Manitex Likely To See Some Short-Term Pain, But Long-Term Gains Still In Play

 

All things considered, Manitex’s (MNTX) performance over the past year has been pretty good. This small heavy machinery manufacturer certainly hasn’t been immune to the wider supply chain challenges hitting the sector, but these shares are basically flat since my last article, outperforming a host of heavy machinery comps like Caterpillar (CAT), CNH Industrial (CNHI), Deere (DE), Manitowoc (MTW), Oshkosh (OSK), and Terex (TEX), though underperforming the S&P 500 and Russell 3000.

The weakness across the sector is interesting, with equipment inventories (new and used) running low and likely demand acceleration in the coming years on renewed construction activity and the longer-term benefits of the infrastructure bill. Manitex still has a lot to prove, but management seems to have the company on a better path where strategy and operational execution are concerned, and I think this is still a name worth watching.

 

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Manitex Likely To See Some Short-Term Pain, But Long-Term Gains Still In Play

Rexel Outperforming, With More Still To Come

 

On balance, 2021 was a good year for France’s Rexel S.A. (OTCPK:RXEEY) (OTCPK:RXLSF). I didn’t see quite as much volume growth in the U.S. as I wanted, but the company did gain share in a sluggish commercial market and is still waiting for large industrial projects to move forward. Execution in Europe remains strong, however, and the company is well-leveraged to ongoing investment in electrification and renovation – drivers that I think will accelerate after Russia’s invasion of Ukraine.

The Europe-listed shares (the ones I own) are up almost 30% since my last update, lagging WESCO (WCC), but outperforming the broader industrial space and other distributors like Grainger (GWW) and Fastenal (FAST), as well as suppliers like Eaton (ETN) and Schneider (OTCPK:SBGSY). The performance of the U.S. ADRs has been less robust, but still a little better than most comps.

Given the potential for future share gains in the U.S., growth in large projects, and electrification and renovation in both North America and the EU, I’m still bullish on these shares. Long-term revenue growth of less than 4% and high-single-digit FCF growth can support a double-digit annualized total return from here, though I would like to see better volumes in the coming quarters.

 

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Rexel Outperforming, With More Still To Come

Without Some Offense, Prosperity Bancshares' Defensive Characteristics Aren't A Big Plus Today

 

When I last wrote about Prosperity Bancshares (PB), my pitch on the stock was largely that it offered some downside protection on a weaker macro recovery and upside tied to M&A activity. Management has remained on the hunt for acquisitions, but hasn’t managed to seal a deal, and meanwhile the economy has come back strong. All of that has contributed to noticeable underperformance at this conservatively-run Texas bank, with the shares underperforming its peers by close to 30% over the past year or so.

It’s quite a bit harder to maintain a positive outlook on Prosperity today, given the bank’s weaker leverage to differentiating loan growth and average (at best) asset sensitivity. The significant surplus capital on the balance sheet is a major “yes, but…”, as the company could announce a meaningful growth-driving M&A transaction at any time and has the option to buy back a meaningful amount of shares. Still, this looks like a middling idea at best without real visibility on growth.

 

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Without Some Offense, Prosperity Bancshares' Defensive Characteristics Aren't A Big Plus Today

Evoqua Shares Continuing To Bubble With Multiple Growth Drivers

 

Investors have bailed out of many water stocks recently, but Evoqua (AQUA) has held up considerably better. As a company that is actually a good play on water quality (including water treatment and remediation), and not actually more of a play on construction, that makes sense. Even so, I’m not going to pretend that I expected the shares to be as strong as they’ve been – up almost 70% since my last article.

At this point, valuation remains challenging, but then I wouldn’t expect a company with above-average revenue growth and margin leverage potential to trade cheaply. Not only is Evoqua a good play on eventual PFAS cleanup spending, but the company is also well-leveraged to a wide range of growth markets and further growth in its outsource “water as a service” offerings.

 

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Evoqua Shares Continuing To Bubble With Multiple Growth Drivers

PerkinElmer Exiting The Pandemic In A Better Position For Long-Term Growth

 

Credit where due - not only did PerkinElmer (PKI) do better during the pandemic than I expected, but management has been opportunistic with the windfall created by COVID-19, reinvesting in acquisitions that have helped to further diversify and grow the company's scientific tools and diagnostics businesses. I'm particularly enthusiastic about the efforts made to expand the company's exposure to areas like cytometry and gene therapy.

PerkinElmer shares have done quite well since my last write-up on the company, not only handily outperforming the S&P 500, but also outperforming other well-liked life science peers like Agilent (A), Danaher (DHR), and Thermo Fisher (TMO). While valuation is no less problematic now, I do believe that the company has at least improved its long-term revenue growth and margin prospects, and above-average revenue growth and margin leverage is usually a compelling combination for stock price performance.

 

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PerkinElmer Exiting The Pandemic In A Better Position For Long-Term Growth

Copa Holdings Firmly Back On A Recovery Flightpath

 

Notwithstanding a first quarter "hiccup" that saw flights canceled in January and February due to the Omicron variant, business continues to recover at Copa Holdings (CPA), with capacity and passenger revenue slowly coming back and management continuing to execute exceptionally well on controllable costs.

Copa shares are up about 23% since my last article, outperforming both Volaris (VLRS) and Gol Linhas (GOL), both of which saw better performance earlier in the recovery cycle from stronger recoveries in domestic traffic within Mexico and Brazil, respectively. At this point, I continue to see double-digit annualized return potential, and I don't think investors need to be overly concerned that they've missed all the recovery gains.

 

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Copa Holdings Firmly Back On A Recovery Flightpath

Bank Of America Looks Quite Appealing Ahead Of Rate Hikes

 

Writing about Bank of America (BAC) back in August, my feelings on this giant bank were mixed – while I liked the long-term growth outlook and the bank’s leverage to higher rates, I didn’t see the near-term setup or valuation as compelling enough to suggest buying. Since then, the shares have modestly lagged the large bank peer group (up around 6% versus 9%), even though there have been clear signs of acceleration in the business.

Obviously Russia’s invasion of Ukraine threw more uncertainty into the global economic outlook, but the “on the ground” operating conditions for Bank of America in the U.S. continue to improve, and not only is Bank of America the most asset-sensitive of the large banks, it has multiple drivers of growth including an expansive commercial lending operation and strong retail banking and wealth management operations.

With a modestly upgraded growth outlook, I think Bank of America looks quite interesting here, with near-term undervaluation in the double-digits and longer-term total return potential likewise in the low double-digits.

 

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Bank Of America Looks Quite Appealing Ahead Of Rate Hikes

Zurn Water Solutions - Maybe Not A Unicorn, But Definitely A Thoroughbred

 

Maybe Zurn Water Solutions (ZWS) isn’t exactly a unicorn stock, but it’s an under-followed water-focused company that has line-of-sight to excellent margins and above-market growth that is still trading below fair value.

With leverage to strong institutional spending, improving commercial activity, and healthy residential activity, not to mention a richer mix of more advanced solutions (leak detection, IoT, BrightShield hygiene solutions, et al), I like the prospects for ongoing above-market growth. Add in the acquisition of Elkay and the leverage to more growth opportunities in drinking water (as well as cost synergy opportunities and increased scale), and the outlook gets better.

Although Zurn doesn’t look “can’t miss” cheap to me today, and there’s a risk of further sentiment erosion in the once-popular water space, I do find a lot to like here.

 

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Zurn Water Solutions - Maybe Not A Unicorn, But Definitely A Thoroughbred

As Water Stocks Come Off The Boil, Watts Water Technologies Looking More Reasonably Valued

 

Investor sentiment can be a funny thing, but if you don’t consider it, then a lot of stock moves will make no sense to you. The action in water stocks is a good case in point. While many of these companies are really more construction plays than any particular play on water quality or water conservation, Wall Street nevertheless took them on a run that has recently cooled off in a big way.

Watts Water Technologies (WTS) is down about 15% since my last update on the company, underperforming the larger industrial sector, but still doing less-bad than other water theme names like Pentair (PNR) and Xylem (XYL) over that period. Although I still wouldn’t call Watts cheap today, this sector is worth watching as investors bail out on their one-time darlings and valuations get more reasonable.

 

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As Water Stocks Come Off The Boil, Watts Water Technologies Looking More Reasonably Valued

RBC Bearings Offers A Tough Quality Versus Value Decision

 

Investors shouldn't expect quality to come cheap, but exactly how much they should pay up for quality is a question with no easy answer, and especially when sentiment on industrial and machinery names is weakening. RBC Bearings (ROLL) is a great company, and one that has long enjoyed a premium valuation, and the acquisition of Dodge from ABB (ABB) only makes this a stronger company in my view.

The "but" is, of course, valuation. The shares look priced for only a mid-single-digit long-term annualized return, but that's also on par with other high-quality industrials like Dover (DOV), Honeywell (HON), and Rockwell (ROK) that also offer leverage to industrial automation and aerospace. The shares also trade at a lower relative EBITDA premium, but the industrial sector is derating, so that approach carries some risk. On balance, I find today's price tempting, but not necessarily compelling.

 

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RBC Bearings Offers A Tough Quality Versus Value Decision

CNH Industrial Undervalued With Strong Ag Demand Likely To Persist

 

If you only looked at used farm equipment prices, you probably wouldn’t expect to see that farm equipment stocks have been weak. While an over-aged equipment base in North America and supply chain-driven production challenges have sent used equipment to record highs (as per Machinery Pete’s quarterly index), AGCO (AGCO) and CNH Industrial (CNHI) shares are down from the time of my last article on CNH, and Deere (DE) is barely positive and may well be in the red too by the time this is published.

I understand concerns about higher rates, supply chain issues, and now the Russian invasion of Ukraine, but with a strong outlook for ag equipment demand over the next couple of years, I’m honestly surprised that CNH shares haven’t held up better, particularly with the spin off of IVECO (IVCGF) complete. While conservative guidance from the recent investor day doesn’t help near-term sentiment, and geopolitical risk is now front and center, I do believe that CNH shares are worth another look even in a weak environment for sentiment on machinery stocks.

 

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CNH Industrial Undervalued With Strong Ag Demand Likely To Persist

Tenneco's Difficult Journey Ends In A Buyout

 

Tenneco (NYSE:TEN) has been a challenging situation for some time, as the company’s original plan from 2018 to acquire Federal Mogul and then split the company could never be executed due to weak margins and untenably high leverage. Management has since been executing on a turnaround program targeting over a quarter of the business, but the pandemic’s disruption to vehicle builds and the more recent spike in supply chain costs have done the company no favors.

Now the execution risk of that turnaround and deleveraging plan is off the table, with Apollo Global Management (NYSE:APO) agreeing to pay $20/share for the company.

Given the high level of debt and the uncertainties of modeling the turnaround, the valuation of Tenneco’s shares has always been highly sensitive to even relatively tiny modeling changes. So while $20/share is nearly spot on with one of my fair value calculations (my last article on the company is here), I can’t argue too much with shareholders who think that they’re not getting the full upside from Tenneco’s long-term plan.

 

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Tenneco's Difficult Journey Ends In A Buyout

Hubbell Lighting It Up With Pricing, But Sentiment On Electrification Plays Dimming

 

I had pretty mixed feelings on Hubbell (HUBB) back in August of 2021, as I liked the company’s leverage to electrification products, including grid modernization, but wasn’t so excited about the margins, valuation, or prospects for outperformance. Since then, the shares have lost close to 15% of their value, lagging the broader industrial sector, but not really doing substantially worse than peers/rivals like ABB (ABB), Eaton (ETN), or Schneider (OTCPK:SBGSY), though nVent (NVT) has done a fair bit better.

I like the sale of the commercial & industrial lighting business, and I think it’s a little premature to write off leverage to further short-cycle recovery, to say nothing of Hubbell’s leverage to further spending on grid modernization assisted by the infrastructure bill. On top of that, Hubbell has done better on pricing than I expected and is in relatively better shape than most with respect to operating leverage.

Valuation is still not compelling to me. The shares are a little below my long-term cash flow-based fair value, but a prospective return in the high single-digits is more “okay” than “compelling”. I would like this as industrial rally idea, but I could just as easily see these shares hitting the $150’s before rebounding as jumping back up above $190 in the near term.

 

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Hubbell Lighting It Up With Pricing, But Sentiment On Electrification Plays Dimming

XPO Logistics' Self-Help Efforts Running Into Cooler Sentiment

 

Writing about XPO Logistics (XPO) almost a year ago, I thought the shares offered upside on solid execution in a tight market for truck freight. Unfortunately, while execution in the brokerage operation has been good, the same cannot be said of the less-than-truckload business. On top of that, the less-than-truckload (or LTL) sector has definitely cooled since late 2021, with concerns about a peak in the cycle.

XPO shares have been a notable laggard, but management has stepped up to address the shortfalls in the LTL business with a multipoint plan to improve service quality and efficiency and drive growth in 2022 and beyond. I don’t see XPO becoming a top player in the space in terms of operating metrics, but given the current valuation they don’t really need to be. While I do have some ongoing concerns about sentiment and “fighting the tape” with investors seemingly having moved on from the sector, the valuation here is enough to get my attention.

 

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XPO Logistics' Self-Help Efforts Running Into Cooler Sentiment

Lumentum Seeing Painful Supply Shortages, But Underlying Demand Is Strong

 

This is a Dickensian period for Lumentum (LITE), as strong demand for optical equipment from service providers and data center customers (“the best of times”) is offset by significant supply issues (“the worst of times”) that are having a definite negative impact on the company’s ability to ship to demand. At the same time, while the 3D sensing business has probably found an equilibrium for the time being, there are still robust expectations for future growth here.

I’ve written recently on my bullishness on Ciena (CIEN) and Broadcom (AVGO) given those companies’ exposure to the 400G+ upgrade cycle and ongoing investments in hyperscale data centers, and as an important supplier to equipment companies (Ciena), Lumentum should be looking at least two or three years of double-digit growth, with future 3D sensing growth a driver further down the road. Priced for a double-digit long-term annualized return on cash flow and even more undervalued on a multiples basis, I think Lumentum is worth a look from more aggressive investors.

 

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Lumentum Seeing Painful Supply Shortages, But Underlying Demand Is Strong

Cummins' Bid For Meritor Underlines The Value Of Quality ICE/EV Component Portfolios

 

In a challenging market for auto and truck suppliers, Meritor (MTOR) had been doing okay since my last update, up slightly and keeping pace with Allison (ALSN) while outperforming American Axle (AXL), Cummins (CMI), Dana (DAN), and Tenneco (TEN), and the S&P 500. That performance trajectory spiked yesterday (February 22), with the announcement that the company had accepted a buyout bid from Cummins.

I like this deal for both parties, though arguably more for Cummins than Meritor. Cummins is paying a premium both to the current price and my own estimate of Meritor's fair value, and the Cummins acquisition gives shareholders cash upfront in exchange for the risks of how the EV market will develop in commercial trucks and how the heavy vehicle cycle will play out over the next years. For Cummins, I like this deal as a way of further integrating both its legacy powertrain operations and expanding its long-term leverage to vehicle electrification.

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Cummins' Bid For Meritor Underlines The Value Of Quality ICE/EV Component Portfolios

Cemex Remains Set For Better Results, Even With Higher Costs Taking A Bite

 

I was definitely too eager to upgrade my view on Cemex (CX) back in September. Although demand remains healthy in most of the company’s key operating areas, more challenging comps and fierce cost inflation took a bigger bite in the second half than I expected. With that, the shares have lost about 30% of their value and significantly underperformed peers/comps like Buzzi (OTCPK:BZZUY), Cementos Argos (OTCPK:CMTOY), Heidelberg (OTCPK:HDELY), Holcim (OTCPK:HCMLY), and Martin Marietta Materials (MLM)

I do have some concerns about demand in Mexico in 2022 and costs clearly remain a key issue, but I think the share price weakness overstates the case. With a strong U.S. market and what I believe to be underrated opportunities in Europe, I think Cemex is set for some good years ahead even with the impact of lower margins. Below $9, I think these shares are worth another look.

 

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Cemex Remains Set For Better Results, Even With Higher Costs Taking A Bite

U.S. Bancorp Looks Undervalued On Recovering Loan Growth And Opportunistic M&A

 

Writing about U.S. Bancorp (USB) last July, I thought there were more interesting candidates among this bank’s large bank brethren, and the shares have since underperformed by around 10%, with others like PNC (PNC), Truist (TFC), and Wells Fargo (WFC) outperforming, though I also tapped JPMorgan (JPM) and Citigroup (C), which haven’t done as well.

That underperformance comes despite the announcement of what should be a value-creative deal with Mitsubishi UFG (MUFG) Union Bank, and I believe reflects both some ongoing lackluster operational results at U.S. Bancorp and the market’s general skepticism around whole bank deals.

With that underperformance, I’m finding more to like in these shares. I do think U.S. Bancorp could be setting itself up for disappointment again on operating leverage in FY’22, but I do like the Union Bank deal, the ongoing investments in IT and fee-generating businesses like payments, and U.S. Bancorp’s ability to use a digital-backed “land and expand” branch-lite model to enter new markets.

 

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U.S. Bancorp Looks Undervalued On Recovering Loan Growth And Opportunistic M&A

A Rare Opportunity At First Republic

 

One of my frequent sayings here on Seeking Alpha is that “buy the dip” is a great strategy complicated by the fact that the best businesses typically only see meaningful dips when something scary is happening. Such is the case with First Republic (FRC) – while the shares of what I believe to be one of the best-run banks out there are typically exceptionally expensive, the stock has pulled back meaningfully on worries related to unexpected management turnover.

I don’t believe the turnover is a sign of anything fundamentally wrong at First Republic, and I believe the board understands the basic idea of “if it’s not broken, don’t break it” when it comes to finding a new co-CEO candidate. Still, the risk of something more significant going on cannot be completely dismissed, and management turnover always carries the risk that new managers will, in fact, “break it”. Growth expectations are hardly low here, but if First Republic can generate double-digit long-term core earnings growth, the shares are definitely worth a look on this pullback.

 

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A Rare Opportunity At First Republic

Veeco Coming Through With Orders And Strengthening Its Enabling Tools Argument

 

Small-cap semiconductor tools company Veeco Instruments (VECO) continues to do its part, delivering better than expected revenue and order growth and strengthening its case as a supplier of important enabling tools for leading-edge semiconductor production. What’s changed since my last update is the extent to which the Street has taken notice – Veeco shares have climbed around 30% since that last article, handily beating larger tool companies like ASML (ASML), Applied Materials (AMAT), and Lam Research (LRCX).

I continue to like where Veeco is positioned. The company is gaining traction with its laser spike annealing (or LSA) tools and could see further adoption in memory chip production, and the company is likewise well-positioned with its ion beam and MOCVD tools in other growth markets. Valuation isn’t quite as compelling as it was 30% ago, but I still see double-digit annualized return potential here and the possibility of further positive revisions to guidance/expectations.

 

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Veeco Coming Through With Orders And Strengthening Its Enabling Tools Argument

Ternium Now In The Muddle-Through Phase

 

The idea that steel prices would be lower in 2022, hitting the revenue and profits of steel companies, is not new, but the reality is still unpleasant. And as that reality takes hold, the quality names are rising once again, with Nucor (NUE) and Steel Dynamics (STLD) outperforming companies like ArcelorMittal (MT), Cleveland Cliffs (CLF) and United States Steel (X).

Ternium (TX) belongs in the “quality tier”, but the company’s fourth quarter miss (the first miss since the first quarter of 2020), uncertainty on capital allocation, and worries about the health/pace of the recovery in Mexico have all contributed to a very weak performance since my last update, with the shares down around 30%.

I mentioned the risk of investors overstaying their welcome at the time of that last piece, and I did sell down some of my stake, but I’m still an owner here on the longer-term opportunities for Ternium to replace imports in Mexico and leverage growth opportunities in Argentina and Brazil. This is a story that will take some time to work, but I think patient investors who can take the risk that steel sets an even lower bottom before stabilizing may want to take a look.

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Ternium Now In The Muddle-Through Phase

Broadcom Still Looking At Robust Demand Even As Tech Investor Enthusiasm Cools

 

Given Broadcom’s (NASDAQ:AVGO) focus on margins and cash flows over growth, it’s never been altogether surprising to me that these shares often lag when the chip sector is very much in favor with the Street but outperform when the bloom comes off that particular rose. And so it seems to be today, with the shares having outperformed the SOX index by more than 16% since my last update on the company as semiconductor valuations come off their highs.

I don’t dismiss the risk that Broadcom shares can get caught up in broader declines for tech stocks (or chip stocks more specifically), but I believe this company is very well-positioned operationally for the next two years, given strong demand in networking (enterprise and service provider), broadband/connectivity, wireless, and data center storage. From here I can see upside toward the $650’s, and I believe the shares are priced for respectable long-term annualized total returns in the high single-digits.

 

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Broadcom Still Looking At Robust Demand Even As Tech Investor Enthusiasm Cools

Roche Knocked Back A Bit Ahead Of A Year Of Important Read-Outs

 

Shares of Swiss pharma giant Roche (OTCQX:RHHBY) (OTCQX:RHHBF) had been weak going into earnings, and a 2H/Q4’21 earnings report that included some notable margin shortfalls certainly didn’t help matters, and neither did guidance that suggested only low-single-digit growth prospects in the near term. With that, shares of the ADRs are down about 5% since my last update, modestly underperforming the global large-cap pharma space.

I’m not that troubled by near-term margin challenges, nor the revenue headwinds that declining COVID-related sales will create in 2022. I’m far more interested in Roche’s clinical trial read-outs in 2022, including key compounds for cancer and Alzheimer’s disease, and I’m likewise more interested to see whether the erosion of sales to biosimilars continues to slow and how the diagnostics space builds off of the momentum/leverage created by the pandemic (including getting more testing systems into more labs).

At this point, I’d call Roche’s valuation “okay” more than compelling, and I’m fine with that … it’s not all that often that a company of Roche’s quality gets especially cheap, and I think a long-term annualized return in the high-single-digits, with upside tied to clinical trial data, still makes for a compelling investment thesis.

 

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Roche Knocked Back A Bit Ahead Of A Year Of Important Read-Outs

FirstCash Navigating A Sluggish Latin American Recovery And Uncertainties Around A Major New Acquisition

 

It’s been a little while since I’ve covered FirstCash (FCFS), and quite a bit has happened since then, including evidence (at last) of a strong recovery in the U.S. pawn market, a more disappointingly sluggish recovery in Mexico, and a major acquisition (American First Finance, or AFF) and entry into new markets (lease-to-own and other credit products).

To be honest, I’m not at all sold on the AFF deal. I can see the appeal, but I think the capital could have gone to expanding the Latin American pawn operations in countries like Colombia and Peru. That said, it does offer another potential source of growth and cash flow and diversifies the business somewhat (only “somewhat” given similar clientele).

FirstCash shares are down slightly since my last update, and at this point, I believe the shares are priced to generate an attractive long-term double-digit annualized total return. That said, I would think that the Street might need a little time to get comfortable with AFF and, likewise, may want to see signs of a stronger recovery in Mexico before really bidding the shares up again.

 

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FirstCash Navigating A Sluggish Latin American Recovery And Uncertainties Around A Major New Acquisition

Asset Sensitivity, Loan Growth, And Operating Leverage Feeding Improving Sentiment For Wells Fargo

 

I've been bullish on Wells Fargo (WFC) for a while, mainly on the basis of the significant operating leverage within the business once rates and loan growth move meaningfully higher. Moreover, while the well-known regulatory issues continue to linger (including the growth-limiting asset cap), the company is making progress resolving these issues and should be able to generate mid-teens ROTCEs a little further down the line, to say nothing of significant capital returns in the short term.

These shares have risen about 17% since my last update, outperforming a healthy big bank peer group. I currently see more upside in JPMorgan (JPM) given the post-guidance drop on worries about higher expenses and in the ongoing restructuring at Citigroup (C), but I don't think the high single-digit annualized returns I expect from Wells Fargo are bad, and I do see room for beat-and-raise quarters over the next two years that could drive more upside.

 

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Asset Sensitivity, Loan Growth, And Operating Leverage Feeding Improving Sentiment For Wells Fargo

Citigroup Appears Ready And Willing To Take A Bigger Swing At Lasting Change

 

The long and painful wait for real progress at Citigroup (C) goes on, and with it, the shares of this under-earning large bank continue to lag. Citigroup shares are down another 10% from the time of my last update, making this a notable laggard relative to other large banks (by around 20% or so). Simply put, there's just no real conviction among investors that Citi management is up to the task of fixing what ails this bank and that these latest strategic efforts will just lead to more of the same - weak single-digit ROTCEs that don't come close to earning back the cost of equity.

I would argue that Citi's announcement that it is exiting Banamex (a sale or IPO) is a sign that management is serious about finding a new path for the bank, as this was long viewed as an untouchable crown jewel asset. Still, the Street is going to need to hear something beyond just "more of the same, only better" at the upcoming March 2 Investor Day, and even if they do, management's ability to execute on a more dynamic plan (and the time it will take to do so) will still be in question.

I've been bullish on Citi for some time now, largely on the basis of the low expectations built into the share price, and that call hasn't worked as the Street has been understandably frustrated as banks like Bank of America (BAC) and JPMorgan (JPM) have marched on well ahead of Citi. I still think there is more potential here than is reflected in the share price, but whether that potential can ever be realized is absolutely a fair question.

 

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Citigroup Appears Ready And Willing To Take A Bigger Swing At Lasting Change

BorgWarner: Current Conditions Remain Challenging, But EV Business Is Ahead Of Plan

 

The shares of BorgWarner (BWA) have underperformed since my last update, trailing the S&P 500 by about 15%, but not performing too badly next to the wider auto supplier sector. The main issues are familiar ones to most readers – weak underlying light vehicle production on component shortages and margin pressures from both supply chain issues and the ongoing cost of developing new EV system components.

BorgWarner’s initial guidance for FY’22 was soft relative to the Street, but I believe management is taking a prudently cautious approach to initial guidance given the ongoing supply shortages and the lack of visibility on supply improvements. At the same time, the company has been building a good track record – beating quarterly expectations and already ahead of the company’s prior 2025 EV revenue target.

I continue to believe that BorgWarner is well-positioned to be one of the top suppliers of EV components in 2025 and beyond. With mid-single-digit revenue growth and mid-single-digit FCF margins on the way, I believe BorgWarner is meaningfully undervalued today and worth consideration ahead of a pickup in auto builds.

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BorgWarner: Current Conditions Remain Challenging, But EV Business Is Ahead Of Plan

PNC Financial Offers Strong Upcoming Earnings Leverage - And It's Baked Into Stock Price

 

I think that about the worst anybody can say about PNC Financial (PNC) is that it’s a conservatively-run bank. With that conservatism, it’s never going to have the fastest loan growth or the greatest asset-sensitivity, nor is it likely to invest large sums into uncertain growth projects. Of course, as the last cycle has shown, it’s also not going to self-destruct because aggressively-written loans go “bang” during a downturn.

I’ve liked these shares for a while, and I’d describe the stock’s performance since my last update as “lackluster”, and it has underperformed larger bank peers who have more leverage to self-improvement and the economic recovery in 2022/23. Still, relative to where the shares are now and what other stocks seem to offer, I find the return today less compelling, and this isn’t the first large-cap bank I’d think to buy with new money.

 

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PNC Financial Offers Strong Upcoming Earnings Leverage - And It's Baked Into Stock Price

Citizens Financial Undervalued Ahead Of What Should Be Further Positive Transformation

 

For some time now, my thesis on Citizens Financial (CFG) has been about a bank that is transforming from a perennial operational underperformer into a much better-run bank. Quarter by quarter and year by year, management continues to build the case for believing in that transformative potential. Now, heading into 2022, Citizens looks well-positioned with respect to loan growth and sensitivity, and if management can execute on further efficiency, competitiveness, and quality drives, the upside could be meaningful.

In response to better quarters and better positioning for the future (including multiple recent acquisitions), my long-term core estimated growth rate has headed higher, and with that my fair value estimate. These shares have continued to outperform since my last update (most of that on a year-to-date basis, as rate expectations have headed higher), but I still see low double-digit annualized total return potential, making this a name well worth considering.

 

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Citizens Financial Undervalued Ahead Of What Should Be Further Positive Transformation

SPX FLOW Highlights Some Ongoing Turbulence In Flow/Process Control

 

This has been an interesting quarter for companies in the flow control space. While many end-markets are quite strong, including food/beverage, biopharma, and pulp/paper, and others are starting to improve (chemicals, among others), many companies are reporting weak-looking results as improving short-cycle demand is counterbalanced by a slower pickup in larger project-oriented spending.

Such is the case with SPX FLOW (FLOW), and in this specific case there are also "order selectively" decisions pressuring reported results, as management continues with a plan to boost future margins and growth sustainability by getting more selective with the large project-type orders it takes on. Nevertheless, SPX Flow earnings do support underlying strength in the flow control space - good news for companies like Alfa Laval (OTCPK:ALFVY), Dover (DOV), Emerson (EMR), and IDEX (IEX).

SPX FLOW is in the process of being acquired by private equity group Lone Star Funds for $86.50/share. I do not expect any counterbids, and I would expect the deal to close in the first half of 2022. With less than 1% upside to the deal price, I see no reason for investors to hold SPX FLOW shares any longer.

 

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SPX FLOW Highlights Some Ongoing Turbulence In Flow/Process Control

Dover Offers So Much To Like, Except The Price

 

I've been pretty consistently bullish on Dover (DOV) as a business, if not always the stock, since Richard Tobin took over the CEO role almost four years ago, and since that time these shares have handily left the broader industrial sector in the dust, rising more than 100% and beating the sector by close to 70%, not to mention outperforming a host of well-loved industrial names like Allegion (ALLE), Honeywell (HON), Illinois Tool Works (ITW), and Roper (ROP).

There hasn't been any secret sauce here either, Dover has outperformed on the back of strong execution, including prudent portfolio transformation and excellent cost/leverage actions. Along the way, management has ignored the siren song of chasing growth by paying up to acquire exposure in areas like software.

With strong performance and underappreciated leverage to secular growth opportunities like automation and biopharma, my long-term growth rate has crept higher and higher. I do expect above-average growth here, as well as above-average margins and returns (ROIC, et al), but the valuation seems to capture that pretty well now. I can certainly go along with the idea of paying up to own superior businesses, but with prospective returns in the mid-single-digits on a longer-term basis, I don't see enough return to want to invest today.

 

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Dover Offers So Much To Like, Except The Price

JPMorgan - Paying The Cost To Be The Boss

 

Two things seem to dominate sentiment around the larger banks these days – the prospect for higher near-term capital returns and the bank’s near-term operating leverage. JPMorgan (JPM) has decided to go its own way, though, with management choosing to increase discretionary spending by billions in the effort to build up the company’s future growth prospects across the business.

With a sharp negative reaction after JPMorgan’s cost guidance during the earnings conference call, these shares have lagged larger banks by more than 15% since my last write-up. While I understand the short-term sentiment shift, as JPMorgan isn’t going to be an earnings growth or ROTCE leader in the near term, I think that overlooks the long-term benefits to increased share in the retail and commercial businesses. With a prospective long-term return back in the double-digits, I think JPMorgan is an excellent idea for investors who want a quality bank, but can also afford some near-term underperformance risk.

 

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JPMorgan - Paying The Cost To Be The Boss

Hologic's Underperformance Makes This A Name Worth Further Consideration

Despite some impressive recent quarters, Hologic (NASDAQ:HOLX) shares have underperformed since my last update on this diversified diagnostics and women’s health company. Hologic has benefited from an unexpectedly strong “tail” to COVID-19 testing revenue, but underlying performance has been solid as well, and the company is now in a much stronger position than it was before the pandemic.

Hologic shares are down about 6% since my last update on the company, underperforming the broader medical device space, but not faring too poorly next to names like QIAGEN (NYSE:QGEN), Bio-Rad (NYSE:BIO) or bioMerieux (OTC:BMXXY). If Hologic can hit my target of mid-single-digit long-term revenue growth, double-digit free cash flow growth, and mid-30%’s “post-COVID” EBITDA margins, these shares look undervalued below the low-$80’s.

 

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Hologic's Underperformance Makes This A Name Worth Further Consideration

Carrier Shares Getting More Interesting, But Sentiment Is A Bigger Threat

 

It’s pretty typical for Wall Street to get all hot and bothered about emerging or future trends and then bail out ahead of the actual realization of those trends (“buy the rumor, sell the news”). It’s also entirely typical for the Street to bail out of names that no longer have differentiated near-term revenue growth and/or margin leverage.

That puts Carrier Global (CARR) in a tricky spot vis a vis the share price and investment prospects. Valuation is definitely more reasonable here than it has been in a while (courtesy of a nearly 25% pullback from its 52-week high), but residential HVAC comps are going to get tough and real margin leverage could be a couple of years out.

As I said in a recent article on Trane (TT), my issue here is more about sentiment and the risk of the Street avoiding Carrier as a “played out” story. Still, I like the growth opportunities here, and this is definitely a name to watch, if not seriously consider today as a buy-the-dip idea.

 

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Carrier Shares Getting More Interesting, But Sentiment Is A Bigger Threat

The Siemens Healthineers Is Looking Better And Better

 

Siemens Healthineers (OTCPK:SMMNY) is one of those frustrating situations for a GARP investor where you have to make your peace with paying more than you'd really like to own a piece of a business that I think is set up to be one of the best large-cap med-techs over the next three to five years. Best-of-breed R&D is driving share gains in imaging, diagnostics is improving, and Varian is a top-tier addition in the radiation oncology space.

Valuation is still an issue for me. The shares have pulled back significantly off their high, but are up about 10% from my last article and still don't offer huge undervaluation. This is a case, though, where I think investors may want to consider paying up for quality and the opportunity to enjoy upside leverage to beat-and-raise quarters down the line.

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The Siemens Healthineers Is Looking Better And Better

Philips Now Has More Problems Than Just The DreamStation Recall

 

Next to "it's different this time", "it likely won't get any worse" (or "how much worse can it get?") are probably the most dangerous words in investing, and the experience at Philips (PHG) shows the dangers of trying to pick a bottom when there is a significant negative, hard-to-quantify event - a major product recall in this case - underway.

Philips shares have lost another 30% of their value since my last update, and not only has the DreamStation 1 recall situation gotten arguably worse, the company has also underperformed on its ongoing fundamentals. That dredges up a lot of unpleasant memories related to past execution missteps and inadequacies and raises legitimate questions about whether Philips really has changed for the good.

Even with negative revisions to my margin estimates and discount rate (to account for greater risk/uncertainty), the shares do still screen as undervalued, but it wouldn't be hard to argue that this is a "cheap for a reason" case with not much to drive substantially better near-term sentiment.

 

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Philips Now Has More Problems Than Just The DreamStation Recall

Gentex Biding Its Time Until Unmanageable Headwinds Abate

 

Since my last write-up on Gentex (GNTX) in August of 2021, operating conditions have gotten substantially more challenging, with semiconductor shortages not only having a bigger/longer-than-expected impact on light vehicle production, but supply chain cost inflation creating substantial margin pressures as well. Against that backdrop, I would argue that Gentex management is doing as well as they could reasonably be expected to do.

Gentex shares are down about 5% since my last update, underperforming many of the company’s peers, albeit not dramatically so. In that last article I was neutral on the stock, seeing high single-digit long-term potential but not finding the near-term outlook so compelling. My feelings are similar now, although the long-term potential is getting attractive, I think it may take a little while longer for the Street to warm up to the name.

 

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Gentex Biding Its Time Until Unmanageable Headwinds Abate

IPG Photonics Hit Hard By Ongoing Share Loss And Global Tensions

 

Going positive on IPG Photonics (IPGP) back in August has turned out to be a bad call. Not only has geopolitical tension with Russia created worries about how IPG Photonics could be impacted by potential sanctions against Russia, but the company appears to be losing even more share in China, and management is now talking about 2022 as a "reset" year for the business at a time when short-cycle industrial companies are doing rather well from a revenue perspective.

IPG shares are definitely beaten down, falling almost 20% from the time of that last article and trading at a forward multiple that the shares haven't seen in approximately six years. I think there's still some appeal here for patient contrarian investors, but one of my long-time concerns about the company - growing competition from Chinese fiber laser companies - is still very much in play and I think investors need to be aware of the risks around this business.

 

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IPG Photonics Hit Hard By Ongoing Share Loss And Global Tensions

The Lack Of Reaction To Strong Earnings From Komatsu Is Getting Interesting

 

I was pretty negative on Komatsu (OTCPK:KMTUY) when I last wrote about the stock in mid-2021, mostly due to my concerns about the long-term ramifications of what I believe were bad strategic decisions in the past. At the same time though, I did expect to see improving results in the reported financials as global construction markets recover and miners refresh and expand their aging fleets. The shares have basically done nothing since then, outperforming mining-focused Weir (OTCPK:WEGRY) and more or less keeping pace with other comps like Caterpillar (CAT) and Epiroc (OTCPK:EPOKY).

I still have concerns about the long-term strategic positioning of Komatsu, but I'm finding the lack of response to better-than-expected earnings over the last several quarters to be curious. All told, I'm more bullish now on mining and construction equipment than before, and I do think there are signs that Komatsu is moving to correct past strategic blunders. I'd never want to own Komatsu as a long-term holding, but I'm increasingly interested in the shorter-term opportunity here.

 

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The Lack Of Reaction To Strong Earnings From Komatsu Is Getting Interesting

Pentair Punished As Investors Shift Away From Expensive Water-Theme Stocks

 

I’ve long been unwilling to pay up for popular “theme” stocks, and with the correction in valuations for industrial “compounders” and water stocks, I don’t feel so bad about passing on the group six months ago. The performance of Pentair (PNR) hasn’t been the worst in the group since my last update on the company, but a greater than 20% drop is still painful underperformance all the same.

Not unlike in the HVAC space, there are worries now around how Pentair will handle increasingly difficult comps in its core residential pool business, to say nothing of the question of how much demand was pulled forward during the pandemic lockdowns (when a lot of people redirected spending to renovating and improving their homes). I do believe that water treatment offers some upside and I think the industrial filtration business is better than commonly appreciated, but I do think Pentair faces a tough one-two combination of slowing revenue momentum and weaker margins on cost pressures.

Like many other former darlings, I’m conflicted about Pentair today. I do have concerns about “lower for longer” revenue performance, but this is also a company with growth drivers outside of pools and a return on tangible assets that is well above average (one of the highest among multi-industrials). While I do worry that sentiment could limit near-term outperformance, a long-term annualized total potential in the high single-digits for a well-run company is hard to ignore.

 

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Pentair Punished As Investors Shift Away From Expensive Water-Theme Stocks

The Case For Kennametal Is Getting No Less Complicated

 

This is a tough time in the cycle for stocks like Kennametal (KMT). As I mentioned in my last article on this metalworking tools and components company, these shares are in a group of shorter-cycle industrials (including Gates (GTES), 3M (MMM), and Parker Hannifin (PH)) that tend to underperform when the PMI goes above 60. That happened back in April, and all of these stocks have lagged the broader industrial space since then, with Kennametal being among the weakest of the group.

Still, I wonder if the market has overshot the mark and whether fundamental performance can drive a second look. I am concerned about a slowdown from here in shorter-cycle business, but autos should be recovering from here, aero and energy are just starting their recoveries, and Kennametal's earthworks business should fare well with improving greenfield mining activity and upcoming infrastructure work.

I don't love Kennametal, and I'll discuss why a little later, but the valuation has drifted to a "yes, but …" point where I'm starting to see more opportunities in a stock that the sell-side doesn't like all that much.

 

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The Case For Kennametal Is Getting No Less Complicated

Margin Headwinds Chipping Away At IDEX's Premium

 

Writing about IDEX (IEX) in August I said that this manufacturer of "best of breed" fluid management equipment was one that "I'd love to get a crack at a more reasonable valuation". With the market now quite a bit more concerned about supply chain and cost challenges in 2022, and maybe also more concerned about the durability of the cycle, the shares have declined about 12% since that last update.

Is IDEX cheap enough now? Not really, but it's close, and sometimes "close" is the best you get when it comes to the really well-run companies. Mid-single-digit long-term revenue growth (around 4% organic, augmented by 200bp of M&A) and high single-digit FCF growth can support a long-term annualized total return in the high single-digits, and that's very tempting. By the same token, though, I do see sector-wide risks that 2022 estimates could be too high and investors can be brutal once they deem a trend to be over.

 

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Margin Headwinds Chipping Away At IDEX's Premium

Quarter By Quarter, Outperformance Is Building Société Générale's Credibility

 

After more than a lost decade, Société Générale (OTCPK:SCGLY) ("SocGen") is really starting to deliver on a self-improvement and build (or perhaps "rebuild") credibility with investors. There are still a lot of issues left to tackle, including low intrinsic profitability, but management has key businesses like French Retail on a better path and a plan in place for operations like the global trading and flow lending operations that have been long-term laggards. Along the way, management has shown that it's willing to be opportunistic - negotiating with ING (ING) on their French retail operations and purchasing LeasePlan through its ALD subsidiary.

Low expectations are still an asset when it comes to evaluating SocGen's investment prospects. Low single-digit core earnings growth can still support a healthy return from these shares, even after a 27% move since my last update (outperforming European peers by about 10%). SocGen's market share prospects in French Retail and ability to really turn around the trading and advisory operations are valid concerns, but I'd say the risk/reward balance still favors SocGen shares at these levels.

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 Quarter By Quarter, Outperformance Is Building Société Générale's Credibility

ITT Managing Fierce Headwinds Well, And Underlying Demand Is Strong

 

Industrial demand is recovering sharply, but ITT Inc. (ITT) is having a hard time meeting it given ongoing supply chain issues. That ITT posted the margins it did in the fourth quarter should be a testament to management, but cost headwinds are going to remain fierce through at least the first half of the year, dampening the near-term operating leverage at this industrial name.

I was lukewarm on ITT back in August, seeing okay long-term potential in the name, but more near-term challenges, particularly in light of valuation. Since then the shares have declined about 5%, doing a bit worse than the broader industrial space, but holding up pretty well compared to names like Eaton (ETN) and IDEX (IEX). Given what I think is realistic (if not conservative) guidance at a time when other industrial management teams seem to be taking more chances with guidance, and given a more attractive valuation, I think this is a name that is once again worth a closer look.

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ITT Managing Fierce Headwinds Well, And Underlying Demand Is Strong

Neurocrine Biosciences Looking At A Year Of Heavy Lifting

 

Investors hoping for a quick return to the glory days at Neurocrine Biosciences (NBIX) are likely to be disappointed. Barring the possibility of a buyout, 2022 is going to be a year of hard work and heavy lifting, as the company invests more resources into growing Ingrezza. While 2023 is shaping up to be a year of some important clinical read-outs, pipeline developments in 2022 are more likely to be Phase II proof-of-concept - not bad, but likely not enough to energize the shares.

I'm still bullish on Neurocrine, and I think the shares are undervalued, but I can very much appreciate that this is not going to be every biotech investor's cup of tea. Ingrezza is clearly not a drug that can sell itself, and Neurocrine has chosen to focus its clinical development on high-potential, high-risk projects across neuro and psychological disorders. While there could be some major winners in the pipeline, the likelihood of early-stage failures is commensurately higher.

 

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Neurocrine Biosciences Looking At A Year Of Heavy Lifting

ABB Undervalued As The Next Phase Of Its Evolution Begins

 

For a company that was perpetually restructuring over the last two decades, what CEO Bjorn Rosengren has accomplished in two years at ABB (ABB) impresses me. The company has embraced decentralization with gusto and starting moving more definitively in terms of rearranging the portfolio (selling Dodge, looking to IPO the charging business, spin-off turbocharging, and so on). With that, margins have improved and the company's credibility on the Street is substantially higher.

Now comes the next phase – growing off of this improved base, and this offers a different set of challenges and risks than the prior phase. I like ABB’s leverage to electrification and automation, two of what I believe will be the dominant trends over the next decade, but there will still be challenges to navigate, including the ongoing question of whether ABB has invested enough in software capabilities.

ABB has been a modest underperformer since my last update, but not by a wide margin. I still see core revenue growth potential of around 4% long term, as well as high single-digit to low double-digit FCF growth, and with that I think ABB is priced for a high single-digit long-term annualized return; good enough to keep it at a buy in my book.

 

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ABB Undervalued As The Next Phase Of Its Evolution Begins