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

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

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?

Société Générale: Beats On Capital, But The Growth Costs Are More Evident

With banks there’s a tradeoff between shoring up capital and achieving earnings growth – when companies have to build up their capital position, it comes at the cost of growth, and that’s what’s happening with France’s Societe Generale (OTCPK:SCGLY) now. Years of underperformance in core banking, and financial services, coupled with large legal settlements, have left the bank’s capital in precarious shape, forcing management to shore up capital at the cost of growth.

The good news is that expectations are exceptionally low now. If SocGen can somehow generate just low single-digit earnings growth without having to conduct a capital raise, the shares are meaningfully undervalued. The bad news is that SocGen has been losing share in France, chronically missing its own internal targets, and may find itself forced to sell one of its more attractive assets to shore up capital if this latest plan doesn’t work out.

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Société Générale: Beats On Capital, But The Growth Costs Are More Evident

Parker-Hannifin Not Quite Paused, But Growth Has Slowed

Parker-Hannifin's (PH) fiscal third quarter (calendar first quarter) earnings reflected a lot of my concerns about slowing short-cycle markets, with management noting weakness in "general industrial", machine tool, autos, upstream oil & gas, power gen, and semis - something I've been outlining for a little while now. What's more, with destocking continuing through the June quarter and the possibility for an intensified tariff trade war with China looming, I'm still concerned that the short-cycle markets could decelerate further, even though Parker-Hannifin reported some improvement in orders in April.

I thought Parker-Hannifin shares offered some interesting upside when I last wrote about them if at the cost of some elevated short-term risk. The shares have outperformed the broader industrial space a bit since then, and my feelings about the stock remain more or less the same - this is one of the relatively rare reasonably-priced (if not slightly undervalued) quality industrials, and although I do think there's economic cycle risk over the next 12-24 months, I think this is a solid name for long-term ownership.

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Parker-Hannifin Not Quite Paused, But Growth Has Slowed

AerCap Still Not Getting The Full Benefit Of Its Quality Operations

I still think the shares remain meaningfully undervalued, but I can’t really complain about the performance of AerCap (AER) shares since my last update, with the shares beating the market with a 16% return – slightly outdoing Air Lease (AL) and outperforming Aircastle (AYR) and Fly Leasing (FLY) by wider margins. The trailing one-year performance still isn’t that robust, though, and there appear to be some ongoing worries about increasing competition in the aircraft leasing space, airline bankruptcies, and the issues around the Boeing (BA) 737 MAX aircraft.

Although delays in the MAX program will be a hassle, it’s a hassle that AerCap can manage. Moreover, I’m not concerned about competition, as few lessors can replicate AerCap’s model and I expect most of the new entrants to scrum with each other over business AerCap really doesn’t want. Although a global recession would be a risk, the long-term trends driving air traffic seem quite resilient and I think AerCap is undervalued below $60.

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AerCap Still Not Getting The Full Benefit Of Its Quality Operations

Low Expectations And Portfolio Transformation At SPX Flow

When I last wrote about SPX Flow (FLOW), I wasn’t too enamored with the stock, as the company’s orders seemed underwhelming relative to the cycle and I didn’t like the near-term prospects for growth and margin improvement. Since then, the shares are down about 10% (including a strong post-earnings move), lagging the broader industrial sector by close to 20%, not to mention peers/rivals like Alfa Laval (OTCPK:ALFVY) and Flowserve (FLS) – in fact, until this post-earnings spike, the shares had been lagging troubled GEA Group (OTCPK:GEAGY), and that’s really not a good thing.

I don’t believe SPX Flow is a vastly better business today than a year ago, but I have seen progress on margin and portfolio improvement efforts, the most obvious example being the decision to look to divest the lower-margin Power & Energy business, but also including subtler moves like deprioritizing larger dairy orders. What’s more, the expectations embedded in the business seem quite low. I do have some concerns that this could be a value-trap, but the value proposition is interesting.

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Low Expectations And Portfolio Transformation At SPX Flow

Sensata Still Drifting As Auto And Industrial Markets Slow

When I last wrote about Sensata Technologies (ST) in the summer of 2018, I talked about this leading manufacturer of sensors for the auto, off-road, aerospace, and industrial markets as seemingly stuck between the mid-$40’s and mid-$50’s as bulls and bears duked it out over the risk of slowing auto and industrial markets versus the opportunities provided by content growth and further operating leverage.

Not much has really changed, with the shares lagging the broader industrial sector since then and offering some buying opportunities on dips to and below $45. At today’s price in the low $50’s, I look at Sensata and sort of shrug. I like the business and the company, but the valuation isn’t a can’t miss, and while I think the risks in the auto sector are well-known, I’m not sure the same is true for the off-road and industrial parts of the business. I can certainly argue for upside to the mid-to-high $50’s, but I can also argue for the mid-$40’s, so I’m not inclined to step up here.

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Sensata Still Drifting As Auto And Industrial Markets Slow

MaxLinear Now Getting Plenty Of Benefit Of The Doubt

It wasn’t so long ago that I was writing pieces on MaxLinear (MXL) with the theme of “just be patient … it won’t always be that bad”. The shares have since enjoyed a great year-to-date run (up around 45%), beating the SOX by over 10% and beating Broadcom (AVGO) by 20%, and also beating Inphi (IPHI) until just a few days ago. Now I feel like the story is switching more towards “whoa, folks … lets not go crazy here.”

I still like MaxLinear’s leverage to 5G and hyperscale data center with its transceivers, power management, and integrated DSP, driver, and TIA PAM4 chips, and I believe next year will see an acceleration into multiple years of double-digit revenue growth and good margin leverage. Moreover, the Connected Home business seems stable and should improve. The obvious “but” is valuation; I can make a bull-case argument that MaxLinear isn’t totally played out, but expectations are definitely much healthier now and the 5G/hyperscale opportunities are by no means overshadowed by the Connected Home troubles now.

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MaxLinear Now Getting Plenty Of Benefit Of The Doubt

FormFactor Not Seeing A Sharp Turn Yet

I liked FormFactor (FORM) around the start of the year, as this market-leading wafer-testing company is driven by chip production volumes, not semiconductor equipment capex budgets, and ongoing migrations to more complex chip designs and packaging. Since then, the whole chip market has done better than I’d expected on renewed enthusiasm that the cycle correction will be short and fairly shallow, and FormFactor shares are up more than a third since that last article even with a pretty nasty post-earnings fall.

While I do still like the basic story at FormFactor, I think there’s still too much bullishness around the chip recovery story. With mixed reads from probe companies like FormFactor and Micronics and my own concerns that the correction process could take a little longer, I’d be careful about jumping in right away on this post-earnings decline.

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FormFactor Not Seeing A Sharp Turn Yet

3M's Acquisition Of Acelity Is Too Much 'Business As Usual' For Me

The more things change, the more I guess they stay the same. After a sharp drop in the wake of its worst quarterly report in years, and growing investor concern about the direction and fundamental growth capacity of the business, 3M (MMM) has chosen to spend almost $7 billion of shareholders’ money on a medical technology business that isn’t growing all that fast and doesn’t have exceptional margins. I can see how this deal for Acelity could produce above-average synergies and become a stronger deal over time, but to me, this seems all too familiar of a deal with 3M overpaying for an asset that doesn’t really add much of what the company really needs.

Worse still, 3M announced that they’ll be pulling back on share buybacks. Coupled with concerns about possible long-tail pollution-related payouts, this is not what 3M’s generally more conservative investor base wants to hear, and I’m concerned that future divestitures could further compromise short-term FCF generation capacity. I don’t believe this fundamentally alters the 3M investment argument (yet…), but it’s another thumb on the wrong side of the balance scale.

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3M's Acquisition Of Acelity Is Too Much 'Business As Usual' For Me

Lackluster Growth And Valuation At nVent, But Balance Sheet Flexibility Remains

In a mixed quarter for industrials, nVent's (NVT) mixed quarter seems like par for the course to me. By no means was it a disaster, and the price-driven margin uplift was encouraging, but there's not much reason to expect robust growth in the near term, and after a moderately sector-beating performance since my last update, the valuation is more in the range of "okay, I guess…" now. I don't recommend selling core positions on the basis of quarter-to-quarter vibrations, but with some concerning signs regarding end-market growth across the industrial sector and relatively elevated valuations, I'd wait for a better entry point for new money.

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Lackluster Growth And Valuation At nVent, But Balance Sheet Flexibility Remains

IPG Photonics Takes A Volume Hit From Weaker Margins, And Competition Is Still A Real Threat

Even relative to the strong rally in industrials and the market in general so far on a year-to-date basis, IPG Photonics’ (IPGP) performance has been exceptional, as investors are clearly willing to look ahead and build in a recovery for machine tools later in 2019. I think this enthusiasm may be overdone, though, as although the market in China does indeed appeal to be stabilizing, competition continues to be a long-term threat to IPG’s volumes and margins.

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IPG Photonics Takes A Volume Hit From Weaker Margins, And Competition Is Still A Real Threat

Hubbell Outperforms On Margins, But Growth Is Going To Slow

As a later-cycle play, Hubbell (HUBB) shares have done only so-so in the market since my last update, underperforming the broader industrial category, as well as other electrical product companies like Schneider (OTCPK:SBGSY) and nVent (NVT), but doing comparatively better than Eaton (ETN), Acuity (AYI), and ABB (ABB) over that time. While Hubbell does seem a little ahead of pace on margin improvement, and I believe management's outlook for market growth as 2019 rolls in is quite realistic, slowing growth in future quarters may limit some of the share price potential.

I don't prefer Hubbell to Schneider or Eaton, but the shares do seem undervalued at a time when many industrials seem richly valued. While I think Hubbell's lower growth profile and still-not-so-impressive margins may remain an issue for the share price performance, I do still see some value here at a time when that's harder to find in industrials and the market in general.

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Hubbell Outperforms On Margins, But Growth Is Going To Slow

Inphi Validating Its Growth Stock Credentials, With PAM About To Ramp

Although I liked Inphi (IPHI) as a higher-valuation/higher-risk pick back in September, I didn’t quite expect the 35% move the shares have logged since then. While Inphi has done quite a bit better than the SOX, and would-be competitor MACOM (MTSI), MaxLinear (MXL) has more or less kept pace as investors get more bullish about the upcoming ramp of PAM chips in high-end data centers.

As things sit now, I still love the opportunity Inphi has in data centers, not to mention an arguably under-appreciated opportunity in 5G backhaul. The valuation more fully reflects that, though, and so while I do think Inphi is capable of additional beat-and-raise quarters, I can’t really say this is a situation where the Street is significantly underpricing the near-term opportunity. That said, looking a few years out at what this company could do in terms of revenue, margins, EBITDA and so on, there could still be further upside for shareholders.

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Inphi Validating Its Growth Stock Credentials, With PAM About To Ramp

Alnylam Posts Another Encouraging Quarter Early In Onpattro's Launch

As difficult as it is to get a drug from the lab to the market, that's only part of the formula for success for biotechs - successful commercialization is every bit as important, and commercialization can have its own frustrating bumps along the road. While I see nothing wrong with the launch trajectory of Alnylam's (ALNY) Onpattro, it would seem that investors were spooked by quarter-to-quarter lumpiness in some of the launch metrics.

I continue to believe Alnylam is an appealing albeit high-risk investment opportunity. Onpattro is off to a good start, and the company should see a series of needle-moving regulatory approvals and commercial launches over the next few years, with more than a couple drugs holding $1 billion-plus revenue potential.

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Alnylam Posts Another Encouraging Quarter Early In Onpattro's Launch

Ingersoll-Rand Makes A Big Move, And The Street Very Much Approves

I’ve liked Ingersoll-Rand (IR) for a little while and thought it was still one of the better ideas in the multi-industrial space back in late January, but I wasn’t expect quite this level of performance, as Ingersoll-Rand has outdone even Honeywell (HON), though still lagging Atlas Copco (OTCPK:ATLKY). Of course, much of that outperformance was driven by the announcement that Ingersoll-Rand would be merging its Industrial business with Gardner Denver (GDI) in a Reverse Morris Trust; although I thought something in the direction of a break-up was possible, it wasn’t my base-case assumption.

The Street by and large wanted a Climate-only Ingersoll-Rand and that’s what they’re getting, with the added benefit of a healthier valuation now assigned to the compressor-driven Industrial business. Although I like the prospects for both Climate-only IR and the soon-to-be new Gardner Denver, I can’t say that there’s anything like the same unappreciated potential in the shares now as a few months ago.

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Ingersoll-Rand Makes A Big Move, And The Street Very Much Approves

Rexel Finally Getting Some Love

It has been a little lonely at times being a Rexel (OTCPK:RXEEY) [RXL.PA] bull, and not just because this is an almost-unknown name to U.S. investors (and the U.S. ADRs have very low day-to-day liquidity). Although the company has been making meaningful progress in restructuring its go-to-market effort (becoming more multi-channel and digital-friendly and meeting the customer on the customer's terms) and repositioning its U.S. business, the quarter-to-quarter financial results haven't always showed unequivocal progress.

I still believe there's more upside to be gained from Rexel's restructuring efforts, growth in commercial and industrial electrical installations, and some recovery in ABB's (ABB) GEIS business (a major supplier, particularly in the U.S.). I've trimmed back my estimates on an abundance of caution (maybe an overabundance) due to weakening European PMI numbers, but I still see double-digit upside on the back of low single-digit long-term revenue growth.

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Rexel Finally Getting Some Love

Lexicon Pharmaceuticals Languishing In The Dog House

Fool me once, shame on you. Fool me twice, shame on me. Disappoint investors over a period of decades? Well, then you’re Lexicon Pharmaceuticals (LXRX). Yes, that’s snarky and mean, and not everything that has happened to this company is the fault of management, but in terms of real world, on-the-ground results, just look at a 10-year chart next to one of the biotech indices like the IBB (IBB).

Lexicon once again posted disappointing results for its only commercial drug, and offered no additional clarity on the path forward for the Type 1 diabetes indication of Zynquista. Although the European approval is nice-to-have, Lexicon’s economics are best on the Type 1 U.S. indication, and that’s the needle-mover in my model. While Lexicon does have some early-stage clinical compounds worth following, it’s going to take time for this story to turn around.

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Lexicon Pharmaceuticals Languishing In The Dog House

Maxim Integrated's Earnings As Expected, But Market Valuation Seems Too High

Like other chip stocks, Maxim Integrated Products (MXIM) has ridden the “what, me worry?” trend that has driven semiconductors higher this year, even though inventories remain elevated and demand hasn’t recovered as much as hoped (at least not yet). I thought Maxim looked too pricey back in mid-February, and though the shares have lagged the SOX and other analog companies like NXP Semiconductors (NXPI), Analog Devices (ADI), and Microchip Technology (MCHP), I’m not calling that a successful call given that the performance relative to the broader markets has still been pretty good.

I like Maxim’s decision to under-ship relative to apparent demand (reducing channel inventories), and I still like longer-term opportunities in autos, industrial automation, and 100G optical, but I’m also still concerned about the company’s short-term vulnerability to weaker auto and industrial trends, as well as its comparatively lower leverage to 5G and data centers. Maxim pays one of the better dividends among its peers and I have no long-term quality concerns here, but I’m not chasing these shares, particularly when there are some other, more reasonably priced options.

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Maxim Integrated's Earnings As Expected, But Market Valuation Seems Too High

Crane's Sluggish Growth Guidance And First Quarter Head Fake Won't Help The Shares

Crane's (NYSE:CR) first quarter results, and the reaction to them, sort of remind me of what happens when you have a smart dog and you do the "pretend to throw the ball but actually don't" trick. While the growth in this first quarter looked very strong, it's not going to last, and the underlying trends in the business are more in the range of "okay" than exciting.

I have very mixed feelings on Crane as an investment. The growth and margin outlook, not to mention the growth and margin history, aren't exceptional, and it can be challenging to generate above-average long-term gains from average performers. On the other hand, Crane is leveraged to what should be comparatively healthy markets, and management has plans in place to improve the margin profile. With the shares more than 10% below my fair value, it's hard not to consider this name more closely.

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Crane's Sluggish Growth Guidance And First Quarter Head Fake Won't Help The Shares

Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

When I last wrote about Lattice (LSCC) I said “clearly the word is out” on this company’s turnaround/restructuring plan, but the shares are up another 25% since then as investors continue to wake up to the significant opportunities for Lattice’s low-power FPGAs in emerging applications like 5G and edge AI inference. With FPGA competitors like Xilinx (XLNX) and Intel (INTC) focusing on much different products and markets, and product performance challenges with would-be competitors from the MCU space, I like the set-up for Lattice over the next three to five years.

What I don’t like is the price. Even factoring in a significant revenue and margin ramp, it is difficult to call today’s price a bargain. While there is room for Lattice to exceed even bullish expectations, and investors love semiconductor growth stories (as seen with IoT-driven Silicon Labs (SLAB) ), I’m not inclined to chase the shares at this point.

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Lattice Semiconductor Posts A Good Quarter, But The Bigger Story Is Still Building

Eaton Keeping Its Ducks In A Row And Still Undervalued

In the context of my general view of "long-cycle good, short-cycle bad", Eaton's (ETN) performance was largely as I expected in the first quarter. The stock performance also continues to support my general idea that Eaton, along with Honeywell (HON) is a better-than-average choice right now, as the shares have outperformed its industrial peers since the fourth quarter report (though not keeping pace with Honeywell!).

I still have my worries about shorter-cycle industrial markets, but I think Eaton's broad exposure to a wide range of end markets across a wide range of geographies helps insulate it somewhat, and I think the company is well-placed to benefit from growth opportunities in areas like data centers, aerospace, and perhaps some renewed vigor in oil & gas. The shares aren't dramatically cheap but still offer relatively decent upside in a sector where a lot of names have gotten pricey and where expectations have gotten more and more demanding.

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Eaton Keeping Its Ducks In A Row And Still Undervalued

Cognex Hammered On Ongoing Weakness In Core Markets

Wall Street is weird sometimes. Institutional investors spend remarkable amounts of time collecting data, and yet can still be flat-footed at surprising times. Given the slowdown in factory automation reported by companies like ABB (ABB), Rockwell (ROK), and Schneider (OTCPK:SBGSY), not to mention commentary on the auto and electronics markets from other automation providers like Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY), it should have been pretty clear that Cognex (CGNX) would see some real weakness here.

Granted, Cognex’s guide for a year-over-year decline in revenue in 2018 was surprising, so there’s certainly validity to being surprised by the magnitude of what’s going on at Cognex. What’s more, I think you can ask some very relevant questions about whether 2018/2019 is a dip in an otherwise strong investment cycle, or whether 2017/2018 was more of a “supercycle”-like plateau that gave investors a false sense of the near-term market opportunity for machine vision.

I’m still bullish on the machine vision opportunity and Cognex’s long-term opportunities, but guidance for 2020 later this year will be critical. In the high $40s Cognex isn’t a must-buy, and I previously said I was looking for a mid-$40s buy-in price before this revision, but it’s a tempting idea now.

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Cognex Hammered On Ongoing Weakness In Core Markets

Fortive's Valuation Already Assumes A Lot Of Improvement

Spun off from Danaher (DHR) and operating according to a broadly similar business philosophy, Fortive (FTV) has long enjoyed a benefit of the doubt with the Street, and that seems to be even more the case today. I like Fortive, but I’m surprised at how willing the Street is in this case to overlook fairly meaningful short-cycle exposure, broadening (or loosening) M&A standards, and a rich valuation for a company that doesn’t (yet) have the sort of recurring revenue mix or margin structure of companies like Danher or Roper (ROP).

I have little doubt that I’ll hear from Fortive shareholders for those comments, but so be it. Like I said, I like this company, and I like the direction it's heading – the premiums management is paying for M&A concern me, but I agree with the strategic rationales for the deals they’re doing. With the implied return looking pretty similar to Danaher and Roper, I’d rather overpay for those two than Fortive at this point in time.

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Fortive's Valuation Already Assumes A Lot Of Improvement