Lundbeck's Pullback Makes It Worth Considering Again

Investors often gravitate toward pharmaceutical stocks due to the perception that the sector offers less volatility than other sectors, but that has not been the case for H. Lundbeck (OTCPK:HLUYY) (LUN.KO), and the shares have remained quite volatile as investors try to figure out the confounding trends in both the legacy and growth portfolios, not to mention the potential future contributions of the pipeline.

While Lundbeck’s fourth quarter wasn’t bad, management was cautious with guidance. Coupled with concerns that too much of the recent earnings momentum has been driven by the legacy portfolio, investors have once again sold the stock. Although I can’t call Lundbeck a best-of-sector idea, and it is certainly not as dependable as a company like Roche (OTCQX:RHHBY), I think there may be more value here than the shares currently reflect.

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Lundbeck's Pullback Makes It Worth Considering Again

Lenovo Continues To Execute, But Also Continues To Suffer From Macro Headwinds

I noted in my last article on Lenovo (OTCPK:LNVGY) that the company’s lack of meaningful internal drivers was an impediment to building any real share price momentum and/or shrinking the valuation gap. Moreover, in the absence of meaningful internal drivers, Lenovo is subject to the vagaries of transient macro challenges, the latest being the increasingly global Covid-19 outbreak.

The ADRs are pretty much flat relative to that last article, even though the company delivered yet another better-than-expected quarter, despite a number of macro challenges including the ongoing U.S.-China trade war, supply/component shortages, and the aforementioned outbreak. Although the shares look undervalued on assumptions of low single-digit revenue growth, low-single-digit operating margins, and only minimal improvement in free cash flow margins, it will likely take real improvement in the data center or mobile business to meaningfully shrink that valuation gap.

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Lenovo Continues To Execute, But Also Continues To Suffer From Macro Headwinds

Parker Hannifin Is Less Cyclical Than Before, But The Valuation Leaves No Room For Error

Credit where due -- not only has Parker Hannifin (PH) management used M&A to diversify the company, but they have also reduced the cyclical margin sensitivity of the legacy business. That’s no easy feat, and it’s certainly worth something, but Parker Hannifin shares continue to trade out of sync with economic indicators and at a valuation that leaves no room for stumbles.

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Parker Hannifin Is Less Cyclical Than Before, But The Valuation Leaves No Room For Error

ABB Offsetting Challenging Market Conditions With A Self-Improvement Story

The hiring of Sandvik (SVDKY) CEO Bjorn Rosengren has already started benefiting ABB (ABB), with investors increasingly willing to give the company more benefit of the doubt with respect to future margin improvement initiatives; so much so that it was tempting to go with a “Bjorn Again” title for this article. To be sure, Rosengren has proven his capabilities over his career, with his recent performance at Sandvik offering an attractive blueprint for ABB.

I’ve been bullish on ABB for a while on its self-improvement potential, but I do have some concerns that valuations for industrial stocks have gotten too frothy. I like ABB’s exposures to broad markets like electrification and industrial automation, and I see meaningful opportunities for the company to improve its execution. Still, that won’t happen overnight, and I’m concerned investors have overly high expectations for the entire sector.

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ABB Offsetting Challenging Market Conditions With A Self-Improvement Story

More Progress At Societe Generale, But Long-Term Core Growth Remains A Key Challenge

Societe Generale (OTCPK:SCGLY) has continued to outperform its peers since my last update, outperforming other European stocks by about 2%, bringing its trailing one-year outperformance to around 15%. I believe much of this performance has been tied to the relatively quick progress management has made with shoring up the capital position, though some improvement in the French retail business certainly hasn’t hurt.

This French bank remains a challenging bank to recommend, though I do believe it is still undervalued. The company’s efforts to improve its capital ratios have very likely added to the bank’s long-term growth challenges, though markets like Russia and Africa can still offer some upside. Improved visibility on lower capital requirements could help support the shares this year, and expectations are still relatively low, but investors shouldn’t overlook facts like the bank’s inability to earn its cost of equity, nor management’s ongoing downward revisions to ROTE expectations.

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More Progress At Societe Generale, But Long-Term Core Growth Remains A Key Challenge

Truist Produces The Sound, The Market Provides The Fury

Admittedly, that title is a little overheated, but the market reaction to Truist’s (TFC) first quarter as Truist was not particularly positive, with analysts and investors fretting about a longer timeline to expense synergies and a greater income contribution from non-core amortization. The disappointment moderated somewhat after the call, but the reality is that Truist didn’t offer the sort of positive operating leverage story that investors really want now.

Given the complexity in modeling the merger, I wasn’t going to put much faith in this first quarter, whatever the results. I think this merger still makes a lot of sense from a strategic standpoint, but I also see a lot of execution challenges and management will have to rise to the occasion. With core underlying core earnings growth potential of around 5%, I believe these shares are undervalued below the high $50’s.

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Truist Produces The Sound, The Market Provides The Fury

Roche Still Going Strong, As Pipeline Productivity Fuels Pharma Growth

The fourth quarter was not perfect for Roche (OTCQX:RHHBY), but it was no worse than “good enough” and assuming management is applying their typical caution with early guidance, 2020 is shaping up as a good year. Although I have few if any real concerns with the pharma business, the diagnostics business continues to look rather weak and is an area that needs to be addressed.

Roche shares have risen another 10% since my last update, but I’m still bullish on balance. The prospective returns aren’t what I’d call superior, but I think the risk-adjusted return is still attractive. On balance, I think Roche remains a good buy-and-hold for investors who want pharma exposure, and particularly the kind where management execution (on the pharma side, at least) is not an issue.

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Roche Still Going Strong, As Pipeline Productivity Fuels Pharma Growth

Stanley Black & Decker Comes In A Little Light, But Has Drivers For 2020

The last year has been fairly good for Stanley Black & Decker (SWK) despite significant headwinds from tariffs, the U.S. dollar, and challenging conditions in the auto end-market. Helped by growth in the tools business, Stanley Black & Decker’s organic growth held up better than most multi-industrials, and there has been further progress in the Security business.

When I last wrote about the stock, I recommended picking up SWK shares if and when they fell below $140. Investors got two of those opportunities, and the shares have solidly outperformed the industrial sector and the S&P 500 since the last one. At this point, even with what is likely to be an above-average organic growth profile for 2020, I think the shares are little pricier and I’d be more interested again in the $150’s.

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Stanley Black & Decker Comes In A Little Light, But Has Drivers For 2020

A Few Short-Term Challenges Don't Cancel Ingersoll-Rand's Strong HVAC Results

You can never be quite sure what investors will be willing to just "look past"; investors seem to have taken the suspension of 737 MAX production in stride as it concerns leading aerospace suppliers, and likewise investors seem to not be overreacting to a noisy quarter at Ingersoll-Rand (IR) that was impacted by some short-cycle industrial weakness and a steep downturn in the cyclical (but quite profitable) Thermo King business.

Given the significance of HVAC in global energy consumption (to say nothing of the number of people around the world who don't yet have it), Ingersoll-Rand is not only tied to a very strong underlying multiyear driver, but one that has an appealing ESG angle as well. This has led me to look past some of my valuation concerns, and I still like these shares, though I'd like them a lot more if I had the chance to buy below $120.

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A Few Short-Term Challenges Don't Cancel Ingersoll-Rand's Strong HVAC Results

Stryker Humming Along, But Seems To Be Straining The Sell-Side

However you feel about the valuation, I don’t know how you don’t admire the money-making machine that is Stryker (SYK), and this excellent med-tech company continues to execute at a high level that most other med-techs (if not most other companies in general) could only aspire to reach. The “but” is that once you reach such a high level, feeding the Street’s insatiable appetite for “more” gets harder and harder.

Although transitioning to the next year in my model does boost my fair value assumptions for Stryker, it’s not enough to bring the shares into the realm of “cheap”. It’ll probably take a significant market washout or a real misstep from the company to drive significant derating, though a suppose it’s plausible that just a general “it’s gone as far as it can go” malaise could come into play. Whatever the case, it’s a must-follow if you care about med-tech, but it’s hard to get excited about what looks like a mid-single-digit prospective return, particularly with Stryker likely to be more on the sidelines with growth-driving M&A in the near future.

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Stryker Humming Along, But Seems To Be Straining The Sell-Side

Rockwell Automation Puts Up A Decent Quarter In A Challenging Macro Environment

Automation specialist Rockwell Automation (ROK) reported a decent quarter for its fiscal first quarter (calendar fourth quarter), but Rockwell's valuation isn't predicated on decent results - the valuation embeds expectations of superior growth and margins, and I'm concerned that investors may continue to be disappointed on that front, as the company's reputation can overshadow its reality. On a more positive note, the company's digital industrial initiatives do appear to be gaining some traction.

Rockwell shares are down a little from my late November update, modestly lagging the industrial peer group over that very brief time frame (though Rockwell has also underperformed a bit over the past year). That hasn't brought the shares to what I'd call an undervalued level, but I can say that the shares aren't all that more expensive than many other high-quality industrials these days in terms of prospective returns.

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Rockwell Automation Puts Up A Decent Quarter In A Challenging Macro Environment

Mellanox More Than Biding Its Time Into The Nvidia Deal Close

With Chinese approval of the proposed Nvidia (NVDA) acquisition of Mellanox (MLNX) still an “any day now” event, there’s been no new developments since my last update for arguably the most important driver of Mellanox shares now. I had hoped that approval would come before the Chinese New Year, but that didn’t happen, and with the added issue of the coronavirus outbreak, Mellanox and Nvidia shareholders may have to sit tight a little while longer.

I continue to believe that there’s little long-term risk in playing this opportunity. Yes, I expect Mellanox shares would be weak in the immediate aftermath of a deal cancellation, but with the strength seen in Mellanox’s business lately, investors look likely to come out ahead either way.

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Mellanox More Than Biding Its Time Into The Nvidia Deal Close

Fanuc Still Under Pressure From The Automation Slowdown

Since my last update on Japanese factory automation specialist Fanuc (OTCPK:FANUY) (6954), the shares have declined about 6% - broadly in line with other Japanese automation plays like Yaskawa (OTCPK:YASKY) and THK (OTCPK:THKLY), but lagging Western players like Rockwell (ROK) and ABB (ABB). Fanuc has also been one of the weaker stocks in the group over the past year, an issue that I believe ties back just as much to the overheated valuation as fundamental deterioration in the business.

I still see a lot of challenges for Fanuc. The company’s extensive investments in capex have created a lot of operating overhead, and it’s no better than unclear to me as to whether significant increases in R&D spending over recent years have really improved product vitality and competitiveness. Worse still, I see more competition eroding the company’s former strength in CNC controls and I haven’t been all that impressed with the company’s leverage to opportunities like cobots or industrial IoT.

Fanuc still enjoys a strong reputation as arguably the go-to name in Japanese automation, and I think that is reflected in the share price. I expect business to pick up significantly in the coming years, and I see significant potential to improve FCF margins, but I can’t make the valuation work.

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Fanuc Still Under Pressure From The Automation Slowdown

Positive Commentary Around China Has Reignited Hope For Accuray

If you look at a long-term chart of Accuray (ARAY), you’ll see a few spikes - periods where investors thought that the company had finally gotten its various ducks in a row and was about to start generating real share growth and leverage. There’s a new hope around Accuray again, but it’s up to management to follow up with a sequel more like The Empire Strikes Back than The Holiday Special.

I still want Accuray to succeed, but the reality is that for all of the good things this management team has done, executing on growth opportunities has proven elusive thus far. Maybe the China opportunity will finally unlock the potential that long-suffering long-term investors have held on to, and it’s certainly true that even with this recent spike in the share price, the valuation doesn’t anticipate an especially significant, durable growth ramp. If Accuray can execute (and build) on what management has characterized as a $100 million-plus opportunity in China over the next couple of years, further upside is certainly possible.

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Positive Commentary Around China Has Reignited Hope For Accuray

FirstCash Doing Pretty Well Through A Challenging Period

There was no reason to expect FirstCash’s (FCFS) fourth quarter to be strong, as management had warned investors about the impacts of curtailing the consumer lending business (payday lending) and social programs in Mexico that were impacting pawn loan demand. While I wouldn’t call the results “strong”, I think they do demonstrate that FirstCash management is able to effectively manage the company through both the boom times and the challenging times, neither of which last forever.

FirstCash shares have recovered from their lows but still appear to offer double-digit upside on a long-term discounted cash flow basis. The U.S. operations will be a cash cow, generating cash for dividends and buybacks, while the company continues to reinvest the cash flow generated by the Latin American operations into further store growth across the region. All told, while this is a stock with above-average risk, I think it’s a name worth considering.

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FirstCash Doing Pretty Well Through A Challenging Period

Maxim Among The First To Deliver A Real Recovery, But Expectations Were Already Steep

“First in, first out” seems to be working out for Maxim (MXIM), as this diversified chip company chose to make hard decisions earlier in the cycle that punished growth at the time, but now leaves the company ahead of many of its peers as the recovery begins. I also like the leverage Maxim has to multiple growth opportunities, including autos, factory automation, data centers, and 5G, not to mention a strong margin profile and clean balance sheet.

Maxim’s beat-and-raise quarter was a welcome sight, but I am a little concerned about the sustainability of the outperformance in wireless. Then again, this is hardly a Maxim-specific issue. The bigger issue for me remains valuation. Multiples are high across the chip sector, all but demanding beat-and-raise quarters to sustain, let alone drive, share prices, but again this is not a Maxim-specific issue. I’d rather own STMicro (STM) at current prices, but Maxim is definitely a name I’d consider on a pullback.

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Maxim Among The First To Deliver A Real Recovery, But Expectations Were Already Steep