Rogers Looking To EVs To Drive Growth Acceleration

 

If you want a picks-and-shovels play on passenger vehicle electrification, advanced driver-assistance systems (or ADAS), 5G infrastructure, automation, and IoT, Rogers (ROG) might be worth a look. There’s ample competition from companies like Kyocera (OTCPK:KYOCY) and Shin-Etsu (OTCPK:SHECY) in various business lines, but Rogers has managed to distinguish itself in the past with product development, and management is keenly focused on leveraging the company’s capabilities in areas like metalized ceramic substrates, high-frequency laminates, and specialty polyurethanes/silicones to benefit from growth in those aforementioned markets.

In the four and a half years since I last covered Rogers for Seeking Alpha, the shares have outperformed the S&P 500, Kyocera, and Shin-Etsu, kept pace with the NASDAQ, and lagged the semiconductor space. Relative to my modeling expectations, Rogers underperformed on revenue growth (my primary concern at the time) but did outperform on margins.

At this point, Rogers trades like you’d probably expect a play on EV/hybrids, power electronics, and sensors would, which is to say the shares aren’t obviously cheap. Double-digit revenue growth and meaningful margin improvement from here can drive a worthwhile return, and there are certainly opportunities for Rogers to outperform, but I don’t see the shares as a huge bargain right now.

 

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Rogers Looking To EVs To Drive Growth Acceleration

With Tough Comps And Price Pressures, RPM International Worth Watching

 

Sometimes companies just fall off your radar for a while, particularly when you get frustrated waiting for an entry price that suits your needs. So it has been with RPM (NYSE:RPM), for me, but I haven’t missed out on all that much over the last seven years or so, as the shares have underperformed the S&P 500, as well as peers/rivals like Sherwin Williams (NYSE:SHW) and Sika (SXHAY).

RPM has kept up its pace of niche acquisitions, but has significantly improved the business in recent years through its “Map To Growth” program by cutting costs and breaking down some of the walls between its operating businesses and pushing for synergies and collaboration where appropriate. On the other hand, the company is facing tough comps in its consumer business and a tough cost/supply outlook in the near term. RPM isn’t “can’t miss” cheap at this point, but there’s enough here to at least merit a spot on a watch list.

 

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 With Tough Comps And Price Pressures, RPM International Worth Watching

Masimo Corp Offers Exciting Hospital Automation Exposure, But At A High Price

 

Masimo (NASDAQ:MASI) was already a well-established play in medical monitoring before COVID-19, with leading share in pulse oximetry through its proprietary Signal Extraction Technology (or SET), and had already started offering some hospital automation components, but COVID-19 has definitely accelerated the business plan. Hospital administrators have gained more appreciation for the potential of combining more widespread general floor monitoring with automation.

There’s a lot of potential left in the Masimo story, including increased penetration of Rainbow (advanced monitoring beyond the core SET pulse oximetry offerings), increased automation, and home/remote offerings through the SafetyNet platform. The “but” is that investors have to pay a steep price for that exposure, with Masimo already trading at around 12x ’22 revenue. Bullish investors will point to the multibillion-dollar addressable opportunities like hospital automation and Opioid SafetyNet as justification, but at this price there’s little safety net if the company trips up on execution.

 

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Masimo Corp Offers Exciting Hospital Automation Exposure, But At A High Price

Qorvo Still Not Getting All The Love It Should

 

More than six months have passed since my last write-up on Qorvo (QRVO), and this remains a frustrating stock. The shares have modestly underperformed the S&P 500, outperformed the NASDAQ, more or less kept pace with the SOX, and outperformed other well-known chip companies with meaningful smartphone front-end exposure (like Broadcom (AVGO), Qualcomm (QCOM), and Skyworks (SWKS), but I still find the performance to be less than the fundamentals should merit.

I get that there is less bullishness about smartphones now than in past cycles, but I think that overlooks the content and unit growth leverage that Qorvo has, as this company has been gaining share outside the Apple (AAPL) ecosystem. I also understand some of the short-term frustrations with the Infrastructure business, but I think the long-term outlook remains attractive. All in all, I see the potential for double-digit annualized total returns from here, and it looks attractively priced in a sector that doesn't have many of those opportunities.

 

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Qorvo Still Not Getting All The Love It Should

Daikin Industries: Window Of Opportunity Closed Quickly, But Business Performing Well

 

I liked Daikin (OTCPK:DKILY) (6367.T) on a relative valuation basis back in June as a way of playing a generally expensive HVAC-R sector, but I didn’t expect a better than one-third return in under three months, and investors definitely liked the strong fiscal first quarter results from Daikin. Looking at a longer-term basis, though, Daikin has been less impressive since my October 2020 write-up, having outperformed the S&P 500, the wider industrial sector, and Lennox (LII), but lagging Carrier (CARR), Johnson Controls (JCI), and Trane (TT) on what I believe is a perceived lack of equivalent leverage to green commercial HVAC demand.

I no longer see Daikin as especially undervalued, but I do still like it on more of a “first among equals” basis, as I think the market still underestimates the company’s leverage to green retrofits in Europe and the U.S., as well as potential share gains/margin leverage in the U.S. residential business, and potentially more leverage to its internal R&D efforts.

 

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Daikin Industries: Window Of Opportunity Closed Quickly, But Business Performing Well

Supply Chain Issues Knock Inogen Back, But Underlying Growth Is Encouraging

 

Inogen (NASDAQ:INGN) is still early in the early months of its new CEO’s tenure, and likewise still in the early days of its model transition, but there has definitely been progress, with better-than-expected revenues across the business in the first half of 2021. Unfortunately, that progress has smacked into a hard near-term wall created by semiconductor shortages that will likely drive lower sales in the second half of the year.

Longer term, I continue to believe that shifting the company’s focus toward the B2B (home medical equipment providers) and rental markets is the right move relative to doubling down on direct sales to consumers. I also still see the shares as more interesting on a valuation and story basis, with med-techs with the growth I expect from Inogen usually trading at more than 4x forward sales rather than today’s 3x.

 

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Supply Chain Issues Knock Inogen Back, But Underlying Growth Is Encouraging

Commercial Vehicle Group, Inc. Executing Well On Its Transformation Plan

 

Management at Commercial Vehicle Group, Inc. (NASDAQ:CVGI) has taken on multiple challenges at once, transitioning CVG away from its historical reliance on seating and wiring for Class 8 trucks toward a much more diversified collection of markets, leveraging its opportunities in electrical vehicles and warehouse automation, and shifting the business mix within legacy businesses toward higher-margin, higher-return opportunities.

So far, I would say it’s going relatively well. Although CVG shares have lagged the S&P 500 since my last update, they’ve outperformed other commercial vehicle-leveraged supplies like Allison (NYSE:ALSN), Cummins (NYSE:CMI), and Dana (NYSE:DAN) by around 10% to 15%, though they haven’t kept pace with names with more leverage to warehouse automation like KION (OTCPK:KIGRY).

With an increased focus on warehouse automation, electric commercial vehicles, and more profitable commercial vehicle opportunities, I’m expecting long-term revenue growth solidly in the mid-single-digits, with a significant improvement in FCF margins into the mid-single-digits. If CVG can achieve this, the shares are still priced for a long-term annualized double-digit return and are still worth a serious look today, though this is a higher-risk story suitable only for more adventurous investors.

 

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Commercial Vehicle Group, Inc. Executing Well On Its Transformation Plan

Slower Progress At Grupo Aeroportuario Del Centro Norte, But Progress All The Same

 

The last five to six months really haven’t seen all that many surprises for Grupo Aeroportuario del Centro Norte (OMAB) (“OMA”) other than better-than-expected expense control, as traffic has started to recover, but not at the same pace as for airports with more tourism and “visiting friends and relatives (or VFR) exposure – namely Grupo Aeroportuario del Pacifico (PAC) (“Pacifico”) and Grupo Aeroportuario del Sureste (ASR) (“Sureste”).

I still liked OMA when I last wrote about the stock in mid-March, though I did say that I thought that, “the obvious undervaluation has been soaked up” and that investors were looking more at a solid single-digit long-term return potential. Since then, the shares have lost about 10% of their value, underperforming Pacifico and Sureste by about 10% and 7.5%, respectively. With this recent underperformance, the absolute and relative valuation are much more interesting, and this is a name I’d definitely consider again, particularly with near-term worries about COVID-19 pressuring the sector.

 

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Slower Progress At Grupo Aeroportuario Del Centro Norte, But Progress All The Same

Materion's Lagging Share Price Performance Getting More Interesting

 

Writing about Materion (MTRN) in early March, I said that I liked the company’s near-term leverage to improving end-markets in 2021 and the long-term opportunities available from restructuring the business toward more high-value opportunities, but I didn’t find the valuation so compelling. With the shares down about 5% since then, underperforming the S&P 500 by more than 20%, I’m much more intrigued by the opportunity.

The core of the Materion bull story revolves around the company’s prioritization of higher-value opportunities in areas like semiconductors, industrial end-markets, aerospace, and consumer electronics driving materially higher reported margins – from the mid-to-high single-digits for EBITDA margin to, say, the low teens and possibly the mid-teens over time, with the FCF margins likewise doubling from the low-to-mid single-digits to the mid-to-high single-digits.

I’m increasingly bullish on those prospects, and if Materion can deliver long-term core revenue growth around 6% and bring FCF margins up to around 7% to 8% (driving FCF core growth of 13%), these shares offer long-term annualized double-digit return potential.

 

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Materion's Lagging Share Price Performance Getting More Interesting

Harsco's Business Is Picking Up, But The Stock Price Isn't

 

The broad economic recovery is doing good things for Harsco’s (HSC) numbers, but the number that most shareholders care most about, the share price, isn’t seeing the same benefit yet. The shares are up since my last article on the company, but the 6% rise lags that of the S&P 500 and the broader industrial sector.

I remain modestly concerned that the Street is going to treat this like a short-cycle stock, and I note that the trading action of the shares on a year-to-date basis resembles that of Kennametal (KMT), Parker Hannifin (PH), and Sandvik (SDVKY) – stocks where there is an established historical pattern of institutional rotation away when the manufacturing PMI exceeds 55.

I don’t think Harsco should trade that way. While I do see some risk that the Environmental business is at or near a peak, it could turn out to be more of a plateau as strong demand keeps steel mills busier for longer. With Clean Earth and Rail, I think there are still more significant improvements in underlying business to come. If Harsco can generate a long-term revenue growth rate around 5%-6% and get FCF margins up into the high single-digits, I see near-term upside into the low-$20’s and high single-digit long-term annualized returns after that.

 

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Harsco's Business Is Picking Up, But The Stock Price Isn't

Hollysys Investors Seeing A Light At The End Of The Tunnel... And It's Not An Oncoming Train

 

It’s been tough to be a Hollysys (HOLI) investor, as the company’s promising industrial automation and transportation automation (automation systems for high-speed rail and subways) has been undermined at times by incompetent management, inconsistent shareholder communication, weak liquidity/analyst coverage, and more general macro factors like competition and the pandemic.

Oh, and there’s been a dust-up with a former CEO who has been trying to advance a low-ball offer to take the company private.

At long last, though, there could be some light at the end of this tunnel. Hollysys management has received a credible offer from its founder (and former chairman and CEO) that values the company much more appropriately, and the company hasn’t swatted it down. Given that the company is actually overdue with fiscal Q4 earnings, that may be a signal that there’s been serious discussion about the bid, but that’s speculation on my part.

I’ve always said I saw real potential in the business and that it was undervalued. With a bid on the table that’s close to my estimated fair value and good underlying performance in the Industrial Automation business, it’s easier to be more bullish on this name.

 

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Hollysys Investors Seeing A Light At The End Of The Tunnel... And It's Not An Oncoming Train

Crane Getting Some Credit For Cycle Leverage, But Has More To Give

 

Up about 25% and beating the broader industrial sector by about 7% since my last update, I can’t complain that Crane (CR) is going neglected and unappreciated by the Street, or at least not to the same extent. While Crane came close to matching the broader multi-industrial group for organic growth in Q2, about half of the business is in longer-cycle markets that really haven’t recovered yet, so there’s still more to come.

The shares look undervalued on my numbers, which are in turn lower than sell-side estimates and management’s projections offered in recent investor updates. If management can deliver to that even higher standard, double-digit returns are still very much in play from here.

 

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Crane Getting Some Credit For Cycle Leverage, But Has More To Give

Infineon Lagging Into A Sector Peak And Order Turbulence

 

Even the best parties eventually end, and investors seem to be preparing for the end of this powerful semiconductor boom, or at least they’re not as interested in Infineon (OTCQX:IFNNY) at this point in the cycle. While the SOX index has risen about 13% since my last update on Infineon, the shares have only risen around 4%, and the year-to-date underperformance is likewise around 10%.

I understand why investors would be concerned about signs that demand is starting to decelerate and that increased industry-wide capacity in 2022 will embolden customers to cancel their excess orders (double-ordering to ensure they get what they need). It will almost certainly cause a period of de-rating in the chip sector, and chaos for some operators, but I believe Infineon will come out of it in fine shape, and I’d stay alert to weakness as an opportunity to add shares.

 

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Infineon Lagging Into A Sector Peak And Order Turbulence

After A Sharp Drop, IPG Photonics Is Worth Another Look

 

Second quarter earnings at IPG Photonics (IPGP) didn’t bring much happiness to investors, as weaker than expected results and a meaningful downward guidance revision hammered the stock. Still, I think it’s well worth noting that the stock was already weak going into earnings – underperforming the broader industrial sector by about 20% – and I’m starting to wonder if the company/shares have matured to a point where the market treats it like another short-cycle stock to be rotated away from when the manufacturing PMI tops 55.

I remain concerned about the risks to IPG’s business from improving Chinese offerings, but the company also deserves credit for its own internal innovation and its superiority in high-value areas, including pulsed green lasers used to manufacture EV batteries and solar panels. If IPG is still capable of long-term revenue growth in the high single digits and can deliver 20%-plus FCF margins, these shares offer interesting upside at today’s price.

 

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After A Sharp Drop, IPG Photonics Is Worth Another Look

Lennox Pushing A Stronger-For-Longer Case In Residential HVAC

 

Investor enthusiasm for HVAC-R hasn’t really waned all that much, but Lennox (LII) isn’t participating like it was before. While Lennox is still outperforming the broader industrial space on a year-to-date basis, the shares have lagged both the industrial group and other HVAC-R players like Carrier (CARR), Daikin (OTCPK:DKILY), and Trane (TT) over the last three months and since my last update on the company.

There’s a bit of an interesting debate around the stock now, with sell-side analysts largely dismissing management’s arguments in favor of a “stronger for longer” residential HVAC cycle, just a few weeks after writing reports that included praising the CEO for his history of candid and balanced commentary (in the context of the announced CEO transition next year). Although I personally think the CEO’s commentary is more “bull-case” than “base-case”, I am in the odd position of being more bullish on the underlying fundamentals of the business but less bullish on the relative valuation.

In any case, I still find Lennox to be an expensive stock here. At best I can make an argument for a fair value in the $340’s, largely driven by the company’s above-average ROTA, and I think the long-term annualized returns from here are likely to be fairly pedestrian.

 

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Lennox Pushing A Stronger-For-Longer Case In Residential HVAC

Franklin Electric Offers Attractive Leverage To Water Scarcity And Water Quality

 

Water is still abundant on this planet, but accessing clean water is getting more and more challenging in many areas as population growth and demands from agriculture and industry are leading to more intense groundwater depletion. That’s not a good thing, but it creates opportunities for Franklin Electric (NASDAQ:FELE) through its diverse line of groundwater pumps and related equipment, as well as its recently-assembled water treatment business.

There’s more to Franklin than groundwater pumping, as the company also has a large business in surface pumping equipment, as well as pumps and other system components for fueling systems. There’s really no such thing as a cheap water stock these days, but I do find a little more relative appeal in the idea of owning a stock that has such a clear tie to water accessibility and water quality.

 

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Franklin Electric Offers Attractive Leverage To Water Scarcity And Water Quality

Siemens' Ongoing Underperformance Is Curiouser And Curiouser

 

“How much should numbers matter?” is not a new question in investing, but Siemens (OTCPK:SIEGY) provides an interesting case study. By just about any metric, Siemens has mediocre-to-weak margins, ROIC, ROA, ROTA, and so on when compared to other multi-industrials, including peers in the electrification and automation space like ABB (ABB), Eaton (ETN), Emerson (EMR), Rockwell (ROK), and Schneider (OTCPK:SBGSY). But it also has strong market positions (if not leadership) in many attractive growth areas, including automation (factory and building), digitalization, electrification, and healthcare.

I’m generally a big believer in the idea of skating to where the puck is going to be – in other words, not letting weak trailing/current results overshadow what you think the likely future trajectory will be. Still, in looking for reasons why Siemens continues to look undervalued, I do think the relatively poor profitability metrics are worth noting, but I think leverage to growth markets and improved profit/FCF opportunities counts for more, and this is still a stock worth considering.

 

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Siemens' Ongoing Underperformance Is Curiouser And Curiouser

Schneider Electric's Strong Performance And Long-Term Potential Complicate The Valuation Argument

 

“Let your winners run” is good advice … right up to the point where you end up seeing long-term underperformance because you held on to shares that were overvalued and valuations eventually returned to their long-term norms.

I bring that up because it’s a concern I have with Schneider Electric (OTCPK:SBGSY). Operationally, I have no meaningful doubts that this company will be a long-term winner in electrification, digitalization, and automation, and I still see upside to long-term expectations. This is where “let your winners run” can be good advice – great companies have a habit of outperforming expectations and “growing into” their valuation over time.

On the other hand, in the short run at least, I can’t say Schneider shares are particularly cheap. The valuation isn’t bad relative to many other high-quality industrials, but I find the sector increasingly expensive. All in all, I still lean bullish given Schneider’s strong share in, and leverage to, markets that should outgrow the overall economy, but I wouldn’t fault any investor who holds off in the hopes of buying in on a pullback.

 

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Schneider Electric's Strong Performance And Long-Term Potential Complicate The Valuation Argument

nVent Leveraging Improving Demand And Driving Better Margins

 

The last six months have largely gone the way I expected for nVent (NYSE:NVT) since my last article. The company has indeed leveraged improving electrification demand across its industrial, commercial, and infrastructure markets, as well as seen a faster-than-expected turnaround in the thermal business. Incremental margin leverage has been more or less on par with other industrials, and management has gotten more active putting capital to work in M&A.

I still don’t believe that nVent is a superior play on the electrification “super-trend” I expect over the next decade, nor the best play on grid modernization/hardening or data center growth, but a company doesn’t have to be superior to outperform, as the Street is driven so much by expectations. I continue to believe that there’s a “it’s better than you think” angle to nVent’s story that’s still relevant, and while I think return expectations are now more ordinary, “ordinary” is the new undervalued in this market, so it may still be worth some consideration.

 

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nVent Leveraging Improving Demand And Driving Better Margins

Ametek: Well-Placed To Leverage A Broad Multi-Market Recovery

 

With most of its end-markets in recovery, Ametek (NYSE:AME) is enjoying a strong rebound, and the company’s focus on innovation within growing niche markets appears to be supporting healthy pricing in a time where many companies are having challenges from price/cost mix. At the same time, management has been getting back to business on M&A, spending around $1.8B so far this year with another $2B potentially to spend.

I like Ametek’s leverage to automation, process monitoring, and aerospace, as I believe these are markets that are likely to generate above-average growth over the next five and 10 years. I also like the asset-light model and the continuous reinvestment in R&D, not to mention the well above-average margins. The hitch is that valuation is not so straightforward, particularly given the significant role of M&A, and while the forward multiple seems a little low relative to what the Street is paying for other companies with less appealing combinations of growth and margins, the entire sector does still look expensive to me.

 

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Ametek: Well-Placed To Leverage A Broad Multi-Market Recovery

Record Resin Prices Leaving Braskem In Great Shape

 

Although I did see upside in Braskem (BAK) shares back in mid-March, I absolutely didn’t expect the magnitude of “stronger for longer” resin prices that we’ve seen since. With record resin prices fueling the business, Braskem’s ADRs have risen roughly 80% since that last article, blowing away other chemical companies I follow like Olin (OLN), PPG (PPG), and even the mighty Sika (OTCPK:SXYAY), not to mention other industry peers like ALPEK (OTC:ALPKF) and LyondellBasell (LYB).

While it hasn’t been an absolutely perfect storm for Braskem – some operational challenges have kept various units from running at full (or near-full) capacity – Braskem is nevertheless seeing cash flow roll in, easing concerns about the Alagoas liability and giving the company much more flexibility on debt repayment and capital returns, not to mention reinvesting in green/ESG projects.

I don’t believe today’s prices are sustainable (I don’t think anybody does…), but it’s plausible that 2022 prices could still be well above long-term averages before settling down in 2023 and 2024. There could still be upside here on a continuation of the “stronger for longer” trade, and Braskem is likely to reap the benefits from this windfall for a long time to come, but this will be a tough stock to hold once resin prices start to correct.

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Record Resin Prices Leaving Braskem In Great Shape

Axogen: Renewed Covid-19 Worries Hitting, But The Growth Story Is Very Appealing

 

I’ve said in the past that it’s often a fool’s errand to try to figure out short-term moves in stocks that don’t have clear-cut causes, but I’ll throw caution to the wind and risk being foolish – I think Axogen’s (AXGN) (formerly "AxoGen") recent pullback from around $22 (and closer to $21 when I last wrote about the stock) has a lot to do with fears that resurgent COVID-19 infections will yet again drive lower procedure counts and deferrals in the company’s addressable markets of trauma, breast reconstruction, and oral-maxillofacial surgery (or OMF).

I don’t dismiss that short-term risk, but I do believe it is just a short-term issue. Axogen’s numbers continue to show increasing use among its core surgeons, and whenever pandemic-driven restrictions lift, there will be meaningful sales and education opportunities. Further down the road, clinical data should further drive the case for using Axogen’s nerve repair products. With 20% annualized revenue growth over the next five years and close to 20% growth on a longer-term basis, I believe Axogen shares are worth another look on this pullback.

 

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Axogen: Renewed Covid-19 Worries Hitting, But The Growth Story Is Very Appealing

Natural Grocers Hit By Transitional Turbulence

 

The last six months have been rough for Natural Grocers by Vitamin Cottage (NGVC) (“Natural Grocers”), as a quick reversal in same-store comps, inflation, supply chain challenges, and challenges in opening new stores drove a big drop in the share price after fiscal second quarter earnings, a drop that the shares have yet to recover from despite some solid two-year comp stacks and evidence of stabilization/normalization in the business.

Down more than 25% since my last update, this call has clearly not worked, with Natural Grocers shares lagging comps like Sprouts (SFM) and United Natural Foods (UNFI) (a distributor, not a store operator). I’ve revised my numbers lower, but high single-digit long-term revenue growth (driven by both new store openings and same-store sales) and low single-digit FCF margins can support a higher price than what the market is showing today.

 

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Natural Grocers Hit By Transitional Turbulence

Adecoagro Benefiting From Past Investments And A Tight SEE Market

 

Modeling Adecoagro (NYSE:AGRO) is a masochist’s dream. I mean, all you have to do is successfully model global sugar prices, regional ethanol prices, commodity crop prices, and weather in multiple areas of the world. Oh, as well as production costs, capex plans, and so on.

Super easy. Barely an inconvenience.

So far Adecoagro’s multiyear capex program, inventory management, and hedging strategies are looking smart, as the company is well-placed to leverage rising commodity prices. Why are the shares down from an early summer high close to $12? I assume it’s because of management’s acknowledgement that frosts would reduce crushing output this year. There are risks that the weather impact to Adecoagro’s output could be even worse, but I think the high prices offer at least some coverage and I think these shares remain undervalued.

 

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Adecoagro Benefiting From Past Investments And A Tight SEE Market

Truist Deploys Even More Capital Toward Growth

 

If nothing else, Truist (TFC) management has made one thing very clear to investors over the last couple of years – this is not the bank for investors who want management to prioritize capital returns to shareholders. Management at Truist clearly believes they’ve identified attractive avenues for long-term growth, and they’re not at all afraid to direct capital towards realizing that growth. Having already spent over $1B year-to-date on M&A, including the large acquisition of the Constellation insurance brokerage, management recently announced that it was spending $2B to acquire Service Finance Company – a fast-growing specialty POS lender. This deal will be dilutive initially, but over the longer term, it looks like a good (or better) way to leverage growth in home improvement, as well as an opportunity to leverage under-used liquidity.

The SFC acquisition is going to reduce Truist’s near-term returns of capital to shareholders, but it should also improve the long-term growth rate, adding a few percentage points to my fair value, and pushing the total expected return up a bit.

 

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Truist Deploys Even More Capital Toward Growth

Globus Medical Continuing To Harness Innovation To Drive Impressive Growth

 

In a market that has been pretty good for med-tech, Globus Medical (GMED) has done even better, harnessing strong share growth in its core spine and trauma businesses to beat expectations and fuel even higher estimates. That, in turn, has driven the shares up another 25% or so since my last update - beating the medical device sector by about five points.

Valuation, not growth or opportunity, remains my hang-up with Globus. The shares trade above what the market has normally been willing to pay for the level of growth Globus is likely to deliver, but it's hard to be too negative on a share-gainer with sizable addressable markets still in front of the business. I have some concerns about a sector-wide rerating taking Globus along with it, but until and unless that happens, these shares should have some appeal to growth investors.

 

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Globus Medical Continuing To Harness Innovation To Drive Impressive Growth

Armstrong World Industries Worth Watching For An 'Air Pocket'

 

Ceilings are pretty fundamental to construction, given that employees don’t particularly enjoy the sun beating down on them or getting rained on, and Armstrong World Industries (AWI) has built itself into a leading player in the commercial ceiling market with its mineral fiber offerings, including a range of premium products that can meet project-specific demands for acoustic performance, humidity or fire resistance, sustainability, or even air purification capabilities.

Armstrong has jumped on post-pandemic recovery expectations and the results in the first half of 2021 have been stronger than expected, helped by strong renovation/repair demand. As that demand eases in the second half, there could be an “air pocket” of performance between less robust renovation demand and recovering new-build activity, and that would be an opportunity to watch over. While Armstrong isn’t “can’t miss” cheap today, management has simplified the business into an FCF engine that should keep running for some time to come.

 

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Armstrong World Industries Worth Watching For An 'Air Pocket'

The Recovery At DBS Group Is Underway, With Growth To Come

 

Since my last update, Singapore’s DBS Group (OTCPK:DBSDF) (OTCPK:DBSDY) has continued to perform fairly well, outperforming other Singapore banks like United Overseas Bank (UOVERY) and OCBC (OTCPK:OVCHF), as well as Standard Chartered (OTCPK:SCBFY) and the Asian banks in general, with a total return of around 17% for shareholders. Outperformance has been driven largely by much lower than expected credit costs, but fee income, expenses, and loan growth have been trending more positively than expected as well.

I continue to like DBS Group’s growth opportunities over the next decade. Management has been increasing its exposure to growth opportunities in India and China, as well as Southeast Asian markets like Indonesia, and I believe there’s a long runway for the company’s “phygital” strategy of building a strong digital bank complemented with a local physical presence. Long-term core earnings growth of 5% to 6% can drive total long-term annualized returns in the double-digits from here, making this still a bank well worth considering.

 

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The Recovery At DBS Group Is Underway, With Growth To Come

Watts Water Tech Riding The Tsunami Of Water-Stock Love

 

Water is cheap – I pay less than $0.003/gallon to my water utility, but water stocks are another story. If you want to own a good water infrastructure company, be prepared to pay at least $17 for every dollar of EBITDA, and in some cases quite a bit more. I’d like to say that these premium valuations are justified by the underlying fundamentals, but I still don’t see it – I like the leverage to increased efficiency and digitalization, and I understand the growing power of ESG investment mandates, but it still seems excessive.

Given what’s happening in the space, I’m not that surprised that Watts Water Technologies (WTS) is up another 40% in just the four months since my last update on the company. Water infrastructure companies are reporting torrid demand and strong operating leverage, and again, this is a popular place to play. While I do think Watts is more reasonably priced than many stocks, and I think the probability of additional beat-and-raise quarters is higher here than for many sectors, I can’t make sense of the valuation beyond investors wanting to pile into a hot space.

 

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Watts Water Tech Riding The Tsunami Of Water-Stock Love

Investors Are Treating Xylem As If There's Gold In Water Infrastructure

 

Medieval alchemists had it all wrong – if you want to transform common things into gold, the best way to do that is through a water infrastructure company. Xylem (NYSE:XYL), like many companies in the water infrastructure and metering equipment space, has seen its valuation multiples expand considerably over the last few years, the last 18 months in particular, as investors have been drawn to themes like infrastructure stimulus, increased adoption of smart digital solutions, and overall ESG exposure.

Xylem isn’t a bad company at all; management has managed to deliver better than 12% EBITDA, 8% FCF, and 5% BVPS growth over the past decade, and the shares have produced a very good return for shareholders – up around 160% over the last five years versus about 105% for the S&P 500, 150% for Watts (NYSE:WTS), 110% for Franklin Electric (NASDAQ:FELE), and 23% for Mueller (NYSE:MWA).

Not surprisingly, it’s hard to reconcile the Street’s enthusiasm for a hot water space with fundamental valuation. Relative even to the “compounders” – well-loved growth industrials like Ametek (NYSE:AME), Danaher (NYSE:DHR), IDEX (NYSE:IEX), Rockwell (NYSE:ROK), and Roper (NYSE:ROP) - Xylem screens as pricey at a little over 24x ’22 EBITDA (Danaher is at about 25.5x and its core markets are growing faster). Discounted cash flow offers even less respite. If you’re looking to play the water infrastructure/ESG angle and you don’t care about valuation, I suppose Xylem could be the stock for you, but the valuation really doesn’t make sense to me.

 

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Investors Are Treating Xylem As If There's Gold In Water Infrastructure

Wells Fargo Marking Time Before Regulatory-Driven Growth Re-Acceleration

 

To whatever extent quarterly performance matters for large banks, it matters even less for Wells Fargo (WFC), as the key gating factor on this large bank’s growth is the company’s regulator-imposed asset cap. Once that cap is lifted, Wells Fargo is likely to enjoy a period of elevated growth as the business resets from around 9.5% to 10% ROTCEs to a level closer to the mid-teens.

I’ve been bullish on Wells Fargo for a while now, and that call has been working in 2021, as the shares have handily outpaced the larger bank index, and individual peers like Bank of America (BAC), Citi (C), JPMorgan (JPM), PNC (PNC), and U.S. Bancorp (USB) by 25% or more. That performance has shrunk the undervaluation I saw here, but the total return potential still more or less on par with larger banks, though Wells Fargo really needs to get out from under the asset cap to reach its mid-term targets.

 

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Wells Fargo Marking Time Before Regulatory-Driven Growth Re-Acceleration

Copa Holdings Continues To Execute Well, But COVID-19 Lingers On As A Threat

 

Management at Copa Holdings (CPA) have burnished their reputation for operational excellence during the sharp pandemic-driven declines in air travel demand, as the company has tightened up spending and preserved liquidity to a greater extent than expected, and the June quarter showed unexpected operational upside as traffic begins to recover.

COVID-19 lingers on as a threat, though, and I believe that’s one of the major factors that has kept pressure on the shares in recent months – unlike Mexico’s Volaris (VLRS), which has been able to leverage recovering intra-country travel in Mexico (particularly tourist and family trips), Copa’s international routes remain heavily impacted by travel restrictions and reduced business activity.

I haven’t meaningfully changed my numbers since my last article, though Copa will come out of this downturn in better shape on cash/liquidity than I’d expected. I’m still anticipating a return to pre-pandemic revenue levels in mid-2024, with a 30% or better EBITDAR margin in 2023. With those inputs, I believe Copa remains substantially undervalued, with upside to $100/share or more once restrictions begin to lift.

 

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Copa Holdings Continues To Execute Well, But COVID-19 Lingers On As A Threat

Cognex Hits An Air Pocket And Analysts Start Caring About Multiples

 

Growth stock investing is a funny thing, and that’s probably why I don’t do a lot of it. When things are going great – robust beat-and-raises, sky’s-the-limit growth projections, and so on – analysts will bend over backwards to find creative ways to argue for a multiple that produces a price target at least 10% to 20% above the current price. But if the growth story hits a few bumps, even with no disruption to the long-term story, suddenly valuation matters again.

To be (somewhat) fair to analysts, they’re not the only ones – institutional and retail investors do the same. In any case, it’s looking like Cognex (CGNX) is going to see revenue flatten out a bit for two or three quarters, with some gross margin pressure from a major new customer and supply chain issues, and so the shares have flattened out a bit, “only” rising about 10% since my last update in March and lagging the broader industrial group and the S&P 500.

I’m still expecting high-teens growth over the next five years and longer-term growth closer to the mid-teens, as well as margin leverage, and I still view Cognex’s machine vision technology as a key enabling technology for automation. Multiples-based valuation was always tricky, but the prospective return as per discounted cash flow isn’t bad; in a sector with a lot of really expensive stocks with less exciting growth stories, Cognex looks relatively a little more interesting.

 

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Cognex Hits An Air Pocket And Analysts Start Caring About Multiples

ING Returning Capital Today, Returning To Growth Tomorrow

 

The last six months have been better for ING Groep (ING) shareholders, as the bank finally has the green light to resume capital distributions to shareholders and has also managed to put together a little run of better-than-expected core profit results. That has helped drive the shares up about 25% since my last update – not quite beating Societe Generale (OTCPK:SCGLY) over that time (which I recently covered here), but outperforming local peers like ABN AMRO (OTCPK:AAVMY) and KBC (OTCPK:KBCSY), as well as outperforming the wider European bank group by more than 10 points.

I’m still bullish on the prospects for this bank. There are legitimate questions and concerns about the spread income outlook and the bank’s ability to hit its own cost-cutting targets, but I think there’s evidence that management is taking a serious approach to the long-term return potential of the bank, and I think the market still underestimates the long-term potential of leveraging past tech investments and gaining share in growth markets. I’m only looking for long-term core growth of around 2%, but that’s still enough to support a fair value for the ADRs in the mid-teens and a double-digit long-term annualized return.

 

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ING Returning Capital Today, Returning To Growth Tomorrow

Parker-Hannifin Looks So Tempting Today

 

Parker-Hannifin (PH) is so tempting right now, I worry that it’s a trap. Management has gone to great lengths to make Parker a less cyclical, less-correlated-to-IP company, but the Street seems to be responding with “yeah, that’s nice … but the manufacturing PMI is above 60, so no thanks.” While names like ABB (ABB), Eaton (ETN), Rockwell (ROK), and Trane (TT) march merrily higher on popular long-term secular growth themes, Parker seems stuck in that “it’s short-cycle, so don’t bother” malaise.

I’m not currently including Meggitt (OTCPK:MEGGY) in my estimates, and I’m looking for Parker to generate long-term revenue growth of around 4% and long-term FCF growth of around 6% to 7%. With that, I see a high single-digit return well ahead of what most other industrials offer, and if Parker where to be treated like “any other industrial” right now, you could argue for a fair value above $350.

 

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Parker-Hannifin Looks So Tempting Today

JPMorgan Still Has Many Paths To Growth

 

Once you reach the top, where else is there to go? In the case of JPMorgan (JPM), while I believe this is already the best bank in the country (and quite possibly the world), I still see multiple attractive paths for future growth. Of course there will be competition, from well-run large banks like Bank of America (BAC) and PNC Financial (PNC) among others, as well as up-and-coming fin-techs, but JPMorgan has a great starting position and a deep bench of management talent.

These shares have basically tracked the larger bank index over the last three months, and modestly underperformed the S&P 500. I do see a near-term “value trap” risk for banks given uncertain rate prospects and weak loan growth, but I’m not concerned about the longer-term picture. With the shares still offering high single-digit long-term return potential on around 4% long-term core earnings growth, I think this is at least a solid hold, if not a name still worth consideration from longer-term buy-and-hold investors.

 

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JPMorgan Still Has Many Paths To Growth

Turkcell Continues To Execute Very Well, But Macro Issues Cancel Out The Benefits

 

I really wonder what sort of valuation Turkcell (TKC) would get if it weren't operating in Turkey. Management has done a very good job here in terms of execution, and I largely agree with the company's growth priorities … but double-digit revenue growth and improving EBITDA margins are only worth so much when your country's currency has lost two-thirds of its value in just five years.

Turkcell remains a very small position that I carry mostly for the purposes of "loss farming" (carrying a tax loss to offset a gain someday) and mostly out of spite, since it irritates me to no end that Turkcell's strong operational performance has been canceled out by the inept leadership of Turkey. In any case, I do think Turkcell is meaningfully undervalued, but I don't know that any large Turkish company will get much love in the market until there's a change in the government in Ankara.

 

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Turkcell Continues To Execute Very Well, But Macro Issues Cancel Out The Benefits

FEMSA Undervalued As Latin American Consumers Recover

 

The pandemic isn't over and operating conditions aren't fully back to where they were in 2019 (at least in some respects), but FEMSA (FMX) is doing better as activity in Latin America, and Mexico in particular, gets back to normal. In addition to strong traffic and shopping trends in the core OXXO convenience stores, the performance of the drugstores continues to improve, and modifications to the framework agreement between Coca-Cola FEMSA (KOF) and Coca-Cola (KO) should keep that business on a good path.

I continue to expect around 7% long-term revenue growth from FEMSA as it continues to expand its convenience stores and drugstores across Latin America, while also pursuing opportunities like spin and Premia to enhance the value of its OXXO customer base. M&A likewise remains a potential driver, with management sounding more interested in resuming consolidation in the bottling business than they have in some time. All in all, I continue to believe that FEMSA offers an attractive valuation, as well as broad exposure to Latin American consumers.

 

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FEMSA Undervalued As Latin American Consumers Recover

Donaldson Leveraging Strong Demand And Easier Comps

 

With strong production growth in commercial vehicles and recoveries in many short-cycle industries, not to mention strong demand for freight capacity, Donaldson (DCI) isn't hurting for business these days. While component shortages are starting to crimp truck production, and are likely capping Donaldson's revenue upside, the overall operating environment is still healthy.

I'm excited to see what Donaldson can achieve by repurposing its core air and liquid filtration technologies for markets like food/beverage and pharma/life sciences, as well as markets like electronics and specialty chemicals, but Rome wasn't built in a day and this is going to be a multiyear process, likely one that requires M&A spending in what is not a cheap market.

These shares have modestly outperformed the S&P 500 and the broader industrial sector since my last update, and I think another beat-and-raise quarter is likely when Donaldson reports again in early September. Valuation is so-so. I can see some upside from here and the long-term prospective return isn't bad compared to what I think is an expensive sector, but a lot of my bullishness stems from a fundamental leaning toward "letting your winners run" and a belief that Donaldson's future growth and margin opportunities could drive even better results than I'm currently modelling.

 

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Donaldson Leveraging Strong Demand And Easier Comps

Accuray: As Usual, Two Steps Forward, One-And-Three-Quarters Steps Back

 

Accuray (ARAY) is probably one of the most exasperating companies and stocks I’ve ever followed, which is part of the reason I’ve always been willing to sell down my position whenever the stock runs up. For all of what should be positive drivers for the company and its technology/product offerings, steady progress towards growth and scale has always proved elusive.

I applaud management’s urge to be cautious with guidance, but I think we’re once again seeing “investor fatigue” here, as mid single-digit revenue and low single-digit order growth guidance aren’t going to get it done... particularly when compared to what should be a large China opportunity that is starting to bear fruit. While I do think these shares are valued too lightly today, I can’t really bring myself to invite other investors onboard this pain train.

 

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Accuray: As Usual, Two Steps Forward, One-And-Three-Quarters Steps Back

ITT Inc. Delivers Impressive Margin Leverage, But The Market Wants More

 

Markets ebb and flow, but here recently it looks like valuation may actually matter a bit again, and that’s not good for a generally expensive industrial sector. While I continue to like ITT (ITT) as a long-term holding, and the shares did modestly outperform the larger industrial sector since my last update, a negative rerating for the wider sector won’t leave this stock untouched.

ITT is showing impressive margin leverage, and although the market has recently been obsessed with growth and theme over quality, margins are a powerful long-term driven of multiples and valuation. Moreover, I do think ITT has some thematic positives, including leverage to EVs and longer-term cyclical recoveries in the aerospace, oil/gas, and chemical end markets. The shares still have worthwhile long-term potential, and they’re more reasonably-priced than many industrials, but I can’t really pound the table at today’s price.

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ITT Inc. Delivers Impressive Margin Leverage, But The Market Wants More

Veeco Instruments Leveraging Increased Demand Well, But The Market Doesn't Care

 

When good news from a company, a small company in particular, runs up against a rising tide of negative sentiment, it’s almost always the tide that wins. Veeco Instruments (VECO) has been delivering, with beat-and-raise quarters, improving order/revenue outlooks, and improving margins, but the market is not rewarding the stock for it, and Veeco isn’t the only player in semi tools that’s been weak in recent months.

The market is going to do what the market is going to do, but I do believe the shares are undervalued below the mid-$20s. In addition to near-term opportunities in the core business, including more tool sales for advanced packaging, I see longer-term opportunities in memory and compound semiconductors. Moreover, I believe management is continuing to build credibility with its margin improvement efforts, and the upcoming virtual analyst day is an opportunity to provide some new multiyear targets.

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Veeco Instruments Leveraging Increased Demand Well, But The Market Doesn't Care

ams OSRAM Still Can't Catch A Bid Despite Very Low Built-In Expectations

 

Despite a very low valuation, ams OSRAM (OTCPK:AMSSY) (“ams”) still can’t buy a break. The expected loss of 3D sensing business at Apple (NASDAQ:AAPL) has been confirmed, but that hasn’t really brought any relief, as the ADRs of this sensing and lighting semiconductor chop around $10 and have lagged the SOX index since my last update.

While I do think the current valuation undervalues the potential of the business, whether management is up to the task of realizing that potential is very much up for debate. Front-facing 3D sensing adoption has been slow with Android OEMs and it looks as though both the behind-OLED (or BOLED) and LIDAR-on-VCSEL programs are behind schedule. This isn’t the first time that ams has had operational stumbles, and it raises questions about how smoothly the integration of OSRAM will go and how effectively the company can leverage design and product synergies.

All of that pessimism and more seems to be in the shares now. While I could argue for a fair value as low $8 on the basis of weak near-term margins, I think fair value is more in the low-to-mid teens assuming just 3% long-term revenue and lackluster long-term margins.

 

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ams OSRAM Still Can't Catch A Bid Despite Very Low Built-In Expectations

Grupo Aeroportuario Del Pacifico Shares Don't Fully Reflect Improving Traffic

 

Grupo Aeroportuario del Pacifico (PAC) (“GAP”) has seen a bit of a split recently between underlying operating performance and investor enthusiasm for the shares. While traffic has recovered at a faster-than-expected rate since my last update, and management has not only done a good job of managing costs and the reopening process but also started returning cash to shareholders, the stock has just kind of puttered along – outperforming Grupo Aeroportuario del Centro Norte (OMAB)and Grupo Aeroportuario del Sureste (ASR), but not really moving much.

Perhaps none of the Mexican airport operators are “gotta buy it NOW” cheap, but I do think GAP is back at a level where investors can reasonably expect a long-term total return in the double-digits as traffic continues to recover and as GAP continues to implement new tariffs and non-aero revenue-generating ideas.

 

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Grupo Aeroportuario Del Pacifico Shares Don't Fully Reflect Improving Traffic

Grainger's Growth Drivers Are Delivering, But Long-Term Margins Still In Debate

 

The bull/bear debate on W.W. Grainger (GWW) (“Grainger”) hasn’t really changed much in recent years and boils down to – “competition from the likes of Amazon (AMZN) will continue to drive down their gross margins” vs. “nuh-uh!”. Obviously I’m being glib, but the bulls don’t often offer much up for their pro-margin argument beyond “management says so” and a few vague comments about future scale advantages in the Endless Assortment operations.

I was leaning bullish on Grainger back at the time of my last article, and the shares have kept pace with the wider industrial market since then, giving back some outperformance since reporting disappointing second quarter earnings where, surprise!, margins were an issue. Looking at a year-to-date or trailing-year comparison, Grainger’s stock performance falls between Fastenal (FAST) and MSC Industrial (MSM), which feels right on several levels (quality, market exposures, etc.).

I’m still stuck in a valuation grey zone with Grainger shares. I like the company’s strategic moves (and priorities), and while I don’t think the bulls are completely right on gross margins, I also don’t think the bears are completely right. I see Grainger as a mid-single-digit return prospect now over a longer-term holding period, which isn’t bad for industrials, but isn’t really compelling either.

 

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Grainger's Growth Drivers Are Delivering, But Long-Term Margins Still In Debate

IDEX: Improving Macro And Capital Deployment, But Not Much Share Price Momentum

 

Despite a broad recovery underway in many markets, IDEX (IEX) shares have stalled out a bit. Just barely up since my last article, IDEX has modestly lagged a sluggish industrial sector. A few other high-multiple compounders like AMETEK (AME) and Fortive (FTV) have seen similar results, but then Danaher (DHR), IMI plc (OTCPK:IMIAF), and Roper (ROP) have marched merrily onward, so I don’t think there’s any broader conclusion.

This remains a stock that I’d love to get a crack at at a more reasonable long-term valuation. The best I can say about the shares now is that there are plenty of industrials that offer similar lackluster long-term prospective returns and IDEX is a better company than many of them. I realize there’s always going to be an “ignore the valuation and just buy” contingent, and I do like the long-term prospects for this best-of-breed fluid management company, but the valuation still doesn’t really appeal to me now.

 

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IDEX: Improving Macro And Capital Deployment, But Not Much Share Price Momentum