefit from oncoming volume/capacity increases in a still-healthy market while others are now investing for capacity that won’t come into play for years.

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Nucor Has The Right Mix And A Better Valuation

Innospec Offers Steady Performance And Occasional Opportunities

Among specialty chemical companies, Innospec (IOSP) is a relatively low-drama player, with a solid management team that generally does a good job of managing its businesses to the realities of their respective end-markets – maximizing margins in slower-growing businesses, but exploiting growth opportunities where they are available. Innospec doesn’t often get all that cheap apart from broader market/sector pullbacks, but those are good times to reconsider these shares.

Innospec has come off a bit from a recent peak and the shares aren’t all that exciting from a DCF-driven value perspective, though an EV/EBITDA approach offers a little more upside. Capital deployment into growth M&A remains a definite possibility, but I’d prefer to try to pick up shares in the $70’s if possible.

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Innospec Offers Steady Performance And Occasional Opportunities

Qorvo Still Not Getting Its Due

When I last wrote about Qorvo (QRVO) in early January, I thought the shares of this chip company were undervalued, but I thought the near-term outlook was clouded by the possibility of another guidance cut (which happened with fiscal Q3 earnings in February) and a lingering perception of Qorvo as a “problem child” with respect to overreliance on mobile end-markets and problematic gross margins. To that latter point, the shares have continued to consistently lag the SOX since that last article, though they’re up about 20%.

Generating alpha by investing in laggards is a tough way to go, but it is not without its rewards. Once a company’s perception changes, the rerating can be quick and significant. While Qorvo seems to have lost content with Apple (AAPL) (back to Broadcom (AVGO), presumably), I think the IDP segment is under-appreciated, and I likewise think the gains with non-Apple vendors are underappreciated for their margin benefits. It doesn’t take heroic assumptions to get a high $80’s fair value, but this is a stock that has tested investor patience for some time and we may not be out of the woods yet with this sector correction.

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Qorvo Still Not Getting Its Due

Harsco Shifting From Turnaround To Transformation

Harsco (HSC) is a case-in-point as to why I say that successful turnarounds can exceed your expectations at the start of the turnaround, as management has done a great job of improving its core Metals & Minerals business and it seems as though some of the changes made to the Rail business are about to start paying off. On top of that, Harsco benefited from lucky timing (always a good thing in a turnaround) with the global recovery in steel production and in markets like oil/gas (for its heat exchangers).

Now management is underway with a transformation process that is seeing the company become less of a multi-industrial hodgepodge and more of a focused player in industrial-environmental markets like waste reclamation and treatment. Although the bigger move into waste treatment carries some operational risk, I believe management has earned the benefit of the doubt with respect to its ability to execute.

As for the shares, even with this recent sell-off, the shares are up about 10% from the time of my last article. I saw high $20’s to low $30’s value then, and I still see that now, and a return to the low $20’s in a broader market sell-off would be an opportunity to consider.

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Harsco Shifting From Turnaround To Transformation

Veeco Showing Signs Of A Longer-Term Transition To A Better Model

Although I thought Veeco (VECO) was undervalued in November of 2018, I didn’t expect the strong rebound in the share price, and I definitely underestimated the Street’s enthusiasm for the changes management was making to the business. To be fair, it’s not just a change in perception that I believe has driven the share price move; I believe Veeco has a better strategy and business plan in place now, and I underestimated the growth potential that such a shift could bring into the picture.

Veeco’s decision to move away from commoditized markets like blue LED and embrace more front-end equipment (not to mention equipment that enables leading-edge chip production) should bode well for growth and margins. Exactly how much it will margins is a big question when trying to figure out the valuation. If the changes management has made can put the company in a position to generate long-term EBITDA margins in the 20%’s and FCF margins in the mid-teens, there could still be further upside from here.

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Veeco Showing Signs Of A Longer-Term Transition To A Better Model

Slow Progress At BRF SA, But ASF Is Providing A Boost

BRF SA’s (BRFS) turnaround process is going to take years to complete, but management has made some progress already. Helping matters, a potentially severe outbreak of African Swine Fever (or ASF) in China has boosted protein stocks (BRF included) in anticipation of higher protein imports from that country and less demand for grain in Brazil.

The impact of the ASF outbreak is unlikely to provide a permanent boost to BRF, but it should boost revenue, profits, and cash flow at a time when the company could really use the boost. The shares look more fully-valued on a near-term basis, but I maintain my longer-term outlook that a successful turnaround could drive a meaningfully higher price for more patient investors.

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Slow Progress At BRF SA, But ASF Is Providing A Boost

With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

I thought Dialog (OTCPK:DLGNF) (DLGS.XE) was undervalued back in January on ongoing uncertainty over the company’s relationship with Apple (AAPL) in power management chips and what the future of Dialog would look like. Since then, the shares have shot up about 50% as investors have come to a more rational set of expectations regarding the ongoing contributions of sub-PMIC sales to Apple and emerging opportunities in connectivity and charger products.

I do like Dialog’s emerging portfolio in low-power connectivity, a key enabling technology for IoT, and I like the amount of capital management has on hand to deploy toward more business-building deals. Management has been disciplined here so far, and I hope that will continue. Now, though, the shares are valued much more like any other semiconductor company, and while I don’t think the valuation is inflated, I also don’t see a big discount to underlying fair value.

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With Apple No Longer An Overhang, Dialog Needs To Build Its Future Business

Louisiana-Pacific's Weaker First Quarter Looks Like A Bump Along The Bottom

When I last wrote about Louisiana-Pacific (LPX) in February, I thought that the shares were an iffy prospect given the run since last December and with weak near-term prospects for housing activity and OSB pricing. With the shares down about $1 since then (a little less than 5%), I really don’t feel like I missed out on much, as LP is going to have to spend a little time here bumping along the bottom of the OSB cycle.

Relative to a fair value in the high $20’s based on my estimate of “full-cycle EBITDA”, I think LP shares are a little undervalued, but not so dramatically so that I feel inspired to do much – this is an “apples to oranges” comparison, but Weyerhaeuser (WY) looks more substantially undervalued, offers a sizable payout, and has some similar underlying drivers (namely, housing).

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Louisiana-Pacific's Weaker First Quarter Looks Like A Bump Along The Bottom

PRA Group Doing Okay, But Needs To Find Another Gear

PRA Group (PRAA) has been a frustrating stock to follow and own lately, as management’s performance on margins has been underwhelming, while continuing to use leverage to buy more charged-off debt. A still-healthy economy is helping on the collections side, while rising charge-offs point to more supply in the relatively near future.

I’m still concerned about the possibility that there has been a permanent change in PRA Group’s core market and that collections margins will never be what they once were. Likewise, PRA’s sheer size is a limit to how much cherry-picking the company can do when buying new inventory. I can still argue for a price in the low $30’s, but I’m growing frustrated with the slow pace of margin improvement and management’s credibility could use some improvement.

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PRA Group Doing Okay, But Needs To Find Another Gear

Friday, May 10, 2019

Calyxt Continues To Make More Progress Than Is Shown In The Share Price

Make no mistake, Calyxt (CLXT) still has a long row to hoe. Although this bio-ag has now logged its first commercial sales in multiple product types, the company is likely somewhere around five years away from its first profitable quarters and six or so years away from being free cash flow positive. Moreover, a lot of the growth I model for Calyxt comes its high-oleic soybean product, a product category that has attracted plenty of competitive attention, and there is still a risk that a segment of consumers turn against gene-edited foods in the way they have against genetically-modified foods produced from seeds developed by the likes of DowDuPont’s (DWDP) Corteva or Bayer (OTCPK:BAYRY).

Although the shares have rebounded from the time of my last update, I don’t believe the shares fully reflect the progress and potential of the company. There have been some pushouts relating to commercial and development pipelines, but nothing out of the ordinary for a company at this stage, and there is meaningful upside from here as the company scales up its HO soy program and advances other projects to the market.

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Calyxt Continues To Make More Progress Than Is Shown In The Share Price

ITT Overlooked And Undervalued As A Late-Cycle Play

I'm not sure it's entirely appropriate to call a stock followed by over a dozen sell-side analysts and widely-owned by institutions "overlooked", but I don't get the sense that ITT (ITT) is as widely-known among investors as it should be. And, that's a shame. ITT isn't perfect, but I like this diversified industrial's philosophy of adopting best practices irrespective of their source, not to mention broad late-cycle exposure and a strong growth auto business.

Below the mid-$60s, I think ITT is undervalued. While there is some asbestos liability here, I believe it is well-covered, and the company has the dry powder available to make select acquisitions to build out its operations further. I believe the perception of the auto business has already corrected, and ITT's short-cycle industrial exposure is moderate, and so I believe this is a good time and place to consider this name.

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ITT Overlooked And Undervalued As A Late-Cycle Play

Colfax Logs A Stable Quarter Amid Significant Transformation

In multiple past articles on Colfax (CFX) I took management to task for the state of the business, including questionable long-term value in the Air & Gas Handling business, an unimpressive turnaround with Fab Tech, and a need to do something more transformative with the business mix. Since my last update, the company has made some significant announcements, led by the $3 billion-plus acquisition of DJO Global and the impending sale of the Air & Gas Handling business.

Although I think management’s growth expectations for DJO Global may be too high, this non-cyclical business should generate some solid cash flow and the AGH sale will reduce some of Colfax’s cyclicality. Top-line growth will still be a challenge, but better margins and a more stable business mix should be rewarded with a better multiple, and today’s multiple is not demanding.

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Colfax Logs A Stable Quarter Amid Significant Transformation

Copa Shares Snap Back As The Street Is Reminded Of The Strong Cost Story

Copa’s (CPA) low $70’s share price around Christmas of 2018 will probably go down in my annals of “shouda, couda, wouda”, and maybe ought to serve as a reminder to use a more compelling alert/reminder system. Anyway, while this Latin American airline’s shares had been drifting since February, the shares rebounded strongly after first quarter earnings, as management once again demonstrated its proven (but still occasionally overlooked) cost management ability and maintained a fairly benign outlook for the business, as well as reiterating some encouragement about the Brazilian market later this year.

I still believe Copa is undervalued and buyable here. There are risks that Brazil won’t recover as quickly or as strongly as hoped, and that’s likewise true for Argentina, but I believe the company has been operating well even with things as they are. With a very strong network and operating plan in place, I believe mid-single-digit revenue growth can drive high single-digit EBITDAR growth and support a fair value around $100.

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Copa Shares Snap Back As The Street Is Reminded Of The Strong Cost Story

Middleby Doing Better On A Core Basis, And Valuation Reflects That

With much-improved performance in the residential business and decent growth in commercial foodservice, Middleby (MIDD) has come back into investors’ good graces, with the shares up better than 25% over the past year. I liked Middleby better when the restructuring efforts were still in process and recovery in the business (and sentiment/perception) was still up for debate, and now I find the valuation more demanding for a company that I believe is too large to significantly outgrow its markets on an organic basis.

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Middleby Doing Better On A Core Basis, And Valuation Reflects That

Microchip Technology Bumps Along The Bottom

I’ve been writing for a little while now that I thought the semiconductor rally was ahead of itself, and that between ambitious expectations for a second half bounce, high inventories, shrinking lead-times, and ongoing uncertainty with trade relations with China, there were a lot of factors in play that could blunt the “V-shaped” rally so many investors seemed to be counting on. To that end, I thought Microchip Technology (MCHP) shares were ahead of themselves in the short term back in February, and the shares are now pretty much flat versus that last article.

With Microchip revising down for the fourth time, and blaming it largely on the tariff issue, I wonder if this will be the moment of reckoning for the larger chip space. Either way, I still see some downside risk over the near term. Specific to Microchip, I do like the business and management’s active approach to inventory management and M&A, even if I think they are occasionally too bullish on guidance. High debt is a risk (almost 8x my FY20 FCF estimate), and the shares don’t look like a margin bargain on short-term metrics, but I’d keep an eye on any sell-off, as I think the shares can go higher over the long term.

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Microchip Technology Bumps Along The Bottom

Lundbeck, Like The Dude, Will Try To Abide

Danish pharmaceutical company H. Lundbeck’s (OTCPK:HLUYY) (LUN.KO) first quarter is likely to be pretty much par for the course for the near term – double-digit growth from its portfolio of newer offsets that can’t offset the generic erosion of its old portfolio, with investors hoping for updates on pipeline-building deals.

The multiple misses in the growth portfolio were disappointing, but not entirely surprising given the track record here. The deal for Abide looks somewhat promising, but Lundbeck needs to do quite a bit more to replenish its portfolio, and the clock is ticking with respect to patent coverage on Northera (2021/22) and Trintellix (2026). Given where the shares are, and the risks involved in recharging the portfolio, it’s hard to make a compelling must-own case for these shares.

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Lundbeck, Like The Dude, Will Try To Abide

Quality, Value, And A Little Bit Of Growth - Bank Of America Seems To Offer Quite A Bit

There are some exceptions, of course, but investors who want to invest in U.S. banks today have to make some choices and trade-offs between quality, value, and growth. JPMorgan (JPM) has quality and growth, but not as much value. U.S. Bancorp (USB) has quality and maybe more growth potential than believed, but also not much value. Citi (C) and Wells Fargo (WFC) may offer more value, but quality is certainly an issue with both franchises.

And that brings me to Bank of America (BAC). Bank of America has the scale (#2 overall in deposits and assets) to keep up with the likes of JPMorgan and Wells Fargo in IT investments and drive operating scale, but it also done quite well with expenses and deposit costs without overly compromising loan growth. I don’t wish to position or suggest Bank of America as a scintillating growth story, because it’s not, but management continues to invest in growth opportunities like digital banking and opening branches in new strategic markets, and I believe Bank of America can beat the average large bank in pre-provision profit growth over the next three to five years.

All that, and a stock I think should trade closer to the mid-$30’s.

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Quality, Value, And A Little Bit Of Growth - Bank Of America Seems To Offer Quite A Bit

Wednesday, May 8, 2019

US Foods Appears Back On Track, But Still Reasonably-Priced

Self-inflicted problems took their toll on US Foods (USFD) in 2018, but it looks like those service issues (which impacted fill rates and on-time performance) are behind the company, and it likewise looks as though customer volumes are willing to give the company another chance. Add in ongoing opportunities to drive share-of-wallet with existing customers, penetrate further into the independent restaurant market, and drive more private label adoption, and there’s still a credible case for above-average revenue and profit growth here.

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US Foods Appears Back On Track, But Still Reasonably-Priced

Emerson Stumbles Again On Margins, But The Long-Cycle Story Still Has Appeal

When I last wrote about Emerson (EMR), I tempered some of the undervaluation I thought I saw with the comment that, “… I have some concerns that the shares could underperform as investors look for more exciting stories.” Prior to a recent sell-off, Emerson shares had more or less been drifting around the sector averages, but lagged the likes of Ingersoll-Rand (IR), Honeywell (HON), and Yokogawa (OTCPK:YOKEY). Actual results did show further slowing in the business, but this looks more like a pause than a real shift.

I do think process automation order momentum has probably peaked, but there’s a rich project funnel to deliver on over the next few years, and I think Emerson has meaningfully improved its process automation operations after the Pentair (PNR) deal. Further progress in discrete and hybrid markets would be gravy on top of that. I do have some concerns about the Climate business, but not enough to cancel out what looks like a relatively undervalued opportunity in an expensive industrial sector.

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Emerson Stumbles Again On Margins, But The Long-Cycle Story Still Has Appeal

Advanced Energy Industries Takes A Hit As The Semiconductor Cycle Is Still Sorting Itself Out

I believe Advanced Energy Industries (AEIS) highlights at least some of the risks I've seen in the rally in semiconductor and semiconductor equipment names. Even though the year-to-date performance is still strong (up about 18% as of this writing), the shares have come down about 15% off a recent peak on a combination of weaker first quarter results and guidance, as the market isn't seeing the quick, sharp recovery that investors want to believe is going to happen.

Another weak quarter (or two) remains in play as a risk factor, but I think these shares hold some appeal for more risk-tolerant investors. I don't see any real sign that AEIS is losing traction with its two largest customers (Applied Materials (AMAT) and Lam Research (LRCX)), and I think the long-term outlook and realities of the semiconductor market mean good long-term demand for chip-making equipment and AEIS's components.


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Advanced Energy Industries Takes A Hit As The Semiconductor Cycle Is Still Sorting Itself Out

Infineon Managing To Weaker Assumptions About The Chip Recovery Cycle

With Infineon (OTCQX:IFNNY) being one of the rare semiconductor companies to challenge the rally in chip stocks by pointing to a lower, slower recovery, it’s not surprising that these shares have lagged the SOX this year, not to mention peers like ON Semiconductor (ON) and STMicro (STM). Japan’s Renesas Electronics (OTCPK:RNECY) has been down in the doldrums with Infineon, but then there are some pretty serious margin (and possibly market share) issues at that large MCU player.

At this point, it’s just too soon to tell whether what’s going on at Infineon is an issue of company-specific end-market/customer mix, market share shifts, or a more aggressive approach to dealing with inventory and demand challenges. Given the relative valuations and recent performance trends, I’d probably list my preference order as STM, ON, Infineon, Renesas, but Renesas has a lot of upside if they get back on track, ON has more inventory risk, and Infineon may prove to be managing this downturn the best when it’s all said and done.

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Infineon Managing To Weaker Assumptions About The Chip Recovery Cycle

Wright Medical - No Fuss, No Drama, Just A Good Quarter

I’ve commented more than once recently that Wright Medical (WMGI) needs a run of steady, strong performance, and the March quarter was a good step in that direction. Revenue was good overall, gross margin was strong, and there wasn’t much that really needed explaining. What’s more, looking around the neighborhood, it looks like some of the competitive pressure has eased a bit, giving Wright Medical a smoother runaway to reestablishing reliable double-digit growth and its credentials as the leader in extremities.

With a quarter that offered few surprises, there’s not much to do on a modeling or valuation front, so I still think these shares deserve to trade closer to the mid-$30’s. The stock has been a little weak relative to the device space since the AAOS meeting, but I don’t see any near-term competitive concerns coming out of that meeting. While Wright Medical has earned a reputation for being more volatile than it probably should be, I do think the company is on a solid path now and represents a good GARP (“growth at a reasonable price”) set-up.

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Wright Medical - No Fuss, No Drama, Just A Good Quarter

Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

This is harvest time for Commercial Vehicle (CVGI), as this supplier of seats, wiring harnesses, and other components to the global truck, construction, ag, and mining equipment market is seeing robust demand as companies like Daimler (OTCPK:DMLRY), Volvo (OTCPK:VOLVY), and PACCAR (PCAR) deliver on record Class 8 truck backlogs and healthy medium-duty truck backlogs as well. While Commercial Vehicle is weathering some higher manufacturing costs (wage-driven, primarily), the company is doing a good job of managing costs and maximizing margins.

The “what next” question is very relevant to this stock. I expect a double-digit decrease in sales next year, as plunging Class 8 orders will quickly deplete that backlog, and recent wins outside of trucking and in geographies like China won’t offset it. I’d love to see CVGI put some of its liquidity to work – while management has long talked of wanting to acquire complementary assets, they haven’t done much, and I think acquiring some electrification assets could be money well spent. I do still believe these shares are undervalued, but they’re unfollowed and the shares could languish on a steeper/longer trough in the core truck market.

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Commercial Vehicle Enjoying A Profitable Peak, But Needs To Plan For The Future

Dana Caught Up In Several Cross-Currents

I was puzzled by Dana’s (DAN) valuation back in October, thinking that the shares looked undervalued even factoring in a weaker near-term outlook for light vehicles and an eventual end to the heavy truck boom. Lending some support to my notion that stocks don’t move up just because they’re cheap, the shares are more or less in the same place now (down about 5%), albeit with a steep drop into the close of 2018 and a rally in the interim.

Now Dana is in the middle of that light vehicle slowdown, and heavy trucks in North America are enjoying an extended peak, but orders have been plunging. Meanwhile, heavy off-road machinery has been looking a little wobbly lately. So even though Dana has built up a strong electrification portfolio that management believes will help drive revenue to over $10 billion in 2023, nobody seems to believe that today. With the shares undervalued even at lower long-term growth rates, valuation remains a head-scratcher and I’m increasingly tempted to take a flyer on this name.

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Dana Caught Up In Several Cross-Currents

Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

I can understand why sell-side analysts would see light at the end of the tunnel at Valeo (OTCPK:VLEEY) (FR.PA) and assume it’s an oncoming train. That’s what happens when you miss guidance for two and a half years, offer vague and unconvincing explanations of those misses, and generally make any bulls look foolish. And yet, the markets tend to have short memories if and when companies turn around their performances, so maybe, finally, my bullish thesis on Valeo doesn’t feel so foolish.

I’m not changing any of my core assumptions in any meaningful way, as there’s still a lot of “show me” to this story. Still, 5% revenue growth for a company with a strong hybrid/EV order book (if they can deliver…) and strong FCF growth (if they can deliver…) doesn’t seem out of line, and would support a meaningfully higher share price from here, even after a recent rally that has seen the stock outperform peers/rivals like BorgWarner (BWA), Continental (OTCPK:CTTAY), and Schaeffler (OTC:SFFLY).


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Valeo's Outperformance Relative To Underlying Volume May Be The Start Of The Turn

American Axle Working Through Operational Challenges And A Pessimistic Street

Almost a year ago, I was leery of investing in American Axle (AXL) (or "AAM") ahead of a decline in the auto and light truck sector, even though the valuation was curiously undemanding, and the shares are down a further 20% from that point (with a steeper dive into the end of 2018). Mix and company-specific issues certainly explain some of the relative weakness next to names like Meritor (MTOR) and Dana (DAN), but valuation is curiously weak relative to published sell-side estimates over the next two years.

As was the case a year ago, I'm intrigued by the seemingly low valuation, but it also makes me paranoid as to what I may be missing. I'm not overawed by AAM's mix and its relatively modest leverage to the hybrid/EV migration, but I also believe it will take longer for light trucks to convert to those alternative power sources. I also don't like the high debt level, nor the lack of diversification outside the U.S. (though that doesn't seem so bad right now). This one goes on my watchlist simply because of the curiously low valuation, but I'm still scratching my head as to why that valuation does look so low.

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American Axle Working Through Operational Challenges And A Pessimistic Street

Allison Transmission Remains Hard To Value In An 'EV Someday...' World

What do you do with a very well-run company that enjoys exceptional margins and would still seem to have room to grow share, but is also looking at a possible sea change in its core addressable market that may leave it with much lower content shares and margins? That’s the conundrum with Allison Transmission (ALSN) today; management continues to execute well and generate fantastic margins and cash flows for a commercial vehicle components company, but the advent of electrification in commercial trucks threatens its entire business structure.

I do believe that commercial vehicle electrification is a “when, not if” situation, but that leaves plenty of uncertainty over timing, not to mention content (some commercial EVs will still have transmissions). Likewise, while Allison is investing in EV technologies of its own, it’s unlikely to enjoy the same sort of share and margins, but how big will the change be?

I generally make it a policy to step aside if I don’t feel like I have a great handle on valuation, and that applies here to some extent. I’m really not worried about Allison’s future over the next five years or so, but I’d need a price closer to $40 to coax me in.

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Allison Transmission Remains Hard To Value In An 'EV Someday...' World

Manitex Does Well On Margins, But Orders Bear Watching

In a generally still-healthy construction market, Manitex (MNTX) seems to be doing okay. The first quarter was maybe not quite as robust as some investors may wish to see on the revenue and order lines, but the margin progress was encouraging, and the overall environment for construction-related machinery still seems fairly healthy in North America. A key challenge, and opportunity, for Manitex management remains in the acceleration of the PM knuckle boom crane business, a machinery category that is relatively under-utilized in North America relative to Europe.

Manitex’s better-than-expected gross margin was nice to see, but orders were softer than I’d like. Still, even on the assumption of long-term FCF margins averaging out in the mid-single-digits, the shares look undervalued today.

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Manitex Does Well On Margins, But Orders Bear Watching

A Recent Rally Has Soaked Up South State Bank's Undervaluation As It Repositions

I was a little surprised to see South State Bank (SSB) outperform so well since my last article – up more than 25%, beating regional banks by about 5% overall and a more direct set of peers by about 10%. While I thought the shares were undervalued on a longer-term basis, the Street isn’t famous for taking a longer-term perspective, particularly when near-term earnings growth potential is more limited by the bank’s ongoing restructuring efforts. Still, with many large regional banks announcing plans to expand into the U.S. Southeast, and the bank close to the end of that repositioning process, I suspect this outperformance could be due in part to expectations that a regional bank may look to M&A to accelerate its expansion plans.

I do think South State could make an attractive buyout candidate; while the loan-to-deposit rate isn’t perfect, the bank has an attractive core deposit franchise in attractive growth markets like Charleston, SC, and Charlotte and Raleigh, NC. While a bank like U.S. Bancorp (USB) could offer as much as a 20% premium in a cash deal and still see some accretion, South State’s valuation isn’t exactly cheap on a stand-alone basis. Much as I like the long-term story at South State, with a lot of smaller banks offering 10%-20%-plus discounts to fair value today, it’s hard to call this a must-buy at this price.

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A Recent Rally Has Soaked Up South State Bank's Undervaluation As It Repositions

Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

These aren’t great times for the auto sector, with U.S. auto sales down more than 5% in April, European registrations down 4% in March, and Chinese auto sales down 11% in the first quart of 2019. Against that backdrop, it’s not really surprising that BorgWarner (BWA) is seeing revenue and margin contraction.

Looking out further, though, BorgWarner’s backlog suggests that the company’s leverage to hybrids and EVs is increasing as expected, and while there is still uncertainty as to what the margins on that business will look like, I believe today’s price discounts an excessively pessimistic view. The numbers probably won’t start looking better for BorgWarner until the second half of 2019, and there is still some risk there, but I think longer-term investors may want to dig in and do their due diligence on this underrated powertrain player.

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Look Past The Current Auto Weakness, And BorgWarner Has Investment Appeal

DBS Group Executing Well, But Caught Up In U.S. Rate And U.S.-China Concerns

DBS Group (OTCPK:DBSDY) management continues to do well relative to what it can control – spreads are okay, pre-provision profits have been growing, credit quality remains strong, and there’s a cogent plan in place to grow across multiple markets. The “but” is that there’s next-to-nothing management can do about the Singaporean government’s housing cool down policies, let alone the U.S. rate cycle and the trade tensions between the U.S. and China – the latter two issues seemingly weighing more heavily recently.

DBS shares haven’t done that well since I last wrote about the company, though they’ve done better than other Singaporean banks and most other banks in its operating theater. Although a credit loosening cycle in the U.S. and increased trade tensions could create some near-term challenges, I like the long-term outlook for mid-teens ROEs, higher dividends, and mid-to-high single-digit earnings growth. I still believe fair value lies above $90, so I think this sell-off is a buying opportunity for investors who can live with the risk of elevated near-term volatility.

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DBS Group Executing Well, But Caught Up In U.S. Rate And U.S.-China Concerns

ING: Steady And Underappreciated, Or Boring And Underwhelming?

The best I can say about ING Groep (ING) and its performance over the past eight months or so is that the shares have at least beaten its European peers … albeit only by a few percentage points and the shares are still down over that time period. For better or worse, the story remains the same – steady execution, but uninspiring growth in a low-rate environment where credit costs probably can’t get much better.

There are certainly areas where ING could look to improve, including fee income, but I think the company’s credit and capital position are healthy, and while I don’t expect ING to be a scintillating growth name, I think its underlying growth potential is still undervalued by the market. I’ve cut back my growth expectations on a weaker overall outlook for Europe and the banking cycle, but if 3% to 4% long-term core growth is still a credible target, these shares should trade in the mid-to-high teens.

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ING: Steady And Underappreciated, Or Boring And Underwhelming?