Anchors Aweigh For Kirby, As Chemical And Refinery Activity Drives More Barging Demand

It has taken a little longer than I expected, but Kirby (NYSE:KEX) is finally seeing operating conditions in its core inland barge business improve to a meaningful extent. A strong economy and limited new barge capacity should make for a much more profitable operating environment for at least the next two or three years, while the long-suffering Distribution & Services business benefits from increased power generation, trucking, and energy sector demand.

These shares are up about 12% since my last update, beating both the S&P 500 and the Dow Jones Transportation Index over that time – neither of which are great proxies for this company, but you have to take what you can get sometimes. With the stock off sharply since the announcement of an agreement to supply barges for an offshore wind project, this seems like a good time to revisit the name.

 

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Anchors Aweigh For Kirby, As Chemical And Refinery Activity Drives More Barging Demand

Infineon Shares Already Pricing In Some Correction To Order And Margin Trends

No matter how many times the semiconductor sector proves its cyclicality, there are always analysts and investors ready to declare that “it’s different this time” during the next up-cycle. You can imagine what follows, and this cycle has been no different, with some analysts and investors attempting to claim that capacity constraints and new end-market demand will mean an end to the sector’s cyclicality, never mind the fact that past cycles had those same basic drivers (tight capacity and new growing end-markets).

Despite a strong long-term outlook, I didn’t like the shorter-term outlook for Infineon (OTCQX:IFNNY) back in August of 2021, and the shares are down more than 20% since then, underperforming the SOX index by close to 15%. At this point I’m still worried about the risk that estimates for 2023 (and possibly 2024) are just too high and that there’s further downside risk as orderbooks and margins shrink. I also note, though, that Infineon shares have already fallen close to 40% from their high and the valuation for longer-term investors is looking a lot more interesting.

 

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Infineon Shares Already Pricing In Some Correction To Order And Margin Trends

Donaldson Deserves A Second Look After A Steep Decline

Writing about Donaldson (NYSE:DCI) in August of 2021, I noted that I was more concerned about valuation with this high-quality filtration company, but that I was inclined to “let the winner run” on the basis of strong near-term demand and intriguing long-term diversification and growth opportunities.

That was not a good call, as the shares have since declined almost 25% over that period. While it’s true that many industrials have been taken to the woodshed over the last six months on fears related to supply chain pressures, global macro instability, and so on, Donaldson has dramatically underperformed, trailing the industrial space by almost 20%. All the more curious is that sell-side expectations for Donaldson actually aren’t all that much lower now; margin assumptions for FY’22 have come down, but have been offset by higher revenue.

I find Donaldson much more interesting at these levels. Not only do I believe there’s a healthy off-road cycle left to leverage, but I believe the company’s efforts to reapply core technologies into new markets like food/beverage and life sciences can drive higher revenue and FCF over time. I wouldn’t call the shares “screaming buy” cheap, but I do think the valuation is more interesting for long-term investors.

 

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Donaldson Deserves A Second Look After A Steep Decline

A Look At Citigroup And JPMorgan Going Into Q1 Earnings

Even as the banking sector moves toward a period where core earnings growth should be as good as it's been in years (helped by rates and loan growth), the large bank sector has been hit hard recently, with major banks around 20% from their highs. Several factors have contributed to this, including weaker capital markets, rising global macro uncertainty after Russia's invasion, ongoing worries about inflation, and yield curve inversion, to say nothing of growing chatter about a recession within 18 months.

Neither Citigroup (NYSE:C) nor JPMorgan (NYSE:JPM) have been spared from this weakness, with both on the weakest end of the performance curve year to date, but both continue to look undervalued going into this first quarter reporting period. What follows is a comparison of these two large-cap banks, as well as some trends worth watching.

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A Look At Citigroup And JPMorgan Going Into Q1 Earnings

BOK Financial Seems Overvalued Relative To Its Growth Prospects And Profitability

Banks are looking at improving earnings outlooks, with rates set to continue to rise and improving loan demand giving them better-earning options for their capital. Still, there are increasing uncertainties about the pace of rate hikes, as well as opportunities for operating cost leverage in 2022. I believe BOK Financial (NASDAQ:BOKF) has above-average loan growth prospects in 2022 and 2023, but I believe some of that leverage is tempered by less promising outlooks in the fee-based businesses and a structurally less profitable business than many peers.

At this point I’m not all that bullish on BOK Financial shares, even with the year-to-date underperformance. I like the bank's leverage to energy lending and the attractive Texas loan market, but higher expenses are a drag and I just don’t find the valuation all that compelling now.

 

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BOK Financial Seems Overvalued Relative To Its Growth Prospects And Profitability

NXP Semiconductors Has Already Sold Off Ahead Of Potentially Rockier Demand

A year ago, NXP Semiconductors (NASDAQ:NXPI) was a consummate example of “love the company, don’t love the stock (or the valuation, more precisely)”. Since my last update on the company, the shares have fallen about 18%, underperforming the SOX by around 17%, while names I preferred like onsemi (ON) and STMicro (STM) have done notably better. While nothing is fundamentally wrong with NXP, I think the weakness can be tied to limited margin upside over the next few years, as well as risk/vulnerability in the coming normalization (if not down-cycle).

I think a lot of the correction may already be in the shares and I’m increasingly intrigued by the value I see here. Although there are better plays to leverage auto electrification, NXP will generate growth here, and I like the company’s leverage to industrial automation, edge intelligence, and what I’d call “non-traditional” mobile (UWB in particular). I certainly acknowledge a risk that I may be underestimating the downside if the cycle really corrects sharply, but I still think NXP is set for high single-digit revenue growth and strong margins that can fuel an attractive long-term return from today’s price.

 

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NXP Semiconductors Has Already Sold Off Ahead Of Potentially Rockier Demand

US Foods Spotlight On Management's Operational Challenges

I've been lukewarm on US Foods (NYSE:USFD) for a while, as I feel stuck between valuing the company on the basis of what it could (and arguably, should) achieve in terms of organic growth and margin leverage and the reality that management hasn't been delivering on that potential in a meaningful way. Now there's a proxy fight for control of the board, with investor Sachem Head looking to take over and presumably put the company on the "right path".

These shares are up about 7% since my last update, beating the S&P 500, but largely tracking with food distribution peers Sysco (SYY) and Performance Food Group (PFGC). These shares do still look undervalued, but I see risks around the proxy fight - if management wins, I'm concerned that investors may see more of the same underwhelming results, but I haven't seen a compelling plan from the other side either, and I worry about the risks of a hack-and-slash approach to cost-cutting.

 

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US Foods Spotlight On Management's Operational Challenges

Cognex Could Come Back To Life In 2022

The last six months or so have not been good ones for industrial stocks, and particularly higher-multiple growth stories. Within that limited context, then, Cognex (NASDAQ:CGNX) actually hasn't done so bad; the shares have lagged the broader industrial space by about 10% since my last update, but the shares have held up better than those of other high-multiple favorites like Fortive (FTV), IDEX (IEX), and Rockwell (ROK).

I do still have some modest concerns about a transition in how Cognex is viewed by the Street - less of a "pure" growth story and more of a "good growth… for an industrial" - but sentiment is difficult to predict, and I think Cognex still has a powerful tailwind from overall growth in automation adoption across multiple industrial end-markets. I'm also concerned that my double-digit growth projections are too aggressive, but again I see significant growth opportunity in existing served markets, growth in new markets, and opportunities to grow/acquire adjacent products and software.

Cognex isn't what I'd call "truly cheap", but I do see high-single-digit total annualized return potential at this level, and I think 2022 could be a better than expected year for growth, so I'm leaning more favorably on these shares even after the nearly 25% bounce of recent lows.

 

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Cognex Could Come Back To Life In 2022

Bank OZK Should Reverse Some Recent Underperformance As Loan Growth Accelerates

Given the prospect for numerous rate hikes over the next two years, not to mention improving loan growth, the over growth prospects for banks are looking better than they have in some time. Keys for this next part of the cycle will be the ability to grow loans, manage costs, and keep deposit costs low, and I think Bank OZK (NASDAQ:OZK) is well-placed to achieve two of the three, making it an above-average prospect at this point.

When I last wrote about Bank OZK a year or so ago, I thought the bank’s near-term prospects were more modest than for other banks I preferred at the time, and the shares have modestly underperformed since then. At this phase of the cycle, though, I’m more bullish on Bank OZK, and I think this is a name worth considering again.

 

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Bank OZK Should Reverse Some Recent Underperformance As Loan Growth Accelerates

POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

Among the steel companies I regularly follow, Korea's POSCO (NYSE:PKX) has become more and more of an outlier, and not in good ways. While there have been steel companies whose shares have done even worse since my last update on the company, the performance is still notably bad compared to companies like ArcelorMittal (MT), Nippon Steel (OTCPK:NPSCY), Nucor (NUE), and Steel Dynamics (STLD).

Some of this underperformance can be explained by margin pressures from input cost inflation and uncertainties in the demand outlook, but POSCO also stands out from the crowd with its desire to pursue empire-building - if management has its way, steel will only be around half of the business in eight years and the company will have extensive operations in areas like battery and hydrogen production.

I don't necessarily think that reinvesting the cash flows from the steel operations into new businesses is a bad idea, but POSCO has a bad historical track record outside of steel (even if that record was built by other managers) and investors these days tend to want their steel companies to be steel companies. While POSCO does screen out as quite cheap on fundamentals, it's hard to say when sentiment will turn around.

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POSCO Looks Abnormally Cheap, Even Factoring In The Risks Of Empire-Building And Capacity Growth

A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders

For most of the time I've followed Compass Diversified Holdings (NYSE:CODI), my feelings have been some version of "it's alright… I guess". Indeed, since my first piece on the company for Seeking Alpha, a positive write-up, the shares have basically matched the S&P 500 on a total return basis. Likewise, since my last piece, with a total return just a bit below the S&P 500.

Some of my lack of enthusiasm can be traced to what I've felt was a lack of capital recycling activity - a management team too willing to be passive and hold its portfolio instead of making more opportunistic transactions. That seems to be changing, with management selling several businesses in recent years and putting out a multi-year growth target that will require more acquisitions and faster revenue growth from its portfolio.

This strategy does carry some risk, but Compass brings a lot of positives, including a low cost of capital, an attractive operating structure for potential founder-sellers, and far more patience and long-term focus than most private equity buyers. I do consider a competitive M&A environment to be a risk, and the valuation today isn't spectacular, but I think this is a "steady as she goes" investment idea with some opportunities for outperformance-driven upside.

 

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A More Aggressive Compass Diversified Holdings Could Be Better For Its Shareholders

Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

The shift away from high-multiple growth names in life sciences has been brutal, with many names down 50% or more over the last year. This list includes Pacific Biosciences (NASDAQ:PACB) (“PacBio”), which has dropped another 60% or so since my last write-up on this sequencing company. Although I think PacBio is in even better shape now than a year ago from a long-term perspective, the reality is that sentiment has shifted and this is the risk that goes with owning shares valued at double-digit multiples of future revenue.

Between improvements to its long-read sequencing technology and the addition of a short-read technology platform, I believe PacBio has an even stronger long-term outlook, and while there is (and likely always will be) chatter about what competitors in the space are doing, so far none have come close to PacBio where accuracy is concerned. Long-term revenue growth of over 30% is hardly a humble assumption, but I do think PacBio shares look undervalued today.

 

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Pacific Biosciences Hit By Sentiment, But The Future Of Long-Read Sequencing Is Strong

Badger Meter In The Right Water Markets, But The Valuation Is Steep

For some time now, my refrain on water-leveraged industrials has been iterations of “yes, this is a good sector to be in long term, but the valuation more than reflects that”, and the sector has definitely pulled back and derated recently. Badger Meter (NYSE:BMI) has been caught up in that, with the shares underperforming since my last update; underperforming the broader industrial space by about 15%, as well as other water plays like Mueller (MWA) and Franklin (FELE), though outperforming Xylem (XYL).

As I’ve said in other articles, I don’t believe that all water exposure is equal, and I think Badger is in some of the best places to be, including water quality and loss mitigation. Even so, I can’t make the valuation work at this level and it’s hard to recommend this name over some other companies in the water space with more reasonable valuations.

 

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Badger Meter In The Right Water Markets, But The Valuation Is Steep

Enpro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

At a point in the cycle where the market really isn’t fond of short-cycle industrial exposure, Enpro’s (NYSE:NPO) decision to shift toward faster-growing, higher-margin, and less typically cyclical business is looking better and better. Since my last update, not only has the company steadily beaten expectations (including full-year results that were comfortably above my expectations), but the shares have outperformed the broader industrial group by almost 15%, with a 16% total return that also surpasses what the S&P 500 has returned.

Given Enpro’s greater leverage to a faster-growing semiconductor end-market, my long-term revenue growth estimate moves from around 4% to between 5% and 6%, and I see stronger long-term FCF margins as well. I still see these shares offering more than 10% near-term upside, as well as long-term total annualized return potential in the high-single-digits, which is better than what most industrials are offering today.

 

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EnPro Has Continued To Pivot Toward Less Cyclical, More Profitable Business

As The Colfax Chapter Ends, Both ESAB And Enovis Have Something To Prove

By the time this is published, Colfax (NYSE:CFX) will no longer exist as it did before, with the company changing its name to Enovis (ENOV) and keeping the medical business, while spinning out 90% of the welding business ESAB (ESAB.WI) to shareholders. In executing on this transaction, I believe management is hoping to unlock more value on the med-tech side, with the idea being that a nearly debt-free mid-cap med-tech company with growth potential should obtain a better valuation on its own than it could blended in with ESAB.

I was mixed on Colfax’s prospects a year ago, as I thought turbulence related to the split and operational challenges in the med-tech business could still weigh on the shares, but that there was likely more value here than was being reflected in the share price. The stock underperformed since then, and while I do see opportunities here, there are challenges ahead for both businesses.

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As The Colfax Chapter Ends, Both ESAB And Enovis Have Something To Prove

After A High-Profile Failure In Melanoma, Nektar Therapeutics' Value Shifts To Its Early-Stage Pipeline

Nektar Therapeutics (NASDAQ:NKTR) is now facing the unenviable challenge of picking up the pieces and rebuilding investor confidence in the company and the stock after the disappointing failure of the company’s pivotal combo study in melanoma. Although there are still additional studies of bempegaldesleukin (or “bempeg”) that have yet to read out, it seems unlikely that there will be winners here, leaving Nektar as a more development-stage biotech with three early-stage lead compounds.

I was completely wrong about the likelihood of bempeg succeeding in melanoma, and that was what I believed to be the program with the highest likelihood of success given the established use of IL-2 as a last-ditch therapy. I can’t completely write-off the remaining bempeg studies, but I think it would be highly surprising if any of them showed efficacy to warrant an NDA submission, and the three remaining lead compounds (NKTR-358, NKTR-255, and NKTR-262) are too early in their development to support a strong share price today.

 

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After A High-Profile Failure In Melanoma, Nektar Therapeutics' Value Shifts To Its Early-Stage Pipeline

A Multiyear Enterprise Investment Cycle Continuing To Drive Opportunities For Broadcom

It hasn’t been that long since my last update on Broadcom (NASDAQ:AVGO), but the shares have continued to outperform (up 8% versus a slight decline in the SOX) on the company’s strong leverage/exposure to a red-hot enterprise/networking segment and ongoing excellence in execution on margins. Moreover, with lead-times still near record levels and not as much inventory-building in markets like networking and broadband, Broadcom is better-protected from some of the cyclical sentiment risk that has hit chip stocks.

I continue to like Broadcom today. Taking another look at the key data center market, I believe this market can continue to drive strong revenue growth for Broadcom for several more years, helping offset some of the risk in markets like wireless. With longer-term revenue growth potential above 6%, along with further margin leverage, these shares look undervalued below the $700’s.

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A Multiyear Enterprise Investment Cycle Continuing To Drive Opportunities For Broadcom

Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Supply chain challenges added another pelt to the wall when Ciena (NYSE:CIEN) warned in mid-February that the company would miss fiscal first quarter targets due to supply chain challenges, and management subsequently indicated that supply chain pressures remained a risk in the second quarter. While this is a setback, the company still grew more than 10% in the quarter, is still poised to benefit from significant spending growth in telecom and datacom markets, and is still an attractive play on global data traffic.

These shares have given back about 7% since my last update, underperforming rivals like Cisco (CSCO) and Infinera (INFN) by around 7% to 10%, with Nokia (NOK) performing similarly. While the near-term supply challenges take a trivially small amount of my fair value estimates, the share price decline has these shares set up again for a double-digit long-term total annualized return, making this an attractive name to consider again at this price.

 

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Ciena Tripped Up On Supply Chain Challenges, But No Real Change To A Strong Multiyear Story

Manufacturing And Self-Help Come Through For MSC Industrial

I've been skeptical about MSC Industrial's (NYSE:MSM) latest self-help initiatives, but management is providing the best rebuttal possible - good execution. I can, and will, quibble that sales growth should be higher given the underlying strength in manufacturing, but the company is definitely doing better on margins, and that helped drive better fiscal second quarter results - a set of results that should also bode well for the broader multi-industrial space in the upcoming calendar first quarter earnings cycle.

I flipped from neutral to positive on these shares in late February, in part due to valuation/sentiment, and in the short time since, the shares are up about 10% - roughly doubling the performance of the underlying industrial sector. With some positive adjustments to my margin assumptions, I still see around 10% to 20% near-term undervaluation, with longer-term total return potential in the high single-digits.

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Manufacturing And Self-Help Come Through For MSC Industrial

Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down

Writing about Calyxt (NASDAQ:CLXT) in the past, my concern was never whether the company’s core TALEN gene editing technology (licensed from Cellectis (CLLS)) worked, whether it could work in agriculture, or whether it could develop credible modified crops. My concern was whether the company could execute, and the answer was definitively “no”.

Now the company is on to its third iteration, attempting to remake itself as a “synthetic biology” company that harnesses its core competencies to develop and produce sustainable plant-based molecules for use in end-markets like pharmaceuticals, food/supplements, and cosmetics. The company starts this next chapter with less than $25 million in cash and not much time to convince potential partners of the validity of the platform in order to secure partnerships.

The basic concepts behind the company’s PlantSpring and BioFactory platforms seem credible, but this company has never given investors a reason to believe that they can deliver, and this is at best a speculative bet that Calyxt can secure enough capital to prove the commercial viability of this latest plan.

 

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Calyxt Switches Gears Again, But The Cash Clock Keeps Ticking Down