Schneider Electric Reassures On Margins, But Macro Remains A Risk

Schneider Electric (OTCPK:SBGSY) has continued to do reasonably well, slightly outperforming the broader industrial group since its first quarter earnings release and pulling ahead of the group on a trailing twelve-month basis. With the company’s Wednesday investor day in the books, the company took the opportunity to reiterate and further explain its margin improvement targets, as well as outline some key longer-term growth opportunities like data centers and smart factories.

I liked Schneider before, and I still like it now, though valuation is more “okay” than exciting. While success on its margin improvement efforts could drive another point on the forward EV/EBITDA ratio, the near-term trading is likely to be more concerned with the macro environment, as Schneider is vulnerable to a slowdown in Europe, decreased capex in China, and a slowing U.S. market.

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Schneider Electric Reassures On Margins, But Macro Remains A Risk

MTN Group Making Operational Progress, But Macro Challenges Loom Large

MTN Group (OTCPK:MTNOY) shares have certainly recovered from the panicked levels of September 2018 as investors have had a chance to digest the real likelihood of the company having to make significant payments (again) to Nigeria’s government, as well to observe the real progress that the management team has been making with the business.

With the shares up more than 50% from my last article, sentiment has improved, but there are still serious ongoing uncertainties about the business in Nigeria, as well as the possible impact of sanctions (or worse) against Iran. On the other hand, management has been delivering on goals like increased data usage, expanded fintech usage, and monetization of non-core assets. MTN Group shares continue to trade at a discount to their fair value, but investors need to be aware of the above-average macro risks that seemingly always accompany the story.

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MTN Group Making Operational Progress, But Macro Challenges Loom Large

Bimbo Has Been Outperforming As Margins Improve

It took longer than investors wanted, but the last couple of quarters have finally shown the margin improvement investors have been waiting for in Grupo Bimbo’s (OTCPK:BMBOY) U.S./Canadian operations. Unfortunately, top-line momentum has been fading in both Mexico and U.S./Canada, and management has acknowledged limited capacity for price increases.

I thought Bimbo was undervalued back in June of 2018, and I think the share price outperformance since then has been reasonable. I still think the shares are undervalued, particularly if management can get its Latin American and EAA operations on better footing, but the discount to fair value isn’t as large anymore and it’s hard for me to be as bullish on this stock relative to the underperforming Gruma (OTC:GMKKY).

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Bimbo Has Been Outperforming As Margins Improve

Challenges In The U.S. Weighing On Gruma

Mexico’s Gruma (OTC:GMKKY) may be defensive insofar as it is a leading food company and a leading player in tortillas and corn flour in the U.S., but “defensive” doesn’t mean immune to share price declines. Largely due to weaker results in the U.S. business, Gruma shares have lost about 13% of their value since I last wrote about the company – a decline that seems outsized relative to the actual erosion in performance and expectations.

Gruma is well-run and has room to grow its business in both Mexico and the U.S., but it’s not a particularly dynamic company and it’s hard to see what would shift sentiment quickly. Steady execution will bring the Street around in time, yes, but that could take several quarters. More clarity on management’s priorities for free cash flow could help, particularly given the concerns that the company will make value-destroying acquisitions. This looks like a name for investors who want to shop in the bargain bin, but sentiment is lousy with the stock at four year-plus lows.

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Challenges In The U.S. Weighing On Gruma

Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

As the complexity of chip design continues to intensify, it's requiring more and more R&D from semiconductor equipment companies to keep pace, and that is making scale a more significant competitive factor - memory, foundry, and logic companies want "partners" (and yes, I use quotations deliberately there) that they can trust to deliver the goods, and that's making it harder for small players to stay in game. To that end, the combination of Rudolph Technologies (RTEC) and Nanometrics (NANO) announced earlier this week certainly makes some sense as a way for both companies to stay competitive in the process control/metrology/inspection markets they serve.

Whether the two companies will achieve their synergy goals from the deal is, of course, an open question now. The expense synergy targets look reasonable at first blush, but integrating operations will still offer challenges and the revenue synergies may prove harder to achieve than it would seem at first blush. For me, this is a "don't love it, don't hate … but I get it" sort of transaction, and the new Rudolph (the surviving entity) will be a name worth watching as the semiconductor equipment (or SCE) space recovers.

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Rudolph And Nanometrics Hoping To Unlock A Little M&A Synergy Magic

Better Execution At Natural Grocers Counterbalanced By A Tougher Operating Environment

These are tough times to be in the grocery business. With intensifying competition from newer entrants like Aldi and Lidl, steady pressure from Walmart (WMT), and growing online sales, it's hard for everybody, and it's even harder for organic/natural-focused grocers like Natural Grocers (NGVC) and Sprouts (SFM) as "regular" grocers increase their organic assortment and continue to pressure pricing.

Natural Grocers shares have fallen 40% since my last update, and the company is now largely uncovered (two analysts currently have published estimates). While the company has not done quite as well as I'd hoped six months ago in terms of boosting margins, it looks like a tough macro and a negative sentiment toward the sector has more to do with the underperformance. I do see the shares as undervalued now, but the grocery space is getting more and more challenging, and Natural Grocers has relatively less room for swallowing higher COGS than its peers/rivals.

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Better Execution At Natural Grocers Counterbalanced By A Tougher Operating Environment

Ongoing Improvements In Rail Sweeten Cosan's Story

I liked Cosan Ltd. (CZZ) roughly a year ago, and between significant ongoing improvements in the rail business and a buyback at the holding company level, the shares have risen about 80% since then – outperforming the local performance of both Cosan SA (CSAN3) and Rumo (RAIL3), to say nothing of peers and rivals like Adecoagro (AGRO) and Sao Martinho.

Cosan has taken a “hunker down” approach to the current weak environment in sugar, while continuing to grow the retail fueling business and focusing considerable attention on the rail assets. The valuation discount for Cosan Ltd. has shrunk noticeably, and with that management may feel freer to invest its cash flow into growth (instead of buybacks), something management has made clear would be their preference. Although I still think Cosan is a very well-run company and a great collection of assets, I don’t see the same striking discount to fair value as before.

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Ongoing Improvements In Rail Sweeten Cosan's Story

Strong Productivity And Asset Management Bode Well For SLC Agricola

It's been a while since I've written about SLC Agricola (OTCPK:SLCJY), and the shares have had quite a ride since then, trading up as much as 30% relative to the price at that last article before starting a downward slide that now has the shares trading about 20% below where they were last year. While they're all different companies, that net performance largely mirrors the disappointing performance at Adecoagro (AGRO) (which does some farming, but is predominantly a sugar/ethanol company), and significantly lags the performance of other Brazilian ag/sugar/ethanol players like Cosan (CZZ), Sao Martinho, and BrasilAgro (LND).

Commodity companies are difficult in general, and agricultural commodity companies are even more difficult given the significant impact local/regional weather can play (among other factors). At SLC, though, I think the company's consistent superior productivity must factor into the valuation as well as management's strategy to go asset-lighter and conduct more sale/leaseback transactions. I see fair value in the $5.25 to $6.25 range, though I would note the liquidity on the ADRs isn't great.

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Strong Productivity And Asset Management Bode Well For SLC Agricola

Adecoagro Continues To Underperform Despite A Respectable Underlying Business

Adecoagro (AGRO) has been a frustrating name for quite some time, and one where nobody has really made any money on a long-term basis for the better part of three years. All of that comes despite a very efficient sugar/ethanol business, a low-cost farming operation, and a land bank that has consistently yielded healthy premiums to the appraised values. Weak sugar prices and volatile crop prices continue to do their damage, though, and it will take a little while longer before investments made into the rice and dairy businesses provide any real benefits.

This year (2019) will likely be the peak capex year for the company’s five-year capex plan, a plan that management believes will lead to EBITDA of around $400 million and FCF of $200M on a run-rate basis by the end of 2021. The Street continues to price in far, far less than that, though. I continue to believe that Adecoagro is undervalued on a long-term basis, but at some point it is fair to ask just how long investors can be expected to wait for that value to show up in the share price.

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Adecoagro Continues To Underperform Despite A Respectable Underlying Business

The Street Still Highly Skeptical On AxoGen's Growth Story

It’s rough for investors when institutions change their mind about growth sectors, and the performance of some smaller high-growth med-techs over the past year illustrates that, with Abiomed (ABMD), AxoGen (AXGN), Avanos (AVNS), Inogen (INGN), and Nevro (NVRO) among some of the names that are down substantially from a year ago as the market has shifted away from what was at the time a long-term peak valuation for the sector.

Of course, it’s not just sector allocation that matters, and AxoGen has had some of its own challenges, including a late 2018 short report that rattled investors, a miss in Q4, an enrollment expansion in a key clinical study, and ongoing uncertainty about the real size of the peripheral nerve repair market and AxoGen’s ability to emerge as a long-term winner.

I’ve chosen to shift to much more conservative modeling assumptions, including lower sales force productivity, more competitive pressure, and a slower path toward converting surgeons into active users of nerve conduit products. Even with those changes, though, I still believe AxoGen can generate better than 20% long-term revenue growth and support a fair value in in the $30’s.

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The Street Still Highly Skeptical On AxoGen's Growth Story

Core-Mark Achieving Better Leverage, But Volatility And Valuation Are Issues

Wholesale distribution isn’t that volatile of a business, but looking at Core-Mark (CORE) shares, and particularly the overreactions around earnings reports, you’d think this was a biotech, or at least a popular trading target. In any case, while the company does appear to be back on track as far as leveraging its infrastructure and driving better margins go, the share price isn’t a particular bargain today. Given how these shares have traded over the last few years, though, it may be worth keeping on a watchlist so as to buy after another market freak-out.

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Core-Mark Achieving Better Leverage, But Volatility And Valuation Are Issues

American Eagle Hit By Market Turbulence

My late December call on American Eagle (AEO) had been working out okay, with the shares up a market-beating 25% into early May, but tariffs and growing concerns about comps and margins across the sector have weighed heavily on the shares (as well as the shares of peers like Abercrombie & Fitch (ANF) and Urban Outfitters (URBN)), and AEO now sits about 5% lower than where it was in late December.

I am concerned about the corrosive impact tariffs could have on gross margins, particularly when the company has been upping its SG&A spending. I'm likewise concerned about the risk of further slowdowns in consumer spending. On the other hand, AEO has established itself as an enduring player in several significant categories (denim especially), and the aerie concept is still growing very well, with a long growth runway ahead of it. I think it's pretty easy to argue for a fair value in the low-to-mid $20s, and possibly even close to $30, but margin pressures need to abate before the shares are likely to be substantially re-rated.

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American Eagle Hit By Market Turbulence

Clinical Data Making A Stronger Case For Nektar Therapeutics

I’ve been what I’d call “cautiously bullish” on Nektar (NKTR) and its lead drug bempegaldesleukin (formerly known as NKTR-214, I’m going with “bempeg” for short); while the idea of a safer form of IL-2 to accompany PD-1 antibodies and other established cancer therapies is appealing, the initial data were mixed and the shares are down almost 50% from when I last wrote about the company.

I don’t think is exclusively a Nektar issue, as the infamous blow-up of Incyte’s (INCY) melanoma drug epacadostat made investors more skeptical about melanoma treatments, not to mention a shift in attention to other categories of cancer drugs. On top of that, it looks like competition is ramping up in the modified IL space, with multiple companies looking to advance drugs into the clinic.

All told, I see Nektar as a more focused company than just a few years ago, with bempeg as the lead drug, but some other promising compounds like NKTR-262 and NKTR-255 in cancer and NKTR-358 in autoimmune disease. NKTR-181 (a pegylated opioid) is much more of a wildcard now, but all told I think Nektar shares trade too low today.

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Clinical Data Making A Stronger Case For Nektar Therapeutics

NuVasive Is On A Better Path, But Remains A 'Show Me' Story

NuVasive (NUVA) has strung together four quarters of above-market growth, but investors remain skeptical as to just how quickly new management can get this business back on a better path. Progress on operating margin expansion has been frustratingly inconsistent, though management has made it clear that 2019 is a re-investment year, and it will take time for the company to recover from the mistakes of the former management team, including supporting/ignoring the wrong product development opportunities.

The shares look undervalued to me on both cash flow and revenue growth, and I believe the company is on its way toward fixing/resolving a lot of the issues that have caused problems over the last few years.

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NuVasive Is On A Better Path, But Remains A 'Show Me' Story

The Penumbra Story Is Coming Along Nicely

Up almost 30% from my last article, Penumbra (PEN) is getting more credit now for its high-quality thrombectomy business and the longer-term opportunities in both stroke and peripheral clots. Although Medtronic (MDT) and Stryker (SYK) have both stepped up their competitive efforts, Penumbra still appears to have the best system available and the market continues to grow as physicians become more aware of the benefits of aspiration (supported by clinical trials and publications).

Valuation is no longer so compelling. Penumbra’s numbers have come in quite close to my above-Street expectations, and neither my estimates nor the Street’s are significantly higher than they were at the time of that last article. With the shares trading at a fair price relative to historical norms for growth med-tech, this is more of a hold/watchlist idea right now.

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The Penumbra Story Is Coming Along Nicely

Komatsu Kicked Around As Management Looks For Weaker Machinery Demand

Not unlike the situation at FLSmidth (OTCPK:FLIDY), investors seem to have fallen out of love with Komatsu (OTCPK:KMTUY), as they pull back from heavy machinery, and particularly those companies tied to the mining industry. It was getting harder and harder to justify Komatsu’s price on the basis of full-cycle cash flow, and with the company setting an operating income target for fiscal 2020 (ending March 2020) that was almost 20% below prior expectations, a lot of worries about mining and construction capex have come home to roost.

It can be a strange thing to go from worrying about over-valuation to the other side of the coin, particularly when you do expect near-term weakness in the business. I do think Komatsu is probably undervalued now on the basis of free cash flow, margins, and returns, but if I were going to take a contrarian position in mining, I think I’d prefer a more productivity-centric story like FLSmidth than Komatsu.

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Komatsu Kicked Around As Management Looks For Weaker Machinery Demand

Pacific Biosciences Stumbles As The U.K. Raises Concerns About Illumina's Bid

While a quick look at their respective market caps would perhaps suggest that Illumina’s (ILMN) acquisition of Pacific Biosciences (PACB) (“PacBio”) is no big deal, regulators in the U.K. don’t seem to agree, as the country’s antitrust office (the Competition and Markets Authority, or CMA) has notified the companies that it will likely move to a Phase II review of the deal. At best, such an extension will delay the close of the deal. At worst, the deal will be rejected and PacBio will be forced to go it alone.

I highlighted this risk in my last article on PacBio, and I can’t say I’m that altogether surprised by it. The good news, such as it is, is that doubts about the deal reaching completion have already been priced in and the company does still have a worthwhile future on a standalone basis. While I believe that the CMA’s objections are off-base and that PacBio now trades below standalone fair value, this remains a situation with above-average risk and volatility.

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Pacific Biosciences Stumbles As The U.K. Raises Concerns About Illumina's Bid

Materion Rewarded For Exceeding Even Bullish Margin-Improvement Assumptions

I’ve commented many times over the years that successful turnarounds, particularly when the company has some meaningful moats, can significantly exceed expectations. That’s certainly been playing out at Materion (MTRN), as the company’s restructuring efforts – including a more lucrative product mix and a shift toward a more variable cost structure – have paid off better than the Street or I expected. With that, the shares are up more than 20% over the past year – significantly outperforming kinda/sorta comps like Allegheny (ATI), Carpenter (CRS), and Johnson Matthey (OTCPK:JMPLY).

I’m reluctant to just assume that Materion can’t find still more ways to improve itself, but I’m already valuing the company on the assumptions that 2019 EBITDA margin will reach a new peak (and continue to improve) and that FCF margin will reach a new peak in 2020 (and continue to improve). On the other hand, these improvements have come despite weak trends in consumer electronics and auto electronics, and improved revenue growth in a couple of years could unlock even more leverage.

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Materion Rewarded For Exceeding Even Bullish Margin-Improvement Assumptions

Better Execution Leading To Better Valuation For GenMark

I thought GenMark Diagnostics (GNMK) was a high-risk/high-reward opportunity in mid-December, amidst a sharp downturn in the market overall and small-cap med-tech especially, and the shares have rebounded strongly (up almost 50%) since then. While a general sector and market recovery certainly helps, I think GenMark is also helping itself with more consistent management execution and a more credible path to key revenue breakpoints like $100 million, $200 million, and $400 million.

GenMark shares still look undervalued, but this is a competitive space and the company is somewhat late to the game. Although I think the qualities of the ePlex system will help GenMark win slots and drive usage, and I believe the shares are still undervalued below $8, this is still a stock with above-average risks.

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Better Execution Leading To Better Valuation For GenMark

Alaska Air Focusing On Execution, But The Shares Are Lagging

Alaska Air (ALK) enjoys a good reputation for the quality of its operations and management execution, but the "what have you done for me lately?" world of Wall Street doesn't reward that on a consistent basis. To that end, while I had some concerns in my last article about weaker sentiment across the airline sector, Alaska Air has underperformed, largely on what I believe to be concerns about near-term weakness in fares in its West Coast and Hawaiian operations.

Alaska Air's concentration on the West Coast remains a risk factor, but I believe the quality of the operation is still undervalued, and with a significant upturn in free cash flow on the way (barring a major deterioration in the sector), I believe management will be in a good place to return more capital to shareholders. Below $80, I think the shares are worth a look.

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Alaska Air Focusing On Execution, But The Shares Are Lagging

Geely Trying To Stay Between The Lines In A Turbulent Chinese Market

It has been something of a wild ride for Geely (OTCPK:GELYY) [0175.HK] shareholders since my last update. While the shares are up close to 20% since that last article (which was around the time of its 52-week low), the shares were up more than 60% before this recent 30% sell-off on ongoing concerns about the company’s volumes and margins.

I do still believe that Geely shares are undervalued, and I still believe that Geely is going to emerge from the Chinese auto mosh pit as one of the survivors and leaders of the local industry. I also believe, though, that 2019 is going to be a rocky year with considerable uncertainty over U.S.-China trade relations and their impact on Chinese consumer spending and sentiment. I’d really like to see better sales momentum in Geely’s newer offerings before getting more bullish, though timing entry points for this name has always been challenging, given its relatively controversial status (very wide spreads between high/low price targets and estimates for revenue, EBITDA, and free cash flow).

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Geely Trying To Stay Between The Lines In A Turbulent Chinese Market

FLSmidth's Underperformance Seems Overdone

I didn’t really like the prospects of FLSmidth (OTCPK:FLIDY) (FLS.KO) as a long-term hold back in September, but I didn’t expect a nearly one-third drop in the share price, nor the significant underperformance relative to other mining-exposed names like Epiroc (OTCPK:EPOKY), Metso (OTCQX:MXCYY), and Weir (OTCPK:WEIGY). In addition to concerns about an early end to the mining capex cycle, I believe the market has sold off FLSmidth on lingering angst over the company’s weak, low-margin cement business.

While the cement business looks like an “is what it is” situation for the foreseeable future, I think the market is too sour on the mining business and the company overall. FLSmidth is well-aligned with the mining industry’s push towards automation and productivity and I believe copper, gold, and coal prices remain supportive for the business. With the shares more than 20% below fair value, this is a name to consider, but the U.S. ADRs have lousy liquidity and if macro weakness spreads, it’ll likely pressure commodity prices and mining names in the near term.

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FLSmidth's Underperformance Seems Overdone

HollySys Undervalued (Maybe Significantly), But Confounding

HollySys (HOLI) is a case-in-point to what I’m talking about when I say that some otherwise undervalued opportunities just aren’t worth the hassle. Although HollySys has significant growth potential serving China’s automation and rail markets, consistent growth has always been elusive and management’s communication with investors is tragically bad. Considering all of that, and ongoing risks to China’s near-term economic health, I’m not all that surprised that the shares are down more than 10% from my last update on the company.

So is HollySys worth the hassle now? The shares are looking more than 30% undervalued to me, and I do believe the company has strong core capabilities in areas like control technology. I believe there are opportunities for HollySys to take share from the likes of Honeywell (HON), Emerson (EMR), and Yokogawa (OTCPK:YOKEY), while also expanding its portfolio and addressable markets. All of that said, the risks here are high, as management has earned the “doubt of benefit” and really needs to establish credibility with analysts and investors to prosper.

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HollySys Undervalued (Maybe Significantly), But Confounding

Broadcom Looks Undervalued After Resetting Expectations

I’ve been cautious on chip stocks in recent months, primarily because I thought the Street was carrying inflated expectations for a strong second half rebound. Although I can’t say Broadcom (AVGO) has totally de-risked its fiscal second half, nor can I say that there’s no further downside for the global economy and/or chip stock revenue expectations, I think expectations are at a much saner level than they were before, with chip stocks having modestly underperformed the overall market.

I believe Broadcom shares should trade above $300. Moreover, I think management has proven itself over the years as one of the most realistic teams in the space with respect to what drives value in semiconductors. With a strong presence in the data center, as well as a host of other opportunities, I continue to believe this is one of the best-run semiconductor companies, and now it’s trading below fair value.

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Broadcom Looks Undervalued After Resetting Expectations

OMA Delivering Some 'Oh My' On Margins

I thought Grupo Aeroportuario del Centro Norte (OMAB) (or “OMA”) shares looked too cheap back in mid-December as investors rushed to panic about the potential risk to airport concessions/tariffs and air travel volumes in Mexico from the new populist government. Since then, not only has OMA’s traffic held up better than expected (true for Mexico as a whole as well), but OMA has outperformed with respect to growing non-aero revenue and controlling/reducing expenses.

With the 50%+ move in the ADRs, I look at OMA as more of a hold now than an appealing buy. Air traffic is holding up well and there could be more upside in EBITDA and FCF on even better operating leverage, but I’m not inclined to press my luck too far here. A pullback to the mid-$40’s would be a different story, though, and this is a name worth keeping on a watchlist.

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OMA Delivering Some 'Oh My' On Margins

Air Transport Services Group Leveraging Its E-Commerce-Driven Growth Opportunities

With the rapid growth in e-commerce and Amazon's (AMZN) ever-growing logistics needs, Air Transport Services Group (ATSG) continues to look like a relatively below-the-radar name worth considering. Customer concentration is a notable risk, but Amazon appears deeply committed to growing its logistical/delivery capabilities, and Air Transport Services Group's services are invaluable to the DoD as well. Free cash flow will remain difficult to predict on a year-to-year basis, but the underlying profitability of the business appears to be improving and adding A321 conversion capabilities down the road should only help.

Free cash flow modeling is challenging as the year-to-year commitments to growth capex can swing wildly with new contract wins (like the expanded business ATSG secured from Amazon late in 2018), but EV/EBITDA is a little more consistent and suggests worthwhile upside from here.

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Air Transport Services Group Leveraging Its E-Commerce-Driven Growth Opportunities

Wabtec Has To Re-Earn Its Premium, But Valuation Seems Low Relative To Near-Term Expectations

Wabtec (WAB) has certainly lost the benefit of the doubt it enjoyed for so many years, at least in terms of how the market viewed its growth potential and the multiples that growth potential was worth. Between worries about the quality of the business it acquired from GE (GE), management’s ability to integrate the deal, and underlying market/business trends in both freight and transit, expectations are certainly quite a bit lower now than a year or so ago, and the shares have lost about a third of their value since my last article on the company in early October.

Although I think there are still valid arguments for a fair value above $90, there’s a lot that Wabtec has to prove before that will resonate with the Street, and Wabtec needs to deliver some clean quarters before the market will pay 12x or more for forward EBITDA.

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Wabtec Has To Re-Earn Its Premium, But Valuation Seems Low Relative To Near-Term Expectations

Cummins Well-Positioned For The Correction

Cummins (CMI) is enjoying the last few quarters of this heavy-duty truck-driven cyclical peak, but management is already preparing for a downturn in 2020 that will almost certainly lead to one year (maybe two) of negative comps in revenue, EBITDA, and free cash flow. Ex-North America demand and other businesses like Power could help soften the blow, but cyclicality is just part of the story and something that long-term investors need to accept.

I think valuation on Cummins is pretty reasonable today, and I don’t see it as particularly over-valued or under-valued. Certainly there is a risk that end-market demand will correct to a “weaker for longer” cycle than currently expected, but my bigger concern is just how markets tend to treat cyclical stocks; Wall Street is obsessed with growth and Cummins shares may well lag when the reality of the cycle starts showing up in the numbers, even though everybody knows it’s a cyclical company that goes through its ups and downs and still manages to generate strong cash flows and ROICs across the cycle.

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Cummins Well-Positioned For The Correction

Expectations Are Low, But voestalpine Is Getting Squeezed On Costs And The Outlook Is Tricky

If you want more evidence of the challenges facing the steel industry, look no further than voestalpine’s (OTCPK:VLPNY) (VOES.VI) fiscal fourth-quarter results and new guidance from a few days ago. While voestalpine is more leveraged to specialized products and downstream operations than steel producers like ArcelorMittal (MT), the fact remains that steel companies are feeling the squeeze from weaker prices, iffy demand, and rising costs, and it doesn’t sound like those challenges are getting any easier.

With management calling for flat EBITDA in fiscal 2020 and pointing to growing signs of weakness in several key end-markets, it’ll take some time before investors start considering the possibility of better earnings in FY'21 and beyond. Likewise, while the valuation looks low now on both a relative and absolute basis, weakening end-user demand and ongoing cost pressures aren’t going to have investors too excited about buying in ahead of that recovery. I do believe that voestalpine has some long-term appeal here, but investors are going to have to have patience with this one.

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Expectations Are Low, But voestalpine Is Getting Squeezed On Costs And The Outlook Is Tricky

Kirby's Marine Business Recovers, But Energy And Valuation Are Challenges

I thought Kirby's (KEX) marine business was likely to improve when I last wrote about the company in August of 2018, but I also thought the valuation anticipated that. To that end, the shares are about 7% lower than the time of that last article, but there were some pretty significant swings in the meantime, as shares fell almost 30% to their December lows before a meaningful rally. During that period, Kirby's marine business has indeed showed ongoing signs of improvement and recovery, with improved utilization, pricing, and margins in the inland business, and a slower recovery in coastal, but a recovery all the same.

With shares having basically round-tripped in the interim, my feelings on valuation haven't changed that much. In the $70s (or below), this is a good name to consider for its strong position in inland petrochemical barging and the prospects for an improving mix in its diesel engine service business. At today's prices, though, I'm not quite so interested.

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Kirby's Marine Business Recovers, But Energy And Valuation Are Challenges

Hurco Now Definitely In The Down Cycle

There's really no more "if" or "I wonder" about Hurco (HURC) and what's going on in the machine tool cycle - Hurco's April quarter marked the third straight quarter of year-over-year declines in orders, and revenue comps should soon turn negative. Although I think Hurco is faring better than average so far, it's too soon to really tell, and I think investors should expect year-over-year declines in revenue for both this year and next, though I still expect a return to growth in 2021.

Buying into a downturn is tricky. I was pretty underwhelmed by the near-term potential of these shares back in March, and the shares have dropped about 10% since then - lagging not only industrials in general, but also other machine tool companies like DMG Mori (OTCPK:MRSKY) and Fanuc (OTCPK:FANUY). Although I do believe the shares are undervalued, I don't believe the market has really accepted the probability of a weaker-than-expected second half in the U.S. economy, and I see more downside risk for the shares and the market. With at least a couple more quarters of order correction likely, I think there's still risk here, even though longer-term investors may want to keep an eye out for good entry points.

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Hurco Now Definitely In The Down Cycle

Ciena Doing Great In North America; Europe Remains An Opportunity

Between strong deployments from Tier 1 and Tier 2 service providers in North America and healthier trends among enterprise customers than seen by chip companies like Xilinx (XLNX) and Intel (INTC), Ciena (CIEN) had a great fiscal second quarter. Better yet, between a strong competitive position at 800G, ongoing growth in segments like submarine deployments, and opportunities to gain share in Europe, I don’t believe Ciena has exhausted its growth potential.

I’ve been generally bullish on Ciena for a while now, and there are at least some metrics by which the shares are still undervalued. I like to buy stocks like Ciena when they slip below my long-term DCF-based fair value (which is now near $40), and Ciena has been volatile enough that I don’t think it’s entirely unreasonable to think there will be more “buy on a pullback” opportunities. Still, management is executing well on its opportunities, leading to share gains and improving margins.

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Ciena Doing Great In North America; Europe Remains An Opportunity

Stryker Priced Accurately For What It Is - 'The' Best Large Med-Tech

I've made no secret of my abiding respect for Stryker (SYK) and its ability to leverage M&A and disruptive internal R&D to target and deliver on above-average growth opportunities in med-tech. In the roughly seven years Kevin Lobo has been the CEO, the company has spent $14 billion on M&A but has stayed away from "scale for scale's sake" deals in favor of purchasing potentially disruptive assets like Mako, SBI, and K2M, and has managed to deliver organic growth rates (over 7% in Q1) comfortably ahead of its peer group.

Trees don't grow to the sky, but Stryker has growing room. The company is under-leveraged to Europe and emerging markets relative to its peers and Mako continues to drive share gains in knees, while trauma and neuro still offer room for growth. Valuation is still my main hang-up, as I'm not all that excited about the mid-single-digit prospective returns that the stock would seem to offer at today's prices.

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Stryker Priced Accurately For What It Is - 'The' Best Large Med-Tech

AllianceBernstein Seeing Short-Term Pain, But The Long-Term Plan Intact

The first quarter of 2019 wasn’t a particularly easy one for asset managers, AllianceBernstein Holding L.P. (AB) included, and this asset manager’s roughly 3% decline since my last update puts on the slightly below-average end of the scale over that period, though it remains one of the leaders in its peer group over the past year (a period in which many rivals are down 10% or more).

First quarter results weren’t great in absolute terms, nor relative to expectations, but long-term trends remain positive, as AB continues to see strong retail inflows, healthy fees, and good performance. While weaker markets are pushing back the 30% operating margin goal, I believe the underlying fundamentals are still healthy, and I believe these shares are attractively-priced below $30 for investors who want a more income-skewed total return.

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AllianceBernstein Seeing Short-Term Pain, But The Long-Term Plan Intact

XPO Logistics Taking A One-Two Punch Of Slowing Macro And Persistent Business Quality Questions

When I last wrote on XPO Logistics (XPO) roughly a year ago, I wasn't all that interested in the shares due to what I thought was an overheated valuation. Little did I expect the chaos that would ensue, including a large M&A transaction that never happened, the loss of a significant chunk of business from Amazon (AMZN), significant high-level executive turnover, multiple EBITDA misses, and persistent questions regarding the company's working capital management and intrinsic growth capacity.

Although I still like XPO's less-than-truckload (LTL) trucking operations and I believe the contract logistics business may be underappreciated on its long-term leverage to e-commerce fulfillment, I don't like the debt-funded share buybacks, and I think the macro picture is getting more challenging. On the other hand, there's a sizable short position here and the market could reward performance that simply meets expectations in 2019. On top of that, today's valuation seems to only be anticipating low single-digit long-term FCF growth.

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XPO Logistics Taking A One-Two Punch Of Slowing Macro And Persistent Business Quality Questions

Ship Finance May Be Looking To Grow The Business Again

A high-yield play on shipping, Ship Finance (SFL) has never been the easiest stock for investors to follow. Between eccentric non-GAAP accounting, little sell-side coverage, and share price volatility tied to the volatile and cyclical shipping industry, the shares have moved around a fair bit over the last five years. While the dividend has been more stable for about two years, it is still more than 20% below the peak ($0.45/share, last paid in Q1’17), and an uncommonly high yield has long been one of the key attractions of this stock.

Appreciating that the dividend is relatively safe (but far from guaranteed), this continues to look like a good option for investors willing to take on some higher risk in the pursuit of higher yields. The company has a significant portion of revenue locked up until multiyear time charters with high-quality counterparties and an empty order book should mean substantial cash flow coming in over the coming years. While I’d like to see management prioritize debt reduction and an increased payout, investors should be prepared for capital deployment into M&A, as it still sounds as though that’s where management’s attention is now.

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Ship Finance May Be Looking To Grow The Business Again

Criteo Trying To Rebuild A Stalled Growth Engine In Mid-Flight

As an ad tech company built around a machine learning-based ad retargeting engine, Criteo (CRTO) has had a rough go of it in recent years. Between concerns about privacy and the growing use of ad blocking software, Criteo has found it harder and harder to generate growth from what was once a very successful differentiating technology. While the company has been building up other businesses, they’re simply not big enough yet (nor will be in the near future) to offset the fundamental underlying pressures in the core business.

Expectations are low for Criteo now; low-to-mid single-digit revenue growth and mid-single-digit FCF adjusted free cash flow growth can support a fair value above $20, but 2019 is going to be a year of next-to-no growth (and possible contraction), there are still risks with changes to Google’s (GOOGL) Chrome browser, and management frankly doesn’t have much credibility with the Street. Newer offerings like sponsored products and in-app advertising could help spark a turnaround, and expectations are low, but investors will need a lot of patience.

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Criteo Trying To Rebuild A Stalled Growth Engine In Mid-Flight

Wall Street Seeing More Risk As Palo Alto Networks Evolves With The Times

Investors don’t really like change, and Palo Alto’s (PANW) decision to embrace more cloud-centric security offerings and alter its billing/sales approach seems to be causing some concern with at least some analysts and investors. On top of that, the company’s ongoing willingness to spend up on M&A has let some to ask questions along the lines of “well … if they’re so good, why do they need to do that?”

One of the things that I’ve always liked about Palo Alto is the company’s efforts to be proactive/active more than reactive (compared to, say, Check Point (CHKP) ) and I believe these latest moves are in keeping with that. What concerns me more at this point is the relatively high overall valuation levels in the software/tech space and the likelihood of slowing growth at Palo Alto (“trees don’t grow to the sky” and all that), given the central role growth plays in driving software company valuations. Even so, these shares look undervalued and still interesting today.

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Wall Street Seeing More Risk As Palo Alto Networks Evolves With The Times

Analog Devices Already Well-Valued For Its Quality

There are certainly some bargains out there in the chip sector today, but I’m not finding many in areas like analog. To that end, while I have no qualms about the quality of Analog Devices (ADI), nor its prospects for above-average growth in the years to come, I find that the market is already on top of the story. I don’t think the shares are notably overvalued (unless the economy is teetering on the brink of outright recession), but given the ongoing risks in the sector and my preference for buying in at discounts to fair value, I don’t see a need to jump in here today.

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Analog Devices Already Well-Valued For Its Quality

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

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