Nidec Performing Well Through The Downturn

"It's different this time" are words that can come back to haunt an investor, but for this cycle at least, Nidec (OTCPK:NJDCY) (6594.TO) really has been different. While Nidec has been hit by the global pandemic, the impact to sales has been less severe than for many companies. On top of that, the company's serial efficiency drives continue to produce positive results, support overall margins and reducing the breakeven point for the emerging EV motor business.

Nidec shares have done well since my last update, rising close to 20% and outperforming the average U.S. industrial stock, not to mention the average Japanese stock. There's really no mystery left to the story here, and the expectations are far from low, but Nidec has shown an ability to exceed expectations on multiple levels, including maintaining better margins in the hard drive business and gathering far more EV traction motors than expected a year ago. While valuation makes it hard to recommend this name with the same vigor, I wouldn't be eager to sell if I owned it, and I would keep an eye open for a pullback if I didn't.

Click here to continue:

Nidec Performing Well Through The Downturn

STMicroelectronics' Return To Growth Is In Sight, And The Share Price Is Still Reasonable

STMicroelectronics' (STM) performance since my last update has been mixed; until very recently it was beating the broader SOX index, though it has been lagging peers/rivals like Infineon (OTCQX:IFNNY), NXP Semiconductors (NXPI), and ON (ON) more noticeably (while outperforming Texas Instruments (TXN)). Although short-term performance is notoriously tricky to predict, I believe STM’s beat-and-raise quarter should ease some concerns, though the second half auto-driven recovery was already well understood by the Street.

I’ve been more bullish than the Street on STM for a while now, and the Street has increasingly caught up to me. I still expect mid-teens long-term FCF growth and I still see a decent prospective return here, as well as relative undervaluation, but it’s not quite the slam-dunk it once seemed to be, even though I still see significant growth opportunities in auto power, ADAS, imaging, automation, and smartphone content growth.

Read the full article here:

STMicroelectronics' Return To Growth Is In Sight, And The Share Price Is Still Reasonable

3M Past The Worst, But Management Has More Work To Do Long-Term

There are still ample unknowns around the shape of the upcoming recovery, but it looks as though 3M (MMM) has managed to get through the worst of the downturn. With the company’s strong exposure to markets like auto, “general manufacturing”, and elective healthcare, I do believe the company should be the beneficiary of some relatively V-shaped recoveries starting later in 2020 and continuing on into 2021.

When I last wrote about 3M, I said that I saw a decent prospective long-term return, but that I liked higher-quality names like Eaton (ETN), Emerson (EMR), Honeywell (HON), ITT (ITT), and Parker Hannifin (PH) even more. Since then, 3M has modestly underperformed the industrial group as a whole and every one of those aforementioned names. 3M shakes out relatively better now on a value basis, but I also see a lot of work ahead for management to improve the operations to a level on par with some of its best peers, and that adds a little tinge of risk to what is otherwise an okay story.

Follow this link to the full article:

3M Past The Worst, But Management Has More Work To Do Long-Term

FEMSA Hit Hard As It Proves Less Defensive Than Hoped

One of the primary appeals for FEMSA (NYSE:FMX) for some time has been its status as a "defensive growth" stock. Rising populations and incomes in Central and South America meant growth opportunities for the Coca-Cola FEMSA (NYSE:KOF) beverage operations, as well as the company's multiple retail formats, with incremental opportunities also available simply from out-executing smaller players with less scale and operating efficiency. Along with that, the company's status as a retailer of "staples" was supposed to provide some downside protection, as people still need to eat in recessions.

COVID-19 has thrown out a lot of the conventional wisdom about "defensive" names, and FEMSA is no exception, as mobility restrictions (stay at home orders and the like) have hit the business harder than expected. Even allowing for the worse-than-expected economy in Mexico, FEMSA has lagged the Mexican index by about 10% on a year-to-date basis and the S&P 500 even more significantly (close to 25%). While I do continue to believe that FEMSA is undervalued, this is a "show me" story that will require meaningful improvement in the outlook for OXXO same-store sales and margins before investors are willing to reconsider the name.

Click here to continue:

FEMSA Hit Hard As It Proves Less Defensive Than Hoped

ABB Taking Its First Positive Steps Down A Long Road

"Long-suffering" is probably a good description for many ABB (ABB) shareholders, but it looks as though their patience is starting to show a few rewards. While the long-term performance of ABB shares doesn't compare so favorably to its peer group (including companies like Emerson (EMR), Rockwell (ROK), Schneider (OTCPK:SBGSY), and Siemens (OTCPK:SIEGY)), the shares have continued to outperform since the August 2019 hiring of former Sandvik CEO Bjorn Rosengren, helped as well by a small string of better than expected results.

While better-than-expected results in the second quarter were welcome, there's still a lot of work that needs to be done at ABB. The business still has too much in the way of central/corporate expenses, corporate cultures tend to change slowly, and ABB has some fierce competitors. What's more, there may be some intrinsic complexities to the business that just prove resistant to change. Still, I believe ABB can be a much better-run company than it has been, and while the current share price already prices some of that in, there's further upside if the company can hit the CEO's long-term targets.

Read the full article here:

ABB Taking Its First Positive Steps Down A Long Road

Covid-19 Takes Its Toll, But Roche Still Attractive For Longer-Term Investors

An outperformer over the past year, Swiss drug giant Roche (OTCQX:RHHBY) has given some of that back lately, with the shares underperforming the broader peer group over the last three months. Second quarter results aren’t going to help that, as the Covid-19 pandemic had a bigger than expected impact on drug sales and the performance of the diagnostics business remains lackluster.

I have few meaningful concerns about Roche on a longer-term basis, beyond my previously-discussed concerns that the diagnostics business needs a more thorough restructuring/self-improvement drive. The pharmaceutical pipeline remains well-stocked, and Roche management continues to demonstrate that they are capable of both buying and building attractive clinical assets. I continue to believe that the company can generate mid-single-digit FCF growth on a long-term basis, and mid-to-high single-digit EPS growth on a more medium-term basis, supporting a fair value in the md-to-high $40’s for the ADRs.

Read the full article here:

Covid-19 Takes Its Toll, But Roche Still Attractive For Longer-Term Investors

FirstCash Challenged By New Twists In This Cycle

While hard times have created opportunities for FirstCash (FCFS) in the past, this pandemic has so far been one of those “it’s different this time” events for this leading pawn shop operator. While store closures have been manageable in most operating areas, government support/stimulus and foreign remittances have led to a steeper decline in pawn demand, and adverse foreign currency moves haven’t helped either.

These shares have lost a little more ground since my last update, and the cash flow outlook for the next few years is going to be altered by FirstCash rebuilding its pawn loan balances. I’m still bullish on the long-term opportunity, though, as FirstCash remains a very viable option for customers with poor access to better financing options, particularly in Latin America, and I expect adjusted free cash flow growth in the high single-digits to support the share price as the business starts to normalize toward the end of 2020.

Click here to continue:

FirstCash Challenged By New Twists In This Cycle

Synovus Shores Up Its Capital A Bit And Beats On Operating Earnings

Synovus (NYSE:SNV) has significantly underperformed its peer group as the COVID-19 pandemic has wreaked its havoc on the economy. A big part of the problem is that Synovus's previous decisions regarding capital management, including significant buybacks and running with a thin capital buffer at a CET1 ratio of 9%. That has come back to bite management, as lackluster PPOP performance, reserve-building, and a sudden shift in risk-weighted assets have chewed into that buffer. On top of that, investors are taking a "show me" stance of Synovus's underwriting quality, remembering the outsized losses during the GFC and not giving much credit to the idea of improved underwriting since then.

I've been steadily wrong on this name since the FCB acquisition, and I'm not going to pretend otherwise. Synovus still looks undervalued on what I consider to be a very low earnings growth threshold, and management has some opportunities to further boost capital without cutting the dividend, but there are only so many times you can go to the well on a story. I still look at this as a potential portfolio addition on the basis of growth opportunities in the Southeast U.S. and the "Synovus Forward" program, but this stock remains deep in the Street's doghouse.

Read the full article here:

Synovus Shores Up Its Capital A Bit And Beats On Operating Earnings

Signature Bank Continuing To Grow Through The Downturn

I don't want to push the similarities with banks like First Republic (FRC) or Silicon Valley Bank (SVB Financial (SIVB)) too far, but like those other banks, Signature Bank's (SBNY) more specialized banking focus continues to serve the company well. With that, I expect this bank to continue generating above-average pre-provision profit growth through the downturn and into the recovery. It's been a little while since I've updated my thoughts on this bank, but although the shares are down from the time of my last write-up, they've still outperformed the broader peer group by about 10% to 15%, so I don't feel quite as bad about the positive recommendation, even though banks in general have fared poorly next to the S&P 500, let alone NASDAQ. I still expect high single-digit core earnings growth from Signature Bank, and I still believe that supports a bullish stance, with the shares undervalued below $130 to $140.

Click here to read more:

Signature Bank Continuing To Grow Through The Downturn

Comerica Pushing Through Some Fierce Headwinds

While I thought that Comerica (CMA), like many banks, was undervalued on a long-term basis after first quarter earnings, I also thought that the bank had almost all of the wrong attributes for the current environment and wasn't a great near-term outperformance option. Since then the shares have in fact done a little better than I'd expected, and a little better than the peer group, as some of the more dire bear-case economic scenarios have moved off the table.

Even with that outperformance, though, there are some significant headwinds for Comerica. The bank's high asset sensitivity is problematic, the fee-generating business isn't particularly large or independent of core banking trends, and criticized loan balances are accelerating. Capital levels are still good, though, and Comerica may be able to avoid a dividend cut. I'm still concerned about the short-term relative outperformance prospects, but I think Comerica is undervalued pretty meaningfully if management can get ROEs back up to the high single-digits on a long-term average basis.

Click here to continue:

Comerica Pushing Through Some Fierce Headwinds

Citizens Financial Deserves Better Than A 20% Discount To Tangible Book

The Citizens Financial (CFG) story of late, a story I think has been underappreciated, has been about what the company can do from improved efficiency and balance sheet optimization. Management has been delivering, and the market has noticed with the shares up more than a third from my last write-up. While I think a fair bit of that move has been more about the macro environment, a win is a win.

I still have a few lingering concerns about Citizens' reserves, but it's not a major issue and I still believe these shares are meaningfully undervalued. Likewise, Citizens' core markets aren't the hot markets in banking, but that's arguably not such a bad thing, as it means less incoming competition. Low single-digit long-term core earnings growth can still support a fair value in the $30s, though relatively low levels of ROTCE could constrain the near-term upside, and I still think this is a bank worth buying and owning.

Follow the link below for more:

Citizens Financial Deserves Better Than A 20% Discount To Tangible Book

Zions Looks Undervalued But Also Relatively Lackluster

While I thought Zions Bancorporation (NASDAQ:ZION) was meaningfully undervalued relative to its long-term earnings-based fair value after first quarter results, I also thought that was true of a lot of banks, and I didn't see a lot of places where Zions stood out positively. That's particularly true, given the bank's asset sensitivity, comparative lack of fee-generating businesses, and concerns about how effectively it has repositioned its loan book since the last downturn.

Since that last write-up, the shares have basically tracked its peer group and just slightly underperformed the S&P 500, so I don't feel like investors have missed all that much. Zions had a decent enough second quarter, but I'm still concerned about the level of reserves and the fact that Zions isn't really built to thrive in this low-rate part of the cycle. The long-term value is still significant, though, and the dividend yield is decent, so I can definitely understand why some value-oriented investors may be tempted to buy and wait. I don't dislike Zions here, but I think there are better names out there.

Read the full article here:

Zions Looks Undervalued But Also Relatively Lackluster

Philips Delivering Execution-Driven Upside

When I wrote about Philips (PHG) after first quarter earnings, I wrote that I saw upside to $50 or above if management could execute on the significant opportunity in front of the company in critical medical equipment like ventilators and patient monitoring. So far so good, and management isn't losing ground in its other businesses, even though the Diagnostics & Treatment and Personal Health businesses are under pressure from the pandemic.

With Philips shares up more than 20% since that last piece, the upside isn't so pronounced, but I do see Philips still positioned to benefit from a normalization of elective procedures, and a longer run of growth in Connected Care than some investors may expect. I could see the shares going toward the high $50's if the company catches a few breaks, but I think the mid-$50's is a more reasonable target for the time being given the longer-term structural challenges of the business.

Click here to continue:

Philips Delivering Execution-Driven Upside

Kone Shares Have Taken An Express Elevator To The Top

The market will teach you things if you pay attention, and one of the big messages to take away from Kone's (OTCPK:KNYJY) (KNEBV.HE) ("KONE") performance over the last year and a half is not to underestimate a great company's ability to exceed your expectations, nor the market's willingness to bid up those exceptional companies to eye-watering multiples. Sticking to my value guns cost me on Kone, as the shares have risen more than 60% since my last update on the company, where I thought the valuation for this excellent elevator company was already pretty robust.

Given my increasing caution about the global non-residential market, I'm not going to chase the shares here either. Kone is executing well in China, but I'm not sold on the idea that the second quarter's performance is a sure sign of things to come, and I believe weaker results in North American and Europe (which is still more than half of the business) can and will weigh on the financials. Investors who believe in buying and holding quality irrespective of price may still find something to like here, but paying about 20x 2021 EBITDA seems steep to me.

Read the full article here:

Kone Shares Have Taken An Express Elevator To The Top

Steel Dynamics Looks Undervalued As A Lagging Trade On The Short-Cycle Recovery

I turned more positive on Steel Dynamics (NASDAQ:STLD) after the last quarter, largely on a "it's really not that bad" call, and the shares have done alright since then, with the 19% total return beating the S&P by a bit, as well as beating other steel names like Nucor (NUE) (though not Commercial Metals (CMC)). That decent performance has come despite a pretty weak underlying steel market that has seen steel largely get left behind compared to many basic metals over the last few months.

I think management's guidance may be a bit too bullish, and I'm concerned about the long-term impact of capacity additions in the U.S. market, but I still think the shares are too cheap relative to the long-term/full-cycle earnings and cash flow-generating capability of this company. I still believe Steel Dynamics has a solid claim to "best of breed" (with Nucor and CMC in that mix too), and I think buying best-of-breed names when the stock has been punched in the face generally works out okay.

Read more here:
Steel Dynamics Looks Undervalued As A Lagging Trade On The Short-Cycle Recovery

J.B. Hunt Surprises With Intermodal, But The Future May Be More Dedicated

Transports like J.B. Hunt (JBHT) are often looked at as early-cycle plays, and while the market's abrupt shift toward looking past COVID-19 may be too much too soon, it has helped send these shares more than 75% higher from the March panic-lows. Although that level of appreciation doesn't seem to leave a lot of low-hanging fruit from a valuation perspective, I do see an argument for better performance from this company in the coming years, particularly, I see the company eventually achieving scale with its digital brokerage platform and leaning more toward building its dedicated trucking business further.

I can stretch to make a case for J.B. Hunt shares trading up into the low $150s, but it's not a comfortable stretch and I'm not convinced the U.S. economy is out of the woods. Even so, I think J.B. Hunt is a proven performer and if the shares were to sell off/retrace meaningfully, it's a name I'd definitely consider.

Click here for the full article:
J.B. Hunt Surprises With Intermodal, But The Future May Be More Dedicated

Lennox Riding High On HVAC Enthusiasm

Multi-industrials have had a good run of late on growing optimism around the post-pandemic recovery, or at least increasing confidence that the more bearish scenarios are unlikely to occur, but HVAC companies have done even better, with the worst performer over the past three months (Trane (TT)) still beating the broader industrial peer group, while Johnson Controls (JCI), Lennox (LII), and Carrier (CARR) have all done even better, with Carrier seeing a remarkable run.

While I've liked the HVAC segment on a relative basis, I definitely underestimated the enthusiasm that the market was going to have for these stocks when I last wrote about Lennox. Still, even with what I consider to be pretty bullish expectations - my 2020/2021 are on the high end of Street estimates, and my 2022/2023 are a little higher still on a relative basis - the valuation just really doesn't work unless you're willing to just assume that wherever the S&P 500 is is "fair" and build a premium on top of that.

Read the full article here:
Lennox Riding High On HVAC Enthusiasm

Halma - Pay Up To Sleep Well At Night

“Defensive” doesn’t always mean “no growth”, and Halma (HLMA.L) (OTCPK:HLMLY) is certainly one of those companies that has built wide moats around its business and managed to maintain a healthy pace of growth through both organic expansion and M&A. Moreover, served markets like gas detection, explosion prevention, fire and elevator safety, ophthalmology, and water safety aren’t the sort of markets where demand just suddenly goes away because the economy turns.

Valuation is, of course, a challenge. Chances to buy Halma shares on the cheap are about as frequent as chances to buy Danaher (DHR) or Roper (ROP) at a discount (and for largely the same reasons), but the stock has at least provided 10% pullbacks on a pretty reliable basis. Trading at over 20x the estimated EBITDA three years forward there is no way Halma is conventionally cheap, but if you can make your peace with the different valuation rules in place here, I think this is a name to consider on a pullback.

Click here for more:
Halma - Pay Up To Sleep Well At Night

Assa Abloy: Consistent Historical Execution Versus Uncertain Non-Resi Trends

It's hard to fault Assa Abloy (OTCPK:ASAZY) (ASSA-B.ST) for consistency over the past decade. Organic growth has been steadily positive (a little above 3%), adjusted operating margins have reliably been in the 16%'s, FCF margins have hovered around 10%, and the company has continued to grow its electromechanical lock and automation businesses, while maintaining a market share above its three largest competitors combined.

The problem with that consistency, though, is that it's hard to make a case that the business is going to meaningfully inflect above-trend. I'm sure there will be "rebound growth" after what will be a horrible 2020, but the outlook for non-resi construction isn't so great now, and I'm not really sure there's a strong argument that investments in areas like mobile or touchless access will drive a major change in the business. I do believe that Assa Abloy can achieve mid-single-digit long-term revenue growth and mid-to-high single-digit FCF growth, and I think this is a good stock to own at the right price, but right now it looks like too much is being expected of this steady non-resi play.

Read more here:
Assa Abloy: Consistent Historical Execution Versus Uncertain Non-Resi Trends

Taiwan Semiconductor Manufacturing Company Navigating Geopolitical And End-Market Turbulence Quite Well

I said in my last article on Taiwan Semiconductor Manufacturing Company (TSM) ("TSMC") that I'd be more bullish on the shares below $50, and investors did, in fact, get the chance to buy below $50 before the stock lifted off, buoyed by improving sentiment on wafer volumes in 2020 as well as a hard turn toward technology stocks in recent months. With that, TSMC has done a little better than the SOX Index, while a few equipment/supply names like ASML (ASML) and FormFactor (FORM) have done even better.

My only real concern around TSMC remains the elevated level of long-term margin expectations. I don't think there are really any credible concerns about the company's ability to ramp 3nm or 2nm, nor maintain a strong competitive position relative to Samsung (OTC:SSNLF) and other fabs, and I believe that the year-to-year shifts in customer mix are just something that goes with the business. Still, I do see some risk to the sheer magnitude of margin improvement that seems baked into the valuation. While today's price would appear to offer "high-mid-single-digit" long-term annualized return prospects, which isn't bad for a quality tech name, I'd prefer to wait for another pullback, as those aren't uncommon in this stock's history.

Follow this link to the full article:
Taiwan Semiconductor Manufacturing Company Navigating Geopolitical And End-Market Turbulence Quite Well

Abbott Labs Leveraging An Opportunity In Diagnostics While Looking Forward To Normalization

While I thought Abbott Labs (ABT) was relatively well-placed relative to its peers through the Covid-19 pandemic with my last update, I also thought that the valuation was pretty full overall. Since then, the shares have done a little better than peers like Becton Dickinson (BDX), Boston Scientific (BSX), and Medtronic (MDT), but not all that well compared to the S&P 500 (lagging by about 13%), and that’s with a better-than-expected second quarter and enough management confidence to give some guidance on full-year earnings.

There are certainly positive drivers here, including ongoing long-term growth in MitraClip procedures, long-term growth in the diabetes franchise, and further opportunities in diagnostics from the Covid-19 pandemic. I also like Abbott’s organizational flexibility, including its willingness to do both big acquisitions and big divestitures/spin-offs. My issue is just the valuation – the stock looks priced for a mid-single-digit annualized return that I just don’t find that interesting (though there aren’t a lot of bargains in big-cap med-tech).

Click here to continue:
Abbott Labs Leveraging An Opportunity In Diagnostics While Looking Forward To Normalization

First Horizon Leveraging Trading To Offset Weaker Core Banking

I turned more cautious on First Horizon (FHN) after the first quarter, as I liked the long-term opportunity but had some concerns about nearer-term risks around reserve levels and credit performance in the combined First Horizon and Iberia loan books. Since then, the shares have done pretty well as the Street has gotten more comfortable with the idea that the worst-case scenarios for the pandemic-driven recession are unlikely to materialize, and the shares have outperformed other comparable banks like Regions (RF) and Synovus (SNV).

I do still have some lingering concerns about the bank's reserves and the risk of a bigger hit from credit losses. It's also pretty clear that First Horizon, really, will need to make the most of its opportunities in fixed income trading and in merger-driven synergies to offset the pressures on the core banking franchise from low rates and weaker loan demand. All of that said, the discount to tangible book and my long-term estimate of core earnings is just too low and I still believe First Horizon is poised for above-average long-term returns.

Read more here:
First Horizon Leveraging Trading To Offset Weaker Core Banking

Regions Financial's Greater Conservatism Could Pay Off

I was cautious about the near-term prospects of Regions Financial (RF) after first quarter earnings, and the stock has since had a pretty mixed run next to its peer group. I was concerned about the prospect of higher provisioning/reserve-building and loan losses, and that's been what has happened, though it's not clear to me that Regions is actually as bad off as the share price would otherwise suggest.

Regions' balance sheet sensitivity is a concern in a weaker rate environment, even with the company's hedging efforts, and I'm not ruling out the risk that the underlying credit situation is actually worse than its peers. Even so, I think the risk perception is worse than the reality, and I think Regions has positioned itself defensively relative to most of its peers. It'll take time for the underlying long-term value I see here to come out in the share price, but if the post-COVID-19 recession proves worse than the market's current sentiment reflects, Regions could be an outperformer.

Read the full article:
Regions Financial's Greater Conservatism Could Pay Off

Sandvik Managing A Steep Downturn Relatively Well

One of the very few industrial stocks that I saw as undervalued enough to consider buying a quarter ago, Sandvik (OTCPK:SDVKY) has since appreciated about 40%, outperforming even the mighty Atlas Copco (OTCPK:ATLKY), though not performing quite as well as fellow short-cycle play Parker-Hannifin (PH). Investors have certainly ran the idea of a coming V-shaped recovery in short-cycle industrial markets, but Sandvik's second quarter results offer a reminder that it may not be such an easy play as the market valuations would suggest.

While I do think Sandvik is close to the end of the downturn and has done quite well managing margins through the downcycle, I also think valuation is far more demanding now. I'm not worried about much that is Sandvik-specific, but I do worry that expectations are so high for the recovery now that any bumps along the road could have a disproportionately large impact on valuation.

To read more, click here:
Sandvik Managing A Steep Downturn Relatively Well

Atlas Copco's Long-Term Excellence Continues To Drive The Shares Higher

It's probably true that we've passed through the worst of the pandemic-driven economic downturn, but seeing Atlas Copco (OTCPK:ATLKY) near an all-time high still strikes me as overly optimistic. Don't get me wrong - I think Atlas is one of the best industrials I know, but I struggle to see how any company could live up to the expectations being built into this "safe haven" industrial. With that, I just can't see buying here unless you're the sort of investor who can successively trade momentum stories.

Read the full article here:
Atlas Copco's Long-Term Excellence Continues To Drive The Shares Higher

Bank Of America Still Undervalued As It Invests Through The Downturn

Bank of America's (BAC) recent share price performance (over the last three to six months) has certainly left something to be desired compared to its peer group, but that's not entirely unexpected given the bank's well-above-average rate sensitivity and management's decision to continue investing in the long-term growth of the business. I believe that the latter point will prove important over time, as BAC continues to build up its digital banking capabilities and fee-generating businesses with an aim toward consolidating even more U.S. banking business.

My sentiment on Bank of America isn't much different than it was a quarter ago - I think the shares are meaningfully undervalued and offer attractive long-term potential, but the bank is not particularly well-positioned for the current environment and relative operating performance is going to be lackluster for a while. Investors who aren't so concerned about near-term performance (or aren't interested in market timing) should take a closer look, but this is a name that will need some time (and interest rate normalization) to outperform.

Click here to continue:
Bank Of America Still Undervalued As It Invests Through The Downturn

Truist Posts Underwhelming Results As The Recession Takes Its Toll

While Truist (NYSE:TFC) shares were up some on the day of its earnings release on positive investor sentiment on cost savings and credit costs, I walked away feeling that Truist's performance was actually underwhelming relative to its peers. It wasn't enough of a deviation for me to fundamentally change my view of the company or the stock, but it adds a note of caution going into what was already going to be a challenging second half of the year.

Truist shares have actually done pretty well over the last three months, beating most of its peers in terms of market performance, and the trend over the past year hasn't been bad either. I still believe that Truist can realize significant cost synergies over the next few years and become a leading Southeastern banking franchise with mid-single-digit, long-term core earnings growth, but the shares aren't the biggest bargain in the space and I think there are some arguments for caution given recent performance trends.

Read more here:
Truist Posts Underwhelming Results As The Recession Takes Its Toll

A Small Hiccup In Orders Means Little For ASML's Future

I hope ASML (ASML) shareholders will forgive me for saying I hoped for a more extreme reaction to second quarter results - a quarter in which ASML posted a modest revenue miss, a modest operating margin miss, and the weakest order number in over four years - as an opportunity to buy in at a reasonable (or at least more reasonable) price would be very welcome. Rationality has prevailed, though, and while there was a bit of a sell-off, the shares have already regained most of the lost ground.

ASML remains a unique story in the semiconductor equipment space as the only provider of extreme ultraviolet (or EUV) lithography systems, a key enabling technology for advanced semiconductor production. With leading-edge applications like smartphones, switches, and so on only just starting to use chips that require EUV, I see significant growth in the years ahead.

The "but", as long-time readers of mine can no doubt anticipate, is the valuation. There's just no conventional approach by which ASML is cheap. The best I can do is point to other secular growth stories that trade at even richer multiples (like Amazon (AMZN), Nvidia (NVDA), and Salesforce.com (CRM)) and suggest that ASML could still have some room to run, but that reminds me too much of the sort of justifications used to support ever-higher price targets in prior bubbles.

Click here for more:
A Small Hiccup In Orders Means Little For ASML's Future

Sentiment And Execution Boosting Alcoa's Share Price

When I wrote about Alcoa (AA) after the aluminum company’s first quarter earnings, I saw this as a risky, relatively low-quality name that nevertheless had upside to the mid-teens on prospects for a V-shaped recovery in multiple manufacturing end-markets. In the interim, investors have largely taken the bear-case scenarios for the pandemic-driven recession off the table, and initial data from China’s recovery have been generally positive, helping drive Alcoa shares toward that mid-teens target price and up about 90% from the time of that last piece.

Alcoca management has also helped its own cause, with solid ongoing execution and a continued willingness to make difficult decisions to improve margins and cash flows (like the restructuring at the high-cost San Ciprian facility in Spain). My primary concern on Alcoa shares now is whether a lot of the benefit of a V-shaped recovery is already in the stock. While Alcoa’s high financial leverage makes it quite sensitive to any changes in estimates (positive or negative), I still don’t like the fundamental outlook for the aluminum industry on a long-term basis, and I believe Alcoa is more of a trading opportunity on sentiment than a core buy-and-hold.

Continue here:
Sentiment And Execution Boosting Alcoa's Share Price

PNC's Core Banking Ops Are Under Pressure, But M&A Optionality Is A Plus

This is a tough time to model PNC (PNC), as the company’s decision to sell its large position in BlackRock (BLK) reduces near-term earnings and only adds to the burden of excess liquidity in a low-rate environment. I continue to believe that PNC management will prove themselves good stewards of capital, and will likely look to use that excess capital to acquire one or more banking franchises to accelerate the company’s development into a national commercial-focused banking giant.

PNC shares have underperformed since my last update, and I can see how ongoing uncertainty regarding the use of that excess capital may weigh on the shares for some time – no doubt there will be some investors pushing the company to forget about empire-building and just return the capital in the form of a big buyback and/or special dividend. While there’s above-average modeling uncertainty here (given the significant impact that a large acquisition could have on future financials), I believe PNC remains undervalued and underappreciated as a high-quality bank in a challenging operating environment.

Read more here:
PNC's Core Banking Ops Are Under Pressure, But M&A Optionality Is A Plus

U.S. Bancorp Beats, But Underlying Performance Is Still Lackluster

As seen in the first bank earnings of the reporting season, core banking operations are struggling, and U.S. Bancorp (USB) is no exception. While U.S. Bancorp does have a sizable collection of fee-generating businesses, most of those businesses are tied closely to economic activity (as opposed, say, to Truist’s (TFC) insurance operations or the trading operations of Bank of America (BAC), Citi (C), and JPMorgan (JPM)), and don’t do much to offset the core weakness that the banking sector is seeing now.

I thought U.S. Bancorp was undervalued three months ago, but also a somewhat lackluster near-term prospect, and the share price performance has been basically inline to slightly below its peer group, with Citi and Truist doing noticeably better. While I think U.S. Bancorp has made the right decision in accelerating its reserve-building, the bank’s heavier skew toward consumer banking could still be a relative headwind for sentiment. The shares offer above-average long-term potential, but I would underline the “long-term” part of that statement.

Click here for more:
U.S. Bancorp Beats, But Underlying Performance Is Still Lackluster

Enthusiasm For Yaskawa Electric Seems To Be Running Ahead Of Reality

It’s not news that the stock market is a discounting mechanism, with investors frequently looking past dire near-term conditions and pricing in recoveries well ahead of the actual turns in businesses. We’ve seen that lately in a number of U.S. short-cycle manufacturing stocks (names like Parker-Hannifin (PH) and Rockwell (ROK)), where performance has been driven by evidence that the worst-case scenario is off the table and a late 2020/2021 V-shaped recovery is still in play.

In the case of Yaskawa Electric (OTCPK:YASKY) (6506.T), I think the nearly 30% move since my last update has been too much too soon, as investors seem eager (if not desperate) to buy into a China-centric recovery story. To be clear, I like Yaskawa’s leverage to markets like semiconductors, electronics assembly, and factory automation, but I believe the recovery in the share price is excessive relative to the sort of business recovery I expect to see.

To read the full article, click below:
Enthusiasm For Yaskawa Electric Seems To Be Running Ahead Of Reality

Fastenal Riding Higher On Enthusiasm Over Shorter-Cycle Manufacturing

As investors start looking past Covid-19, this is a pretty good time to be leveraged to manufacturing, and Fastenal (FAST) shareholders are benefitting. Industrials have modestly outperformed the S&P over the past three months, and those names more leveraged to short-cycle manufacturing are doing even better, with Fastenal up more than 25% and Parker Hannifin (PH) and Rockwell (ROK) both up around 30%.

Given the rising expectations that have accompanied these stock moves (the Street has gone from expecting a mid-single-digit revenue decline for Fastenal in 2020 to low-to-mid single-digit growth), I’m not sure how much gas is in the tank. I’ve been consistently bullish on short-cycle industrial end-markets as the preferred way to play the post-Covid-19 recovery, but that’s looking more and more like the consensus view now. With valuation providing no safety net here, I’d be careful about pressing my luck, though I fully acknowledge that Fastenal is an incredibly well-run industrial name and still very well-leveraged to a short-cycle recovery in late 2020 and into 2021.

Read the full article here:
Fastenal Riding Higher On Enthusiasm Over Shorter-Cycle Manufacturing

First Republic Once Again Shows It's Different In All The Right Ways

The argument for owning First Republic (FRC), a bank that has often appeared to trade at robust (if not excessive) multiples, has long been that it’s a different sort of bank. Skeptical veteran investors can be forgiven for shaking their head at the “it’s different this time” argument, but First Republic continues to make the case that it really is a different sort of bank – one that can navigate this unexpected pandemic-driven recession better than the vast majority of its peers.

I liked First Republic after first quarter earnings, and the shares have risen about 16% since then – better than the average regional bank, but only a little better than the S&P 500. While that move has shrunk some of the undervaluation I saw, the shares do still look undervalued and I believe the long-term expected return here is pretty attractive, particularly if you believe that multiples can re-inflate somewhere down the road when investors return to the banking sector.

Read more here:
First Republic Once Again Shows It's Different In All The Right Ways

Citigroup Has Likely Passed The Worst Of The Cycle

I’ve liked Citigroup (C) as a more contrarian call in the larger bank group, and that has worked out alright since the last quarter, with the shares outperforming the bank’s larger peers like Bank of America (BAC), JPMorgan (JPM), PNC (PNC), U.S. Bancorp (USB), and Wells Fargo (WFC). To be clear, this was less a “this is a great bank” call and more of a “it’s not nearly this bad” call, and it seems as though the Street has eased up on some of the pessimism around Citi’s outlook over the past few months.

I expect Citi’s performance to be below-trend through 2022, but I believe Citi has seen the peak in provisions, with actual charge-offs likely to peak in the first half of 2021. Low rates will remain a headwind for some time, and I think Citi’s non-U.S. exposure could be a relative liability over the next couple of years. Even so, if Citi can muster any growth in long-term core earnings (relative to 2019), these shares are significantly undervalued.

Click here for the full article:
Citigroup Has Likely Passed The Worst Of The Cycle

JPMorgan's Core Banking Business Under Pressure, But The Long-Term Outlook Is Still Positive

There was no expectation that bank earnings were going to be strong in the second quarter, not with serious pressures on net interest margin and higher provisioning, but so far it looks as though there aren’t any major surprises – struggling banks like Wells Fargo (WFC) continue to struggle, while JPMorgan (JPM) leads the way with strong results, driven in large part by its strong non-bank operations.

This fiscal year is still looking like a rough one for JPMorgan, and the next couple of years will likely be below the long-term trend, but I expect JPMorgan to deliver low single-digit core earnings growth over the long term, and I believe these shares are meaningfully undervalued on the basis of core earnings and expected ROTCE. Persistently low rates remain a challenge for the entire sector, though, and I would caution investors that this is more of a “slow and steady” performance pick rather than one likely to deliver significant near-term outperformance.

Read the full article here:
JPMorgan's Core Banking Business Under Pressure, But The Long-Term Outlook Is Still Positive

Analog Devices Betting That Bigger Is Better

Relative to, say, Broadcom (AVGO), Analog Devices (ADI) has been an infrequent acquirer in a semiconductor industry that has long seen significant consolidation and M&A activity. When they do act, though, they tend to make meaningful deals that pay dividends down the road (Hittite and Linear Tech). In looking to acquire Maxim (MXIM), I believe Analog is focusing relatively less on technology and know-how this time around in favor of a more scale-driven M&A argument.

I’m not worried about Analog executing on this deal, even if it does seem to be a little expensive to me. While the long-term benefits of this deal are likely to be less meaningful than those two prior deals, I do see it adding long-term value. Given the valuation of the shares, though, I can’t really get too excited about buying them today, even as business seems to be turning around.

Follow this link for more:
Analog Devices Betting That Bigger Is Better

Alfa Laval's Proposed Acquisition Adds Capital Deployment To The List Of Investor Worries

On the whole, I've liked Alfa Laval (OTCPK:ALFVY) more than the Street, and that has worked out okay, with the stock more or less performing in line with the S&P and beating its industrial peer group. Now, though, the company has made a controversial decision to pay a high premium to buy its way into the valve market - a decision that, in the short term at least, will only magnify concerns about the company's exposure to weak end-markets like oil/gas and petrochemicals.

I can understand the long-term argument for acquiring Neles, and I'm certainly not going to ignore the idea that the premium multiple Alfa is offering is inflated by weak current conditions. Moreover, if investors are constantly advised to try to buy into weakness, doesn't the same apply to companies? All of that said, I think there were better options for Alfa, and I think this is a deal that could weigh on sentiment until management can show real deliverables on the deal.

Click here to continue:
Alfa Laval's Proposed Acquisition Adds Capital Deployment To The List Of Investor Worries

MSC Industrial Holding Up A Little Better Than Expected

The going remains tough for MSC Industrial (MSM) (“MSC”), and management’s ability to get going remains very much a point of debate. While the U.S. economy has likely seen the bottom for this sudden downcycle, significant uncertainty remains as to the shape of the eventual recovery. More concerning to me than the short-term outlook is management’s multiyear track record of missing their own sales growth and margin targets, though the last couple of quarters have been better than expected.

When I last wrote on MSC Industrial after fiscal second quarter earnings, I thought the shares looked modestly undervalued amid considerably uncertainty. The shares have since modestly outperformed the larger industrial sector, though lagging peer/rival Fastenal (FAST) by a wide margin and delivering a more mixed performance relative to Grainger (GWW). At this point, I view MSC as more fairly-valued to slightly undervalued, with near-term upside likely tied to the shape of the recovery (and the market’s on-again/off-again enthusiasm for industrial stocks), while the long-term performance outlook remains tied to management’s ability to successfully execute its latest transformational strategy – a development that can, in my opinion, be very fairly called a “show me story” given past failures.

Read more here:
MSC Industrial Holding Up A Little Better Than Expected

A Simplified Ownership Structure Should Help Turkcell Investors

I suppose there’s both cosmic and comic justice that one of the most Byzantine (and dysfunctional) ownership structures I’ve ever seen with a public company would involve a Turkish company – the mobile services operator Turkcell (TKC). For years, a fractious ownership structure has impaired the company’s ability to pay regular dividends, and has likely contributed to a discounted valuation relative to the underlying fundamentals.

With a series of transactions led by the Turkey Wealth Fund, those years of sometimes-childish squabbles should be over, and Turkcell investors should be able to look forward to a more consistent future for the company and its dividends. While there are still significant risks here, and some investors may actually see this transaction as adding to the risks, I believe Turkcell remains meaningfully undervalued even with the inclusion of a “Turkey discount” that reflects the elevated economic and political risks of that country.

Click here to continue:
A Simplified Ownership Structure Should Help Turkcell Investors

Neurocrine Further Expands Its Pipeline With An Early-Stage Deal

Neurocrine Biosciences (NBIX) management has been clear that they want to reinvest the company’s growing financial resources into expanding the clinical pipeline and, eventually, the business. This has been more than just talk, with multiple deals (Idorsia (OTCPK:IDRSF), Xenon (XENE), Voyager (VYGR), Jnana) since October of 2018 that have meaningfully expanded the company’s pipeline and R&D efforts.

The latest announcement, a multi-drug R&D partnership with Takeda (TAK), is more of the same, with this partnership adding more than a half-dozen potential drugs in new therapeutic areas for the company. While the assets that Neurocrine is acquiring are higher-risk (depression and schizophrenia drugs have below-average odds of clinical and commercial success), the market opportunities are large, and the clinical assets do target some appealing underserved market opportunities.

The early stage of development limits the near-term value creation from this deal, but clinical and commercial success for one or more of the included drugs would make a meaningful contribution to Neurocrine’s future value.

Read more here:
Neurocrine Further Expands Its Pipeline With An Early-Stage Deal