Thursday, January 30, 2020

Nucor Beats Its Self-Lowered Bar For Q4

There’s an emerging trend of Nucor (NUE) and Steel Dynamics (STLD) lowering guidance at their mid-quarter updates only to later beat those projections. Draw your own conclusions from that, but at a minimum it suggests low visibility into the business, which is why I think it’s a little funny that at least some sell-side analysts take guidance from these companies as though it were fait accompli.

As I said in my review of STLD’s earnings report, I don’t think the U.S. steel market is going to be as accommodating to these steel companies as managements are projecting. I believe underlying demand is still soft and I think the recent price surge is going to fade after the first quarter. That said, I still respect the operating quality of Nucor and I like it’s leverage to higher-value areas like long products and the consolidated U.S. rebar market.

When I last wrote on Nucor, I said that I preferred Steel Dynamics and Ternium (TX) to Nucor. Since then, both have outperformed (or performed less badly, more accurately), with roughly 5% declines to Nucor’s 14% decline. I still see better relative value in Steel Dynamics and Ternium at this point.

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Nucor Beats Its Self-Lowered Bar For Q4

Atlas Flinches

Investors waiting for that rare opportunity to buy Atlas Copco (OTCPK:ATLKY), one of the best-run multi-industrial companies out there, on a pullback … need to keep waiting. While the shares have already pulled back more than 10% from their high established in mid-January, the prospective return from here still isn’t all that good and I will be holding off in the hope that further derating brings the shares back to a more reasonable entry point.

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Atlas Flinches

BorgWarner Makes A Bold M&A Move

I didn’t see this one coming.

Yes, I thought, and wrote, that the auto supplier industry was likely to see consolidation, particularly in areas like internal combustion engine (or ICE) components, where pressures from eventual hybrid/electric adoption and R&D were going to reward scale. I likewise thought there’d eventually be consolidation in hybrid/EV-related components, as companies who waited too long to move (or made the wrong moves) tried to correct.

Still, while it makes a great deal of sense to me, I didn’t expect BorgWarner (BWA) to pony up and acquire Delphi (DLPH). Part of the reason was that I expected a negative reaction from investors, and that’s exactly what BorgWarner shares saw after the deal, but also because BorgWarner management had been pretty adamant that they had what they needed in terms of hybrid/EV positioning.

I like this deal. I like the synergy in combustion powertrain, and I like the synergy in hybrid/electric, where Delphi’s power electronics business (inverters in particular) meaningfully improves BorgWarner’s leverage to BEVs. The market clearly doesn’t like the deal, and while there will be plenty of execution challenges and risks, I’d buy BorgWarner on this weakness.

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BorgWarner Makes A Bold M&A Move

3M Running Lukewarm-To-Cool, But The Turn Should Be Coming

It’s still a challenging time to be an industrial company. While the early consensus does seem to be that the second-half rebound story is still in play, it’s sounding more and more like the magnitude of that rebound is going to be less than hoped and the first half of 2020 is likewise going to be tougher than expected. In that respect, then, 3M’s (MMM) fourth quarter results and 2020 guidance don’t appear all that unusual.

I still have very mixed feelings about 3M. The company has frittered away a lot of balance sheet optionality on questionable M&A (and arguably oversized buybacks), and I think the latest restructuring effort (we seem to be averaging one a year now) falls short of the more radical change the business needs. On the other hand, 3M’s high R&D spending establishes high walls around a lot of its businesses and all but ensures healthy margins and cash flows. I’d very much like to see a deeper “re-think” of what 3M should look like 10 years from now, but the valuation today is not demanding and business conditions should improve from here.

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3M Running Lukewarm-To-Cool, But The Turn Should Be Coming

Graco Pulls A Strong Quarter Out Of A Tough Macro

Graco (GGG) is a pretty special company for a lot of reasons, not the least of which is its ability to outgrow sometimes challenging industrial markets through price realizations and innovative product development. While nothing so far in this reporting season suggests underlying conditions were easier than expected (the opposite, if anything), Graco managed a stronger-than-expected quarter by once again executing to its strengths.

While they're very different businesses, stocks like Graco, Illinois Tool Works (ITW), and IDEX (IEX) put me in a bind when it comes to valuation. Graco is hands down an excellent company and clearly deserves a premium, but with the shares already above 18x forward EBITDA, it's difficult to construct a positive bull case other than "just think of the leverage when the economy turns back up".

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Graco Pulls A Strong Quarter Out Of A Tough Macro

Synovus's Performance Has Not Been Good Enough To Shift Sentiment

The line between “patient, long-term investor” and “wrong” can be fuzzy in the best of times and is sometimes only visible in hindsight. That’s something to keep in mind with Synovus (SNV), as these shares are down about 30% from the time of the announcement of the FCB deal and have just not worked as a long call. Although I had said back at the time of the deal that, “Synovus is likely to be sitting in the doghouse for a while now”, and “the overhang from the deal announcement will likely last a while”, this is rather more than I had in mind.

I do believe there is a good bank here with better-than-average growth potential, but management’s decision to increase spending in 2020 to take advantage of disruptions and opportunities in its operating footprint (particularly, but not exclusively, the Truist Financial Corp. (TFC) deal) is not what investors wanted to hear. I believe the shares are undervalued on a mid-single digit long-term core growth rate, but this is a stock that really needs some beat-and-raise quarters to boost sentiment.

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Synovus's Performance Has Not Been Good Enough To Shift Sentiment

PerkinElmer Meeting Expectations, But Not Going Much Beyond

For a company with rich expectations embedded into the valuation, I’d say the reaction to fourth-quarter earnings and 2020 guidance from PerkinElmer (PKI) was fairly restrained. The stock has weakened a bit since earnings, but only after an impressive climb from under $80 in early October to over $100 around the time of the JPMorgan Healthcare Conference.

There are certainly attractive growth opportunities in front of PerkinElmer. I see good potential in the Chinese food testing market, the U.S. market for EUROIMMUN, and in the company’s vision of end-to-end solutions for highly-regulated industries. Vanadis could also be a real winner, given its potential value-for-performance argument. The “but” is that a lot of that already seems to be in the share price. Double-digit EBITDA and FCF growth are appealing, but shouldn’t you expect that from a stock already trading at more than 17x forward EBITDA?

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PerkinElmer Meeting Expectations, But Not Going Much Beyond

Crane's Results And Guidance Were A Relief, But The Growth Outlook In 2020 Isn't Great

Judging by the reaction to Crane’s (CR) reported results and guidance for 2020, I think investors were largely relieved that things weren’t worse. The suspension of production of the 737 MAX is going to hurt the Aerospace business in the near term, and Crane’s Fluid Handling business is seeing the expected slowdown in process-oriented industries. Amidst that, the performance of the Payments business is still something of a wildcard.

I like Crane primarily for the valuation, but the markets tend to reward growth and margin leverage and both could be lacking for Crane in 2020 as the process slowdown and the MAX suspension push the progress on those fronts out a year. Calling this a “neutral” for the next quarter or two would probably be better for my own performance numbers, but that’s more of a trading call and I still see underlying value in this business.

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Crane's Results And Guidance Were A Relief, But The Growth Outlook In 2020 Isn't Great

Strong Results Ease Some Worries About East West Bancorp, But Valuation Is Still Appealing

With meaningful exposure to China and worries not only about the long-term health of the U.S.-China trade relations, but also concerns about asset sensitivity and credit quality, the wall of worry has been higher of late for East West Bancorp (EWBC), leading to pronounced underperformance over the past year. Strong fourth-quarter results should help ease some of those fears, but credit costs will be an ongoing concern in 2020.

East West Bancorp is a riskier-than-average bank investment idea, and I use a higher discount rate as a result. Even with that higher discount, though, I think the market is undervaluing what I see as mid-single-digit core earnings growth prospects over the next decade, not to mention opportunities to return more capital to shareholders and/or acquire within its existing footprint.

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Strong Results Ease Some Worries About East West Bancorp, But Valuation Is Still Appealing

Tuesday, January 28, 2020

Huntington Bancorp Looking More Undervalued, But Still Driver-Poor

When I last wrote about Huntington Bancorp (HBAN), I damned it with the faint praise that although it is a high-quality bank that was trading at a double-digit discount to fair value, I saw no real positive catalysts that would shrink that valuation discount. Seven months later, the shares have barely moved on a net basis (they were up as much as 17% at one point), lagging the broader peer group by around 5% and weakening significantly since earnings.

I didn’t really think the earnings or guidance were that bad, but it brings back that earlier point – what’s going to get investors to reconsider these shares and shrink that valuation gap? I think Huntington will have a relatively better run when it comes to pre-provision profits, and those deposit repricing opportunities will certainly help, but investors are going to need to be patient here. I do see risk from a “it’s going down, so sell it/avoid it” trend, but with the discount to fair value close to 15%, I’m getting more bullish on this as a “it doesn’t deserve to be this cheap” trade.

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Huntington Bancorp Looking More Undervalued, But Still Driver-Poor

Commerce Clicks Off Another Quarter, But Value Is Hard To See


I admit that Commerce Bancshares’ (CBSH) valuation is a puzzle to me. I appreciate the virtues of a bank with very strong fee-generating businesses, low asset sensitivity, and strong core operations in a challenging part of the cycle like this, but the market seems to value that to an excessive degree in the case of Commerce. Not that it has hurt performance, though, as these shares have been a standout performer in the space going back as far as 15 years (with respectable outperformance since my last update as well).

I’m still not comfortable with the valuation, and that’s pretty much a deal-breaker for me. But as far as investors who are/were already comfortable with the valuation here, I don’t really see anything in the fourth quarter results that should shift sentiment.

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Commerce Clicks Off Another Quarter, But Value Is Hard To See

Franklin Financial's Restructuring Work Pays Off With A Good Buyout Offer

In doing some prep work ahead of earnings, I’d flagged Franklin Financial Network (FSB) as a name to cover given what I thought would be an increasing likelihood of a buyout as management cleaned up and repositioned the balance sheet. Turns out that was the right assumption, as Franklin Financial announced in conjunction with fourth quarter earnings that it had accepted a buyout offer from FB Financial (FBK), a fellow Tennessee-based bank company.

I think Franklin Financial shareholders are getting a pretty good deal here. Even though FB Financial shares have sold off a bit, the approximately $38/share effective deal price as of this writing is about 1.4x tangible book value – a small premium to the highest ROTCE Franklin has posted in recent years and a hefty premium to the current financial performance. For those investors who don’t want to sell out, FB Financial isn’t a bad bank, though I don’t see the shares trading at a significant discount today unless management can really work some synergy magic with Franklin.

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Franklin Financial's Restructuring Work Pays Off With A Good Buyout Offer

Monday, January 27, 2020

Steady Performance At Umpqua, With Some Possible Upside From Opex

Having lagged a bit leading into my last piece, Umpqua (NASDAQ:UMPQ) came back strongly, rising as much as 14% before declining into and after earnings, following the sector lower as earnings reports and guidance have failed to live up to investor hopes and expectations. Still, the shares reflect a little more of the underlying value I saw, and management continues to execute relatively well against their targets.

Looking to 2020 and beyond, my feelings are a little mixed. Fundamentally, I think this is a solid bank with a solid core deposit base. I also think it’s a bank with growth potential across the West Coast, particularly on the commercial side. The “mixed” part is that, while I see ongoing opportunities to execute better on costs, management has come up short so far, and I’m likewise a little concerned about the below-expectation trend in loan growth. While I see upside towards $20, these shares are not quite so undervalued as before and management needs to execute better on cost initiatives.

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Steady Performance At Umpqua, With Some Possible Upside From Opex

Coronavirus May Drive Extra Attention Toward GenMark, But Adoption Trends Are Critical

It’s at least a little ghoulish to read the reports of the coronavirus outbreak in China and think “how can I profit from this?”, but the reality is that outbreaks like these can be stock drivers. While I think the financial impact to GenMark Diagnostics (GNMK) will be limited, it may drive more investor attention toward the stock and shrink some of the valuation gap I see.

The big challenge for GenMark remains driving sales and profitability of its core ePlex offering. A limited testing menu is definitely a challenge to adoption, and management has not been producing the sort of beat-and-raise guidance you’d like to see, but the Street is not factoring in much chance at of long-term success.

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Coronavirus May Drive Extra Attention Toward GenMark, But Adoption Trends Are Critical

Sandy Spring Bancorp Growing Its Footprint, Making Progress On Funding

Two things I was looking for when I last wrote on Sandy Spring Bancorp (SASR) were improvements in the funding mix and some activity on the M&A side, and the company delivered both in 2019. Looking into 2020, loan growth prospects are still pretty healthy and the bank management believes they can continue to improve the funding mix. The shares have done okay since the time of that last article, outperforming regional bank indices, but underperforming the S&P, and I still see value in the shares today.

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Sandy Spring Bancorp Growing Its Footprint, Making Progress On Funding

F.N.B. Corp. Comes Up A Little Short In Q4, But The Growth Story Is Intact

A lot of smaller banks have come up a little short in terms of core earnings growth this quarter, and F.N.B. Corp. (FNB) ("FNB") is no exception. While FNB's overall spread performance and loan growth was not this quarter, results did come up a little short of expectations and next year could be a challenging one for positive operating leverage.

Longer term, though, there's a lot to like here. FNB has improved its capital meaningfully, offers good expense leverage for a bank its size and has legitimate growth opportunities in attractive markets like North Carolina, particularly with a chance to benefit from any merger fallout from Truist (TFC). With fair value of around $13 to $14, this is a name worth considering for investors who want exposure to a growing Mid-Atlantic bank.

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F.N.B. Corp. Comes Up A Little Short In Q4, But The Growth Story Is Intact

Sterling Bancorp Isn't Valued For What It Really Is

Investors are nervous about banks with significant exposure to New York’s commercial real estate market, and multifamily in particular. While Sterling Bancorp (STL) certainly does make loans in both of those categories, the shares trade more like a risky multifamily monoline lender than the more diversified lender it really is, to say nothing of giving the bank credit for an above-average deposit base and expense efficiency.

I do have some concerns that management’s guidance for loan growth and operating leverage in 2020 could be too bullish, but I do think the shares are undervalued on the basis of the company’s long-term growth opportunities. With fair value in the low-to-mid-$20’s, I think this is a name worth considering at today’s price.

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Sterling Bancorp Isn't Valued For What It Really Is

Teradyne Still On Fire, With 5G And Memory Test Chipping In

Even by the standards of semi equipment, Teradyne (TER) has been on a tear, with the shares more than doubling over the past year (compared to the paltry nearly 70% gain at Applied Materials (AMAT) and 75% gain at ASML Holding (ASML)). Then again, with Advantest (OTCPK:ATEYY) up about 180% and FormFactor (FORM) up more than 100% as well, it’s pretty safe to say that the wafer testing market has been a good place to be, as demand from logic customers has definitely improved heading into 2020.

Sustainability and valuation were my primary concerns going into this quarter, and they remain my primary concerns. Management’s guidance suggests a year weighted to the first half, and it may well prove to be the case that 5G demand in China was artificially elevated by concerns about future restrictions on access (essentially pulling demand forward). As far as valuation goes, I know growth and momentum investors won’t care, but it’s tough to reconcile today’s price with a reasonable set of long-term growth expectations. The best I can do is to say that, within the spectrum of where semi equipment stocks trade today, the company’s valuation is not so unreasonable. Make of that what you will.

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Teradyne Still On Fire, With 5G And Memory Test Chipping In

STMicroelectronics Delivers A Beat-And-Raise Quarter, With Long-Term Upside Still In Play

I’ve liked STMicroelectronics (STM) (“STMicro”) for a while now, based on the company’s leverage to multiple higher-value growth opportunities, including power management in auto and industrial markets, MCUs in auto, industrial, and IoT markets, and 3D sensing and MEMS across a range of markets, as well as margin leverage from improved utilization, higher-value business, and internal efforts like 300mm wafer use. Thus far, that’s worked out alright, with the shares up another third or so since my last update.

Although I’m worried that the chip sector (analog in particular) has come too far too fast in this rally, I’m less concerned about that with STMicro. The reason for that is that I see the company having comparatively better revenue growth opportunities as it enters new growth markets and gains share, as well as better margin leverage opportunities. My margin-driven EV/revenue model still shows upside into the low-to-mid $30s, but I wouldn’t be too surprised to see the sector cool off at some point in the near future.

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STMicroelectronics Delivers A Beat-And-Raise Quarter, With Long-Term Upside Still In Play

Sunday, January 26, 2020

KeyCorp Still Not Getting Much Love From The Street Despite Better Prospects For 2020

Sometimes you find a relative valuation situation that’s a head-scratcher, and I think that’s the case with KeyCorp (KEY). I don’t exactly love this bank from an operational standpoint, but management has made a lot of good moves over the years – cutting the efficiency ratio from the high-60%’s to the high-to-mid-50%’s, diversifying/growing the consumer lending business, adding digital platforms – but doesn’t seem to get full credit for it. True, the bank has outperformed the sector over the last five years (with strong outperformance over the last year), but it still looks curiously under-valued.

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KeyCorp Still Not Getting Much Love From The Street Despite Better Prospects For 2020

Fees Boost M&T Bank, And Expenses Look Better Heading Into 2020

Valuation and a recent trend of missing operating expense estimates were my biggest concerns when I wrote about M&T Bank (MTB) last quarter, and even after a big post-earnings pop, the shares haven’t moved much beyond the price of that last article. Since then, though, M&T has posted a pretty good fourth quarter report, including real progress on expenses and commentary that loan run-off pressures should start abating in 2020.

I don’t have any quality issues with M&T Bank, but I still don’t find the valuation compelling for a bank that will likely only produce low single-digit pre-provision profit growth for a couple of years (and 2021 could still see a contraction). M&T is a decent enough hold, but with several quality banks out there trading at meaningful discounts to fair value, I’d shop around before buying this one.

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Fees Boost M&T Bank, And Expenses Look Better Heading Into 2020

Wobbly Pricing And Uncertain Demand Weigh On Steel Dynamics

I haven’t been very bullish on U.S. steel companies, and I don’t feel like I’ve missed out on much, with Steel Dynamics (STLD) and Nucor (NUE) both down almost 10% over the past year. Steel Dynamics’ share price is getting more interesting again, but I’m concerned that the market will take the restocking demand we’re seeing now as a new starting point and overestimate potential volume and price growth in 2020. To that end, I think Steel Dynamics management is probably overly optimistic with respect to its demand and pricing expectations for the year.

Even though I’m concerned about where expectations are now for the sector, I do see some potential value here. I’d rather let the reset play out first, as I think Steel Dynamics shares will retest the $20s, but if and when that happens, this would be a name to reconsider.

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Wobbly Pricing And Uncertain Demand Weigh On Steel Dynamics

A Lull At Nidec Looks Like An Opportunity

There’s a reason I don’t really like investing with a “valuation doesn’t matter” philosophy, and Nidec’s (OTCPK:NJDCY) (6594.TO) recent performance is an example of why. While I love the long-term potential of this leading motor manufacturer, the shares weren’t exactly conventionally cheap around the time of the October earnings report and the shares have languished since, underperforming U.S. industrial stocks by about 10%.

Although Nidec isn’t as cheap as I’d like, I think it’s still priced at a level where long-term investors can earn a market-beating return from Nidec’s efforts in electric vehicles, robotics, factory automation, and efficient appliances. Double-digit long-term revenue expectations are by no means conservative, but a strong position in EV traction motors alone can drive much of that, to say nothing of opportunities in automation and energy efficiency.

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A Lull At Nidec Looks Like An Opportunity

Saturday, January 25, 2020

First Bancshares Is Aggressively Building Its Footprint, But Organic Loan Growth Is Lacking

It’s been a while since I’ve written about First Bancshares (FBMS), and the shares of this Mississippi-based bank have not performed particularly well in the meantime, with the shares falling about 15% and definitely lagging their community bank peer group. Not only has First Bancshares been pursuing a growth-by-acquisition strategy at a time when acquisitions have generally been frowned upon, the company hasn’t been doing a particularly good job of generating organic loan growth from that expanding footprint, with disappointing results for three straight quarters.

I believe that when investors start shifting more from defense (who will suffer the least during this period of spread headwinds and tough loan growth) to offense, First Bancshares will get more of its due, but I won’t underplay the need for improvement in organic loan generation. Although I think the fair value range extends close to $40, the shares may wait on signs of better internal execution.

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First Bancshares Is Aggressively Building Its Footprint, But Organic Loan Growth Is Lacking

Texas Instruments Sees Stabilization, But The Street Expects So Much More

At this point, chip stock bulls really need to hope that there’s not so much as a stumble for the growth trajectories for new cars, 5G, new smartphones, and industrial automation, as the stocks by and large already reflect a very robust rebound scenario that leaves little room for disappointment. Texas Instruments (TXN), which does admittedly lean toward the conservatism with its commentary, didn’t exactly fan the flames, acknowledging with fourth-quarter earnings that its markets have largely “stabilized”, while offering guidance that was slightly above expectations for the first quarter of 2020.

I’ve written before that I believe a number of quality chip companies, including Infineon (OTCQX:IFNNY), Microchip (MCHP), Maxim (MXIM), ON (ON), and STMicroelectronics (STM) have run up too aggressively in anticipation of this recovery, leaving upside tied to further acceleration in end-market demand – an acceleration that may be at risk giving what companies are saying about their 2020 outlooks. In any case, specific to TI, I can’t say that I see much value here, and if I had to own an overpriced chip stock, I suppose TI’s well above-average quality would be an argument in its favor.

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Texas Instruments Sees Stabilization, But The Street Expects So Much More

Friday, January 24, 2020

Fifth Third Still Lackluster In A Few Important Respects

Credit where due - Fifth Third's (FITB) integration of MB Financial appears to be going well, and the bank is producing good fee-based income growth, which is an important consideration in an environment where spread revenue growth opportunities are limited. Unfortunately, the company is not really distinguishing itself on loan growth nor pre-provision profit growth, and those were concerns that had me neutral on the stock back in the summer (the shares are down slightly since then, underperforming the sector by around 5%).

Fifth Third is another of those situations where the valuation seems too low now, but I wonder and worry about the likelihood of weak loan growth and pre-provision profit growth limiting the gains. Management's guidance seems relatively encouraging on that score, but I'm worried about reports of ongoing defections from the bank and what they may say about long-term loan growth in the now-key Chicago market.

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Fifth Third Still Lackluster In A Few Important Respects

Fulton Financial Puttering Along, But Doesn't Have Much Growth Or Value Appeal

Back in July I thought that Fulton Financial (FULT) shares were fairly priced and didn’t offer much upside outside of M&A, as the near-term prospects for pre-provision profit growth were pretty lackluster. Since then, the company has made a wealth management acquisition but pre-provision profit performance has indeed been “meh”, and the shares have lagged the broader regional bank sector by about 3%, as well as the Russell 2000 and Russell 3000 by a wider margin (as a smaller company, I’d argue the Russell indices are fairer comps than the S&P 500).

I still don’t have all that much love or enthusiasm for Fulton. Guidance for 2020 sounded a little better than expected, and growth in the commercial loan pipeline is encouraging, but I think loan growth in the Pennsylvania/New Jersey/Maryland operating area could be challenging in 2020, and another rate cut is definitely a possibility. Valuation still looks pretty ordinary, though Fulton has the capital to make accretive acquisitions and there are targets out there.

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Fulton Financial Puttering Along, But Doesn't Have Much Growth Or Value Appeal

Restocking Could Help Universal Stainless & Alloy Products, But Leverage Proves Elusive

It's been a long wait for Universal Stainless & Alloy Products (USAP) to gain much leverage with customers, particularly in the high-value premium alloys that would drive significant margin leverage from their higher ASP and better capacity utilization. Unfortunately, the numbers tell the story - revenue has grown only about 3% CAGR over the past five years and gross and operating margins are both lower. Granted, five years is perhaps an arbitrary period to examine, but the best that can be said about USAP's stock market performance is that Allegheny (ATI) has done worse and Haynes (HAYN) about as poorly in the market over the past five years (while Carpenter (CRS) has done "less bad" more than better).

USAP is still arguably undervalued on multiple valuation approaches, but I just don't see the momentum in the business that I expected to see by now. USAP should benefit from restocking in 2020 (I think we saw some of that in Q4'19) and maybe there are still opportunities to win meaningful business with its premium alloys, but I can't get excited about a company that serves a commodity market without some apparent edge on the cost, production, and product design side.

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Restocking Could Help Universal Stainless & Alloy Products, But Leverage Proves Elusive

A Guidance Hiccup Barely Registers With ASML

Semiconductor equipment stocks have come roaring back on strong logic/foundry orders and anticipation that memory orders will soon come back in force. That hasn’t left many bargains, but this is a momentum-driven sector now. To that end, ASML (ASML) has been quite strong since my last update, rising almost 30% and more or less keeping pace with an assortment of semi equipment names like Advanced Energy (AEIS), Applied Materials (AMAT), and VAT Group (OTCPK:VACNY), while Lam Research (NASDAQ:LRCX) has done even better over that time.

I’ve been pretty straightforward in the past that these momentum situations are not my preferred investment environment and that’s just how it often is with semiconductor equipment names – they sell-off too much in the downturns and shoot back too far when spending recovers. Be that as it may, ASML still has a lot going for it, including a monopoly in the nascent EUV lithography market and upside to over EUR 20 billion in revenue in five years. I will say that ASML’s valuation is reasonable today in the context of its peer group, but the entire group is trading at a premium to normal drivers like near-term margins and revenue growth.

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A Guidance Hiccup Barely Registers With ASML

Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

This has been a challenging quarter for many banks, and Pinnacle Financial Partners (PNFP). While the fourth quarter financial results were less than I was hoping for, there were still a lot of positives in the quarter and I remain bullish on the company’s long-term prospects. Management’s recent announcement that it is launching a de novo growth strategy in Atlanta is just one step on that long-term road, and one that I believe will ultimately go well for the company.

The shares have been lackluster performers since my last update (up slightly and down a bit versus broader bank indices), but I continue to see value below the mid-to-high $60’s.

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Pinnacle Financial Is Seeing Some Challenges, But Entering Atlanta Is A Major Opportunity

PTC Hitting Its Marks As It Transitions To An Industrial Digitalization/Automation Growth Story

CAD and PLM software specialist PTC (PTC) picked an interesting time to convert to a growth company, as weak PMIs across the globe don’t really bode well for sales to industrial and auto companies. Even so, the company has been rebuilding credibility with some solid quarters, and I remain bullish on the potential in leveraging IoT partnerships with Microsoft (MSFT) and Rockwell (ROK), as well as leveraging growing interest in IoT and augmented reality (or AR) as invaluable tools within a range of end-markets.

These shares have shot up almost 30% from my last article, helped by a strong reaction to fiscal first quarter earnings (a clean quarter with some guidance upside). Although the stock isn’t so compelling anymore from a FCF/DCF perspective, I still see some multiple-driven upside and I think annualized recurring revenue (or ARR) growth will be the driving factor in how the stock performs in the near term.

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PTC Hitting Its Marks As It Transitions To An Industrial Digitalization/Automation Growth Story

Sluggish Loan Growth, Spread Pressure, And Limited Op Leverage Making It Hard For Zions To Get Ahead

When I wrote about Zions Bancorpation (ZION) after third quarter earnings, I wrote that Zions was a quality bank that was mismatched the current phase of the cycle and not really cheap enough for a “pay you to wait” play. The shares are down a bit since then, underperforming broader banking indices, but that came mostly with the negative reaction to earnings (which included at least two downgrades).

Although Zions’ valuation is not demanding, I think investors are likely looking at at least three, and maybe four or five, quarters of negative year-over-year pre-provision comps and even management thinks that positive operating leverage might be out of reach in 2020. Valuation and a high-quality (if asset-sensitive) business keep this on the watch list, but I need a bigger discount to fair value or more confidence on near-term earnings momentum to step up.

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Sluggish Loan Growth, Spread Pressure, And Limited Op Leverage Making It Hard For Zions To Get Ahead

Signature Bank Standing Out With Above-Average Growth Potential

Given how investors are prioritizing positive operating leverage with banks, you might think that Signature Bank’s (SBNY) negative operating leverage would be hurting sentiment. What’s really happening is that investors are prizing operating leverage in the absence of evidence of growth – in other words, what is spending more on opex getting its investors? In the case of Signature, the bank is following a clear strategy of building its business, including multiple growth drivers, and with two straight quarters of better than expected pre-provision profit performance, the shares are up about 17% since I last recommended them (beating its peer group by over 12%).

I don’t see quite the same undervaluation as before, but I still see upside and strong bank growth stories are rare enough as it is. Up to around $160, this is still a name I’d consider buying.

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Signature Bank Standing Out With Above-Average Growth Potential

Comerica Struggling To Find Leverage Amid Serious Spread Compression

One of the biggest reasons I was neutral to bearish on Comerica (CMA) last quarter, despite apparent undervaluation, was the sentiment headwind the company was facing from what I expected to be a lengthy string of weak pre-provision profit numbers through 2021. That weakness is not only showing up, but it’s worse than I expected, and management’s guidance for 2020 was not encouraging with respect to spreads, loan growth, or operating leverage.

At some point highly asset-sensitive names like Comerica are going to bottom out, but that’s a sentiment call more than a numbers call and it can be hard to predict when investors will collectively decide that they have good enough visibility on the end of the downturn to start buying for the upturn. I do still believe that Comerica is undervalued, but with pre-provision profits again likely to decline throughout 2020 and management guidance pointing the wrong way, it’s still hard to argue for stepping up and buying now.

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Comerica Struggling To Find Leverage Amid Serious Spread Compression

Eaton Continues To Shift To A Steadier, Higher-Growth, Higher-Margin Model

For a stock that many sell-side analysts have described as “controversial” or “a battleground”, Eaton (ETN) has continued to perform well. I’ve liked this stock for a while now, and it continues to outperform – up another 10% from my last article (beating its peer group by around 6%) and up closer to 30% over the last year (beating its peers by more than 10%). Now with the company announcing the sale of its Hydraulics business, there’s not much argument left that management is attuned to the need to craft a new model that is less cyclical, higher margin, and with stronger long-term growth potential.

Selling the Hydraulics business will boost margins and returns on assets and invested capital, and the share price move after the announcement was almost spot-on with what my margin/return-driven EV/EBITDA model says should have happened. Now the questions for Eaton are more about the health of its underlying end-markets in 2020 and what businesses management may target for further M&A.

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Eaton Continues To Shift To A Steadier, Higher-Growth, Higher-Margin Model

Thursday, January 23, 2020

Sandvik Doing Well Through The Slowdown, But The Price Already Reflects A Recovery

Short-cycle stocks by and large did well in the fourth quarter, with investors buying in ahead of an expected return to growth in the second half of 2020. Sandvik (OTCPK:SDVKY) has gone along for that ride, and has also outperformed the broader industrial group since my last article – rising more than 10% and holding that through a fourth quarter earnings report that still showed signs of weakness.

The confidence expressed by Sandvik’s management on the call that short-cycle markets were bottoming certainly won’t hurt the investment case, but I’d keep an eye on economic indicators in Europe and the U.S. all the same – there’s been more weakness than expected to close 2019 and start 2020. While it hasn’t dented the second-half rebound thesis yet, that recovery is already reflected in the multiples.

Sandvik shares already trade near their one-year (and five-year) high, so it’s not like the impending recovery has been ignored in the valuation. I like Sandvik, and I do still see some upside on an EV/EBITDA basis, but the risk/reward doesn’t seem overly skewed in investors’ favor and this would be a name where I’d still rather wait in the hopes of another sector-wide pullback.

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Sandvik Doing Well Through The Slowdown, But The Price Already Reflects A Recovery

Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Among the banks I like, Regions Financial (RF) has been pretty underwhelming, with the shares lagging their peer group by about 4% since my last update and a few percentage points over the past year as well, as the Street remains unimpressed with the weak loan growth, ongoing credit costs, and limited capital opportunities. None of that is going to be fixed by fourth quarter earnings; Regions didn't post a bad quarter, but guidance for positive operating leverage doesn't seem to have convinced the Street, particularly in light of weak lending performance.

I think Regions management is doing a lot of the right things - focusing on loan returns (versus growth), operating efficiency, and sources of non-spread-based income growth. Still, I don't love this name so much because I love the company or management as I think the valuation is out of whack (with a fair value close to $19%). Valuation unfortunately isn't a catalyst in and of itself, and investors will need patience for this to work, meanwhile more dynamic names like Synovus (SNV) and First Horizon (FHN) still offer upside among Southeast U.S. banks.

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Regions Financial Lagging On Weak Loan Growth And Lingering Credit Worries

Fastenal Will Be Fine, But Watch The Short-Cycle Recovery Story

It’s still very early in the reporting cycle, but these first few reports maybe ought to have investors reconsidering the popular second-half short-cycle rebound assumption. Fastenal (FAST) did okay relative to expectations, but the business has definitely slowed and management gave no indications that they see conditions improving soon. Add in similar reports from MSC Industrial (MSM), Sandvik (OTCPK:SDVKY), and Yaskawa (OTCPK:YASKY) and it’s too early too panic, but maybe the right time to start refreshing that “buy when a pullback happens” list.

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Fastenal Will Be Fine, But Watch The Short-Cycle Recovery Story

Weak Loan Growth Makes PacWest's Spread Compression Even More Painful

All things considered, I’d say that PacWest Bancorp (PACW) held up well in trading after earnings, given that there were few real positives in the quarter and core pre-provision profits missed by a pretty wide margin. Spread compression was already built into expectations, but instead of the second half loan acceleration bulls were hoping for, deceleration is what they got.

I was cautious on PacWest when I last wrote about the stock because I was worried about the choppy near-term outlook (increasing loan competition, increasing spread pressures, and pressures on credit), and the shares have underperformed the broader banking group by about 10% since then. While I do see value in the shares, and the dividend helps lessen the sting, the last few quarters have me on edge regarding the bank’s real competitive advantages and the underlying end-market conditions.

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Weak Loan Growth Makes PacWest's Spread Compression Even More Painful

Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

People’s United Financial (PBCT) isn’t going to win any sprints, but I don’t think that’s why most of its shareholders own the stock. People’s United is a high-quality bank that doesn’t take a lot of chances on lending, but instead chooses to leverage a solid core deposit base in the Northeast U.S. while steadily executing on a roll-up community bank M&A strategy and paying a healthy dividend. I can, and will, quibble about unimpressive long-term tangible book value growth, but steady dividend growth over time is not a bad thing.

The shares haven’t really gone anywhere from when I last wrote about the stock, underperforming the sector, and I’m not all that surprised. People’s United has some counter-cyclical defensive characteristics, but I thought those were already reflected in the share price, and I continue to believe that is the case today.

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Healthy Credit, A Good Dividend, And A Repeatable M&A Model Supporting People's United Financial

First Horizon Continuing To Deliver Good Results Ahead Of A Transformative Merger

With good countercyclical opportunities like the trading business and mortgage warehouse lending, First Horizon (FHN) is doing pretty well at a more challenging point in the banking cycle. Loan growth prospects aren’t looking quite so exciting into 2020, but First Horizon seems to be doing more than holding its own, and the impending merger with IBERIABANK (IBKC) should unlock meaningful operating leverage down the line.

I liked First Horizon last quarter and after the IBERIABANK merger announcement, and the shares have been outperforming. I still like them now, with upside to the $19-$20 range and greater long-term opportunities from the IBERIABANK deal.

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First Horizon Continuing To Deliver Good Results Ahead Of A Transformative Merger

Citizens Has Executed Well In More Challenging Circumstances

Back in June, I thought that Citizens Financial (CFG) had some appealing countercyclical and self-help value, but that it wasn’t quite as attractively valued as Bank of America (BAC), First Horizon (FHN), or JPMorgan (JPM). Since then, the shares have outperformed the average bank stock, but underperformed those three preferred names. Still, with better than expected growth guidance for 2020 and opportunities for both positive leverage and improved capital returns, I think Citizens is going into 2020 in very good shape.

Given those relative performance dynamics, I think Citizens is a little more attractively priced now, as well as undervalued on a fundamental basis. There are still things management needs to work on (including balance sheet optimization), but those plans are underway and I think Citizens should trade in the low-to-mid-$40’s.

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Citizens Has Executed Well In More Challenging Circumstances

Bank OZK Beats, But Investors Are Focusing On Any Sign Of Credit Issues

I’ve been cautious on Bank OZK (OZK) for a while now, and I don’t feel as though I’ve missed much – the shares are down about 10% since my January 2019 article on the stock and up less than 2% since my last article – lagging the broader bank sector by about 10% and 3%, respectively, to say nothing of banks I’ve preferred like First Horizon (FHN). I believe there are multiple issues weighing on Bank OZK – a slowing non-residential construction market, growing competition from nontraditional lenders, adverse asset/liability betas, and concern over credit quality.

I’m more and more interested in the valuation opportunity, though, and the risk-adjusted return potential. Credit losses are certainly an ongoing risk, and given Bank OZK’s willingness to write larger loans, the headline risk is not small. Still, the bank should be able to more than handle some losses, and I think a lot of the rate/NIM risk is already in place. If mid-single-digit core earnings growth is still a valid long-term expectation, I believe these shares are starting to show some real appeal.

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Bank OZK Beats, But Investors Are Focusing On Any Sign Of Credit Issues

Bryn Mawr's Non-Spread Businesses Show Their Value

In a quarter where bank earnings have been hovering around “okay”, Bryn Mawr (BMTC) showed some of the virtues of its business mix, as strong non-spread businesses offset some noticeable weakness in the core lending operations and drove a beat at the pre-provision line. Not only am I bullish on what these non-spread businesses can do for Bryn Mawr down the road, I’m also generally bullish on management’s plan to shift toward a more balanced commercial lending mix and start targeting some opportunities outside of its core suburban Philly operating footprint.

Valuation doesn’t excite me as much; Bryn Mawr is a better-than-average bank for its peer group, and it’s priced accordingly. I don’t have a problem with a fair value in the neighborhood of $40, but that suggests price appreciation that is more “okay to good” than “must buy now”.

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Bryn Mawr's Non-Spread Businesses Show Their Value

Monday, January 20, 2020

Strong Volumes Help Insteel Start The Year Right

I cautioned in my recent piece on Insteel (IIIN) that volatility in end-market demand and import pricing made this a more volatile story and a harder company to model, and that worked out in a positive way in the fiscal first quarter, with Insteel reporting better results on stronger volumes. Management also noted that its transportation end-markets looked healthy and that the pricing cycle may be past the worst.

I thought Insteel was undervalued back in late December, but that the volatility and risk made it a difficult stock to recommend for other investors. I feel better about the volume and margin situations, but I think that view still basically holds - the shares do still offer some upside on an EV/EBITDA basis, and the company could well outperform my expectations, but this remains a tricky stock to model, and a lot of the key factors that will influence revenue and margins are beyond management's control.

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Strong Volumes Help Insteel Start The Year Right

Westamerica Continues To Leverage Its Amazingly Low-Cost Deposit Base

Westamerica Bancorp (WABC) may be one of the strangest banks I follow. While the bank’s tangible book value has increased more than 6% a year over the last decade, loan balances have declined more than 6% on average, and earnings have likewise contracted over time. Although Westamerica’s extremely conservative underwriting and ultra-low-cost deposit base can serve investors well in tougher times (the shares have outperformed the bank sector on a one-year, three-year, and five-year basis), this is definitely an atypical bank and investors need to appreciate that before adding it to their portfolio.

Westamerica has outperformed as the banking cycle has become more challenging, and I don’t see a lot of value here in the high $60’s. A pullback into the low $60’s (or high $50’s) would offer a more compelling story, unless you believe that banks are stumbling toward a major credit crisis, in which case Westamerica’s pristine balance sheet will shine all the brighter.

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Westamerica Continues To Leverage Its Amazingly Low-Cost Deposit Base

Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Despite a more challenging operating environment, those banks with legitimately strong franchises and cogent growth plans (particularly those with a strong IT/digital element) continue to prosper. I liked Bank Of America (BAC) back in May, and not only have the shares outperformed the banking sector as a whole, they’ve outperformed the S&P 500 as well. Likewise, BofA stands out favorably in its mega-bank peer group, though my preferred choices, JPMorgan (JPM) and Citi (C), have done a little better over that time.

While I still love JPMorgan, Bank of America seems to have a little more appeal now on a valuation basis. This isn’t just a valuation call either; although BofA’s loan growth has come back to earth a bit, the bank continues to take share in the consumer banking market and the company’s ongoing tech investments can unlock further operating leverage down the road.

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Bank Of America Flexing Its Muscles As A Consumer Banking Titan

Sunday, January 19, 2020

Still More Chaos At Nektar, But There's Value In The Pipeline

Nektar (NKTR) shares have remained volatile, with new turbulence tied to the rejection and abandonment of pain drug NKTR-181, another restructuring to the Bristol-Myers (BMY) partnership, and ongoing uncertainty about the clinical and commercial profile of its key asset bempegaldesleukin (“bempeg”). While the shares are up more than 10% since my last update, a little worse than the return of the two largest biotech ETFs, the shares had been substantially higher less than a week ago – after the release of slides ahead of the JPMorgan Healthcare Conference and the unsuccessful FDA AdCom meeting on NKTR-181.

I think there are valid questions about management here, and it’s hard to feel good about any investment when you’re not really confident about management, but I believe the potential of bempeg in melanoma supports the valuation and I do still see upside from here, though it’s far from what I’d call a high-confidence pick.

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Still More Chaos At Nektar, But There's Value In The Pipeline

XPO Logistics Shifts Gears Yet Again

Is there really any overarching plan in place at XPO Logistics (XPO)? I ask that because this company has shifted gears so abruptly so many times over the years, that transmission has to be pretty well stripped by now. First the company was going to be a roll-up of asset-light logistics services companies … then it became decidedly more asset heavy. And now management apparently is looking to (or at least willing to consider) auction off everything but the U.S. less-than-truckload business.

I shouldn’t complain – these shares are up 75% from my bullish call back in June (and were up about 50% before the announcement of the strategic review). And you know, if the overarching plan is to create maximal value for shareholders by whatever legal means necessary, that’s not so bad. Either way, with break-up values in excess of $100/share now in play and no real sense of what the long-term strategy is now, I can’t say I’m as bullish on the shares now.

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XPO Logistics Shifts Gears Yet Again

Friday, January 17, 2020

Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

Despite liking management’s portfolio transformation plan, I wasn’t very bullish on Alcoa (AA) in late October, and my primary concerns – that the company is too high up on the cost curve and can do nothing about global overproduction – have come home to roost again, with management forecasting a “balanced” market for alumina in 2020, but an oversupplied aluminum market.

These shares still look undervalued relative to my expectations, but even after a 15% or so drop from that last article, I’m still not keen to own the shares. My basic approach on commodities is that you find the better opportunities in situations where there is a supply bottleneck that will take time to work out and/or where the supplier has a cost advantage. Neither really applies to Alcoa, and while I think further capacity curtailments, closures, and/or sales can improve the long-term viability of the business, I’m just not keen on trying to wring performance out of this name.

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Alcoa May Be Bottoming Out, But Management Still Has A Lot To Do To Improve Costs

PNC Financial Comes Up A Little Short Where It Counts In Q4

Given what I thought was only “okay” valuation back in October, I’m not too surprised that PNC Financial (PNC) shares have done only slightly better than its peer group over the last three months. It’s a well-run, well-liked bank, but with core earnings only a bit better than expected, valuation is perhaps a more pressing concern right at the moment. I’m still not really enthusiastic about PNC as a new buy idea. It’s a fine bank, and a fine hold, but I don’t see enough growth differentiation here to really support a significantly higher share price.

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PNC Financial Comes Up A Little Short Where It Counts In Q4

Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

The share of Eagle Bancorp (EGBN) have had a relatively mediocre run since my last update in October, with the stock more or less tracking the broader performance of regional bank stocks. Although Eagle’s fourth quarter had some pretty curious moving parts, I believe the bank is still in fundamentally good shape and well-positioned to take advantage of the growing, less cyclical Washington, D.C. economy.

With ample surplus capital and the bank already spending on preparations to exceed the $10B asset threshold, I think an acquisition is at least plausible. Either way, while I don’t think the shares are hugely undervalued, there’s still worthwhile upside here on a risk-adjusted basis and the potential of double-digit annualized returns for shareholders.

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Eagle Bancorp Had A Curiously Challenging Quarter, But There's Still Value Here

Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

The trouble with excellence is that once you attain a high standard of performance, the improvements that follow don’t seem quite as impressive. Start an exercise program today, and you’ll probably see rapid improvement over the first few months … but after a year or so, those improvements will be slower and harder-earned. That may well be one of the primary issues for U.S. Bancorp (USB) now, as this well-regarded and highly profitable bank struggles to offset spread headwinds and operating leverage challenges.

I still wonder whether investor frustration with the slow progress here may eventually force management toward a more dramatic step like a large acquisition or merger of equals. Management certainly seems more open to the idea than before, but I wouldn’t make that a base-case assumption. In any case, U.S. Bancorp does appear to offer better-than-average upside here, but with sentiment in a “what have you done for me lately?” sort of place, it may take time for this more defensive name to shine.

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Rate And Operating Leverage Challenges Counterbalancing U.S. Bancorp's Valuation

Wells Fargo's Results Show The Amount Of Work Left To Be Done

In quarter that has so far seen earnings reports that I’d characterize as okay-to-good, Wells Fargo (WFC) once again stands out for the wrong reasons. Not only was there barely any positive news of significance in the quarterly results, I’m not sure investors will be patient with a turnaround process that is going to take years – particularly with management indicating that it was going to take most of 2020 for the new CEO just to complete his review of the business.

Of course it’s more important for Wells Fargo’s turnaround to be done right as opposed to right now, but as I said, Wall Street is not a forgiving or patient place, and 2020 results are likely to be weak. Low single-digit earnings growth can still support a fair value in the mid-$50’s, but it’s tough to reconcile above-average long-term potential with considerable short-term challenges.

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Wells Fargo's Results Show The Amount Of Work Left To Be Done

Robust Loan Growth Continues To Feed The First Republic Growth Machine

Understanding what a business does well and not messing that up in the pursuit of even more growth is an underappreciated business talent, but First Republic (FRC) has that going for it with its management team. While management often fields questions from investors about building or buying its way into new markets, continuing to drive market share growth within its core high net worth (or HNW) market in California, New York City, and Boston continues to drive exceptional performance for this specialized bank.

The biggest challenge for First Republic may be funding its loan growth, but so long as the market is willing to keep paying a premium for the shares, equity raises make sense. While the HNW market is likely not as bulletproof as the bulls want to believe (let’s see what happens in the next real tech stock washout…), I have no problem assuming that First Republic will generate double-digit loan and core earnings growth for a long time to come (at least on an annualized basis). Valuation isn’t as extreme as relative comparisons may seem (there really aren’t many, if any, truly fair comparables), but if loan growth slows, the multiple will definitely be at risk.

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Robust Loan Growth Continues To Feed The First Republic Growth Machine

Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

Being bullish on Citigroup (C) has never been a particularly popular call for me, but the shares are up 16% since my last piece, the best among the U.S. mega-banks I follow, and up about 42% over the last year – better than JPMorgan (JPM), Bank of America (BAC), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). Yes, Citi-haters, I know the three-year comps and beyond are not nearly so favorable, but I think Citi’s results have supported the idea that there’s a credible plan in place here and the performance gap is closing (even if slowly…).

My bullish call on Citi has never been predicated on the belief that it is the best-run bank in the U.S., nor the one with the best prospects. Rather, my thesis was and is that the valuation doesn’t adequately or accurately reflect the growth potential of the business. Provided a long-term core growth rate of around 2% is still valid, these shares are undervalued below $90.

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Citigroup Slowing Rebuilding Credibility In Its Self-Improvement Story

Wednesday, January 15, 2020

JPMorgan Adds Another Quarter To Its Remarkable Performance Run

I’m sure the truly dedicated can find something to nitpick in JPMorgan’s (JPM) fourth-quarter results, but I view the quarter as a strong performance even against what has been a pretty remarkable run of quarters across the banking cycle. While the underlying health of the U.S. economy remains a concern (more on the corporate side now than the consumer), as does the ongoing impact of low rates, JPMorgan has shown it can adapt to the environment, and I still see meaningful opportunities for both organic growth and operating leverage.

The only issue now is that the Street is up to speed on this name; the 14% move in the shares since my last update (roughly double the underlying bank sector) has brought the stock to my fair value estimate, even after post-Q4 adjustments. There’s nothing wrong with owning one of the best of the best at fair value, though, and I won’t put it past JPMorgan management to deliver upside to my core long-term 3% underlying growth estimate.

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JPMorgan Adds Another Quarter To Its Remarkable Performance Run

Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

If you’re an American investor, the odds that you’ve ever heard of Bossard (OTC:BHAGF) (BOSN.SW) are quite low. Frankly, considering the size of the company, you could easily be a Swiss investor and never have heard of this company. Be that as it may, this is a high-quality industrial name well worth knowing, as this growing fastener distributor and industrial solutions provider has a solid global growth opportunity.

Bossard shares were down about 10% in Switzerland on its top-line update for the fourth quarter, but the underlying results weren’t meaningfully different than expected. Weakness in both the EU and U.S. industrial markets are clearly areas of concern, but Bossard is highly leveraged to a turnaround in short-cycle industrials. The shares aren’t in my buy zone yet on a DCF basis, but they already have some upside on an EV/EBITDA basis and this is a name to watch if industrial stocks sell off further through this reporting cycle.

Investors should note that there is virtually no liquidity in the ADRs and the Swiss shares themselves aren’t especially liquid, though daily liquidity of over $3 million should be sufficient for most individual investors.

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Hit By Weaker Fourth-Quarter Sales, Bossard Is One To Watch

Tuesday, January 14, 2020

Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help

These have been some interesting times for Acerinox (OTCPK:ANIOY) (ACX.MC), as this leading producer of stainless steel has had to navigate a weakening demand environment and volatile input prices. All things considered, I believe Acerinox management is doing pretty well, and I think the acquisition of VDM Metals will prove to be a savvy move down the line.

While I still liked Acerinox back in May, I thought there were other, better options to consider. Since then, Acerinox has done pretty well (local shares up 15%, the ADRs up closer to 20%), but Gerdau (GGB) and Aperam (OTC:APEMY) have done better, while Ternium (TX) has done worse (neither Gerdau nor Ternium compete in stainless). I still believe that Acerinox is undervalued, and while there is risk to the 2020 demand outlook, I like this company for its above-average productivity and efficiency, as well as its wider set of options to improve performance even further.

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Acerniox Looking For Customers To Restock, But Also Pursuing Self-Help