Monday, December 30, 2019

DBS Group Dragging As Rates And Slow Loan Growth Weigh On Near-Term Growth

When I last wrote about DBS Group (OTCPK:DBSDY), I noted that “a credit loosening cycle in the U.S. and increased trade tensions could create some near-term challenges,” and those challenges have in fact materialized for this leading Singaporean bank. Still, the company has handled these challenges well and the growth outlook hasn’t been compromised all that much, particularly as credit and net interest margins have held up better than expected.

DBS Group shares have eked out a slight gain since that last piece due to the dividend (the share price is down modestly), and the shares have done about as well as OCBC (OTCPK:OVCHY) and the Singaporean market, while United Overseas (OTCPK:UOVEY) and Standard Chartered (OTC:SCBFY) have both done a little better. Despite a lackluster run over the last year or so, I still believe this is a very high-quality Asian bank with good leverage to growth in China, South Asia, and Southeast Asia, and though it might take a little time for the shares to work, I think it’s still a good name to consider.

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DBS Group Dragging As Rates And Slow Loan Growth Weigh On Near-Term Growth

Synovus Still Meaningfully Undervalued, But Also Lacking Quick Fixes To Sentiment

It’s a little lonely being bullish on Synovus (SNV), particularly when you realize the sector-wide issue with near-term earnings headwinds means that the apparent undervaluation at Synovus is largely moot for the time being. And the last quarter certainly didn’t help matters, with a higher provisioning expense and uptick in non-performing loans spooking investors who were already nervous about the credit quality of the FCB business Synovus acquired.

Synovus still looks undervalued to me, but I freely admit that just waiting for the Street to see the value here is not a particularly compelling bullish thesis. There’s still a solid value argument for holding these shares, but it’s going to take patience for the stock to work, and management is a little short on options now for driving much positive news in the near term.

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Synovus Still Meaningfully Undervalued, But Also Lacking Quick Fixes To Sentiment

Sunday, December 29, 2019

The Core-Mark Roller Coaster Back At A Low Point

You wouldn't think distribution would be such a volatile business, but not only are there a lot of moving parts to Core-Mark's (CORE) business, the margins are thin enough that even a small matter can have an outsized impact on results. While investors had seemingly made their peace with a more aggressive/competitive approach from rival Berkshire Hathaway's (BRK.A) McLane operation and erratic progress on value-added service initiatives, greater uncertainty around the company's tobacco business has brought on a lot of selling pressure.

I wasn't all that interested in the shares back in June due largely to valuation. With the shares down roughly 25% since then, though, it may be worth taking another look at this company. While the risks to the tobacco/nicotine business are real, so too is the growth in non-nicotine categories, and Core-Mark is looking to embrace more technology and more automation to improve margins.

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The Core-Mark Roller Coaster Back At A Low Point

NuVasive At New Highs As New Management Has Quickly Built Credibility

Companies don’t turn on a dime, and it’s not fair to attribute all of NuVasive’s (NUVA) recent improvements to new management, but there has definitely been a shift at NuVasive – not just in tone and priorities, but in delivered performance as well. With NuVasive not only improving strongly upon its core (the X360 platform) but also expanding into new areas (Pulse Robotics), and showing improved operational execution, it’s no wonder investors have come back to this name. I liked NuVasive in June, and the shares are up about 35% since then, almost quintupling the performance of the larger medical device segment. Although 2019 has developed more or less as I expected from a modeling perspective, I’m more bullish on the company’s near-to-medium-term future. Although the stock already reflects this, this would certainly be a name to reconsider on a pullback.

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NuVasive At New Highs As New Management Has Quickly Built Credibility

FormFactor Riding A Surge In Logic And Foundry

A surge in demand from foundry and logic customers has driven FormFactor (FORM) to a new decade high, with fourth quarter revenue set to jump almost 25% on renewed demand for probe cards at 5-10nm nodes. While this surge is likely not sustainable on an ongoing quarterly basis, FormFactor is clearly benefitting from the move to increasingly sophisticated chip architectures and packaging, allowing the company to even further separate itself from more commodity-type probe card manufacturers.

Valuation is problematic. Not unlike Teradyne (TER), which makes wafer test systems, FormFactor's multiples are pumped on the exceptional near-term revenue growth and improving margins. I can't really make the numbers work now, but investors who are more motivated by growth and momentum may still find something to like here.

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FormFactor Riding A Surge In Logic And Foundry

Komatsu Undervalued, But Needs To Stay On Top Of Innovation

Komatsu (OTCPK:KMTUY) shares are up only a little from my last update, lagging many of its peers in construction and mining amid a more challenging outlook for both of those markets. The shares still look undervalued, but construction machinery demand growth isn't looking particularly strong in 2020 and the mining outlook has weakened significantly in recent months. Longer term, I also have concerns about Komatsu's ability to maintain share in the Chinese construction market and the larger mining equipment market. That makes this a tougher call, but the valuation is not demanding, the dividend yield is solid, and management has shown a disciplined but successful strategy toward innovation in the past.

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Komatsu Undervalued, But Needs To Stay On Top Of Innovation

Teradyne At A 15-Year High On Strong 5G Demand

Better than expected testing demand related to 5G has been a real boon for Teradyne (TER) this year, driving meaningfully higher demand for system-on-a-chip (or SoC) testing, including better-than-expected results in the third quarter and much, much better guidance for the fourth quarter. With that, the company is on pace for roughly 7% growth this year, against expectations at the start of the year for a modest decline due to the wider slowdown in the chip sector, and the shares are at their highest level in almost 20 years.

I underestimated the near-term demand for 5G infrastructure testing and the extent to which it would drive such a strong second half, but the valuation multiples are about double the long-term norm now, and while Teradyne should see several years of double-digit growth, the market seems to be more than fully pricing that into the shares today.

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Teradyne At A 15-Year High On Strong 5G Demand

Oshkosh At An All-Time High Ahead Of A Cyclical Decline In Its Largest Business

I’m usually very cautious, if not outright skeptical, when I see a cyclical company trading at a high (let alone an all-time high) right as its largest business is going into cyclical decline, and yet, that’s what we have here with Oshkosh (OSK). Oshkosh is likely to dive into the teeth of a reset for its aerial work platform business next year, with three to four quarters of double-digit year-over-year declines likely ahead of a modest recovery late in 2020 or early in 2021. Defense revenue growth will offset that some, but at lower margins, and the higher-margin fire & emergency business will likely slow.

Surprised as I may be that Oshkosh hasn’t sold off ahead of the cyclical reset in AWPs, the valuation is even more surprising, as the stock doesn’t look overvalued. In fact, even with some discounts in place to reflect the cyclical risk, the shares should trade in the low $100s. While I’m concerned the shares could still sell off as the AWP declines materialize (with the risk of a weaker cycle and lower guidance), this is definitely a name I’d watch for a pullback.

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Oshkosh At An All-Time High Ahead Of A Cyclical Decline In Its Largest Business

Weir Group Taking Its Lumps, But Mining Demand Will Return

It’s hard for me to say that Weir Group (OTCPK:WEGRY, WEIR.LN) has had a bad year when the shares are up more than 20%, but Weir hasn’t benefited as much from the mining rebound as hoped, and the company is getting hit again by weakness in its oil and gas business, leading it to underperform fellow mining equipment company Epiroc (OTCPK:EPOKY), though it still has outperformed FLSmidth (OTCPK:FLIDY).

I still like the medium- to long-term outlook for mining equipment, as the world still needs copper, iron, et al, and mining companies are under increasing pressure to do more with less (less water, less power, less labor, less waste), but the near term could still have a few negative surprises. Weir’s strong aftermarket business will definitely help, but investors might need a little patience to see this one work out.

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Weir Group Taking Its Lumps, But Mining Demand Will Return

Thursday, December 26, 2019

Crane Undervalued On Disappointment With The Banknote Business

Aggravate the Street at your own risk. That would seem to be a fairly logical takeaway from Crane’s (CR) recent results, as sell-side analysts and institutional investors seem increasingly frustrated, if not exasperated, by the unpredictability of the banknote business within Payment & Merchandising Technology. So much so, in fact, that I think the Street is overlooking what has been a pretty decent performance trajectory in the Fluid Handling business and improving fundamentals and outlook for the Aerospace business.

Going into 2020, Crane looks like one of the few industrials I follow that is actually notably undervalued. I see some risk/likelihood that the Fluid Handling business slows in 2020, but I think this is a name to consider as an overly-beaten down multi-industrial.

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Crane Undervalued On Disappointment With The Banknote Business

Middleby Continuing To Struggle, But Margins Can Start Supporting Valuation

I've written many times before that one of the biggest risks in paying up for growth is that sooner or later the growth slows and those inflated multiples come back to earth. And so it is with Middleby (MIDD), where the company has seen a return to revenue contraction on an organic basis and ongoing execution challenges across the business. I thought multiples/valuation were too high back in May, and the shares have lost almost another 20% of their value, far worse than the performances of Welbilt (WBT), John Bean (JBT), Rational AG (OTC:RATIY), and Marel over that time period.

I'm not as negative on Middleby down at these levels. The company has a legitimately good commercial foodservice business and I see some options for mitigating the drag from the residential and food processing businesses. Margins are pretty decent and the company should generate solid cash flow over the next few years. I'd like to see a new strategic direction from the company focusing more on consolidating its strengths and improving margins/cash flow, but there is still a valuable core here. With a "mid-high" to low double-digit return potential from here, this is a name worth following.

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Middleby Continuing To Struggle, But Margins Can Start Supporting Valuation

Allison Transmission Better-Placed For This Downturn

Allison Transmission (ALSN) shares have done okay since my last, lukewarm, write-up, with the stock up about 7% - more or less in line with Cummins (CMI) and Dana (DAN), and considerably better than American Axle (AXL) and Tenneco (TEN), and a little worse than the overall market. Over the last few months, the impending decline in the North American on-highway business has become more and more obvious, though the company has done pretty well managing its expenses ahead of the decline, and I believe EBITDA margins will stay comfortably in the high 30%'s, a level that most commercial vehicle suppliers will never see in their best year.

As has been the case for a while, the biggest challenge in valuing Allison is factoring in the eventual impact of electrification (and the size/share of Allison's future EV tech offerings), but neither long-term discounted cash flow nor near-term EV/revenue suggest significant undervaluation today. In fact, like Cummins (another high-quality commercial vehicle supplier with some EV vulnerability), the market seems to already be pricing in a swift rebound after a tougher 2020.

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Allison Transmission Better-Placed For This Downturn

Inphi Riding Great Data Center Momentum Into 2020

This has been an amazing year for Inphi (IPHI), as the market has woken up to not only the company’s strength in physical layer technologies for the data center and telecom markets but also its ability to execute on those technical capabilities. Looking into 2020, Inphi has the chance to leverage 400G ZR, 200G/400G PAM4, and its M200 coherent DSP into even larger addressable markets, keeping the company on a trajectory to a served addressable market of $2 billion in 2022 against a likely 2019 revenue figure around $365 million.

Inphi’s qualities are certainly no longer overlooked, with the shares up over 130%. While I realize that growth/momentum investors will not be discouraged by valuation, it’s harder and harder to work the numbers to support such a robust valuation.

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Inphi Riding Great Data Center Momentum Into 2020

Atlas Air Worldwide Can Turn Around, But Labor Peace Is Essential

The same wind can blow on two different ships and you can get two very different results, and the differences between Air Transport Group (ATSG) and Atlas Air Worldwide (AAWW) show just how important company-specific execution is. Both companies signed major agreements with Amazon (AMZN) almost three years ago, and it has been transformative for Air Transport, but far less so for Atlas Air, as the company has wrestled with significant labor difficulties and a rougher international air cargo market.

Atlas Air has the potential to be much, much better than this, but “potential” is a word that can get an investor into a lot of trouble. Labor peace and improved execution is absolutely critical, and Atlas Air would likewise be a major beneficiary of a better global trade and economic backdrop.

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Atlas Air Worldwide Can Turn Around, But Labor Peace Is Essential

Wednesday, December 25, 2019

Cummins Priced For A Recovery But Only Starting Its Downturn

The next year is looking like a perfect storm for Cummins (CMI), with almost every major market the company serves poised to get worse (heavy duty trucks in Brazil is the one real exception). And yet, with the shares up about 10% since my last update and only the first down quarter in the cycle in the books, investors seem to already be looking well ahead to the recovery that will inevitably come.

Make no mistake, Cummins is one of the best-run heavy machinery companies out there, and I like the company’s share growth and market/product expansion opportunities. Still, I’ve seen too many cycles to shrug and assume “this cycle will be different”. Give me a 10% to 15% pullback, though, and I get a lot more positive on the long-term benefits of owning these shares.

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Cummins Priced For A Recovery But Only Starting Its Downturn

Air Transport's Business Looks More Stable Than The Share Price

Share prices are almost always more volatile than underlying business trends, but the last year or so at Air Transport Group (ATSG) looks like a more extreme example of this. Although the company has expanded its business with Amazon (AMZN), re-upped most of its business with Deutsche Post DHL (OTCPK:DPSGY), added UPS (UPS), and taken strides to securing better future freight conversion supply, the shares have bounced between $19 and $26, with worries about U.S.-China trade policy no doubt playing at least some role in that volatility.

Simply considering the commitments Amazon had made to expand its proprietary logistics operations, I’m just not that worried about Air Transport’s outlook, and I think that Amazon relationship provides some floor to the business. Likewise with the deeper ties with the Department of Defense brought in with the Omni deal. EBITDA margins of 30%-plus in 2019 and 2020 can support a 6.75x forward EBITDA multiple and a fair value in the mid-high $20’s, suggesting these shares still have upside.

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Air Transport's Business Looks More Stable Than The Share Price

Danaher Has Set The Table For A Brighter, Faster-Growing, And Higher-Margin Future

Danaher (DHR) has been busy this year. In addition to the transformative acquisition of General Electric’s (GE) Biopharma business (which Danaher will rename “Cytiva”), Danaher has executed an efficient disposal of the Envista (NVST) dental business, a move that immediately improved the company’s growth rate and margins. These developments have hardly gone unnoticed, as the already-popular Danaher stock has shot up more than 50%, trouncing the roughly 26% year-to-date performance of its industrial peer group (which really isn’t a peer group anymore) and keeping pace with Thermo Fisher (TMO).

Danaher isn’t cheap now, but that’s nothing new, as there have been only a relatively few windows of opportunity in recent years where Danaher looked meaningfully undervalued. Although I’m disinclined to be all that negative on the stock of a company that I think will generate mid-single-digit core growth in a 2020 where many industrials will still be struggling, the shares are already trading at over 20x my 2020 EBITDA estimate (adjusted for Cytiva).

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Danaher Has Set The Table For A Brighter, Faster-Growing, And Higher-Margin Future

The PacBio-Illumina Deal Looks More Tenuous Than Ever, But There May Be Alternatives

It’s increasingly clear that regulatory clearance for Illumina’s (ILMN) proposed acquisition of Pacific Biosciences (PACB) is, at best, only going to come at the cost of major concessions and it may well ultimately be the case that regulators will only approve the deal on terms that Illumina cannot afford to accept. PacBio certainly continues to trade as though the deal is highly unlikely, though I believe within that valuation there may be some undervaluation of the financial support Illumina will continue to provide, not to mention the prospect of alternative arrangements that come short of an acquisition but would still answer some of the strategic and financial needs of both parties.

I don’t know what sort of R&D partnerships and/or distribution deal the two companies could work out, but that now seems like a more likely outcome than the proposed merger. As I said in past articles, I no longer value PacBio with the merger in mind, but I do believe that the combination of the Sequel II ramp, cash from Illumina, and some sort of commercial relationship between the two companies can put PacBio on a path to viability (short term) and success (long term).

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The PacBio-Illumina Deal Looks More Tenuous Than Ever, But There May Be Alternatives

Healthy Traffic And Excellent Cost Control Still The Story For Grupo Aeroportuario Del Centro Norte

Mexican air travel passenger numbers have remained healthier than expected through 2019, despite a weaker, more uncertain economy, and that has certainly helped Grupo Aeroportuario del Centro Norte (OMAB) (“OMAB”). So too has expense control, has management has done an exemplary job of containing and reducing expenses across the business.

With peer Grupo Aeroportuario del Pacífico (PAC) having recently announced a very successful outcome to its Master Development Plan negotiations, OMAB shares have jumped on expectations that there is less risk (and/or actual upside) as OMAB looks to negotiate its own extension in 2020. Traffic growth is slowing, though, most notably at the Monterrey airport that generates close to 50% of revenue, and I don’t know how much further OMAB management can go with cost cutting, though there is still growth potential from non-aero sources of revenue like parking and hotels. OMAB shares look pretty fairly valued to me here, but a pullback toward the mid-to-low $50’s would certainly be an opportunity to reconsider.

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Healthy Traffic And Excellent Cost Control Still The Story For Grupo Aeroportuario Del Centro Norte

Monday, December 23, 2019

Renesas Looks Undervalued As The Business Finally Bottoms Out

I was bullish on Renesas Electronics (OTCPK:RNECY) back in July and the shares have performed quite well since then (up 34%). But I’ve been bullish for a while and these shares have lagged since 2018, so I’m not exactly doing a victory dance here.

Renesas has struggled through not only a tough correction in the auto and industrial markets it serves, but also from plenty of self-inflicted issues regarding inventory and margins. The company’s weak performance versus its auto end-market has also raised valid questions about its competitiveness and long-term market share.

I’m still concerned about Renesas’s long-term market position, though it does still seem to be solid with its core Japanese OEM customers. I’m also more enthusiastic about the company’s plans to rationalize fabs over time, boosting margins and FCF. Although the near-term outlook for auto is still challenging (both company-specific and industry-general issues), I believe Renesas is in better shape and is still undervalued – one of the relatively few names in its peer group where I can say that.

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Renesas Looks Undervalued As The Business Finally Bottoms Out

Schneider Electric Taking Improving Execution And Momentum Into 2020

Schneider Electric (OTCPK:SBGSY) (SU.PA) has been one of my favorite companies to follow for a while now, and better-than-peer results from the third quarter did that sentiment no harm. Although it has taken some time for it to all come together, Schneider has built a strong business that is outgrowing its end-markets in both electrical and automation – two end-markets that I expect to be outperformers over the long term. On top of that, management has made some credible progress towards margin leverage that bodes well for the future.

I like Schneider’s exposure to non-resi construction, utilities, and a range of automation markets, and I love the company’s recent track record of execution in its electrical and automation markets. What I can’t love anymore is the price/valuation trade off, as sentiment has shifted pretty significantly – aided, I’m sure, by institutions flocking towards those industrials still managing to show attractive growth in this growth-poor industrial landscape. The price isn’t so unreasonable on an EV/EBITDA basis considering the margin/return improvement trajectory, but I’d rather wait in the hopes that this name cools off and another window of opportunity opens.

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Schneider Electric Taking Improving Execution And Momentum Into 2020

Maxim Integrated Looking Ahead To Improving Growth Prospects

Having moved aggressively to prune channel inventory, Maxim Integrated (MXIM) looks better-placed than many of its peers to return to growth as the semiconductor cycle bottoms out. I also think it’s very relevant that Maxim’s margins bottom out at levels (mid-60%’s for gross margin, around 30% for operating margin) that many semiconductor managements would love to have in their best quarters. Last and not least, Maxim has some attractive company-specific drivers in areas like autos (ADAS and EVs) and industrial (automation) that should propel above-market growth.

Valuation remains a sticking point for me, particularly as Maxim’s management has what seems to be bullish expectations for demand in 2020. I’m not as excited about analog at this point in the cycle (given valuations, mostly), and I like names with better leverage to data center and 5G, though Maxim’s content growth potential in autos is not trivial. I believe Maxim’s quality merits some premium, but I think there are better options today.

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Maxim Integrated Looking Ahead To Improving Growth Prospects

Manitex - New Management And A New Year, But Old Problems

Management matters, and that’s been proven over and over again in the market. Manitex (MNTX) has a new CEO now, one with directly relevant industry experience and success, and the company still has growth opportunities with its articulated/knuckle-boom crane business that is kinda-sorta new to the U.S. market. But the company also has very familiar old problems including cyclical end-markets, weak margins, and not much evidence of real value-creating momentum in the business.

Do I think Manitex can be run better than it has been? Absolutely. Do I think there’s a credible market opportunity for the company’s straight mast and articulated cranes that can support meaningfully higher revenue, margins, cash flows, and share prices? Yes. Do I think it’s worth the risk to own the shares and find out? That’s a harder call.

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Manitex - New Management And A New Year, But Old Problems

AllianceBernstein Continuing To Out-Execute Its Peers, But Not Fully Rewarded For It

Asset manager AllianceBernstein Holding L.P. (AB) has always required an above-average level of patience, and it doesn’t help that the company’s legal structure limits institutional ownership and can create headaches for individual investors. That said, for investors who can be bothered to deal with the higher level of complexity (which, depending upon your specific circumstances may not be that significant), I continue to believe that AB is worth a look, as management has established what I believe to be a differentiated strategy that can continue to drive above-average inflows, revenues, profits, and distributions.

Market risk is always a concern – whatever can undermine assets under management can undermine revenue, profits, and distributions. Likewise, execution and performance remain risks, as money continues to flow from active to passive, there’s an even greater need to generate strong results from actively-managed funds. AB is doing this, and I think the shares remain undervalued below the mid-$30’s.

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AllianceBernstein Continuing To Out-Execute Its Peers, But Not Fully Rewarded For It

Sunday, December 22, 2019

Mellanox And Nvidia One Step Closer, But Mellanox Still Fine If The Deal Doesn't Happen

There’s been a meaningful “will they or won’t they” discount with Mellanox (MLNX) shares since the announcement of Nvidia’s (NVDA) offer for the company. While discounts to bid prices are normal, Mellanox had until recently been pretty much stuck in a band between $106 and $115 (below the $125 bid price) as investors wondered and worried if the deal would get all of the necessarily regulatory approvals.

Whether China approves the deal is the big remaining unknown, as Nvidia and Mellanox together will have a significant influence over China’s data centers and AI developments. Likewise, the Chinese government may view the deal approval as a point of leverage in ongoing, often contentious, discussions with the U.S. regarding trade policy (including restrictions on Huawei and on technology sales more broadly. While Mellanox shares would certainly fall if the deal were to collapse, I think support isn’t all that far away and Mellanox could well attract another buyer.

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Mellanox And Nvidia One Step Closer, But Mellanox Still Fine If The Deal Doesn't Happen

Lexicon Needs More Than Incremental Positive Clinical Data

This has been a hard year for Lexicon Pharmaceuticals (LXRX), and I can understand why any good news would be welcome. Unfortunately, the three positive trial read-outs the company has offered in December don’t really change the value proposition and don’t really represent any positive change in the outlook.

As is, Lexicon still needs to find a partner for its lead drug sotagliflozin and figure out how to manage its cash needs. More significant data from the TELE-ABC study in 2020 could certainly help, and maybe the company will be able to produce proof-of-concept data on its chronic/neuropathic pain drug LX9211, but for now a partner for sotagliflozin is far and away at the top Lexicon’s Christmas list.

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Lexicon Needs More Than Incremental Positive Clinical Data

Marvell Has The Growth Story, But Valuation Seems Advanced

In downturns semiconductor investors often seek out and reward margins, while growth is more desirable when the cycle turns. I’m speaking in broad generalities of course, but I think that may be a useful way to look at Marvell (MRVL), as the shares of this networking and storage chip company seem pricey on the basis of margins and cash flows, but do seem poised to deliver well above average revenue growth over the next three to five years. Although I’d don’t really like Marvell at this price on a “core holding” basis, I can understand the appeal for growth/momentum investors who are less sensitive to valuation concerns.

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Marvell Has The Growth Story, But Valuation Seems Advanced

Illinois Tool Works Is A Margin Beast, But The Valuation Is A Little Scary

Maybe the worst thing I can say about Illinois Tool Works (NYSE:ITW) as a company is that it’s kind of dull and that it underinvests in R&D – something management likely would disagree with. Otherwise, we’re talking about an incredibly well-run conglomerate that is very diversified across the globe (albeit a little light toward China) and across end-markets (albeit a little heavy toward auto). Management’s 80/20 system has generated proven results for years and very very few companies can produce these kinds of margins and returns on a sustained basis.

I thought ITW had some “best of the rest” attributes back in April, largely on the strength of its margins, but the shares have done quite a bit better than its peer group since then – climbing more than 15%, handily surpassing the performance of the industrial sector as well as many other well-regarded (or formerly well-regarded) multi-industrials like Eaton (NYSE:ETN), Honeywell (NYSE:HON), 3M (NYSE:MMM), Parker-Hannifin (NYSE:PH). Dover (NYSE:DOV) and Danaher (NYSE:DHR) are among the few to beat ITW’s performance over that period, though Danaher really isn’t a true peer anymore.

At this point, I can’t really sign off on the valuation Illinois Tool Works is getting. Sure, I understand that investors are taking positions ahead of an expected 2020 rebound, and I also get that high-margin stocks get high multiples. I also understand that once the Street picks a favorite/safe haven, they’ll run it to unsustainable valuations (as happened with 3M). So, while I could maybe stretch my valuation methodology far enough to say it’s not hugely overpriced, a mid-single-digit prospective return is just too low for me.

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Illinois Tool Works Is A Margin Beast, But The Valuation Is A Little Scary

Ternium Caught Between A Valuation-Sentiment Tug Of War

Ternium (TX) shares have risen 20% since my last update on this Mexican steelmaker, a pretty respectable result next to Nucor (NUE), POSCO, (PKX), Steel Dynamics (STLD), but not so impressive when compared to ArcelorMittal (MT) or Gerdau (GGB), and more or less in line with Voestalpine (OTCPK:VLPNY), another steelmaker with above-average auto exposure. You almost wouldn’t know it, though, as sentiment on the sell-side is still very cautious, if not outright negative, due to weak near-term demand conditions in two of Ternium’s key markets (Mexico and Argentina).

Near-term versus long term is almost always a tough dyad to reconcile in investing, and particularly so in the “it’s always near-term” world of commodities. I do believe that Ternium is going to have a challenging 2020, and I likewise believe that some peers like Gerdau will have a much better time of it. Still, given the quality of the company and the valuation, both intrinsic and relative, I still think this is a stock worth buying and owning here.

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Ternium Caught Between A Valuation-Sentiment Tug Of War

Thursday, December 19, 2019

GenMark Diagnostics Still Not Getting A Lot Of Love

I can understand why investors may be leery of GenMark (GNMK). Although management has done a much better job of late in hitting its own targets, that has certainly not always been the case. Worse, they’re a later entrant into the multiplex molecular diagnostics field, and both bioMerieux (OTC:BMXXY) and Luminex (LMNX) enjoy bigger footprints (particularly the former with its BioFire FilmArray platform. And if that weren’t all enough, as more multiplex MDx tests become available, it is likely that reimbursement will get more complicated (if not less generous).

That all may explain in part why the shares continue to slide, down another 10% or so from the time of my last article. While I don’t dismiss the competitive and reimbursement risks, the shares already trade below where med-tech companies with similar growth rates would normally trade and GenMark has offered some evidence that its blood culture panels are driving good growth.

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GenMark Diagnostics Still Not Getting A Lot Of Love

Sensata Technologies Has Gone Nowhere Fast As Key End Markets Weaken

Although I wasn't all that interested in the valuation opportunity presented by Sensata (NYSE:ST) back in May, I missed quite a ride as the stock dropped 15%, rose almost 15%, fell another 10%+, then rallied almost 25% to end up … around 5% higher than when I last wrote about the stock. While Sensata has benefited from the recovery in both industrial and semiconductor stocks, the company continues to face difficult end-markets in autos, heavy vehicles, industrials, and appliances, and content growth can only offset that just so much.

I still really like this company, but the valuation is only "okay" now, and I think there is downside risk to the 2020 outlook given the growing weakness in heavy vehicles. Were the shares to again retreat back toward $45, I'd definitely reconsider this name for its long-term leverage to content growth in multiple end markets.

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Sensata Technologies Has Gone Nowhere Fast As Key End Markets Weaken

MaxLinear Logging Some Important Wins, But End-Market Conditions Remain Difficult

MaxLinear (MXL) shares were looking a little pricey back in May, but just as the market was starting to warm up to the company’s opportunities in wireless backhaul, 5G transceivers, and PAM4, the company had to deal with the U.S. government’s crackdown on Huawei, as well as even greater weakness in the Connected Home business and worse-than-expected trends in high-performance analog.

With all of that, the shares are down about 20% since my last article and analysts have significantly curtailed their revenue and margin expectations for 2019 and 2020. While I agree that the near-term outlook is tough, particularly with potential delays in PAM4 revenue, MaxLinear is a surprisingly profitable company (on a non-GAAP basis) relative to its revenue base and I think that will translate into impressive leverage when the revenue materializes (which I expect to happen in 2021). This is more of a ”story stock” than a fundamentals-driven call, but this is a somewhat beaten-down name that may still be worth watching.

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MaxLinear Logging Some Important Wins, But End-Market Conditions Remain Difficult

nVent Seems To Be Underperforming Its Markets, And It's Not Clear Why

Given the valuation, end-market exposures, and performance relative to its end-markets, I wasn't too keen on nVent (NYSE:NVT) back in May of this year. Between weakening industrial end-markets (which I expected), further relative underperformance (which I feared), and the surprising departure of the CFO, as well as management reiterated that it doesn't plan on a large-scale change in its R&D process, the shares are down about 10% from the time of that last article and were down closer to 30% before a decent third quarter and an overall industrial rally lifted the stock.

Relative to industrials broadly, and other electrical-exposed peers like ABB (ABB), Eaton (ETN), Emerson (EMR), Hubbell (HUBB), Legrand (OTCPK:LGRDY), and Schneider (OTCPK:SBGSY), nVent's share price performance has been pretty poor. On a positive note, the company's margins still remain quite healthy, and I expect many short-cycle industrial markets to start showing demand recoveries around the middle of next year. I don't really consider the valuation a "can't miss" now, though I would note that once May 2020 rolls around, nVent could be more in play as an acquisition target.

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nVent Seems To Be Underperforming Its Markets, And It's Not Clear Why

Microchip Technology Already Trading On The Recovery-To-Be

Investors have been seemingly chomping at the bit all year to buy a semiconductor rebound that has yet to happen. Of course investors look to get early (the market is a discounting mechanism, after all), but it seems like "oh, next quarter it will turn around" is all that investors have needed to hear. To that end, while my relative value call that Microchip Technology (MCHP) wasn't a great candidate to buy back in May has mostly worked out - the SOX has outperformed by about 10% and my favored name, STMicro (STM), has outperformed by much more - the shares are still up almost 15% from that last article (beating the market).

Although Microchip's business is finally turning (after six consecutive quarters of downward guidance revisions), and this is a very profitable and very diverse chip company, I can't say I love the valuation. Anticipatory buying has already taken a lot of semiconductor share prices higher, leaving investors to either rationalize higher fair values, accept lower returns, or cast about amongst the more troubled stories.

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Microchip Technology Already Trading On The Recovery-To-Be

Good Progress On Cost Control And Strong T&D Markets Helping Hubbell

When I last wrote about Hubbell (HUBB) in May, I saw mixed prospects for this manufacturer of electrical and power products for utility, construction, industrial, and energy customers. I did think (and write) that the shares looked undervalued and that the company’s late-cycle exposure was the right mix for what I thought would be a weaker-than-expected short-cycle economy. On the other hand, I also liked Schneider (OTCPK:SBGSY) and Eaton (ETN) better.

Since then, short-cycle end-markets have indeed weakened more than the Street expected earlier in the year and Hubbell has benefited from its strong utility exposure, as well as its internal self-help efforts on costs (manufacturing, et al). Hubbell shares are up about 18% since then, beating the broader industrial sector, while Schneider has in fact performed better (about 10% better), though Eaton’s performance has been more of a “push”.

Looking at 2020, I like Hubbell’s utility exposure even more, as I see grid spending as one of the healthier markets out there. I’m more concerned about oil/gas, but I think Hubbell’s specific exposures may be better than the overall market, and I expect more progress on costs/margins (particularly in 2021). What I’m not so fond of is the valuation. Like so many industrials, and particularly those with better late-cycle exposure, the shares have been strong enough that I don’t see a compelling valuation, though I don’t find them overpriced either.

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Good Progress On Cost Control And Strong T&D Markets Helping Hubbell

Emerson Bracing For A Slowdown And Considering Its Options

Back in May I thought that Emerson (EMR) looked undervalued, as I thought the Street was underestimating the full-cycle potential of the process automation business (particularly its petrochemical leverage), as well as the Climate segment. Since then, the shares have roughly doubled the return of the larger industrial sector, as cautious guidance from management has been offset by the involvement of an activist investor and investor enthusiasm for potential restructuring up to and including the break-up of the company.

I’m fairly indifferent about a break-up; I don’t think the Commercial and Residential Solutions adds a lot of value, but I also don’t think it really hurts the company all that much. As management seems far more interested in investing in the Automation Solutions business, perhaps it makes more sense to spin off the CRS segment or sell it in parts to other companies. Either way, while I do think process automation markets will slow in 2020, I don’t think they’re going to go negative and I like the long-term pipeline.

Unfortunately, the share price appreciation has pretty much soaked up the undervaluation I saw before and Emerson is valued on par with other high-quality industrials. Granted, with Emerson’s strong leverage to LNG liquefaction and chemical sector capex, as well as its growing discrete/hybrid business, I think you can make a “best of the rest” argument.

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Emerson Bracing For A Slowdown And Considering Its Options

voestalpine Likely Facing The Worst Of The Cycle

Investors have warmed back up towards steel stocks, assuming that 2019 was as bad as it’s going to get for the cycle and that responsible behavior on the supply side and improving steel demand will support prices and margins next year. With that, voestalpine (OTCPK:VLPNY) (VOES.VI) has gone along for the ride in recent months, rising about 25% from its August and October lows despite a recent warning on impairments and a cut to the dividend (both of which I think were, or should have been, largely expected).

I was pretty neutral on the stock in June, and while it has swung around quite a bit (rising about 15% before plunging 30% and then chopping higher), net net, it’s basically flat with where it was back then. Even with the troubles this year, I still like this business and I think I’d rather own voestalpine than ArcelorMittal (MT), and likewise the valuation is more compelling than for Steel Dynamics (STLD) and Nucor (NUE). Although I’m not as bullish on steel as some investors seem to be, I think voestalpine is an okay idea here, and particularly so if you want to play an upcoming rebound in autos and capital goods.

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Voestalpine Likely Facing The Worst Of The Cycle

ams AG Seemingly Going In All Directions At Once

When I first started digging into ams AG (OTCPK:AMSSY) (AMS.S) years ago, I never expected this would be such a volatile and bizarre company. The core technology drivers are still very much there - ams is a leading player in 3D sensing and other sensing and optics technology that is seeing increasing adoption in smartphones, and there are still attractive long-term opportunities in other sensing technologies and markets like auto and industrial automation. At the same time, though, business has proven very volatile on unpredictable OEM adoption curves and management's aggressive pursuit of Osram (OTC:OSAGY) seems predicated on some rather bullish assumptions regarding long-term revenue/technology synergy and cost optimization.

I feel pretty conflicted about the stock. Stand alone, I like ams AG. I'm not bullish on the Osram deal, but even with what I think are post-deal assumptions that don't give much benefit of the doubt to ams management, the shares look pretty meaningfully undervalued. I'm not really a believer in "hold your nose and buy" stories (if you don't believe in management, keep looking until you find a company/stock where you do…), but I still like the core sensing story and it looks like the market is already sufficiently skeptical about the Osram deal.

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ams AG Seemingly Going In All Directions At Once

With Positive Phase III Data From Lumasiran, Alnylam On Track For Another Approval

Some investors may well believe that Alnylam (ALNY) had already de-risked its lumasiran program for primary hyperoxaluria Type 1 (or PH1) with strong Phase II and open-label extension study data, but there is a reason that the FDA requires pivotal studies, and Alnylam came through with strong clinical results that will support a New Drug Application to the FDA early in 2020 and likely an approval before the end of the year.

With the positive lumasiran results, Alnylam is closing in on its third wholly-owned commercial product (joining Onpattro and Givlaari), and The Medicines Co. (MDCO) (which is being acquired by Novartis (NVS)) moving forward with inclisiran, Alnylam will likely be generating revenue from four drugs in 2020, with a fifth (Sanofi's (NASDAQ:SNY) fitusiran) not far behind in 2021.

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With Positive Phase III Data From Lumasiran, Alnylam On Track For Another Approval

Fortive Getting Plenty Of Love For Its Transformative Potential

While short-cycle industrials have recovered in recent months, Fortive (FTV) is still on track for a rare year of underperformance relative to the “average” industrial stock. This comes despite the announced decision to break the company in two and reposition RemainCo to focus more on software, connected devices, healthcare, and workflow management, partly due to the company’s exposure to this short-cycle slowdown. Although I find a lot of things to like about Fortive, I just can’t get that excited about the shares now. While I don’t disagree with the direction/focus of Fortive’s (RemainCo) M&A efforts, some of the specific deals have been questionable in terms of valuation and growth potential. What’s more, while I do expect 2020 to be meaningfully better for important segments like test & measurement, the valuation seems to already reflect that.

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Fortive Getting Plenty Of Love For Its Transformative Potential

Hartford Financial Delivering On A Model With Both Growth And Defensive Traits

I let Hartford Financial (HIG) fall off my regular paper route, but a lot of the things I liked about the company when I last wrote about it, including its Navigators acquisition, have worked out and my bullish stance has been rewarded with a decent 25% or so total return since then – pretty good next to Chubb (CB) and Travelers (TRV), though not quite as good as W.R. Berkley (WRB) and Arch Capital (ACGL) (another one I’ve long been fond of).

Re-examining the story again today, I like the company’s comparatively healthy reserve position and disciplined underwriting strategy – two factors that should let the company benefit from a very hard market where pricing is being driven by underwriting mistakes made by other insurers and claims inflation. I also like the potential for ongoing growth in the small business category, not to mention the potential to continue leveraging the Navigators deal to expand its product line-up.

As far as valuation goes, though, I’m not as bullish as I was. Between discounted core earnings and ROE-driven price/book, Hartford should be trading between the low and mid $60’s and that’s where the shares are today.

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Hartford Financial Delivering On A Model With Both Growth And Defensive Traits

Penumbra Leveraging A Strong Portfolio Into Attractive Under-Penetrated Markets

The only real problem I had with Penumbra (PEN) when I last wrote about the stock in June was the take-no-prisoners valuation. The company has continued to post good growth since then, with quarterly revenue growth rates around 25%, but expectations were so high already that the shares really haven’t gone anywhere on a net basis (there was a steep decline into the $130’s and a recovery to $180 along the way).

The share still aren’t cheap, but management has at least outlined a credible path to developing three markets worth roughly $1 billion a piece, two of which don’t really have a lot of compelling competitive offerings today. Premium small/mid-cap med-tech growth stories can trade at 10x forward revenue (or higher), and Penumbra still has some upside on that basis, but investors should at least be aware that any stumbles relating to growth will likely be harshly punished.

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Penumbra Leveraging A Strong Portfolio Into Attractive Under-Penetrated Markets

Independent Bank And Texas Capital Bancshares Tying Up In A Curious MOE

Mergers of equals have suddenly become a lot more popular in the banking space, likely as an answer to several trends in the industry including significant growth headwinds in 2020 and meaningful economies of scale, particularly with respect to future IT spending and branch network costs. The latest announcement, the tie-up between Independent Bank Group (IBTX) and Texas Capital Bancshares (TCBI), is a curious one in many respects, but also one that makes quite a bit of sense.

Given the significant EPS accretion potential on relatively modest cost savings assumptions and loan marks, not to mention the diversification the deal will provide, I think Independent Bank shares are worth considering here, and likewise Texas Capital.

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Independent Bank And Texas Capital Bancshares Tying Up In A Curious MOE

Tuesday, December 17, 2019

POSCO Getting Less Than Its Due, But Conditions Remain Weak

South Korea’s POSCO (PKX) has perked up some in recent months, following an overall upward trend in many steel names that seems underpinned by the assumption that the worst is past for the steel industry. I have written previously that I find that viewpoint somewhat optimistic, as I think there is still room for demand (and by extension, prices) to disappoint in 2020 and cost relief may not be as great as investors hope.

When it comes to POSCO, though I do think the company could bump along the bottom for a little longer (a few quarters), I do think the company is going through the worst of the cycle. What’s more, I think POSCO has been sold off too far relative to its underlying quality. While I’d probably rather have ArcelorMittal’s (MT) customer base, I’d rather have POSCO’s business on the whole for the next cycle. As one of the cheaper names in the steel space that I follow, I think this one could have some appeal now for investors who feel like fishing near the bottom.

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POSCO Getting Less Than Its Due, But Conditions Remain Weak

American Eagle Continuing To Flounder As Margins Disappoint

Among Warren Buffett’s many famous sayings is, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact,” and that quote seems pretty fitting for American Eagle Outfitters (AEO) as an otherwise well-regarded management team continues to struggle with a host of margin challenges.

This was supposed to be a year where AEO started better leveraging past SG&A spending, and while sales have improved and SG&A leverage has also improved, greater than expected weakness at the gross margin line has more than canceled out any benefit. Although buying AEO on dips has historically been a money-making opportunity, this “dip” could well see the shares drop below $11 before reversing, and the company’s higher apparent fair value is really moot until management can post consistent numbers that move sentiment in a more positive direction.

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American Eagle Continuing To Flounder As Margins Disappoint

Like The Energizer Bunny, Old Dominion Just Keeps Going

One of the frustrating (and invigorating) aspects about investing is that you can be completely right … and still end up completely wrong if you’re right about the wrong things. In the case of Old Dominion (ODFL), the year and the market have developed largely as I expected back in April, with the company seeing growing weakness in volumes as the short-cycle industrial sector slowed throughout the year. And yet, with the shares up another 25% since then, what does it really matter?

I have long loved Old Dominion as a company, and if there aren’t case studies written about how this company has crafted a differentiated model in the at least somewhat-commodified less-than-truckload (or LTL) trucking space, then that needs to be fixed. Still, while I do expect a short-cycle recovery to kick in in 2020 and restore some momentum to Old Dominion’s business, I just can’t make any sense of the valuation. Sure, best-in-class operators absolutely deserve a premium, but with the shares already trading more than one standard deviation above the trailing five-year average forward multiple, I just can’t see how the shares are cheap on any fundamental basis.

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Like The Energizer Bunny, Old Dominion Just Keeps Going

Approval Of The Spark Deal Only Part Of An Expanding R&D-Driven Opportunity At Roche

As one of the largest pharma companies out there, I suppose it stands to reason that Roche (OTCQX:RHHBY) would have an above-average level of newsflow, but tracking the developments at Roche over the last couple of months has been like trying to sip from a firehose. It’s well worth trying, though, as these developments have been quite positive and only enhance the long-term value proposition of Roche shares.

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Approval Of The Spark Deal Only Part Of An Expanding R&D-Driven Opportunity At Roche

Broadcom Again Shows Its Commitment To Continuous Evolution

Broadcom (AVGO) has never been a company content to just sit still and play the hand it holds. Instead, management has always looked to maximize what it sees as the best long-term opportunities – exiting businesses with suboptimal return prospects (or high R&D requirements), and recently diversifying into the high-margin infrastructure software segment. Now it looks like further transformation is on the way, with management possibly looking to exit close to 40% of its semiconductor business while targeting new opportunities like silicon photonics and further infrastructure software bundling options.

Moving another year to the right does shift my fair value range higher for Broadcom, and I believe the semiconductor sector is bottoming out. What’s more, I believe that Broadcom remains a leader in several key businesses, including networking silicon, and I like the growth prospects of new ventures in photonics and base stations. Broadcom has clearly put itself in a different category relative to how many chip companies run themselves, but I continue to believe this is a case of “different is better” and that Broadcom is still a strong core holding candidate.

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Broadcom Again Shows Its Commitment To Continuous Evolution

Canadian Western Looking A Little Undervalued After A Post-Earnings Sell-Off

Canadian Western Bank (CWB.TO) (OTCPK:CBWBF) has had a mixed track record recently relative to sell-side expectations, with modest misses in two of the last three quarters. It hasn’t hurt the stock too much, though, as the shares have climbed roughly 25% and outperformed most other Canadian banks (Laurentian Bank (OTCPK:LRCDF) has largely kept pace), with investors expecting a meaningful revision in its capital requirements in 2020 and above-average EPS growth.

I continue to be rather ambivalent on Canadian Western shares. Including the post-earnings reaction, the stock is basically unchanged from my last update on the company, and while I like the steps that the company is taking to build its long-term growth potential, I remain concerned about the company’s spread exposure, credit quality, and loan growth prospects in the short term. I think investors will do okay from here as is, but should the shares correct into the mid-to-high C$20’s, I’d be a lot more interested.

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Canadian Western Looking A Little Undervalued After A Post-Earnings Sell-Off

An Ongoing Divergence Between Ciena's Business And The Stock Sentiment Offers An Opportunity

Ciena (NYSE:CIEN) is doing its part. This optical equipment specialist has continued to more than hold its own in its traditional service provider networking market, while also executing well on its opportunities in the data center with webscale customers like Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB). What’s more, Ciena has shown it can move the ball forward with respect to technology, staking out a lead with its 400G technology and, now, its 800G technology as well.

And yet, the shares still don’t really reflect that, or at least not on a consistent basis. Ciena shares had drifted back toward $35 before reporting fiscal fourth quarter results (and more encouraging guidance than the Street had expected), but even in the low $40’s, the shares look underpriced based on what investors have normally paid for similar levels of margin. Although 2020 will see a slower pace for the company, I still think these shares are worth serious consideration.

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An Ongoing Divergence Between Ciena's Business And The Stock Sentiment Offers An Opportunity

HollySys Continues Its Frustrating 'Two Steps Forward, One And A Half Back' Dance

I can certainly sympathize with any long-term shareholders of HollySys (HOLI) who are wondering if their patience will ever be rewarded. HollySys shares have lost about 15% of their value over the past three years, a time period that has seen Yaskawa (OTCPK:YASKY) more than double (even with a substantial decline from the early 2018 peak), Rockwell (ROK) climb almost 50%, and even perpetually disappointing ABB (ABB) show some gains. During that time, the market for automation products (as well as train signaling products) has continued to grow in China, but HollySys just can’t seem to live up to its own goals and targets.

I used to cover a long-lagging power company (AES (AES) ) that a reader once described as “unable to ever leave its parents’ basement”, and that feels applicable here – HollySys should be making more progress as an automation provider within China, or at least communicating more pragmatically about its growth targets and goals. That said, AES eventually broke out and the same could still happen for HollySys – the company is flush with cash, has a good niche market position in process automation and train signaling, and stands to benefit from China’s Made In China 2025 (中国制造2025) strategic plan.

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HollySys Continues Its Frustrating 'Two Steps Forward, One And A Half Back' Dance

Growing Signs Of A Brazilian Recovery Have Fueled A Nice Rally In Gerdau Shares

I liked Gerdau (NYSE:GGB) for its leverage to a Brazil recovery story back in October, and the relatively short time since, that story has really caught on with investors. Between the prospect of significant improvement in Brazil in 2020 and more or less stable (but still quite profitable) conditions in North America, Gerdau is looking at solid bounce in 2020 that should make it one of the better growth stories in steel next year.

With the shares running up a third since my last article, I really can't say these shares are undervalued, though the relative value proposition is still fairly attractive next to the likes of Nucor (NUE) and Steel Dynamics (STLD) and considering the more promising near-term outlook relative to Ternium (TX). I usually like to buy commodity stories with a wider margin of error in the valuation, but as a momentum/trading idea, I can't really say Gerdau is a bad one.

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Growing Signs Of A Brazilian Recovery Have Fueled A Nice Rally In Gerdau Shares

Valeo Makes Its Case For Long-Term Electrification Leadership, But Analysts Still Obsessed With Near-Term Costs

“It takes money to make money” is a well-worn cliché, but the sell-side remains fixated on the R&D investments and JV losses Valeo (OTCPK:VLEEY) (FR.PA) is absorbing as part of its efforts to build a leading platform of passenger vehicle electrification technology. I can’t and won’t argue that Valeo’s margins today are great compared to peers, and I likewise won’t argue that there is still ample uncertainty as to what the long-term profitability of EV parts and systems will be, but I believe Valeo is making prudent investments to build a long-term business. Unfortunately, analysts and investors are often obsessed with the short term.

I continue to like Valeo shares, even though the stock has rallied some on strong third quarter results. With investors selling the stock after a capital markets day that didn’t adequately address concerns about near-term profitability, I think this is a name for more risk-tolerant investors to consider.

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Valeo Makes Its Case For Long-Term Electrification Leadership, But Analysts Still Obsessed With Near-Term Costs

Thursday, December 12, 2019

Columbus McKinnon A Victim Of Its Own Success With An Unexpected CEO Transition

Success is, on the whole, a good thing. Even so, it can create its own set of problems, and Columbus McKinnon (CMCO) shareholders are seeing that today (December 11), as the shares are selling off on the surprising announcement of the CEO’s resignation to take the top spot at Fortive’s (FTV) NewCo spinoff.

I believe the loss of Mark Morelli is a significant one, as he oversaw a transformational restructuring process (Blueprint for Growth) that has seen Columbus McKinnon slim down and focus on growth opportunities in material handling, and automation in particular. Although I think Morelli leaves the company much better than he found it, the process of finding a new CEO could well put the transformational process on “pause” and there are always uncertainties when new leadership is brought into a successful situation.

I’m cautiously optimistic that Columbus McKinnon will navigate this transition well – I believe the board has clearly seen the benefits of the strategy Morelli espoused and implemented, and I would expect the board to find a new CEO who will run the company along broadly similar lines. I’m boosting my discount rate by a point to account for the added risk, but the shares are still worth considering.

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Columbus McKinnon A Victim Of Its Own Success With An Unexpected CEO Transition

Rexel Transitioning From "Repair" To Growth

Although Rexel (OTCPK:RXEEY) (RXL.PA) has a decent enough trailing 12-month return (about 20%), the shares have ended up basically flat since my last update on this large electrical distributor, as internal progress with a variety of turnaround efforts has been offset by end-market deterioration. While management believes they’ve exited the “repair phase” of the turnaround, and I see meaningful growth opportunities in markets like the U.S., the reality is that macro indicators are still mixed, and the company is still investing in expanding its digital capabilities.

I still believe that Rexel shares are undervalued and that this stock can benefit from some company-specific drivers in 2020 that is looking pretty “meh” for most industrials. I believe the shares are more than 20% undervalued if Rexel can deliver low single-digit revenue growth and high single-digit FCF growth, but I must also note that the ADRs are illiquid and not all readers may wish to go to the trouble of buying the local shares.

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Rexel Transitioning From "Repair" To Growth