Important Announcement

Hello all,

It has been a long time since I've updated the format of the blog, and a few things about the platform have changed (including support for various functions).

The long and short of it is that I'm pondering whether maintaining this site is worth the bother. I'd like to hear from you if you find this useful. You can use the article comments or email me; whatever you find more convenient. I know there are many people who'd prefer to just read in silence, but feedback will determine whether I update the blog, keep it as is, or close it/delete it entirely.

Thanks for any feedback you all choose to provide. 

Best,

SS

<<EDIT>>

I wanted to add a bit to this in the interests of clarity. I am NOT contemplating an end to my research/writing at this point. So, I still plan to write about the companies/stocks that interest me. I am mostly just curious if this blog is a useful place for you all to come to find my work.

In years past, I sometimes wrote for multiple publishers at once, so this was a useful "central locale" to see what I was up to. Now, though, about 99% of my work is for Seeking Alpha, and they have their own ways to follow my work - which may be more convenient for you all.

So, again, no thoughts today about quitting the work. Just wondering if people get use out of this particular page/portal.

Thanks again!

Another Tough Quarter For FEMSA, But Recovery Comes Next

 

As Mexico’s economy reopens and recovers after the COVID-19 pandemic, FEMSA (FMX) has started to come back to life as well. Traffic is starting to improve in FEMSA’s OXXO stores, and margins have held up surprisingly well through this challenging time.

There are still multiple attractive drivers for FEMSA, including the expansion of the OXXO concept (particularly in Brazil), leveraging new distribution agreements (selling more Modelo through its distribution agreement with ABInBev (BUD)), launching the spin digital wallet, and driving more scale in the pharmacy business. On the other hand, there are also challenges, including standing doubts about the company’s capital allocation into lower-margin areas like logistics and distribution.

I’m still positive on FEMSA and I still see the prospect of double-digit long-term annualized returns on the back of mid-to-high single-digit revenue and FCF growth. Although management’s focus on long-term opportunities isn’t necessarily in sync with the Street’s fixation on short-term results, I believe patience will be rewarded.

Read more here: 

Another Tough Quarter For FEMSA, But Recovery Comes Next

Lexicon Pharmaceuticals Still A Very High-Risk/High-Reward Biopharma Name

 

As the clock keeps ticking, Lexicon Pharmaceuticals (LXRX) have continued to skid – falling about a third since my last update as investor enthusiasm over the company’s opportunity to disrupt the heart failure market with its SGLT-1/2 inhibitor Zynquista as faded. While nothing has changed, that’s actually part of the problem – Lexicon is going to need a partner to successfully launch this drug, and every month without a partner erodes Street confidence in the long-term potential of the drug.

Valuing Lexicon today remains exceptionally difficult as there are a lot of unknowables that have a big influence on the valuation. If AstraZeneca (AZN) and Lilly (LLY) (and Boehringer Ingelheim) report strong positive data from the DELIVER and EMPEROR-Preserved studies of their SGLT-2 drugs in patients with preserved ejection fraction, differentiating Zynquista in the market will be even harder. Likewise, if Lexicon has to go it alone (as opposed to securing a larger pharmaceutical company to market/co-market the drug), the road ahead is considerably rockier.

I’ve reduced my fair value on Lexicon to account for a longer, slower revenue ramp on Zynquista. Still, it’s worth mentioning again that this is a stock where the price could move rapidly on the basis of competitor clinical updates, FDA action on the Type 1 diabetes indication for Zynquista, and/or the results of the company’s Phase II proof-of-concept studies for pain drug LX9211.

Read more here: 

Lexicon Pharmaceuticals Still A Very High-Risk/High-Reward Biopharma Name

Advanced Energy Industries: Temporary Supply Challenges Don't Hurt The Long-Term Case

 

Severe supply constraints for semiconductors and other electronic components claimed another victim with Advanced Energy Industries’ (AEIS) second quarter guidance, sending the shares down 10% in response. Although the shares have recovered some lost ground, they’re still down a bit from the time of my last update and have underperformed peers like MKS Instruments (MKSI), Comet Holdings (COTN.SW), and Delta Electronics (OTC:DLEGF).

On a core level, I’m not too troubled by these supply-related disruptions to the business. The Semiconductor business remains in very strong shape with respect to market share, backlog, and capacity growth, and I expect improving demand in the Industrial segment through 2021. I still expect AEIS to generate long-term revenue growth of around 5% to 6% and FCF growth in the high single-digits, and at today’s price those growth rates support a double-digit annualized prospective rate of return.

 

Follow this link to the full article: 

Advanced Energy Industries: Temporary Supply Challenges Don't Hurt The Long-Term Case

Worries About Growth Keeping A Lid On PRA Group Shares

 

Despite some strong quarterly results, PRA Group (PRAA) shares have gone nowhere fast this year, as investors remain more concerned about future growth prospects than excited about strong recent performance. This is understandable, to a point, but I do believe the Street is undervaluing the long-term value of meaningful efficiency improvements in the operations even if the future supply of collectable receivables is lower than previously hoped.

My fair value range on PRAA shares has been in the $40 - $46 range over my last two updates (here and here), and that's basically still the case, as model refinements narrow that valuation range to $41 to $45. A faster pace of purchasing would likely be the best source of near-term upside, followed closely by an even better sustained trend of cash operating costs, while a return to more activity in legal-channel collections and bankruptcies may not be as well-received by the Street.

Read the full article here: 

Worries About Growth Keeping A Lid On PRA Group Shares

FirstCash Likely Past The Worst, And The Long-Term Growth Potential Comes Back Into Focus

 

Pawn shop operator FirstCash (FCFS) is still in for a few more rocky quarters, but recent data from the company do support the idea that pawn loan demand is bottoming out. It’s going to take time to rebuild retail inventories and pawn loan balances, but the arrow is pointing up and I expect the story to once again shift toward the long-term growth opportunities ahead of the company in Latin America.

As is often the case, the share price has moved ahead of the actual improvements in reported numbers. Up about a third from my last update, I can’t say that the Street is ignoring or avoiding this name now. Still, assuming the company can get back on a trajectory to mid-single-digit growth (relative to pre-pandemic norms), the shares do still offer solid upside on the basis of improving cash flow generation in the U.S. operations funding more dividends and buybacks and a long growth runway in Latin America outside of Mexico.

 

Click here to continue: 

FirstCash Likely Past The Worst, And The Long-Term Growth Potential Comes Back Into Focus

Tenneco Roars Ahead Of The Pack On Strong Earnings, Guidance, And Build Outgrowth

 

When I last wrote about Tenneco (TEN) I said that I saw, “a path to a significantly higher share price” in the mid-teens, but that the execution risks were still high. Not only did Tenneco deliver a very strong first quarter, but it was also one of the few parts suppliers to guide to both higher full-year and second quarter earnings, as Tenneco’s business mix has left it relatively well-shielded from the semiconductor shortages hitting the sector.

I believe Tenneco’s heavy debt load and business mix still merit a higher discount rate than its peer group (which it has smoked in terms of share price performance since my March piece), but the company has definitely bought itself breathing room on the debt issue and showed some impressive operating leverage this quarter. I still think this is a difficult “thread the needle” story, but I can support a cash flow-based fair value in the mid-to-high teens.

 

Read the full article here: 

Tenneco Roars Ahead Of The Pack On Strong Earnings, Guidance, And Build Outgrowth

SPX Flow Continues To Build A More Positive Case For Itself

 

As a long-term investor, I try not to spend too much time fretting over short-term price movements, but I do think the recent performance of SPX FLOW (FLOW) highlights the impact valuation and expectation can have on performance. SPX FLOW shares are up modestly (around 7%) since my last update, lagging the mid-teens performance of the larger industrial group, despite what I thought was a strong Investor Day presentation and a very good set of first quarter results.

I like management’s “80/20” strategic plan and the decision to focus more attention on growth opportunities in the Nutrition & Health and Industrial segments, as well as the decision to deploy more capital into M&A. I think management’s target of mid-teens adjusted operating margins in 2023 could be a little aggressive, but I do think the company is on a better path now as it transitions from a turnaround story to a quality (if cyclical) growth story.

Between the Investor Day presentation, the first quarter results, and trends I see across the company’s end-markets, I’m more comfortable with more bullish assumptions, and I think M&A could push the longer-term revenue growth rate closer to the high end of the mid-single-digits. Assuming that FCF margins move into the low double-digits (and there could be upside here if management really delivers on efficiency efforts), I think there’s a potential high single-digit long-term annualized return here, and that’s pretty attractive on a relative basis.

 

Read more here: 

SPX Flow Continues To Build A More Positive Case For Itself

The Pullback In Pacific Biosciences Makes For A Much More Interesting Opportunity

 

As the frenzy that drove many growth stocks, particularly in life sciences, to eye-watering multiples earlier this year has faded, Pacific Biosciences (PACB) (“PacBio”) shares are getting more interesting to me again. To be as clear as I can be right from the beginning, I think PacBio has great technology and growing use-cases in sequencing, and I think the company now has exceptional management and a good growth plan. My only major issue is valuation.

I’m modeling long-term revenue growth (2020-2030) of close to 30%/year on a compound basis, with operating profitability in 2026 and positive free cash flow in 2025, and I believe the company could exit 2030 with a FCF margin north of 30% - though a lot depends on the strategic decisions made between now and then and the implications those will have for R&D and SG&A spending. More to the point, I believe PacBio has the best long-read sequencing technology out there, and with significant improvements in throughput and cost, I believe the use of long-read technology is going to accelerate significantly in the coming decade.

PacBio isn’t conventionally cheap today, and I wouldn’t really expect it to be, as there is momentum in the business, strong partnerships, and good funding/liquidity. A continuation/reacceleration of this sell-off to $20 or below would make for an easy decision, but even in the mid-$20’s it’s a tempting name.

 

Read the full article here: 

The Pullback In Pacific Biosciences Makes For A Much More Interesting Opportunity

Neurocrine Biosciences: Pandemic Pressures And Few Pipeline Catalysts Continue To Weigh On NBIX

 

About the best thing I can say about Neurocrine Biosciences (NBIX) so far for 2021 is that the shares have managed to outperform a weak tape for biotech (the SPDR S&P Biotech ETF (XBI) is down about 10% versus Neurocrine’s flattish performance), though that comparison looks much worse for NBIX shares over a 12-month period.

I’d previewed some of the drivers of this weakness in earlier pieces – namely challenges to the Ingrezza franchise from the pandemic and a pipeline with few high-probability value-driving readouts. Indeed, Ingrezza has been quite weak, and while blaming that weakness on the pandemic is plausible, it doesn’t fix anything.

I still own these shares and I’m still bullish on the long-term potential, but I’ve cut back my Ingrezza expectations (again). I continue to believe that crinecerfont is an underappreciated asset, but with a pipeline still weighted more toward early-stage assets (there will be several Phase II studies underway by the end of 2021), this is a stock that could take some time to work again.

 

Read the full article at Seeking Alpha: 

Neurocrine Biosciences: Pandemic Pressures And Few Pipeline Catalysts Continue To Weigh On NBIX

Alnylam Executing To Plan, But Catalysts Could Be Harder To Find In The Near Future

 

RNA interference (or RNAi) specialist Alnylam Pharmaceuticals (ALNY) has held up okay in what has been a tougher tape for biotech, with the shares down about 5% since my last update versus a 15% decline for the SPDR S&P Biotech ETF (XBI). Since that last article, Alnylam has posted a couple of good quarters, as well as some positive incremental data on significant clinical programs.

Alnylam is likely going to find itself in a “hurry up and wait” trading pattern for a few quarters, and that can be tough for the share price. Key data on the amyloidosis program won’t be coming until 2022, and early-stage updates on other clinical programs aren’t likely to move the shares all that much one direction or another.

I do believe, though, that these shares are more than 20% undervalued today, and there are numerous early-stage clinical programs that could drive substantially higher value as they mature (assuming clinical success, of course). There are risks here, including clinical trial failure and competitive drug development, but I believe Alnylam still ranks as a high-quality biotech idea.

 

Click the link to continue reading: 

Alnylam Executing To Plan, But Catalysts Could Be Harder To Find In The Near Future

Renesas Electronics Looking To Rise Like A Phoenix From A March Fab Fire

 

Between a painful inventory correction in 2019, the 2020/2021 pandemic, an earthquake, and a March fire in a key fab, Renesas Electronics (OTCPK:RNECF) (OTCPK:RNECY) (6723.T) has been snake-bit here of late, leading to a weak share price performance – the shares are down about 8% since my last update (the ADRs have done modestly better), underperforming the SOX by close to 10% over that short period.

Renesas has scrambled to minimize and mitigate the impact of the fab fire, and they’ve done quite a good job here. Far from a “lost year”, Renesas is still likely to see very strong revenue growth in 2021 on recovering auto and industrial demand, with solid margin leverage even accounting for the unexpected fire-related costs.

The biggest risk I see for Renesas is that the company ends up losing more microcontroller (or MCU) share in autos to NXP Semiconductors (NXPI) and others like Texas Instruments (TXN) and STMicro (STM), and that efforts to diversify the company’s addressable markets (including the Dialog Semi acquisition) don’t go to plan. I think those risks are more than captured by the share price, though, and I believe the shares offer an attractive double-digit long-term annualized return.

Read the full article here: 

Renesas Electronics Looking To Rise Like A Phoenix From A March Fab Fire

Weaker Margin Guidance Overshadowing Progress At Veeco Instruments

 

I’ve written this several times in the past, but it bears repeating – margins matter more in sectors like semiconductor equipment than some analysts and investors believe. Semi equipment company Veeco (VECO) is doing pretty well from a revenue and order flow perspective, and I believe the business is on the cusp of meaningful acceleration, but weaker margin guidance weighs on valuation in the near term and has driven underperformance since my last update.

Veeco is a company that has long struggled to get its ducks in a row, but I believe the outlook is bright. In addition to a strong-moat position in data storage, Veeco has growth opportunities in areas like annealing, EUV mask blanks, GaN chip production, and chip packaging that shouldn’t be ignored. The shares need better margin momentum to outperform, but in a sector that offers few bargains, Veeco is worth a look on its leverage to ongoing capacity expansion spending.

Read the full article here: 

Weaker Margin Guidance Overshadowing Progress At Veeco Instruments

ITT Inc. Already Seeing Strong Incrementals Ahead Of A Full Revenue Recovery

 

Expectations were already high for late-reporting ITT Inc. (ITT), but this multi-industrial nevertheless managed a good top-line beat and an even better performance on margin leverage. Better still, the company broke with a general trend of relatively conservative guidance for the rest of 2021.

I previewed my "but" in the last piece; namely, that Street expectations had already risen pretty notably for this company. The shares have lagged a bit since that last piece, rising around 10% and slightly outperforming the S&P 500, but slightly underperforming the broader industrial sector. Again, I think already-high expectations are part of the issue, as well as a little more investor wariness about auto volume growth in 2021 on component shortages.

Bargains are few and far between in the industrial sector today, and I think ITT can still outperform as important end-markets like aerospace, chemicals, and refining recover in 2022 and beyond. I'd categorize the potential returns here as more "okay" than "compelling", but it is still a relative bargain compared to many industrial names and one that I think has better exposure to later-moving sectors as the recovery matures.

 

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ITT Inc. Already Seeing Strong Incrementals Ahead Of A Full Revenue Recovery

A Bumpy Initial Recovery Hasn't Really Hurt Fastenal

 

High-multiple stocks can often be more vulnerable to disappointments, but that hasn’t been the case for Fastenal (FAST). Despite three straight monthly misses on sales and a very slight negative downward trend in sell-side EPS expectations, the shares have held up well since my last article – appreciating another 10%-plus since then. That’s a little worse than the wider industrial sector, including the recovery star Parker-Hannifin (PH), and worse than Grainger (GWW) (which has risen more than 20% since the time of my last Fastenal article), but still better than the S&P 500.

The reopening/recovery of the U.S. manufacturing sector has been a little bumpy, and I wouldn’t be surprised if that is the case for the remainder of 2021, but I don’t see it as a major threat to Fastenal. The company continues to outgrow the underlying economy and there’s a potential path to better margins for at least the next year or two, as well as a growing revenue base as the company expands the reach of the business. Valuation is still problematic, but it’s tough to see how these shares would trade at conventionally cheap multiples without a serious market decline.

Follow the link to the full article: 

A Bumpy Initial Recovery Hasn't Really Hurt Fastenal

Truist Building Toward Better Growth And Margins

 

Southeastern banking giant Truist (TFC) has continued to lag many of its peers since my last update (and over the last year), as the market has been pretty impatient regarding the expected savings from the SunTrust merger and stabilization in the net interest margin. Still, the shares are up around 25% since that last article, more than doubling the return of the S&P 500.

Although I don’t believe that Truist shares are wildly undervalued (few of the quality banks are), I do believe that there’s still a relative value trade here, and I still believe that Truist isn’t getting its full due. With one of the best operating footprints in the country, surplus capital to accelerate growth, and a potential “goldilocks” operating environment for a few years, I believe Truist has a good chance to deliver beat-and-raise quarters, particularly as I believe that this slower, more deliberate pace of merger integration could ultimately drive better-than-expected long-term benefits.

Read the full article here: 

Truist Building Toward Better Growth And Margins

BRF S.A. Boosted By A Strategic Investor, But Operating Conditions Are Challenging

 

I liked the valuation on BRF (BRFS) shares back in March, and the shares have since outperformed (up more than 25% since then, but that outperformance has a great deal more to do with the recent acquisition of BRF shares by Marfrig (OTCPK:MRRTY) than the current fundamentals, as BRF remains pressured by higher production costs and challenging international markets.

I don't see the near-term pressures abating, and BRF is going to be hard-pressed to continue raising prices at the pace of recent quarters (17% to 22%). Likewise, I don't see the international markets getting easier in the near-term.

I do still like the long-term potential of BRF's ongoing turnaround, and the involvement of Marfrig does raise the question (again) of whether BRF could be a merger/takeout candidate. The valuation argument isn't as compelling today, though, and I look it as more of a borderline buy.

Read the full article here: 

BRF S.A. Boosted By A Strategic Investor, But Operating Conditions Are Challenging

A Welcome Pullback At STMicroelectronics, But The Lead-Time Story Still Carries Risk

 

I went neutral on STMicroelectronics (STM) (“STMicro”) with my last update on the shares, largely because I just couldn’t reconcile the valuations across the sector with the likely growth and margin trajectories. I was also concerned about the high levels of lead-times – a situation that has in the past telegraphed weaker returns from chip stocks as order patterns normalize.

Since that last piece, STMicro shares have declined about 15%, underperforming both the chip sector as well as more specific competitors like Infineon (OTCQX:IFNNY), NXP Semiconductors (NXPI), and ON Semiconductor (ON), though longer-term performance timelines (two years and beyond) still largely favor STMicro over many peers.

I’m a little conflicted on recommending these shares now. I like STMicro’s strong leverage to auto and industrial electrification through not only silicon carbide (or SiC) but other chip types as well, not to mention opportunities in 32-bit MCUs (and embedded processing more broadly), IoT, RF, and sensing. I also like the fact that the shares are back down to a level where I see attractive long-term return potential. What I don’t like is that lead-times are still quite high across the industry and these shares could crack $30 in a correction.

 

Follow this link to the full article: 

A Welcome Pullback At STMicroelectronics, But The Lead-Time Story Still Carries Risk

More Fear And Uncertainty Around II-VI Isn't So Bad For Long-Term Investors

 I’ve said this many times in the past, but it bears repeating – while “buying the dip” is an often a good-to-great long-term strategy with good companies, it’s not always easy to do it. The markets surely do freak out from time to time and offer up seeming bargains, but most often a “buy the dip” opportunity comes about because there are real concerns in the market about the short-term prospects for the company in question. 

That brings me to II-VI (IIVI). I didn’t like the core fundamental valuation on the shares back in February, though I was still bullish on the long-term prospects for this leading (if complicated) optical and materials technology company. With the shares down about 25% since then on fears that the company is overpaying for Coherent (COHR), not to mention worries about near-term end-market demand and an overall cooling on expensive growth, the shares look a lot more interesting for long-term investors today.

 

Read the full article: 

More Fear And Uncertainty Around II-VI Isn't So Bad For Long-Term Investors

Bank Of America's Run Of Outperformance Fairly Values The Longer-Term Opportunity

 

I liked Bank of America (BAC) ("B of A") back in the summer of 2020, as I thought the market reaction to the near-term pressures on the banking sector were extreme relative to the long-term opportunities for this leading consumer and commercial bank. Since then, the shares have largely outperformed most of the bank's mega-cap peers (Citigroup (C), JPMorgan (JPM)) with a roughly 85% total return, though a few (PNC (PNC) and Wells Fargo (WFC)) have done better.

With the run in the shares, I'd say that the market fairly values the opportunity I see for Bank of America. I do expect the company to leverage its strong franchise, scale, and IT capabilities to continue gaining share in the fragmented U.S. banking market, but I don't see the outsized returns I saw before.

 

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Bank Of America's Run Of Outperformance Fairly Values The Longer-Term Opportunity

Lattice Seeing Revenue Acceleration And Moving To Double Its Addressable Market

The Lattice Semiconductor (LSCC) story continues to work, particularly with revenue accelerating nicely in the first quarter and management offering a credible outlook for mid-teens or better growth over the next three to four years. I have had my qualms about paying such a rich price for this stock (currently trading at around 15x expected 2021 revenue), but the shares have continued to outperform the broader semiconductor sector so far this year.

I know some investors were hoping for more operating margin leverage in management’s recent Analyst Day guidance, but I do think the company’s decision to continue investing in R&D and expand into the mid-range FPGA market is a good one for the long-term. I can’t, and won’t, defend the valuation, but I believe the underlying quality of the company and the growth story remain good.

 

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Lattice Seeing Revenue Acceleration And Moving To Double Its Addressable Market