Reshoring Rebuilding Sentiment Around Rockwell Automation

What has happened recently with Rockwell (NYSE:ROK) shares is a great reminder to make sure you take advantage of real-time price alerts for stocks on your watch list. If you moved quickly, you had the chance to buy Rockwell shares in March with a double-digit prospective annualized return - a very rare opportunity for a much-loved (if not over-loved) industrial company.

In any case, Rockwell is one of the very rare U.S. industrial stocks that's almost in the black on a year-to-date basis, as sentiment has quickly recovered. Not only does it seem like investors are getting more comfortable with the idea of a 20% or so drop in the June quarter for many businesses, they're also counting on that recovery to start before the end of 2020. In the case of Rockwell specifically, not only is the company leveraged to some markets with relatively attractive recovering potential, it's also a direct play on a trend of reshoring that is increasingly working its way into base-case scenarios.

With the big rally since the March panic, Rockwell shares are back to their typical premium pricing, and I think there may be more risk here from slower end-market recoveries and disappointment on the scale of future reshoring.

Read more here:
Reshoring Rebuilding Sentiment Around Rockwell Automation

COVID-19 Saps Some Of Accuray's Momentum, But Execution Remains Strong

I feel bad for Accuray (ARAY) management. This team has done a lot of work to improve the company over the years and brought the company to the cusp of a potentially transformative opportunity... only to see COVID-19 slam the brakes on that progress. While delays in converting orders from China into actual placements and revenue are frustrating, I don't view this as an execution issue, nor do I view this business as lost, just delayed.

How bad things will get over the next quarter or two, and possibly even the next year or two, is a big unknown. While hospitals are continuing to provide radiotherapy to patients, the COVID-19 crisis has brought new procurements and installations to a dead stop and has scrambled the budgets for many centers. The arguments for radiotherapy, and for Accuray's systems, remain unchanged, though, and I think the worst that will happen is that business, revenue, and profits get "pushed to the right" and delayed. That does reduce the near-term fair value of the shares, but the 40% drop since my last article far exceeds my estimate of that impact.

Click here to continue:
COVID-19 Saps Some Of Accuray's Momentum, But Execution Remains Strong

Rexel Pounded On Fears Of Protracted Construction Declines

Where I had previously expected Rexel (OTCPK:RXEEY) (RXL.PA) to face a slowing non-residential construction market in 2020 and a bottoming industrial market, those assumption are out the window with Covid-19 leading to drastic slowdowns in activity around the world. With fears of much worse near-term revenue and margin prospects, a longer-term downturn in commercial activity, and a liquidity squeeze, Rexel shares have lost more than 40% of their value from my last update in December.

Current conditions are indeed bleak, and I am concerned about the prospect of an extended decline in non-residential new-build activity, but I see industrial automation spending returning late in 2020 and into 2021, and I believe renovation/retrofit activity can support the non-resi business to some extent. On top of that Rexel still has its own self-improvement initiatives, like the increasing digitalization of its business. If low single-digit revenue growth and long-term FCF margins in the 3%’s are still attainable, these shares are more than 50% undervalued now.

Investors considering this name should note that the U.S. ADRs are not especially liquid.

Read the full article:
Rexel Pounded On Fears Of Protracted Construction Declines

ABB Has To Deliver Against Higher Expectations

The hiring of Bjorn Rosengren as ABB’s (ABB) CEO has gone over well with analysts and investors, helping spur about 15% of relative outperformance for the shares since that announcement, but there’s a lot of work still to be done. ABB most definitely has areas of strength (drives, robots, et al), but it also has a lot of issues that need to be addressed, including sub-scale share in a wide range of markets, weak margins in several segments, and a long history of lackluster performance. The potential is there, but potential has produced next to nothing tangible for investors over the last decade.

I bullish on what ABB could be, but I think that has to be tempered with what it is today, and that is an underperforming multi-industrial with a lot of “problem areas”. Markets like electrification and automation have very attractive long-term prospects, and the company has a proven CEO at the helm, but the Street’s benefit of the doubt is only going to last so long.

Follow this link to the full article:
ABB Has To Deliver Against Higher Expectations

Reduced Leverage And Increased Expected Losses Dogging Huntington Bancshares

I'm worried that Huntington Bancshares (HBAN) was "driver-poor" after fourth quarter earnings, and now, with management guiding away from operating leverage in 2020 and warning of likely future reserve additions, it seems like the Street got its reason to sell off the name and stay away. The shares are down about a third since that last article, underperforming the company's peer group by a slight margin.

Once again, I find my argument for Huntington largely revolving around "it's not really as bad as the price says it is". I think management is being "prudently aggressive" in building reserves, particularly against the energy book, and I do think there will be pre-provision profit growth again late in 2020, and likely into 2021 as well - not a lot, granted, but some. While the shares do look notably undervalued to me on long-term core earnings, I'll grant that there are broadly equal banks trading at discounts to tangible book (versus Huntington's slight premium), so I can't make a really compelling call that you should choose this name over another of the many undervalued regional/super-regional banks.

Read more here:
Reduced Leverage And Increased Expected Losses Dogging Huntington Bancshares

In An Odd Twist, The Market Seems Relatively Calmer About Bank OZK's Credit Situation

I was positive on Bank OZK (OZK) after its last quarterly earnings report, my thinking being that the Street was letting its worst-case scenario thinking get a little too far in front of Bank OZK’s demonstrated historical underwriting excellence. Yes, every cycle is different, but not many banks change as dramatically as the valuation implied with Bank OZK.

Since then, the shares are down about 25%, which is hardly a performance to celebrate, but the stock has outperformed its peer group by about 10%, with most of that coming since earnings. In an odd twist, it seems like the Street is more comfortable with OZK’s reserving assumptions than with other banks. While these shares do still offer an attractive long-term prospective return, there are other banks with even more upside potential and more traditional risk exposures (i.e., not so much concentration in construction and CRE lending).

Read more here:
In An Odd Twist, The Market Seems Relatively Calmer About Bank OZK's Credit Situation

POSCO Now A Passenger As Investor Sentiment On Global Steel Demand Drives The Story

Back in the pre-Covid-19 days, I thought the valuation of POSCO (PKX) shares looked disconnected from underlying fundamentals, but that the shares could “bump along the bottom” for a few more quarters as investors factored in a weaker steel outlook for 2020. Covid-19 has thrown all of that out, and although the shares have actually held up quite well versus Steel Dynamics (STLD) and Nucor (NUE), and outperformed other non-U.S. steel stocks like Gerdau (GGB) and Ternium (TX), a roughly one-third decline in the share price is still pretty brutal.

Are POSCO shares trading too cheaply against even a grim, Covid-19-influenced outlook? I think so. But I also think that it’s going to take evidence of a global economic recovery, particularly in short-cycle end-markets, and improving global steel prices to really change sentiment. In other words, with reports of apparent demand declines of 20% or more coming out of markets like Europe, it’s going to be hard for sentiment to shift, but when signs of demand stabilization start to appeal, these shares should start to recover.

Click here to continue here:
POSCO Now A Passenger As Investor Sentiment On Global Steel Demand Drives The Story

Green Shoots At Fanuc, But Beware Of Lawn Mowers

It’s been a long time since I’ve felt any warm fuzzy feelings about Fanuc (OTCPK:FANUY), not so much because I had issues with the company but because investors traded it more on its reputation than the financial reality. The valuation has become more reasonable since my last update, though, and it looks as though Fanuc may actually be priced at a point where investors can look forward to a respectable return.

I still have my concerns about Fanuc, mind you. I believe there has been more erosion in the CNC business opportunity than bulls think, I think Fanuc faces more serious robotics competition than before, and I think the next smartphone cycle won’t be particularly good for the company. But, I like management’s newfound discipline on costs and with the idea that there’s a fair price for all going concerns, this is one of the better opportunities I’ve seen in these shares in a while.

Read the full article here:
Green Shoots At Fanuc, But Beware Of Lawn Mowers

Valeo Underrated By The Street As It Continues To Outperform Build Rates

With global light passenger vehicle unit sales down more than 24% year over year in the first quarter of this year, you can probably imagine how the shares of most auto parts suppliers are looking these days. Valeo (OTCPK:VLEEY) (FR.PA) certainly isn't unusual in that regard, with the shares down almost by half over the past year and down about 40% since the start of the year.

I continue to believe Valeo is a long-term winner in the evolution toward hybrid and electric cars, but the company is most definitely not out of the woods yet. It's going to take a couple of years to reach/surpass 2019 levels of revenue and profits, and there are ongoing cash burn risks with the company's JV with Siemens (OTCPK:SIEGY), not to mention valid concerns that the COVID-19 recession will push back the adoption curve of hybrids and electrics. On the other hand, this is a company that has been solidly outperforming underlying builds and has a strong hybrid/EV offering. This is a high-risk selection, but one that I think is worth serious consideration.

Follow this link to the full article:
Valeo Underrated By The Street As It Continues To Outperform Build Rates

Epiroc In Good Shape Going Into An Uncertain Downturn

All in all, Epiroc (OTCPK:EPOKY) (EPI-A.ST) shares have held up surprisingly well through a period of significant uncertainty and pronounced weakness in equipment orders - and that was before COVID-19 swept around the globe. I thought Epiroc shares had okay, but not great, upside potential back in the summer of last year, after which the share rose more than 20% before a sharp selloff that led to a roughly one-third peak-to-trough move and a subsequent 30% rally. Over that period, Epiroc has been a relative standout, outperforming peers like Caterpillar (CAT), FLSmidth (OTCPK:FLIDY), and Komatsu (OTCPK:KMTUY), though admittedly none of those are apples-to-apples comps.

At this point I still like the company from a business quality standpoint, and the shares are down about 10% from the time of that last article. I expect significant declines in the business in the next couple of quarters, but longer term, I still see this as a quality mid-single-digit grower and a beneficiary of technology adoption across the mining industry. The prospective return isn't superior now, and investors may want to wait in the hope of another pullback, but I'd note that quality companies don't always give investors that ideal margin of safety.

Continue to the full article:
Epiroc In Good Shape Going Into An Uncertain Downturn

Peak Uncertainty For Universal Stainless & Alloy Products As COVID-19 Undermines Its Markets

The investment case for Universal Stainless & Alloy Products (USAP) was already difficult enough. In my last article, I said the company didn’t have much appeal to me beyond a potential trade on restocking, and now there is major end-market weakness and uncertainty to contend with for at least a couple of quarters. On top of that, USAP is squeezed for liquidity, though I do think the company has a path through that squeeze.

I do believe there are suppliers to the aerospace, heavy industry, oil/gas, and other stressed markets that are worth considering today (I said as much recently in reference to Hexcel (HXL)). I’m not quick to add USAP to that list, as the company has long struggled to really get its premium alloy business growing and contributing to meaningfully higher margins. I do believe aerospace, machine tooling, oil/gas, and other markets will all recover, but I don’t see much more than speculative appeal to USAP at this point.

Read more here:
Peak Uncertainty For Universal Stainless & Alloy Products As COVID-19 Undermines Its Markets

Back To "Hurry Up And Wait" With Lexicon

The frustrating reality for a lot of biotech shareholders is that while these stocks can enjoy strong runs on thesis-altering data announcements, a lot of time as a biotech investor is spent waiting. Such is the case for Lexicon Pharmaceuticals (LXRX) today. Whatever commercial sales potential remains in Xermelo for its current on-label indication of carcinoid-related diarrhea, it’s going to take time to develop. Likewise with follow-on opportunities in neuroendocrine tumors (or NET) and biliary tract cancer, new drug opportunities like LX9211 in pain, and whatever management may try to advance from its preclinical assets.

The “but” is that Lexicon’s clock is ticking. The company has the cash to see if there’s something to the idea of using Xermelo in those expanded oncology indications and LX9211 in pain, and management still has some cards to play with sotagliflozin at the FDA. On top of that, perhaps management will find some alternatives for restructuring debt maturities in 2021 and 2022. The shares do still have speculative value, but it’s tied to largely to the clinical development process now.

Read the full article here:
Back To "Hurry Up And Wait" With Lexicon

SKF Beats, But The Downturn Could Still Turn Ugly

Credit where due, SKF (OTCPK:SKFRY) posted an impressive earnings beat for the first quarter, with stronger margin trends than investors have seen at other industrials like Atlas Copco (OTCPK:ATLKY). The question is how sustainable that will be; SKF is very sensitive to demand in auto and short-cycle industrials, and the second quarter is going to be brutal. On top of that, the company went into this downturn with high inventories and not many positive offsets.

I wasn’t wild about SKF when I last wrote about the stock, and the shares largely traced their peer group lower until this first quarter beat. The valuation actually isn’t bad here, but I think you need a relatively bullish outlook on the post-Covid-19 recession recovery scenario to support a bullish position here.

Click here for more:
SKF Beats, But The Downturn Could Still Turn Ugly

Worries About Oil And Marine Have Alfa Laval Trading Much More Reasonably

I wasn’t all that excited about Alfa Laval’s (OTCPK:ALFVY) share price back in December, but that was before Covid-19 scrambled the markets and threw the outlook for almost every industrial company out the window for at least the next two quarters, and possibly quite a bit longer. With the shares down about 25% since then, modestly underperforming its peer group, the valuation is now once again more reasonable for long-term investors.

“Long-term” really is the key here, as there are significant near-term concerns about the outlook for orders in the marine and oil/gas markets – two major end-markets that collectively account for over 40% of Alfa Laval’s business. Opportunities in HVAC, pharmaceuticals, food/beverage, and industrial end-markets offset this to some extent, but Alfa is likely looking at a more protracted recovery than its shorter-cycle peers, and could weigh on sentiment and share price performance even with a good valuation.

Follow this link to the full article:
Worries About Oil And Marine Have Alfa Laval Trading Much More Reasonably

Old Dominion Will Prove Its Superiority Through The Downturn, But The Price Gives Pause

I know, I know … I’ve written plenty of times that I believe Old Dominion (ODFL) is the best less-than-truckload (or LTL) carrier out there, and quite possibly one of the best-run companies I follow irrespective of industry, but it’s always just so darn expensive. And it certainly won’t hurt the “forget about valuation, just buy good companies and hang on…” argument to note that the shares are up another 15% from my last article – a time period over which the S&P 500 fell 10%, the Dow Jones Transport Index fell 23%, and my preferred proxy for industrials likewise fell a little less than 23%.

I honestly have no concerns about Old Dominion heading into this downturn, at least from an operational perspective. The company will probably lose some share to more aggressive pricing, but when economic conditions turn back up, the company will win most of that back on its higher service quality. Likewise, I see no reason why Old Dominion can’t continue its value-conscious organic expansion strategy and build its national share to more than 15% over time. But unless you’re content to accept a roughly 6% expected total return on cash flows, valuation is still problematic.

Click here for the full article:
Old Dominion Will Prove Its Superiority Through The Downturn, But The Price Gives Pause

Grainger Out-Executing Going Into The Downturn

Two of the three largest industrial distributors have held up relatively well so far on a year-to-date basis, with both Fastenal (FAST) and W.W. Grainger (GWW) outperforming the larger industrial group, while MSC Industrial (MSM) has lagged slightly. In the case of Grainger, the company is going into this downturn in relatively good shape, outgrowing the MRO market by a healthy amount in the first quarter as a variety of initiatives, including its “endless assortment” online business, contribute positively.

Grainger isn’t going to escape the downturn, but the company's diversification and growth initiatives (including Zoro and MonotaRo) should help mitigate some of the damage, and I believe Grainger may see less revenue erosion in 2020 than its peers. I do expect Fastenal to outgrow Grainger on a longer-term basis, but the valuation here is quite reasonable. I’m reluctant to get aggressive on Grainger at this point in the cycle, but if another round of market worries were to take the shares back into the $250s or below, it might well be a name worth considering for the longer-term recovery and its own internal improvement efforts.

To read more, follow this link:
Grainger Out-Executing Going Into The Downturn

Xilinx Still Has Growth Drivers, But The Street Has Gotten More Cautious

When I last wrote on Xilinx (XLNX), I didn’t see a particularly attractive opportunity in the shares, but I also didn’t expect the roughly 50% underperformance relative to the SOX index that was to come. Xilinx has made a credible case for attractive long-term growth opportunities in markets like data centers and from expanded product platform opportunities like Zynq, but the company has also seen a much faster-than-expected erosion of its 5G opportunity from ASIC vendors like Marvell Technology Group (MRVL).

The shares have already enjoyed a good bounce from their March panic lows and do still seem to have some upside relative to discounted cash flow, or at least more than has typically been available. Management needs to rebuild the enthusiasm that investors once had for FPGAs in general, and that is likely to take some time, but won’t be helped by the challenges created by the COVID-19 outbreak. Although I see some opportunity here, there are names I like better on a risk-adjusted basis.

Follow this link to the full article:
Xilinx Still Has Growth Drivers, But The Street Has Gotten More Cautious

Complexity, Enterprise, And Share Gains Are All Still Boosting Teradyne

Teradyne (NASDAQ:TER) is going to go down as another example in my book of how you shouldn't underestimate companies holding a hot hand. While it has been some time since the shares have been conventionally cheap, the company has continued to exceed expectations on a combination of increased testing complexity, growth in key markets, and market share growth with new products.

Surprising to me is that the shares have actually lagged the SOX a bit since my last update. The outperformance on a trailing one-year basis is still meaningful though, and Teradyne bounced back well from the March lows. Valuation looks quite reasonable now, which actually worries me - is the Street starting to price in a second-half slowdown and shifting away in anticipation, or is this just an underappreciated story at this point?

Read the full article here:
Complexity, Enterprise, And Share Gains Are All Still Boosting Teradyne

Wartsila Looks Undervalued, But The Sailing Is Anything But Smooth

I wasn’t bullish on Wartsila (OTCPK:WRTBF) (OTCPK:WRTBY) (WRT1V.HE) back in early 2019 due to the company’s poor record of hitting margin targets and uncertainty in the outlook for marine orders. Those issues have remained very much in play, and the shares were down about a third even before the Covid-19 crisis hit the shares, as sell-side expectations headed steadily lower.

The situation today is a little different. While the outlook for the marine business is pretty poor in the short term, a lot has already been wrung out of the shares, and I think the cruise ship industry will eventually recover. Likewise, I see an ongoing need for the company’s flexible power generation systems even as the world adopts more renewable energy sources. If Wartsila can manage just 2% revenue growth from a point of 20-year lows for new ship orders and roughly steady margins, these shares could offer double-digit returns from here.

Read more here:
Wartsila Looks Undervalued, But The Sailing Is Anything But Smooth

Schneider's Business Has Slowed, But It Still Holds A Great Hand

However you want to characterize what's going on today (panic, pullback, recession, et al), these are the times when investors can get better deals on good or great companies. I believe Schneider (OTCPK:SBGSY) [SCHN.PA] is definitely one of those, and while today's price isn't a slam-dunk discount, I think it's an attractive price for a very good company that is leveraged to some powerful long-term trends like power reliability, energy efficiency, and automation. If approximately 4% long-term growth is still a valid assumption, I believe it is, these shares offer high single-digit to low double-digit annualized return potential, which is quite good for a quality industrial.

Click here for more:
Schneider's Business Has Slowed, But It Still Holds A Great Hand

Steel Dynamics Offers Value, But It's Going To Be Ugly

I wasn’t all that bullish on Steel Dynamics (STLD) back in January, but I did say it was worth another look if the price fell into the $20’s. I certainly wasn’t expecting the global Covid-19 outbreak at that point, and that makes the valuation discussion interesting. I think the steel industry is looking at a tough stretch (tougher than the CEOs seem to be expecting/projecting), but I also think Steel Dynamics is among the best-run in the group, and I think it’s better to own EAF operators than blast furnace operators during tough times.

It’s difficult to recommend a commodity stock given the severe disruptions across its most important markets, let alone the meaningful capacity growth that’s coming over the next 18 months. Still, I don’t think my expectations are that aggressive, and the shares do look undervalued. If you can handle the risk, this may be a name to consider now.

Click here for the full article:
Steel Dynamics Offers Value, But It's Going To Be Ugly

Alcoa: A Battleground Between Sound Management And Unsound Markets

I've always liked Warren Buffett's quote about how in a "battle" between good management and a bad industry, the industry's reputation will almost always remain intact. I think Alcoa (NYSE:AA) has a good management team (and that may be understating it) doing the right things. But I also think that the aluminum business is a fundamentally lousy business, and it's exceptionally difficult for any player to make real money on a sustained basis - long-term FCF margins for this industry have been close to zero.

Unless you believe something is going to change on a deep fundamental basis in the aluminum industry, it's challenging to make a long-term DCF argument for Alcoa. An EV/EBITDA approach is much more favorable, and Alcoa could benefit from more V-shaped recoveries in markets like autos and some industrial markets, but this is a tough, tough stock to love as more than a speculative trade.

Read the full article here:
Alcoa: A Battleground Between Sound Management And Unsound Markets

Atlas Copco Offers Premium Performance At A Premium Price

Results are certain to get worse from here, but Atlas Copco’s (OTCPK:ATLKY) relatively strong performance in the first quarter underlines part of the reason why I love this company and why investors continue to bid it up to such a generous premium over typical industrial companies. While Atlas is by no means immune to the coming recession, the company has out-executed its competition over the years and continues to find new avenues of profitable growth in which to reinvest.

Of course Atlas isn’t cheap now. Even during the period of peak panic in March it was barely cheap by normal valuation metrics. If you’re waiting to buy Atlas when it’s inarguably cheap, you’re likely in for a long wait. I’m not suddenly turning into a “ignore valuation” type of investor, but there’s a point where you have to bow to reality, and the reality is that Atlas Copco is going to get a benefit of the doubt (lower implied discount rate/higher valuation) so long as it continues to execute at peer-leading levels.

Click here to continue:
Atlas Copco Offers Premium Performance At A Premium Price

Credit Worries Loom Large For First Horizon

First Horizon (FHN) has been a notable laggard this year compared to peer regional banks, and I believe at least some of that is due to outsized worries about the loan portfolio of the bank it is acquiring – IBERIABANK’s (IBKC) 5% loan exposure to energy isn’t looking very attractive now, and there are valid concerns over how much reserving will be needed for those loans. On top of that, First Horizon has its own challenges with its loan book, including loans to franchisees and other hospitality/consumer discretionary businesses.

First Horizon’s capital is not as strong as I’d like, and I expect further reserving will be necessary (particularly in the case of Iberia’s book). On the other hand, management’s economic assumptions don’t appear at all heroic, and businesses like the fixed income trading will help generate pre-provision profits through this downturn. First Horizon is definitely a higher-risk call now, and I can understand why investors may want to stay away for the time being.

Read the full article here:
Credit Worries Loom Large For First Horizon

Roche Looks Undervalued Given The Stability Of The Business

The global Covid-19 outbreak has shaken up a lot of things, but Roche (OTCQX:RHHBY) continues on with a steady growth trajectory. While there have been some disruptions to a few drug franchises, and there could be more of an impact in the second quarter, the outbreak has also been a time for Roche’s large diagnostics business to shine. All told, Roche continues to show its stripes as a consistent quality growth name in the pharmaceutical space.

My bullish thesis for Roche now leans more toward that stability and quality angle rather than pure undervaluation. I believe the shares are priced for a high single-digit total return, which isn’t exemplary, but isn’t bad either on a relative basis.

Click here to continue:
Roche Looks Undervalued Given The Stability Of The Business

FirstCash Undervalued Amid Exceptional Operational Uncertainty

I’m not sure who said it, but I’ve long loved the quote, “History doesn’t repeat itself, but it often rhymes” (the quote is often attributed to Samuel Clemens, but it’s disputed). No two recessions are ever the same, and while recessions are often relatively good opportunities for pawn shop operator FirstCash (FCFS), this Covid-19 outbreak and the ways governments are responding to it are creating some new challenges.

I don’t expect 2020 to be a good year for FirstCash; I wasn’t expecting that before, and I’m expecting a worse outcome now. I do think that business will improve in 2021, though, as elevated levels of unemployment and tighter consumer credit will play to the company’s strengths. FirstCash’s leverage, currency risk, and general business risk make this a more challenging name, but I believe the discount to fair value is too wide now.

Read more here:
FirstCash Undervalued Amid Exceptional Operational Uncertainty

It's Not Too Late To Buy STMicroelectronics

If you bought shares of STMicroelectronics (STM) (“STMicro”) at the mid-teens back in March, congratulations – you got a great price for a great company. Even if you missed that opportunity, and the subsequent 60%-plus rally off the bottom, though, I don’t think it’s too late to buy. With very strong leverage to growth trends like auto electrification, industrial automation, IoT, and advanced imaging and sensing, not to mention technologies like silicon carbide (or SiC) and gallium nitride (or GaN), I believe STMicro will be an above-average grower over the next five and 10 years.

There’s still significant uncertainty in the near-term, though, including questions as to whether the crucial auto sector will bottom in Q2’20 and what the shape of the eventual recovery will look like. I believe STMicro is more leveraged to markets more likely to show V-shaped recoveries, but only time will tell. With the shares a little undervalued on long-term DCF and more undervalued on a margin-driven basis, I think this is still a stock worth buying.

Click here for more:
It's Not Too Late To Buy STMicroelectronics

More Conservative Assumptions Should Help Fifth Third

Fifth Third (FITB) has been a relative laggard compared to its peer banks so far this year, and most of that divergence occurred with the announcement that the CFPB filed suit against the bank for unauthorized account openings, bringing to mind the massive scandal at Wells Fargo (WFC). It also hasn't helped that Fifth Third's loan book is perceived as riskier than its peer average.

Based on management disclosures, I don't think the fallout from the account issue will be nearly as bad as it has been for Wells Fargo. I also think that Fifth Third's riskier loan book is mitigated by management taking a more bearish view of the COVID-19 recession and recovery, leading the bank toward a more conservative reserving approach. Fifth Third has never been among my favorite banks from an operational standpoint, but at a 20% discount to tangible book, this is a name worth considering now.

Read the complete article here:
More Conservative Assumptions Should Help Fifth Third

Comerica Slammed As A Perfect Storm Hits

Banks have had a bad year in 2020, but where most banks were slammed down by the market in March and have since rebounded a little, Comerica (CMA) has stayed flat on its back. It’s tough to find much of anything that’s going right – above-average sensitivity is hitting margins, slowing economic activity is hitting fees, loan growth is not impressive, and credit quality is eroding. Oh, and a prior cost efficiency program has probably taken out the low-hanging fruit there.

I expect further reserve-building from here, and I could easily see the charge-off ratio moving into the 2%’s. While I see Comerica having enough capital to get through this, I think there’s a very good chance that the dividend gets cut along the way. The good news, such as it is, is that I think there’s a wider cushion between Comerica and disaster than the share price reflects. I’m very much concerned that this is a dead money value trap for the near term, but it’s hard for me to see how today’s price won’t look attractive in three years’ time.

Read more here:
Comerica Slammed As A Perfect Storm Hits

Prospects For A "U-Shaped" Recovery Have Hit Emerson Hard

Emerson Electric (EMR) was already looking at a slowdown before Covid-19 swept around the world, but now the company is looking at a much sharper downturn as automation projects, particularly in petrochemicals, get pushed further. Management is doing what they’ve done in the past, using the downturn as an opportunity to streamline and take out costs, but the Street seems to really dislike the uncertainty as to Emerson’s recovery path in 2021 and beyond.

I don’t think Emerson will see a 2009-style recovery, but I do think many of these projects will eventually get done, and I think Emerson can benefit from other trends and drivers like increased automation in industries like food/beverage and healthcare/biopharma and increased digitalization of process industries. If Emerson can manage long-term growth of around 2%, these shares look priced to give investors a solid risk-adjusted return.

Follow this link for more:
Prospects For A "U-Shaped" Recovery Have Hit Emerson Hard

Philips Has A Big Opportunity To Show Its Ability To Execute

Diversified healthcare companies don’t really provide many clean reads on the COVID-19 crisis. Philips (PHG) is a good case in point, as the company’s Image-Guided Therapy business is likely to see weak procedure counts until at least the second half of the year, and the COVID-19 crisis could drive lower capital equipment spending in Imaging. On the other hand, Philips is going to see significant revenue growth in its Monitoring and Ventilator businesses, and if management can execute on this opportunity (in terms of margin leverage), the upside is meaningful.

I don’t really like “Big Iron” in healthcare (a colloquialism covering large-scale capital equipment), and that is more than one-third of Philips’ business. On the other hand, expectations are not demanding, and Philips could still have some upside if it can execute well on its order book.

Click here:
Philips Has A Big Opportunity To Show Its Ability To Execute

Texas Instruments Zigging When Others Zag

Texas Instruments (TXN) is a well-respected name in the semiconductor sector, and not unlike Broadcom (AVGO), TI management has earned that respect with sound management practices and a willingness to break away from the “growth above all” philosophy that has often dominated the space. While I thought TI was overvalued back at the time of fourth quarter earnings, the stock has more or less tracked the SOX index since then.

Not everybody is going to agree with it, but TI is once again showing a willingness to break from the pack during this downturn. Learning lessons from prior downturns, when unexpected recoveries in demand caused production difficulties and headaches for customers, TI is choosing to invest in inventory and keep production levels relatively high. If this strategy pays off (particularly if there’s a more V-shaped recovery in TI’s markets), TI could gain share at the expense of rivals that don’t have the balance sheet to do this.

The relative valuation is a little better here now, but still not at a level that I’d say is a clear-cut buy, and I’d still prefer Broadcom (which I own) at these prices.

Click here for more:
Texas Instruments Zigging When Others Zag

Dover Making Its Case As A Different, Better Industrial

Dover (NYSE:DOV) has undergone a lot of changes over the last few years, and now, investors are getting to see how it fares through its first real test. So far, the results are encouraging. Dover is still leveraged to a lot of short-cycle markets, but that won't seem like such a bad thing when the recovery starts. Along the way, margins have also come in stronger than expected, boosting the company in an area that is a key value driver.

Dover's shares have tracked its peer group so far in 2020, while outperforming by about 10% over the past year. I'm a little surprised that Dover hasn't done better, but I also can't say that the shares are all that cheap. Dover looks to me to have less risk than its peer group over the next four to six quarters, but with a prospective return in the mid-to-high single digits, I think there are better opportunities in the multi-industrial space.

Read more here:
Dover Making Its Case As A Different, Better Industrial

Zions Bancorporation Builds Its Case For An Enhanced Post COVID-19 Growth Profile

Zions Bancorporation (ZION) wasn’t one of my preferred ideas after fourth quarter earnings, as I was concerned about the bank’s weak spread, operating, and pre-provision profit leverage, and while Zions has basically tracked the average performance of its peer group, I certainly didn’t expect the 40% downturn.

Zions had a pretty good first quarter, but in the face of significant uncertainty regarding the economy, the loan book, and reserve adequacy, I’m not surprised that investors don’t really care. It’s going to take a while longer for investors to get comfortable with the probable trajectory of the economy and Zions’ reserve/capital position. While I do think the shares are now undervalued, a lot of the share price performance rests on whether management has indeed de-risked the balance sheet over the last decade.

Read more here:
Zions Bancorporation Builds Its Case For An Enhanced Post COVID-19 Growth Profile

M&T Bank Staying On The Fairway, But Reserve Risk Remains

I would describe M&T Bank’s (MTB) first quarter results as a very typical M&T Bank quarter. There were some items to nitpick, but on the whole it was a decent or better quarter against a challenging backdrop. With minimal capital worries and comparatively little chance of seeing losses, M&T Bank deserves to keep its spot on lists of reliable banks that can be held by more conservative investors.

Between my own analysis of the numbers and M&T Bank management’s statements, there’s still risk here of higher provisioning; I think M&T will need to add more to its reserves over the next couple of quarters. Like many of its peer banks, though, M&T shares are trading as though there has been a permanent impairment to the business, and I just don’t believe that to be the case. While investors are spoiled for choice now in terms of stock discounts to long-term fair values, M&T Bank is a solid option.

Follow this link to the full article:
M&T Bank Staying On The Fairway, But Reserve Risk Remains

The Next Couple Of Years Will Be Rough For Hexcel

Going into 2020, aerospace looked like one of the best markets to be in, and one of the relatively few markets where there really weren’t worries about underlying demand. In a few short months, Covid-19 has brought air travel to a standstill, threatened the survival of multiple airlines, and thrown the commercial aerospace market into chaos. As a supplier of advanced composites used in a range of aerospace applications, there’s really no place for Hexcel (HXL) to hide, and the next couple of years are going to be rough for this company.

Few companies offer up an easy modeling exercise today, but modeling Hexcel is complicated by the uncertainties regarding how the airline market will recover. Most likely, domestic demand will recover before international, driving a faster recovery in narrowbody aircraft versus the widebody aircraft where Hexcel is stronger. With that, I’m expecting it to take about five years for Hexcel to regain 2019 levels of revenue and cash flow, but patient and very risk-tolerant investors may yet want to take a look here.

Read the full article here:
The Next Couple Of Years Will Be Rough For Hexcel

Abbott Labs' Diversification And Diagnostics Leverage Paying Off Now

As everyone scrambles to figure out what Covid-19 will mean for health care providers, patients, and companies, Abbott Labs (ABT) is carrying on pretty well, with the shares up on a year-to-date basis, helped by a strong first quarter report. While Abbott is definitely going to see a hit from deferred procedures in areas like cardiac rhythm management, vascular, electrophysiology, and neuromodulation, close to half of the business is more consumer-focused (and likely to hold up better) and the diagnostics business is likely to prove key to getting the U.S. economy back open and on its feet.

As a huge and well-followed company, it doesn’t surprise me that this is now reflected in the share price. Relative to a stock like Stryker (SYK), which is likely to see a much bigger near-term hit to procedure deferrals, Abbott doesn’t look so interesting on a long-term basis, though I won’t understate the possibility that diagnostics could drive some upside from here.

Click here for the full article:
Abbott Labs' Diversification And Diagnostics Leverage Paying Off Now

Truist In A Little Better Shape Than Many Of Its Peers

Painting with a broad brush, all of the super-regional banks are more or less in the same boat now – a tough rate environment, a coming recession, and concerns over reserve levels. I will argue that Truist (TFC) is an incrementally better position, though, with cost savings and accounting options tied to the SunTrust giving the company a little more accounting and capital flexibility than many of its peers.

I believe Truist can generate double-digit earnings growth from what will likely be a very low 2020 base year, and I’m not all that concerned about Truist’s reserve or capital position. Whether the recovery is U-shaped or V-shaped, Truist will have a strong franchise in some of the most attractive U.S. banking markets, as well as a more balanced commercial and consumer operation. Execution risk remains meaningful, though, and Truist’s recent sector performance leaves less upside here than at some peers, including Bank of America (BAC) and U.S. Bancorp (USB).

Read the full article:
Truist In A Little Better Shape Than Many Of Its Peers

Fear Has Pushed Sandvik Back To A More Reasonable Valuation

At least as far European industrials are concerned, analysts have moved swiftly to cut estimates in expectation of a serious recession in the wake of Covid-19, and Sandvik (OTCPK:SDVKY) (SAND.ST) is no exception. Although manufacturing data has held up a little better than feared so far, the second quarter is still likely to be ugly and the sell-side seems braced for an ugly stretch of performance.

Sandvik isn’t my favorite name among European industrials from a quality perspective (that would be Atlas Copco (OTCPK:ATLKY)), and I have some concerns about the long-term growth potential of the core cutting tools business. Even so, the shares would seem to offer a double-digit return on the basis of a 2% to 4% growth rate over the next decade, and that looks like a pretty reasonable risk/reward opportunity.

Click here for more:
Fear Has Pushed Sandvik Back To A More Reasonable Valuation

Lennox Looks Richly Valued On Strong Sentiment For HVAC

While HVAC has proven to be a relatively popular end-market among investors, that hasn’t spared companies like Lennox (LII) or Trane (TT) in this recent downturn, as the HVAC market is proving that it too is not immune to pandemic-related declines. Lennox is one of the few companies so far to offer guidance for 2020 (most companies are pulling/suspending guidance), and this management team is estimating a 20% hit from COVID-19 to 2020 revenue.

While Lennox hasn’t been notably stronger than industrials in general this year, I nevertheless find today’s price/valuation too high. I appreciate that HVAC is a popular market with attractive long-term characteristics, but I think that’s true more of commercial HVAC than the U.S. residential market where Lennox is particularly strong. Although I can see Lennox as a potential M&A target, the valuation seems to already reflect that, and this is not one of my favored names.

Read more here:
Lennox Looks Richly Valued On Strong Sentiment For HVAC

Risk Perception Around Regions Financial Will Remain A Near-Term Headwind

With the Street running scared amid greatly elevated modeling uncertainty (for the economy as well as individual companies), risk perception is a significant factor today, and one that doesn't help Regions Financial (NYSE:RF). Only time will tell whether Regions' loan book is as risky as the Street seems to think it is, but for today's valuation to make sense on a long-term basis, you basically have to assume a significant long-term impairment in returns below the cost of equity and/or the need to raise meaningful capital to cope with elevated loan losses.

I do believe that loan losses will accelerate from here and that Regions will have to add to its reserves (I also believe this is true for virtually all of Regions peers). Even if Regions does have a worse-than-average experience with its loan book over the next few years, I don't think it will be as bad as the Street is pricing in. I thought Regions was undervalued before on similar concerns about its credit quality (as well as its rate exposure), and while the shares do look substantially undervalued, that's true of so many stocks now that investors are almost spoiled for choice unless you believe a truly ugly credit/capital evolution is on the way.

Continue here to the full article:
Risk Perception Around Regions Financial Will Remain A Near-Term Headwind

Reserve And Loan Loss Worries Have Likely Hammered Citizens Financial Too Hard

When it comes to forecasting bank earnings today, analysts and investors aren't much better off than Sergeant Schultz in Hogan's Heroes ("I know nothing, nothing!"). So much now rides on the shape of the U.S. economy's rebound, the efficacy of the federal government's stimulus measures, and the ultimate loan losses from this downturn. If there's a strong second half recovery, most banks are now over-reserving and will be able to release those reserves in 2021 and beyond. If the economy is weaker, though, many banks will likely have to add more to their reserves, depressing reported earnings, and eventual loan losses will be higher.

Click here to continue:
Reserve And Loan Loss Worries Have Likely Hammered Citizens Financial Too Hard

Taiwan Semi's Results Bring Some Relief, With Strong Demand For IoT And HPC

The global COVID-19 outbreak has made uncertainty the word of the moment, and the semiconductor space is no exception. Although data center spending remains strong, investors and analysts have fretted over the potential to hits to semiconductor demand in markets like consumer devices and autos. Based on Taiwan Semiconductor Manufacturing's ("TSMC") (NYSE:TSM) results and guidance, though, it looks like 2020 may yet hold up better than feared.

TSMC's short-term valuation has historically been driven by operating margins, which in turn are significantly influenced by capacity utilization. While today's valuation is not unreasonable relative to expected margins, I think you can argue that the modeling uncertainty calls for at least some margin of safety. I still think TSMC is a high-quality company, but without a wider margin of safety, there are other ideas in the chip space that I prefer today.

Read the full article here:
Taiwan Semi's Results Bring Some Relief, With Strong Demand For IoT And HPC

KeyCorp Wasn't Loved Before, And Now Reserves Are A New Worry

I thought that KeyCorp (KEY), even with some legitimate concerns and criticisms was underappreciated earlier this year, but that was before Covid-19 started to work its way across the U.S. economy. Now on top of longer-standing issues/concerns like the company’s far-flung footprint, its operating efficiency, and its capabilities (or lack thereof) in digital, there are risks concerning the company’s reserves and capital adequacy.

I do think it is likely that KeyCorp will increase its reserves as the year goes on; most banks have already acknowledged that the second quarter is on a worse trajectory than Q1 reserving decisions anticipated, but I also think the company will come through this okay. This is basically a trade now on Street sentiment around reserves, and KeyCorp admittedly doesn’t have as thick of a capital cushion as I’d like. Still, more aggressive investors may want to consider Key, as it is a bank that is at least of “decent” quality and likely to remain profitable through this downturn currently trading below tangible book.

Read more here:
KeyCorp Wasn't Loved Before, And Now Reserves Are A New Worry

Strong Order Growth Seems To Be Shielding VAT Group From The Worst Of Covid-19

This is a good time to sell mission-critical equipment and components for the semiconductor industry, as semiconductor companies continue to order equipment for both logic and memory chip production. Swiss VAT Group (OTCPK:VACNY) (VACN.S), a leading manufacturer of customized control, transfer, and gate valves has seen some impact from Covid-19, but orders remain very strong and management continues to expect growth in 2020 relative to 2019.

Like ASML (ASML), VAT Group swooned in the March panic selling, but has come back strong with a roughly 50% recovery. Healthy double-digit revenue and EBITDA growth over the next few years and strong high single-digit long-term growth isn’t really enough to drive a compelling fair value today, but I can at least say that the company’s relative valuation (relative to other leading suppliers of essential components) isn’t unreasonable today.

Read the full article here:
Strong Order Growth Seems To Be Shielding VAT Group From The Worst Of Covid-19

The Strategic Value Of EUV Limits ASML's Downside

Lithography specialist ASML (ASML) reduced guidance on March 30 and did indeed see an impact to results in the first quarter, but I would argue that the results (including orders) reflect the underlying strategic value and necessity of the company’s lithography systems (especially the emerging EUV opportunity) – a reality that significantly mitigates the company’s downside risk in this period of significant economic upheaval.

The full-out panic back in March did take these shares back below $200, and I hope readers who had watch-list’ed this name stepped up and took advantage, as the shares have shot back up almost 60% and once again trade at a healthy premium. While another Covid-19/recession-related pullback is at least possible, investors are once again left dealing with a stock that offers “okay” potential from here.

Click here to read the full article:
The Strategic Value Of EUV Limits ASML's Downside

Nvidia Clears The Last Major Hurdle In The Mellanox Deal

It took longer than expected, but Nvidia (NVDA) announced on Thursday (April 16, 2020) that it finally secured Chinese government approval to proceed with its acquisition of high-speed interconnect specialist Mellanox (MLNX). With that, Nvidia believes they can close the deal in about 10 days (April 27), bringing the company the acknowledged leader in high-speed interconnect for data centers.

From the perspective of someone who has followed Mellanox over the years, I find this a bittersweet development. The $125 per share in cash is arguably nice to have, particularly given the current uncertainties in the market, but as I wrote in other articles, I believe Mellanox could likely have surpassed that value on their own had the deal broken up. Now, though, investors will need to redeploy that cash into other ideas.

Read the full article here:
Nvidia Clears The Last Major Hurdle In The Mellanox Deal

U.S. Bancorp Likely Needs More Reserves

As I said in another piece on the banking sector, I’m reluctant to overly nitpick the reserve-building decisions that bank management teams are making, as they’re likely doing the best they can in an environment that could only charitably be called “murky.” Still, I think U.S. Bancorp (USB) may be pulling the Band-Aid a little too slowly, making it likely that further reserve additions will be necessary. On top of that, the bank’s payments business is getting hammered on the COVID-19 shutdowns, and the first quarter of results reported in the crisis weren’t great.

Sentiment was already a challenge for U.S. Bancorp and worries about whether there’s another shoe to drop with reserves won’t help. With a thinner capital cushion than at some of its peers/comps, I can understand why U.S. Bancorp shares would trade at a somewhat larger discount. While I do think U.S. Bancorp shares are now pricing in a forward outlook that is too bearish, I don’t like these shares as much on a relative basis to names like Bank of America (BAC), JPMorgan (JPM), or PNC (PNC).

Follow this link to the full article:
U.S. Bancorp Likely Needs More Reserves

PNC Financial Getting Ready For Higher Loan Losses

Time will tell how much pain PNC Financial (PNC) spared its investors through presumably sound underwriting during the good days of the banking cycle, but management is definitely getting ready for the other shoe to drop and warning investors that it may have to increase its reserves even further to cover losses as Covid-19 pushes the U.S. into recession.

Maybe this is obvious, or at least redundant, but the margin of error for modeling banks now is extremely high. It’s unclear when businesses will be able to get back to normal, let alone what the ongoing impact of this shutdown will be in the short term, and the rate and credit cycle was already moving against banks. PNC looks like it will be okay even in a dire scenario, though, and as is the case with most of the quality bank names, the market seems to be pricing in an overly severe scenario today.

Read more here:
PNC Financial Getting Ready For Higher Loan Losses

Bank Of America In The Rapids Now, But Still In Good Shape

In a pretty short period of time, major banks like Bank of America (BAC) have seen their operating environments shift from more or less stable (with some questions about economic growth and credit quality, sure) to whitewater rapids. Adding to that is the fact that there really isn’t a roadmap for what happens next – bank management teams have experience with recessions, credit bubbles, and so on, but epidemic-driven challenges are a new twist.

I believe the high-quality majors, including Bank of America, JPMorgan (JPM), and PNC (PNC), will get through this okay, but with so much uncertainty about when businesses (and the economy in general) will get back to normal and what the credit losses will look like in the meantime, it’s hard to have much confidence in modeling. I do believe that Bank of America is undervalued here, though, and worth consideration even though the next year (or two) will be challenging.

Click here for the full article: 

Bank Of America In The Rapids Now, But Still In Good Shape

Covid-19 Hitting Citigroup's Card Business, But The Capital Looks Okay

Citigroup’s (C) large credit card business gives it quite a bit more leverage to consumer spending and consumer health, and that’s not a great thing right now as Covid-19 has slammed the brakes on consumer spending. Likewise, while Citi has a great trade finance and global cash management franchise, that’s not so helpful when global trade grinds to a halt.

Citi has already reserved up to close to half of its “severely adverse” loan loss scenario, but I expect further provisions in 2020 and I think 2021 charge-offs could be almost double 2019 levels. Even so, I expect Citi will remain solidly profitable on a pre-provision basis and profitable on a post-provision basis, with adequate capital to get through this crisis without halting dividends. The Street clearly doesn’t agree and the shares trade at a substantial discount to my fair value estimate, but I think there’s opportunity here for more aggressive investors.

Continue here for more:
Covid-19 Hitting Citigroup's Card Business, But The Capital Looks Okay

First Republic Shows How It Really May Be Different

One quarter doesn’t make a story, but First Republic’s (FRC) first quarter results certainly don’t hurt the argument that First Republic’s much higher than normal valuation is underpinned by a differentiated business model that can outperform in all seasons. Again, this is just one quarter and there are certainly plenty of risks in front of First Republic, but it’s hard not be impressed today.

When I last wrote about First Republic, one of my bullet points was that it was going to take a much weaker macro environment to push the shares to a “meaningfully cheap” level … and here we are. First Republic has already rebounded strongly from what may be the point of peak pessimism (the third week of March), but if low-to-mid teens long-term core earnings growth is still a valid assumption, these shares are undervalued now.

Read the full article here:
First Republic Shows How It Really May Be Different

Yaskawa Electric Still Getting A Large Benefit Of The Doubt

It’s been a rough 2020 so far for Yaskawa Electric (OTCPK:YASKY) (6506.T). The shares have lost around a quarter of their value, and have more or less tracked the declines in the larger industrial space. While the market didn’t react particularly badly to the company’s fiscal fourth quarter results, where it missed its own operating income target by almost a third, a lot of that seemed to get priced into the shares in the months leading up to the announcement.

Even with a steep year-to-date decline, the shares sport a pretty robust valuation and many investors and analysts seem content to just roll with the punches and assume that the worst is already in sight for this factory automation manufacturer. I’m not so sanguine. I do see good long-term potential in servomotors, inverters, and robots overall, but I think the current price ignores some of the competitive risks to Yaskawa’s business, as well as meaningful ongoing challenges in many end-markets, and already prices in a very healthy recovery beyond 2020.

Follow this link for more:
Yaskawa Electric Still Getting A Large Benefit Of The Doubt

Fastenal's Results Suggest Manufacturing Is Hanging In There

Extrapolating from Fastenal’s (FAST) results should always carry the caveat that Fastenal is an exceptionally well-run company, proven capable of gaining share in good times and bad, and not necessarily reflective of everyone’s experience. On the other hand, Fastenal’s results do provide a pretty good read on the pulse of sectors like manufacturing and non-residential construction, and in that respect the company’s first quarter results are at least a little encouraging.

There’s no mistaking that 2020 will be a tough year for manufacturing companies and the U.S. economy, and I expect Fastenal’s revenue to decline 6% while experiencing weaker margins. Still, Fastenal’s results may support the idea that manufacturing companies will hold up relatively better through this outbreak-induced recession. Specific to Fastenal and its stock, while I do believe in paying up for quality, I don’t see any particular bargain here and I’d note the shares have been outperforming the broader industrial space by a significant margin (close to 20%).

Read the full article here:
Fastenal's Results Suggest Manufacturing Is Hanging In There

JPMorgan Will Be A Survivor, But Chaos Will Reign For A Little While

I imagine a lot of investors looked at JPMorgan’s (JPM) first quarter earnings and guidance, and the start of this reporting cycle, at least a little like that oft-memed scene of Theoden before the Battle of Helms Deep in Lord of the Rings: The Tower Towers – “and so it begins”. Estimates were all over the place for JPMorgan with respect to provisioning, and while the core earnings reported by the bank were better than expected (an arguable point to be sure), investors were not impressed by the high ongoing levels of uncertainty and the risk of further increases to reserves in the coming quarters.

I do see some risk in JPMorgan management’s assumption of a meaningful second half recovery in 2020. Beyond the impact on earnings in 2020 and 2021, though, I don’t think that has much bearing on the value of the business. I continue to believe that JPMorgan is the best-run of the major banks, and I likewise believe that, as has been the case in the past, JPMorgan will emerge from this stronger than most of its rivals. With the valuation now meaningfully discounting the long-term value of the business, these shares are once again attractive.

Click here for more:
JPMorgan Will Be A Survivor, But Chaos Will Reign For A Little While

Covid-19 Further Complicates An Already-Complex Outlook For Cemex

Assessing the prospects of Cemex (CX) was already complex enough – the company had been losing share in an underperforming Mexican market and appeared to be lagging its peers in the U.S., while also making some curious (if not questionable) asset disposal decisions. Now Covid-19 adds entirely new challenges and uncertainties to the operating outlook and model.

First things first, I believe Cemex will survive this unexpected downturn unless the Covid-19 outbreak somehow sparks a long-lasting global recession (or worse…). I also believe today’s valuation likely does not reflect the underlying value of the business as a going concern, nor on a sum-of-the-parts basis. That all being said, Cemex management has not impressed anybody in recent years with its performance, and there are a lot of beaten-down companies to choose from now that don’t have the same long-term operating issues.

Read the full article here:
Covid-19 Further Complicates An Already-Complex Outlook For Cemex

Honeywell Looks Vulnerable To Sentiment And Margin Shock, But Still Attractive

The grim reality is that nobody really knows anything right now when it comes to assessing the impact of Covid-19 on the U.S. economy (let alone the global economy), nor how long it will take to get back to business as usual. While the market has recovered pretty strongly over the last couple of weeks, taking Honeywell (HON) shares up more than 40% from the point of peak panic, I don’t necessarily think we’ve seen the last shoe drop. Given the difficulties in predicting end-market demand in this environment, I’d be surprised if Honeywell didn’t pull guidance entirely. I also see a risk of sharp decremental margins – probably not in the first quarter, but possibly in the second and third quarters – and I believe that may shock the Street and rattle sentiment again. On top of that, a significant chunk of Honeywell’s revenue looks to me to be at risk beyond just a sharp correction that resolves by year-end.

All of this doom and gloom aside, these are the times that value investors wait for. Honeywell’s valuation isn’t quite where I’d like to be after this strong rally, but it’s good enough for this as a long-term holding and certainly at a level where I’d watch this for any potential “double-dip” in the industrial sector as companies start reporting March quarter earnings.

Click here to continue:
Honeywell Looks Vulnerable To Sentiment And Margin Shock, But Still Attractive

Aptose Riding Higher As The Street Starts Paying Attention

In a relatively short span of time, Aptose (APTO) has gone from a little-known Canadian biotech toiling largely in obscurity to a promising name with wider sell-side coverage. That expanded interest isn’t unreasonable in my view, as promising (but very early) data have made an initial case that Aptose might really have something special with its pan-FLT3/pan-BTK inhibitor CG-806 for hematological cancers.

There remains a long road between commercial success and today, though, and while I do think Aptose has made a strong case for how and why CG-806 is meaningfully better than other options both on the market and in the clinic, the fields of biotech are littered with the bodies of once-promising companies whose therapies were going to change the standard of care, but didn’t come through with the clinical data when it really mattered. I believe these shares are still worth owning today, but investors need to appreciate the well above-average risks that go with investing in early-stage biotech.

Read more here:
Aptose Riding Higher As The Street Starts Paying Attention

MSC Industrial's Earnings Bring Some Relief, But Uncertainty Remains The Primary Takeaway

MSC Industrial (MSM) is now effectively one of the first industrial stocks to report in an earnings cycle, and MSC's Wednesday report on its fiscal second quarter (calendar first quarter) brought some relief, but also a reminder of the exceptional uncertainty that companies are operating within at the moment. Sales held up about as well as expected, but management declined to provide guidance given fast-changing end-market dynamics and wider timing spreads between orders and shipments.

This year (calendar 2020) is going to be a tougher one than I was expecting, but I don't think COVID-19 is going to materially change the long-term trajectory of the business. The bigger issues for MSC management revolve around whether their plans to reaccelerate growth (to 300bp or more above market) and recapture above-industry incremental margins can bear fruit. I remain skeptical, but I do acknowledge that today's share price offers a decent prospective return for a stock where sentiment has shifted to a more conservative "show me" stance.

Read more here:
MSC Industrial's Earnings Bring Some Relief, But Uncertainty Remains The Primary Takeaway