Precision Ag Gives Deere A Driver Beyond Commodities And Fleet Dynamics

A lot of industrial companies posted better than expected margins this quarter, but I believe Deere's (DE) strength will prove more durable, as the company is seeing some meaningful benefits from structural changes that have been years in the making. On top of that, Deere has drivers that go beyond traditional drivers like commodity prices, farmer balance sheets, and fleet age, with technology-driven precision ag offerings that deliver demonstrated benefits to farmers.

Up about 10% from the fiscal third quarter earnings release, and up almost 40% over the past year, well ahead of peers/rivals like AGCO (AGCO), Caterpillar (CAT), and CNH Industrial (CNHI), these positive drivers are not exactly a secret or meaningfully underappreciated by the Street. That makes valuation tough; the return potential is okay, and I like the momentum in the business and the prospect for more beat-and-raise quarters, but this isn't a value pick.

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Precision Ag Gives Deere A Driver Beyond Commodities And Fleet Dynamics

Palo Alto's Shift Towards Cloud Hasn't Been Seamless, But The Opportunity Is Still Meaningful

It seems to only be a matter of time before security software companies, however well-liked they may be, take their turn at the whipping post. Often times, it is to sales force execution/transitions, but in the case of some bigger legacy players like Palo Alto (PANW) and Check Point (CHKP), recent concerns have shifted more towards weak sales of traditional firewall appliances. Given Palo Alto’s ability to offer a “firewall as a platform” approach, and considering the exceptional growth in the company’s Next Gen business, I’m not really worried if product revenue growth wobbles from quarter to quarter.

Ongoing growth in cloud has some negative near-term consequences for margins, but I’m not really worried about over the longer term. With double-digit long-term revenue growth potential and improving free cash flows, I view Palo Alto as a “the strong getting stronger” play in security, and I still think there are worthwhile returns available at this price.

 

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Palo Alto's Shift Towards Cloud Hasn't Been Seamless, But The Opportunity Is Still Meaningful

Import Competition Remains Fierce, But Insteel Is Worth A Look

This is a challenging time to model non-residential construction investment, particularly in the municipal area, as COVID-19 is likely to hammer local and state budgets. On top of that, federal tariff policy remains inconsistent, protecting some companies and leaving other companies more exposed than before.

I was cautious on Insteel (IIIN) back in January, largely due to questions about end-user demand and pricing, and the latter issue has really been relevant in the past couple of quarters. With the shares down almost 30%, though, I wonder if this under-covered small-cap fabricator isn't worth another look. While the outlook for the next couple of years is still very foggy, I like how management has run this business and I believe today's valuation prices in a long-term deterioration of the business that is unlikely to occur.

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Import Competition Remains Fierce, But Insteel Is Worth A Look

nVent: Low Valuation And Modest Upside As A Cyclical Turnaround Play

This is a tough time if you have considerable exposure to short-cycle industrials, non-resi construction, and oil/gas, and indeed nVent (NVT) is having a tougher go of it. While other players in the electrical space have benefited from leverage to utility grid spending, that's not the case at nVent, and the company's data center exposure really isn't enough to meaningfully counterbalance the significant pressures elsewhere in the business. On top of that, steep decremental margins are chewing into one of the few strengths of the investment story.

I haven't been positive on nVent for a while, and with the shares down another 20%-plus since my last update, underperforming the industrial sector and significantly underperforming peers/rivals like ABB (ABB), Eaton (ETN), Hubbell (HUBB), and Schneider (OTCPK:SBGSY), I don't feel as though I've missed much. Looking at the business now, though, this is a tempting short-cycle recovery play, albeit with some concerns about oil/gas and non-resi exposures. Given the performance gap with other short-cycle names (many of which also have oil/gas and non-resi risk), this is a name that I think maybe worth a lot more consideration now.

 

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nVent: Low Valuation And Modest Upside As A Cyclical Turnaround Play

Cummins Shows Again That It Is A Cyclical King

Just as there are some stocks out there that are cheap for good reasons, there are stocks that carry well-earned premiums, and Cummins (CMI) is one of them. While this is certainly a cyclical business, few companies in the heavy machinery space (and perhaps few cyclical companies in general) do a better job of adjusting the cost structure to capture the upside in the good times and limit the downside in the bad times.

I had hoped back in May that there’d be a pullback after the machinery sector rallied, but that never happened and now these shares are another 20%-plus higher. Not only has Cummins continued to outperform industrials in general, but also heavy machinery peers like Caterpillar (CAT), Navistar (NAV), and PACCAR (PCAR), though Deere (DE) has done even better. If I owned Cummins, I probably wouldn’t be in a hurry to sell (I might consider protective stops), but it’s tougher to make the case for buying in now, as I think the shares already price in a healthy cyclical recovery and expectations may have more downside than upside risk at this point.

 

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Cummins Shows Again That It Is A Cyclical King

Trane Offers Good Leverage To Green Building Retrofits And A Transport Recovery

Trane Technologies (NYSE:TT) is in a good position to take advantage of some meaningful trends in the HVAC-R market over the next few years. In the short term, Trane should benefit from a rebound in residential construction and a recovery in transportation refrigeration. Over more of a medium-term timeline, Trane is well-placed to benefit from green building retrofits in the U.S. and Europe. Longer term, Trane’s healthy balance sheet and global position give it M&A optionality to be a consolidator and to reinvest in newer technologies in HVAC-R and building controls.

While these shares have lagged HVAC-R peers on a year-to-date basis, that doesn’t mean the shares are particularly cheap. Mid-to-high single-digit revenue growth over the next five years and long-term revenue growth around 4% isn’t enough to drive a particularly attractive free cash flow-based fair value, and the shares likewise don’t look particularly cheap on an EV/EBITDA basis. Trane does offer a good story, though, and HVAC is a popular space, so I’m not betting against further gains, but I do think valuation is a factor investors should consider, even if they decide theme or momentum are more important.

 

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Trane Offers Good Leverage To Green Building Retrofits And A Transport Recovery

Silicon Laboratories Beating And Raising On Healthy 5G And Improving IoT

Silicon Laboratories (SLAB) does not lack for growth opportunities. The company has one of the strongest portfolios of lower-power wireless connectivity assets for IoT (both consumer and industrial), a “good enough” microcontroller business for IoTs, and an underrated timing and isolator business that gives the company leverage to 5G and auto electrification. That 5G leverage certainly helped in the second quarter, allowing the company to post better revenue numbers than the average chip company.

My primary issue with Silicon Labs when I wrote about the company back in May was the valuation. Since then, the shares have lagged the SOX index by a fairly wide margin (about 20%) and the gap is wider than 50% over the past year. I often get pushback on this, but valuation matters – sooner or later. At this point, I still don’t believe Silicon Labs is undervalued on a long-term discounted cash flow basis (my preferred entry criteria), but I do see some modest upside on a margins/growth-driven basis.

 

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Silicon Laboratories Beating And Raising On Healthy 5G And Improving IoT

Hubbell Feeling The Squeeze From Its More Cyclical Business Mix

Relative to ABB (ABB), Eaton (ETN), and Schneider (OTCPK:SBGSY), Hubbell’s (HUBB) electrical products business is more sensitive to short-cycle industrial demand, and the company also lacks the strong leverage to data center growth of those larger rivals. On the other hand, the company is doing well with its cost reduction efforts, and the company has significant leverage to a healthy transmission & distribution market (or T&D) as utilities upgrade their grid infrastructure.

I liked Hubbell three months ago, and the shares have done pretty well since then, with a 30% move that beat the industrial sector and peer nVent (NVT), but lagged those larger, more diversified players. At today’s valuation, Hubbell looks more like a hold than a clear buy. The total projected return is still decent, and Hubbell’s greater cyclicality could be an asset in a recovery, but I do have concerns about Hubbell’s leverage to oil/gas, as well as its leverage to commercial lighting and new construction, as opposed to the stronger retrofit opportunities I see with the likes of ABB, Eaton, and Schneider.

 

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Hubbell Feeling The Squeeze From Its More Cyclical Business Mix

Eaton: More Than Just A Short-Cycle Story

Short-cycle names have done pretty well of late in the market, and Eaton’s (ETN) nearly 25% share price move since my last write-up has kept it a bit ahead of industrials in general, though not to the same extent as Parker-Hannifin (PH) and a few other short-cycle names. In any case, I believe there’s more to the Eaton story than just a short-cycle recovery in 2021 and an eventual, longer term, recovery in markets like non-resi construction, aerospace, and oil/gas. Eaton is leveraged not only to data center growth and utility upgrades, but also an increased focus on building efficiency and possible reshoring.

Eaton’s performance fits with my earlier call of it as a “borderline buy” where I leaned positive mostly because of the near-term drivers I saw. I’d say that’s still largely true. There aren’t many out-and-out bargains in high-quality industrials anymore, but I like Eaton’s leverage to electrification, as well as some self-help on margins. With a prospective return on par with other high-quality industrials, but a better “story” in my opinion, I think this is still a name to consider if you must buy into what I think is a pricey sector.

 

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Eaton: More Than Just A Short-Cycle Story

Great Execution In Attractive Markets Propelling Marvell To New Heights

In the short term at least, a good story can take you far on Wall Street, and with strong wins and execution in its cloud, wireless, and auto businesses, Marvell (MRVL) has a good story to tell, with the shares having risen almost 50% since my last update on the company, handily outperforming the semiconductor sector and virtually all of its peers (even giving Inphi (IPHI) a run for its money).

My issue with Marvell back in December was valuation, not execution, and not only did Marvell hit my numbers for FY 2019, the results since then have also been pretty much in line with my expectations. These shares now trade well ahead of the norms for the likely revenue and margin trajectory, and the company is going to need an extended run of high-teens growth (or higher) to sustain this kind of multiple. Beat-and-raises driven by strong underlying demand in cloud, wireless, and auto markets (and increasing market share) could do it, but expectations are already high.

 

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Great Execution In Attractive Markets Propelling Marvell To New Heights

Once The COVID-19 Tailwind Fades, Natural Grocers Will Have Some Challenges

It is perhaps in poor taste to talk about companies or industries benefiting from the COVID-19 pandemic, but the reality is the shift in consumer behavior patterns has meant considerably higher volumes for grocery retailers, and with that, better margins as well. In the case of Natural Grocers by Vitamin Cottage (NGVC) (“Natural Grocers”), that has sent comps from the low single-digits into the double-digits, while boosting gross and operating margins.

The COVID-19 boost won’t last, though, and when it fades, Natural Grocers will still face the same challenges as before – an increasingly crowded space where it’s hard to stand out, and a relatively weak core profitability versus its peers. I wasn’t very bullish on Natural Grocers a year ago, and the shares fell another 15% or so before the COVID-19 pandemic sent shoppers and investors toward the grocery stores. I don’t think the shares are particularly expensive now, but I do think this is a difficult place to generate long-term alpha.

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Once The COVID-19 Tailwind Fades, Natural Grocers Will Have Some Challenges

Nektar Looks Undervalued, But The Biggest Value-Driving Events Are Still In 2021

 

In the absence of real news, biotech stocks can drift lower as impatient investors pursue names with more near-term excitement, and I’m not altogether surprised that Nektar (NKTR) shares are lower than when I last wrote on the company, though the nearly 20% decline seems a little overdone. Since then, the company has delivered a mildly positive update on its lupus program, while maintaining generally as-expected timelines for other key clinical read-outs.

The performance of Nektar’s shares over the next 12-18 months are still largely tied to updates on the performance of the company’s lead drug bempegaldesleukin (or “bempeg”) in a series of oncology trials, with the melanoma studies in particular looking like the biggest value-drivers to me. Success in melanoma alone could drive a substantially higher share price, while clinical trial failures would hammer the stock, even though there are valuable compounds in the pipeline beyond bempeg. As is, Nektar remains a virtually binary call, and one that I think is worth at least considering ahead of some data updates in November of this year and through 2021.

 

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Nektar Looks Undervalued, But The Biggest Value-Driving Events Are Still In 2021

FLSmidth Looks Undervalued, But Near-Term Recovery Prospects Are Not Strong

 

Sooner or later, mining and cement companies are going to have to invest in upgraded technology to maintain profitability and compliance with increasingly stringent government requirements. Unfortunately for FLSmidth (OTCPK:FLIDY) (FLS.CO), it’s looking more and more like “… or later”, and the company’s heavy reliance on large project-oriented orders is a definite challenge today.

Although FLSmidth’s valuation was not demanding back in December, I thought it was risky to buy these shares going into a cyclical decline. COVID-19 has only magnified the pressures on the company, and the ADRs are down about 20% since then (the local shares have performed a little worse), underperforming peers like Epiroc (OTCPK:EPOKY), Metso (OTCPK:OUKPY), and Weir (OTCPK:WEIGY) pretty meaningfully. I do still see a “value trap” risk here, particularly with the company needing to restructure the cement business, but the valuation is not demanding if the business is indeed bottoming out.

Investors should note that the ADRs are illiquid.

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FLSmidth Looks Undervalued, But Near-Term Recovery Prospects Are Not Strong

MetLife Has More Potential Than The Market Seems To Think

 

It’s been a while since I’ve written on MetLife (MET), but not much has changed for the good as far as the stock price is concerned. Although there are still growth opportunities in areas like pension risk transfer and group benefits, and reinsurance transactions could free up capital from MetLife Holdings, the market doesn’t seem to give much credit for those, nor is the market assigning much incremental value to the company’s progress in becoming a simpler, less capital-intensive company.

Rates are certainly a valid worry now, as MetLife management has highlighted the downside risk to a prolonged period of lower rates. Even if MetLife can only manage very low single-digit core operating earnings growth over the long term, with a long-term adjusted ROE below 10%, I still believe the shares should trade closer to the high $40’s. Add in the decent dividend, and I think this is a risk worth taking, though it will take some time to work out.

 

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MetLife Has More Potential Than The Market Seems To Think

Schneider Electric Outperforming Through The Downturn And Adding More Software Assets

 

The electrification and automation markets have certainly been impacted by COVID-19, but Schneider (OTCPK:SBGSY) (SCHN.PA) continues to execute at a high level. Benefitting from healthy demand in areas like data centers, utility smart grids, and building automation, Schneider’s business held up well during the first half of the year. Moreover, the company continues to invest in its future, with its majority-owned software operation AVEVA (OTCPK:AVVYY) acquiring OSIsoft in a widely-expected deal.

Since my last write-up, the local shares have more or less kept pace with the broader industrial group, while the ADRs have outperformed (up more than 40%). ABB (ABB) has led the sector lately, but the Schneider ADRs have done well relative to other players like Eaton (ETN), Emerson (EMR), and Rockwell (ROK) while the local shares lagged a bit – pull the comparison out to a year though, and only Rockwell has outperformed Schneider.

I still love Schneider as a business, but the rally in industrials has mopped up a lot of the value I saw earlier in the year. Schneider now looks priced like the high-quality industrial it is, but unless you view prospective returns in the neighborhood of 7% as “the new 10%” (given lower interest rates), I think the shares look more like a hold than a buy.

 

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Schneider Electric Outperforming Through The Downturn And Adding More Software Assets

Garrett Motion Upping The Stakes In Its Asbestos Battle With Honeywell

 

For Honeywell (HON) shareholders, there was almost no downside to the spin-off of Garrett Motion (GTX), as it eliminated a highly cyclical business and allowed the company to offload asbestos liabilities tied to the Bendix brake business. It wasn’t such a great thing for Garrett, though, as the company is now straining under the combined pressure of the COVID-19 downturn, the need to make future investments in technology, an already-high debt load, and those asbestos liabilities.

Now Garrett has informed investors that it is “exploring alternatives” for its balance sheet, and that very well may mean a bankruptcy filing. While investing in bankruptcy-risk stories carries an exceptionally high level of risk, Garrett may have some aces up its sleeve when it comes to dealing with Honeywell and gaining some relief on the indemnity agreement that was imposed upon the company. For Honeywell, this may be a time to negotiate, as a negotiated settlement may be easier to work with than an imposed judgment if events go in that direction.

 

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Garrett Motion Upping The Stakes In Its Asbestos Battle With Honeywell

Dialog Has Work To Do, But The Valuation Seems Unreasonably Cheap

 

What do you do when you can’t find attractively-priced assets in one market? Try other markets. I’ve lamented the “too far too fast” performance of U.S. semiconductor stocks, but I’ve found some interesting ideas in other places – Renesas (OTCPK:RNECY) in Japan and Dialog (OTCPK:DLGNF) in Europe. While I thought Dialog’s valuation was “just okay” more than a year ago, around the time the company came to an agreement with Apple (AAPL) on its main PMIC business, the shares have noticeably lagged the SOX index since then, despite reasonably good performance.

To be sure, Dialog has work to do. The company has done very well winning new power business with Apple, but progress on non-Apple diversification and growth projects has been more mixed. While I see opportunities in areas like auto PMIC, high-voltage PMICs, and industrial IoT, I need to see actual execution here, and I think that’s a major key to unlocking more value in the market. As is, though, I believe Dialog is meaningfully undervalued on the basis of low-single-digit revenue growth and operating margins around 20%.

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Dialog Has Work To Do, But The Valuation Seems Unreasonably Cheap

Body-Blows Across The Business Bring Innospec Back To An Interesting Valuation

 

It's been a while since I've written on Innospec (IOSP), a high-quality small specialty chemical company that I previously thought looked a little too pricey when specialty chemical companies were still popular. COVID-19 came along, though, and delivered some significant blows to the business, as oil and fuel demand plunged across the world.

While I do have some concerns about the pace of a recovery in the oilfield business, I believe Innospec is in solid shape otherwise. This could be a good time for the company to be opportunistic with M&A, and I like the long-term opportunities across the business. If Innospec can deliver long-term FCF growth in mid-single-digits, I believe these shares are priced for a double-digit annualized return today.

 

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Body-Blows Across The Business Bring Innospec Back To An Interesting Valuation

Harsco Hammered By Weak Volumes, But This Transformation Is Worth Watching

 

Harsco (HSC) was already underway with an ambitious corporate transformation plan, selling off its hodgepodge of industrial businesses and investing in hazardous waste treatment in a big way, and then COVID-19 came along and threw a few extra handfuls of sand into the gears. Now Harsco is dealing with very weak steel plant utilization rates and an overall slowdown in activity that has hit hazardous waste volumes.

It’s challenging to model Harsco, as the waste handling business is still new and the significant piece acquired from Stericycle (SRCL) wasn’t performing at top form at the time of the deal. On top of that, a recovery in steel demand looks like a multiyear process and it’s unclear as to how companies will balance capacity/output and price. Those modeling issues increase the risk, but I believe Harsco shares should trade in the high teens, provided management can execute on the integration of ESOL into the Clean Earth business and the economy doesn’t see a significant stumble from here.

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Harsco Hammered By Weak Volumes, But This Transformation Is Worth Watching

IPG Photonics Holding On To Margins But Facing A Battle In China

 

With IPG Photonics (IPGP) having entered its downturn a bit ahead of the pack, and management doing a relatively good job of preserving margins, these shares have managed to outperform industrial peers since my last review of the company, while also doing a little better than the S&P 500.

I like IPG's leverage to short-cycle industrial recoveries in 2021, as well as its automation-enabling technology and some potential leverage from reshoring. And of course we are talking about a company with very good margins. What I don't like is the prospect of intensifying competition in China, as IPG's main rival has made it clear that market share growth is its primary focus today. While IPG shares aren't overvalued relative to its margins and cash, it's also not any cheaper than other high-quality industrials.

 

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IPG Photonics Holding On To Margins But Facing A Battle In China

NuVasive's Valuation Prices In An Excessively Bearish Outlook

 

When a med-tech stock, particularly an established one, seems to be undervalued on the basis of both its cash flow and growth, it’s wise to reconsider your assumptions. While NuVasive (NUVA) enjoyed a honeymoon period after Chris Barry was brought on as CEO, the company has been smacked by COVID-19, and delays with the Pulse platform and better relative performance at rivals like Globus (GMED) have led to questions about whether the company can still drive meaningful share growth and margin leverage.

NuVasive has been a tough stock to recommend in the past, as it seems to always find a way to snatch defeat from the jaws of victory, and the shares have been a long-term laggard in the med-tech space. While I’m worried about blundering into a value trap, I believe there are still real opportunities in product platforms like X360, Cohere, Coalesce, and Modulus, and I believe that Pulse, whenever it finally reaches the market can drive some incremental growth. With the shares looking undervalued below the low-to-mid $60’s, I think this is a risk worth taking for investors who don’t want to chase pricier names that have already run.

 

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NuVasive's Valuation Prices In An Excessively Bearish Outlook

Widespread Skepticism On Renesas Looks Like An Opportunity

 

With most semiconductor stocks having rallied strongly on the expectation of sharp V-shaped recoveries in major markets like autos and industrials, finding bargains in the space has gotten more challenging. While Renesas Electronics (OTCPK:RNECY) too has seen a strong recovery rebound (more than doubling from its April lows), the stock has significantly lagged the SOX index over the past year, as well as peers/rivals like NXP Semiconductors (NXPI), STMicro (STM), and Texas Instruments (TXN), on what I believe are elevated concerns about market share loss in autos and inadequate margin leverage.

I don’t want to underplay the risks that Renesas is facing in the auto business; companies like Infineon (OTCQX:IFNNY), NXP, ON Semi (ON), and STMicro are targeting the sector aggressively, and I don’t see Renesas as particularly well-placed in vehicle electrification. On the other hand, the non-auto business is doing well, with the IDT acquisition having added some meaningful diversification. Not unlike the situation with STMicro a year or so ago, I think there’s too much pessimism here, and I believe the combination of improving end-markets and improved execution can drive a higher valuation for the shares.

 

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Widespread Skepticism On Renesas Looks Like An Opportunity

Allison Transmission's Lagging Performance Pushing The Stock Into Value Territory

Changing your mind as investor can be surprisingly hard to do, but it's an important skill if you're going to generate consistent returns. While I haven't typically been all that bullish on Allison Transmission (ALSN), largely due to what I saw as underinvestment in electrification and, thus, meaningful long-term risk from EV adoption, today's valuation and relative performance makes less and less sense to me. That's particularly so in the context of a commercial truck market that still offers share growth potential and increased efforts at highlighting its R&D efforts.

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Allison Transmission's Lagging Performance Pushing The Stock Into Value Territory

VAT Group Leveraging Healthy Memory Markets To Gain Even More Share

As semiconductor manufacturing processes become even more demanding, it’s helping the technology leaders to consolidate their markets even further, as the differences between “good” and “good enough” become unacceptably wide for the most demanding applications and as also-rans find it increasingly expensive to stay in the game (ongoing R&D demands). That’s good news for VAT Group (OTCPK:VACNY) (VACN.SW), as this Swiss company is a leader in critical vacuum valves and is benefitting from market volume growth and increasing share.

I was lukewarm on these shares in April, but only because of the valuation. The local shares have continued to appreciate since then, climbing another 17%, but have lagged the SOX index and major semiconductor equipment suppliers like Applied Materials (AMAT) and Lam Research (LRCX). While I suppose VAT Group may look like a relative bargain next to ASML (ASML), trading at less than 7x my 2021 revenue estimate (versus closer to 9x for ASML), and with exceptional market share, I find the prospective returns too low at this point to take on the risks that go with the cyclical semi equipment space.

 

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VAT Group Leveraging Healthy Memory Markets To Gain Even More Share

Tenneco Has Rallied, But It Must Do More Than Just Survive

This was a brutal quarter for auto, truck, and commercial vehicle suppliers, as auto production dropped around 45%, and suppliers scrambled to cut costs and preserve liquidity ahead of an expected rebound later this year. Tenneco (TEN) managed to post better-than-expected results, and the company’s survival seems less tenuous now, but overall performance was still nothing to celebrate.

I’d written in the past that Tenneco was a high-risk binary situation where investors were either going to win big or lose big. Since my last update, the shares are up more than 50% on what I believe is greater optimism about the auto end market in general and Tenneco’s liquidity situation, in particular. Although I still see potential upside from here, I continue to have serious doubts as to whether this company is structured to do more than just survive and shuffle along.

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Tenneco Has Rallied, But It Must Do More Than Just Survive

Valeo Weak Second Quarter Shouldn't Overshadow The Long-Term EV Story

Even though the second quarter was a pretty rough one for the auto sector, Valeo (OTCPK:VLEEY) held up okay in some respects. There are some issues to discuss with respect to orders, writedowns, and the balance sheet, but I believe these are transitory problems, and I continue to believe that Valeo is the best play on EVs in Europe and up there with BorgWarner (BWA) and Nidec (OTCPK:NJDCY) as key names to consider for the hybrid/EV evolution.

Valeo shares are up more than 30% in local terms and closer to 40% for the ADRs, roughly matching the performance of BorgWarner, since my last Valeo article and outperforming rivals like Continental (OTCPK:CTTAY) and Denso (OTCPK:DNZOY). Even with that solid run, I think these shares remain meaningfully undervalued on the basis of long-term revenue and FCF growth ranging from the low end of the mid-single-digits to the high end.

 

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Valeo Weak Second Quarter Shouldn't Overshadow The Long-Term EV Story

Middleby Now Trades With A Strong Recovery In The Price

What a difference a quarter makes. Although third-party research entities like Moody’s are still expecting double-digit default rates in the restaurant industry, and banks are still forecasting elevated losses over the next two years from this segment, the market’s view on Middleby (MIDD) has shifted rapidly, with the shares up about 40% since my last write-up as investors have shifted strongly toward recovery-phase thinking.

Even with the risk of meaningful long-term demand destruction, I thought Middleby shares offered interesting potential back in May. With the big move in the shares, though, the stock looks priced more like a high-quality short-cycle industrial, and that seems a little excessive. While the residential business should be set to improve and I do think established restaurant chains will resume capex next year, that appealing margin of safety is largely gone now.

 

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Middleby Now Trades With A Strong Recovery In The Price

Epiroc's Valuation Already Prices A High-Quality Recovery Story

I thought Epiroc (OTCPK:EPOKY) was in good shape for the downturn and offered a decent return for its superior quality back in late April, but I certainly did not expect the strong rally in the shares since then – close to 30% for the local shares and close to 45% for the ADRs – as investors apparently are going all-in on the prospects for a sharp near-term rebound in mining output and infrastructure activity.

Weir (OTCPK:WEIGY) has been even stronger, while FLSmidth (OTCPK:FLIDY) and Caterpillar (CAT) are only modest laggards on a comparative basis. As far as laggards go, that would be Komatsu (OTCPK:KMTUY) and Sandvik (OTCPK:SDVKY) (OTCPK:SDVKF), though both are still up about 15% since the time of that last Epiroc article.

I continue to like Epiroc, but I can’t see the macro developments that would support such a sharp revision in sentiment and valuation. I do like Epiroc’s long-term leverage to more mining going underground, as well as its strong service-driven aftermarket business, and its leverage to digitalization/automation, but unless you believe miners are suddenly going to open the taps on capital spending, I think Epiroc is due for some retrenchment.

 

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Epiroc's Valuation Already Prices A High-Quality Recovery Story

Buying Alaska Air On Eventual Normalization Isn't Easy But It May Be Smart

It's been almost a year since I've updated my thoughts on Alaska Air (ALK), and suffice it to say the world has changed a bit in the interim. Although Alaska Air still occupies an attractive niche with respect to costs and revenues (sandwiched between traditional network carriers and LCCs) and an attractive core franchise on the West Coast, COVID-19 has destroyed air travel demand and the road back to normal is a multiyear path with virtually no visibility. I like Alaska Air's cost structure, balance sheet, and fleet flexibility, and I think those attributes will serve the company well. 

I'm modeling Alaska Air with a return to 2019-era revenue and EBITDAR in 2023, with a longer timeline to FCF "normalization" due to an extended delivery schedule for 737 MAX aircraft. Multiple valuation methodologies suggest that Alaska Air is meaningfully undervalued and priced for double-digit annualized returns from here, but this is an idea that will take time and patience and will be vulnerable to meaningful recurrences of COVID-19 in the coming quarters/years.

 

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Buying Alaska Air On Eventual Normalization Isn't Easy But It May Be Smart

KeyCorp Shares Are A Notable Bargain Provided Management's Credit Estimates Prove Accurate

Like most banks, KeyCorp (KEY) finds itself in something of a profit growth no man’s land, as painfully low spreads, weak underlying loan demand, and rising credit costs conspire to limit organic growth opportunities. More specific to KeyCorp are lingering doubts that the company has truly reserved enough to withstand the upcoming default cycle in C&I credit – a cycle that may not peak until late in 2022 or early in 2023.

Even with those negatives in view, I thought KeyCorp was simply too cheap last quarter, trading as it did below tangible book. The shares have done a little better than the average peer bank since then (up more than 20%), which is probably a reasonable performance given the ongoing pressures on bank profit growth and the worries about reserve adequacy. For my part, I believe that KeyCorp’s reserves are a little better than they may otherwise seem, and I think this is a name that more aggressive investors can still consider.

 

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KeyCorp Shares Are A Notable Bargain Provided Management's Credit Estimates Prove Accurate

Check Point Enjoying A Rare Tailwind, But It Won't Last

I had mixed feelings on Check Point Software Technologies (CHKP) a year ago, as I thought the shares were priced for some decent returns, but also didn’t see much going on with the business that would break it out of its prolonged doldrums where growth was concerned. Since then, the shares have basically kept pace with the S&P 500 and Palo Alto (PANW), but have been left behind by smaller players like Fortinet (FTNT), Sailpoint (SAIL) and Zscaler (ZS).

This current environment may be about as good as it can get for Check Point, with security spending holding up as an essential area where enterprises won’t look to cut costs, work-from-home driving some incremental sales opportunities, and Check Point’s large recurring revenue base providing some security at a time when there are still a lot of modeling uncertainties. I’m still worried about Check Point’s relatively modest leverage to cloud security, though, and what that could mean for margins five or 10 years down the road. The valuation isn’t bad here, but I believe near-term outperformance would be more likely driven by another wave of pessimism/fear hitting the markets.

 

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Check Point Enjoying A Rare Tailwind, But It Won't Last

Fortive Offers Balanced Cyclical And Acyclical Growth, But Valuation Is More On Par With Peers Now

Maybe Fortive (FTV) is a little too good for its own good? I liked Fortive back in May and saw a pretty good prospective return for what has often been a relatively pricey company. Since then, the shares have done pretty well (up 20%), but have only just beat the S&P 500 and have actually trailed the broader industrial sector. Fortive has good short-cycle recovery exposure, which the Street likes right now, and has been buying its way into more software and recurring revenue, which the Street really likes (at least when Roper (ROP) does it), so I’m actually a little surprised it hasn’t been more of a standout.

Even so, that’s not to say that Fortive screens as “cheap” now. The returns now look more in line with the high-quality industrial sub-group where I believe Fortive belongs, though I do like Fortive’s M&A optionality, its focus on growth, and its potential leverage to some trends like reshoring and green buildings. I don’t like prospective returns in the mid-single-digits, but if I had to own a pricey stock in the space, Fortive wouldn’t be a bad choice in my opinion.

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Fortive Offers Balanced Cyclical And Acyclical Growth, But Valuation Is More On Par With Peers Now

If Zimmer Biomet Has Turned The Corner In Major Joints, More Beat-And-Raises Could Be Coming

Credit where due – Zimmer Biomet’s (ZBH) management gave more than a few indications during the quarter that business was recovering at a faster than expected pace, but few listened (Morgan Stanley’s David Lewis and Goldman’s Amit Hazan were notable exceptions). Although revenue was still down sharply due to COVID-19 restrictions and lockdowns, Zimmer thumped expectations with stronger results across the board and some actual share gains in major joints.

The biggest question I have is whether this was a one-quarter fluke or whether the first quarter of major joint outperformance since 2015 is a sign of things to come. I freely admit I have been skeptical about Zimmer’s competitive position vis a vis Johnson & Johnson (JNJ) and Stryker (SYK), and the shares have been stronger than I expected since my last update, beating most of its comps by a pretty decent margin. The valuation still leaves some room for a decent upside, but expectations are certainly going to be more demanding in the second half of the year.

 

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If Zimmer Biomet Has Turned The Corner In Major Joints, More Beat-And-Raises Could Be Coming

Microchip Offers Seemingly Less Recovery Upside, But Still Significant Potential Margin Leverage

Sometimes being different isn’t best for short-term performance. Microchip (MCHP) is a little out of step with its peer group of analog and MCU companies with respect to its product and end-market exposures, and although the shares haven’t done poorly over the last three months, they have lagged many of the company’s peers in the analog/MCU space, as the company isn’t as well-leveraged to recoveries in markets like auto.

While Microchip’s shallower decline/shallower recovery may be playing into near-term performance, I believe it is the company’s ability to execute on margin leverage opportunities that will have a bigger impact on performance over the next couple of years. Microchip’s relative underperformance in recent months does leave it looking more reasonably priced now, but less leverage to autos and industrial end-markets could remain a headwind into 2021 as the market is already clearly pricing in a meaningful rebound for the space.

 

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Microchip Offers Seemingly Less Recovery Upside, But Still Significant Potential Margin Leverage

Although Undervalued, The Street Is Still Holding Its Breath On Bank OZK's Credit

“You don’t know until you know” may be honest advice where bank loan losses are concerned, but it’s not particularly helpful advice. And that’s the issue with Bank OZK (OZK) – is past loan loss experience for this construction and CRE lending specialist still relevant given the growth in the business over the past decade-plus and the particular challenges created by COVID-19? I don’t think actual losses will meaningfully strain the business, but it is still early in this recession and Bank OZK may yet see both worse losses and weaker demand as the process rolls on.

Bank OZK’s valuation is a mixed bag. There are a lot of cheaper-looking banks out there, and in some respects, I’m surprised there isn’t a bigger fear discount here. On the other hand, this still looks like a pretty good price for a bank with demonstrated ability to grow share in a specialized segment of the lending market.

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Although Undervalued, The Street Is Still Holding Its Breath On Bank OZK's Credit

Voestalpine Stuck In No Man's Land With Weak Prices And Few Leverageable Opportunities

This is a very challenging time to be a steel company. While the general consensus is that the auto and most industrial markets bottomed in the second quarter, utilization remains very weak in North America and Europe and it seems unlikely that demand is going to rebound strongly enough to allow for real pricing power.

I thought voestalpine (OTCPK:VLPNY) (VOES.VI) (or “Voestalpine”) was an “okay” idea back in December largely on the basis of its relative quality and valuation. As is often the case, higher-quality companies fared better during this recent downturn, with voestalpine’s performance on par with Steel Dynamics (STLD), Nucor (NUE), and SSAB (OTCPK:SSAAY), while companies like ArcelorMittal (MT) and U.S. Steel (X) performed notably worse. I do now believe that voestalpine is cheaper than peers like Steel Dynamics and Nucor, but I see a relatively better risk-reward in ideas like Acerinox (ANOIY) and Ternium (TX).

 

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Voestalpine Stuck In No Man's Land With Weak Prices And Few Leverageable Opportunities

Expectations, Not Competition, Remain Inphi's Biggest Near-Term Threat

I've had my issues with Inphi's (IPHI) valuation, as you have to stretch and look at what the market has historically been willing to pay for exceptional growth to drive an estimate of fair value, but I've had no issue with the performance of the company. In a quarter where even many tech companies saw significant revenue declines, Inphi more than doubled revenue on the back of strong demand in data centers and telecom, and demand for leading-edge data center solutions doesn't seem to be flagging.

It's possible to argue that Inphi shares are worth more than $130 on the basis of what the market has historically paid for similar growth stories, and some sell-side analysts are arguing the shares are worth more than $160 based upon what the market is currently willing to pay for stocks like AMD (AMD) and NVIDIA (NVDA). I don't really like valuing stocks this way, but it's hard to argue that Inphi isn't in a rare company where growth is concerned and that the opportunities in both telecom and data center remain very attractive.

 

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Expectations, Not Competition, Remain Inphi's Biggest Near-Term Threat

Dana Undervalued On Underappreciated Margins And EV Leverage

Dana (DAN) has admittedly been something of a value trap for a little while now, though recent performance relative to names like American Axle (ALX) has improved some. I continue to believe that the Street remains stuck on “old Dana” and fails to recognize and appreciate not only better-than-expected decremental margins through this trough, but positive leverage to both North American light vehicle trends and long-term commercial and off-road vehicle electrification.

Dana shares have seen a double-digit improvement since my last write-up, but I continue to see fair value in the high teens.

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Dana Undervalued On Underappreciated Margins And EV Leverage

MTN Group Struggling With Some Macro And Currency Issues

African cell service provider MTN Group (OTCPK:MTNOY) has continued to struggle, but the primary sources of the struggles continue to be largely beyond the company's direct control. Although the company's financial performance since my last update has been decent, the ADRs have fallen by another third, hurt by further erosion in the value of the rand (around 16%), worries about the company's dollar-denominated debt, and ongoing struggles in the South African market.

While MTN Group's ADRs do look undervalued, the same can be said for other emerging market telcos like Turkcell (TKC) where investor concerns have more to do with macro and currency risks than company-specific execution. Although I believe the strategic priorities outlined by the company are sound, the lack of a near-term dividend, and the ongoing operational challenges in certain markets remain meaningful issues.

 

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 MTN Group Struggling With Some Macro And Currency Issues

Analog Devices Burnishes Its Reputation As An All-Weather Chip Stock

Quality comes at a price, but I still believe that overpaying does limit some of your upside. Like many (if not most) other quality chip stocks, I thought Analog Devices (ADI) shares had come too far too fast, and my opinion of the valuation back in May (around the time of the fiscal Q2 earnings report) was “meh”. Since then, the shares are up about 5%, lagging the SOX index, the S&P, and the NASDAQ.

With strong leverage to industrial markets, I expect Analog to have a good 2021, and I don’t believe the coming slowdown in 5G will last all that long. I also still see worthwhile upside from the Maxim (MXIM) deal, particularly given Analog’s past success in outperforming synergy expectations and the fact that Maxim’s shift toward more B2B markets has weighed on the apparent growth rate in recent years. Although there are a few better bargains in the chip space, and the absolute valuation isn’t impressive to me now, Analog offers above-average quality and still looks like a decent hold.

 

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Analog Devices Burnishes Its Reputation As An All-Weather Chip Stock

More Turbulence At HollySys Makes The Valuation Almost Moot

I've complained in the past that HollySys (NASDAQ:HOLI) is not exactly "shareholder-friendly" even by the standards of publicly-traded Chinese companies. To illustrate this point, the company removed its CEO and Chairman back in July, but you wouldn't know that from the company website; to the best I can find (in both English and Mandarin), there was no actual announcement, and investors who don't receive notices of SEC filings (6-Ks) may have not even known about the change until this quarter's earnings report.

That kind of communication "issue" makes this almost an uninvestable stock. Yes, this company has credible automation systems that appeal to Chinese customers that very much want to shift toward domestic suppliers. The company also has meaningful growth opportunities in discrete/factory automation, as well as some opportunities in rail. But how do you invest in a company where turbulence and unpredictability seem to be the rule?

 

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More Turbulence At HollySys Makes The Valuation Almost Moot

Lenovo Gets No Love For Another Beat, With Investors Focused On Ongoing DCG Investments

Although I flagged overly negative sentiment as a risk for Lenovo (OTCPK:LNVGY) shares in my prior update, it's still frustrating to see, and these shares have continued to lag HP (NYSE:HPQ) and Dell (DELL) since my last update (and over the past year), as investors and analysts remain more fixated on the prospect of ongoing investments to build the data center business than on the successes in the PC business.

Older investors may be familiar with the expression of "don't fight the tape", and that's not bad advice to a point. It seems as though Lenovo will face sentiment headwinds until and unless the DCG turns a profit, but I do believe the company's investments here will pay off eventually. I'm willing to be sort-of patient about this (I will still complain…), and I continue to see Lenovo as meaningfully undervalued as assumptions of low single-digit revenue and FCF growth still drive a double-digit annualized potential return.

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Lenovo Gets No Love For Another Beat, With Investors Focused On Ongoing DCG Investments

Turkcell Can't Swim Faster Than The Negative Currents Around Turkey

As far as “controlling the things they can control”, I find almost nothing to fault Turkcell (TKC) management for as the company has navigated a change in leadership and the challenges of COVID-19 quite well. Turkcell continues to do a good job of shifting its sub base towards postpaid plans, while supporting increased data use through prudent network upgrades and a growing suite of services. The company’s non-cellular activities also continue to grow well, as the company expands its fiber and IPTV businesses.

The problem remains the economy of Turkey and the political leadership of the country. Whether “basket case” is a harsh or fair assessment, inflation remains persistently high (low double-digits recently) and President Recep Erdoğan’s eccentric views on economics remain a problem. Foreign investment in Turkey has dropped, and the average exchange rate between the dollar and the lira fell another 11% from the first quarter to the second quarter. Although I continue to believe that Turkcell is fundamentally undervalued, the currency and country risks remain high, and that makes this a difficult recommendation.

 

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Turkcell Can't Swim Faster Than The Negative Currents Around Turkey

Accuray Idling On The Runway Ahead Of A Significant Chinese Revenue Launch

I have said it before and I'll say it again - while it doesn't really show up in the share price, the current CEO of Accuray (ARAY) has done a good job with this business, not only in stabilizing the financial situation, but also reprioritizing/refocusing the R&D efforts and repositioning the company for sustainable growth. The company was never going to win the head-to-head battle with Varian (VAR) in markets like the U.S. and Europe, but taking a page out of Willie Keeler's book ("hit 'em where they ain't"), Accuray has refocused on opportunities in Japan and China where its system designs have some meaningful potential advantages.

Still, factors outside the company continue to weigh heavily on performance, as disruptions related to COVID-19 and the Chinese tendering process have continued to delay the anticipated revenue ramp. The business is profitable now and the shares are up a bit from my last update, but the key catalyst remains a significant ramp in China - the timing of which management pushed back again by another quarter. While this has been a frustrating wait, and major competitors like Varian and Elekta (OTCPK:EKTAY) are certainly targeting China's large market opportunity, I believe Accuray shares remain undervalued albeit with well above-average risk.

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Accuray Idling On The Runway Ahead Of A Significant Chinese Revenue Launch

COVID-19 Takes A Bite, But BRF Continues To Execute Pretty Well

BRF (BRFS) had plenty of challenges in the second quarter, the most prominent being COVID-19, but also higher production costs, increasing competition with the Brazilian processed food market, and increasing competition in global bulk poultry. All told, relative to expectations and the scale of the challenges, while BRF did miss by a bit on the EBITDA line, I’d call it a good quarter on balance.

I remain concerned about the risks from greater in-market competition in Brazilian processed food and increasing global chicken export supply. I do expect high single-digit revenue and FCF growth from BRF over the next decade (and similar growth rates over the next five years) and the upside to my fair value range of $5 to $6 is decent, but this is a business where management can only do so much to contain volatility and I’d still view it as a riskier-than-average business.

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COVID-19 Takes A Bite, But BRF Continues To Execute Pretty Well

Lundbeck Seeing Healthy Double-Digit Growth From New Drugs, But The Pipeline Is Very Thin

The COVID-19 pandemic has created many challenges across the healthcare sector, but it has been even a little more challenging for H. Lundbeck (OTCPK:HLUYY) as the CNS drugs that make up Lundbeck’s focus are more sensitive to in-patient visits. Still, the company has executed reasonably well, with better than expected progress on cost-cutting.

As has been the case for some time, the pipeline is the main sticking point. Another clinical failure of a once-promising asset means no novel compounds in Phase II or Phase III testing, and the jury is still very much out on the value of the company’s forays into M&A. Without M&A and/or successful follow-on indications, Lundbeck has all the assets its going to have for at least the next five years, and the real question is whether management can prudently deploy the free cash flow the company will generate. I do think the shares are somewhat undervalued now, but the pipeline/new drug development issues are significant.

 

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Lundbeck Seeing Healthy Double-Digit Growth From New Drugs, But The Pipeline Is Very Thin

Roper Goes Back To The M&A Well, As COVID-19 Highlights Some Of The Business Model's Advantages

Roper (ROP) is typically covered by sell-side analysts who otherwise cover industrial companies and "multi-industrial" conglomerates, and while it is most definitely a conglomerate, its diverse acyclical markets and high recurring revenue mix really put it in a category of its own. And that's certainly true for the valuation as well - even by the aggressive standards of software industry valuation, Roper seldom ever screens as fairly-valued, let alone cheap.

Roper's second-quarter results provide ammunition, though, as to how and why the company really is different. In a quarter where many companies have reported double-digit organic revenue declines and 25%-plus decremental margins, Roper posted a low-single-digit decline and a margin improvement. Likewise, while the deal for Vertafore adds even more goodwill and debt to the balance sheet, it's a logical deal for a leading player in a large space that generates attractive margins.

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Roper Goes Back To The M&A Well, As COVID-19 Highlights Some Of The Business Model's Advantages

Universal Stainless & Alloy Products Looks Undervalued, But This Downturn Is Brutal

There's really not much good news in the world of specialty alloys, particularly as recoveries in end-markets like aerospace, power gen, and oil/gas look like multiyear events. For companies like Universal Stainless & Alloy Products (USAP), Allegheny (ATI), and Carpenter (CRS), the recovery is not going to sharp or quick.

USAP shares are basically flat from when I last wrote about the stock, outperforming Carpenter, but lagging Allegheny and Acerinox (OTCPK:ANIOY). Management is doing what it can to contain costs and get the company through this chokepoint, but the near-term outlook is decidedly challenging. Major markets like commercial aerospace, power gen, and oil & gas won't be much help until 2022, at best, and comparatively stronger markets like auto tooling, semiconductor, and medical aren't big enough to carry the extra load. While I see some value here, this is a high-risk situation, and it's tough to see what will drive a quick cyclical turn.

 

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 Universal Stainless & Alloy Products Looks Undervalued, But This Downturn Is Brutal

Acerinox Running A Good House In A Bad Neighborhood

There's only just so much you can do as a metal producer when apparent demand in your key markets falls over 20% in a quarter, and I believe Acerinox's (OTCPK:ANIOY) during this downturn supports the general notion that they have high-quality assets and a good management team. Recoveries in markets like appliances and process industries does support a brighter outlook, but the next few quarters are still likely to be challenging.

Longer term, I still like Acerinox and the shares do look a little undervalued next to the quality steel producers in North America and Europe. Since my last update, these shares have lagged peers like Aperam (OTC:APEMY) and Outokumpu (OTC:OUTKF), though not by much with Outokumpu, as well as quality steel names like Steel Dynamics (STLD), but have outperformed others like ArcelorMittal (MT).

The addition of VDM gives the company some meaningful growth and synergy opportunities, and I think there is more management can do with its asset base once the market recovers. Steel, whether conventional or stainless, is really not a market that supports buy-and-hold, but I believe there is upside in Acerinox as a recovery cycle trade.

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Acerinox Running A Good House In A Bad Neighborhood

DBS Group Knocked Back On Rates, But Credit And Long-Term Opportunity Are Sound

No bank is getting through this cycle unscathed, and DBS Group (OTCPK:DBSDY) is no exception. Not only is DBS seeing significant spread compression from weakening loan yields, loan demand has moderated some. On the positive side, the company’s investments and efforts into building a stronger fee-generating business base are paying off, digitalization is helping reduce costs and maintain better business activity relative to less-digitalized peers, and the credit evolution has so far been pretty good.

These shares are down about 20% since my last update on this Singaporean money-center bank. That’s not the performance I expected in a pre-COVID-19 scenario, but it as at least better than the average American bank’s performance over that period, not to mention better than pretty much all of its peers, including United Overseas (OTCPK:UOVEY), Standard Chartered (OTCPK:SCBFY), Bank Rakyat (OTCPK:BKRKY), and Bangkok Bank (OTCPK:BKKLY), while it has basically been even with OCBC (OTCPK:OVCHY).

I continue to believe that DBS Group is a solid long-term holding to consider, as the bank has significantly improved itself over the last decade-plus. In addition to leveraging global trade growth, DBS is well-placed to benefit from the growth of retail banking in Southeast Asia, with a predominantly digital focus that keeps costs low and tends to attract younger, wealthier customers. With solid prospects for mid-single-digit core growth after the post-COVID-19 recovery, I believe DBS Group is undervalued below the $70’s.

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DBS Group Knocked Back On Rates, But Credit And Long-Term Opportunity Are Sound

Komatsu Still Offers Heavy Machinery Recovery Upside, But It Could Take Some Time

This has been a challenging downturn so far for suppliers of construction and mining equipment. Unlike most recessions, in which customers continue to operate at lower levels, this downturn saw a dramatic curtailment of activity. While parts and service demand has held up better for Komatsu (OTCPK:KMTUY) than new equipment, it has still been a sharp deterioration, and the outlook for the recovery is cloudy at best, particularly with weak trends in North America and Europe and an ongoing shift away from coal as a fuel source for electricity.

When I wrote about Komatsu a quarter ago, I had mixed feelings about the company, with the long-term/recovery valuation looking relatively appealing but the short-term outlook looking pretty poor. Since then the shares have appreciated some (up around 10%), but they’ve lagged peers and rivals like Caterpillar (CAT), Epiroc (OTCPK:EPOKY), and Hitachi Construction Machinery (OTCPK:HTCMY). I still see some upside in the valuation, but I’m more interested in mining companies with less reliance on coal than Komatsu.

 

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Komatsu Still Offers Heavy Machinery Recovery Upside, But It Could Take Some Time

Commercial Vehicle's Decision To Embrace New Opportunities Looks Like The Right Call

Investors do well to be skeptical when a company announces a major shift in its business and strategic focus. Then again, when a company has amply demonstrated that its legacy businesses just can't produce adequate long-term returns, it can be the beginning to a much brighter future. I have a lot of doubts and questions about Commercial Vehicle Group's (CVGI) decision to pivot toward new opportunities in warehouse automation, military electronics, and EV/logistics vehicles, but considering that the company really couldn't get anywhere with its legacy operations, it seems like a longshot bet worth taking.

I thought CVGI had significant potential upside on a cyclical turn, but I believe the near-tripling of the share price since that last article is driven more by this announcement that it will restructure its legacy operations and pursue new growth opportunities like warehouse automation. This shift makes valuation considerably more challenging, but the valuation isn't bad even if you just look at this as a restructured seating and wiring company, let alone factoring in the new growth opportunities.

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Commercial Vehicle's Decision To Embrace New Opportunities Looks Like The Right Call

Quarter By Quarter, BorgWarner Wears Down The Bear Arguments

Vehicle component suppliers are undeniably cyclical, and the upcoming shift toward hybrids and EVs has created understandable worry about which suppliers will be left out in the cold. Even so, it has seemed for some time to me that BorgWarner (BWA) doesn't really get the credit it deserves. Not only have I seen bears try to wave away the company's multiyear streak of growth ahead of underlying global production (all but one quarter since 2017), they've simultaneously criticized BorgWarner's R&D and M&A investments into electrification while fretting about whether BorgWarner will have the technology to make the transition.

Up more than 40% since my last update on the company, it looks like some of the panic has eased off, but I continue to see upside from here. There are certainly other names in the space worthy of consideration - including Dana (DAN), Valeo (OTCPK:VLEEY), and motor developer Nidec (OTCPK:NJDCY) - but I continue to believe that BorgWarner offers enough prospective return from here to be worth consideration.

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Quarter By Quarter, BorgWarner Wears Down The Bear Arguments