I like Xylem’s leverage to water utility infrastructure spending, as well as industries like mining and food/beverage, and I think Xylem could benefit from relatively less exposure to construction markets that could see a sharper slowdown in the face of higher interest rates. Valuation is not as attractive anymore, but I would still regard this as a solid hold and a name to watch for another pullback.
Read the full article:
Xylem: Benefiting From End-Market Diversity And Good Cost Management
Writing about Watts Water Technologies (NYSE:WTS) ("Watts") in late February, I said I preferred to wait in the hopes of seeing an even better entry price. The shares continued to slide through late June to mid-July, bottoming out below $117 before rebounding nicely since those doldrums.
I've been impressed with the execution at Watts, as management has leveraged a healthy retrofit/renovation market and improving new construction markets to gain share. I'm even more impressed with the strong margin execution against a backdrop of input and distribution cost pressures. As far as criticisms and concerns go, I do have some concerns about the impact of higher rates on new-builds, as well as a declining tailwind from renovation projects spurred by the pandemic. Valuation isn't superb, but this is a quality name leveraged to construction growth (balanced between non-residential and residential) and trends like energy efficiency and loss prevention.
Click the link for the full article:
Watts Water Tech: Strong Construction And Retrofit Markets, Boosted By Excellent Execution
I really don't see much to fret about here. I've been impressed with not only how Zurn Elkay has leveraged strong availability to gain share (as well as leveraging hygiene retrofit trends), but also how well margins have held up in a challenging cost environment. The outlook has faded some since my last update, but I'm still bullish on Zurn Elkay based on mid-single-digit long-term organic revenue growth and mid-to-high single-digit FCF growth.
Follow this link to the full article:
Zurn Elkay Seems To Be Drifting Despite Solid Execution And Growth Opportunities Beyond 2022
Itron shares have gotten hammered since my last update, falling over 40% as the company has seen significant hits to the business from supply chain issues and demand disruptions. At the same time, though, the Device Solutions has structural issues that won't vanish quickly and there are large players in the company's more attractive markets to challenge their share/revenue growth in the coming years.
I've cut back my modeling assumptions substantially since my last update, and as much as I'm concerned that I'm getting pulled into a bull trap, long-term core revenue and FCF growth of 3% and 10% from the 2019 peak can still support an attractive return from here.
Read more here:
Itron Has Been Hammered On Disappointing Results And Investor Rotation
I do think the view on the Street that 2023 will be as good as it gets for commercial P&C insurance is weighing on shares, and I think that view is basically right. Still, I think what the Street may be overlooking is that lesser insurance companies need hard markets to rebuild their reserves, but companies like Hartford can outperform through the cycle when underwriting conditions aren’t as favorable. I still think Hartford is poised to generate 4%-plus long-term core earnings growth, and I still think the shares are undervalued, but investors will have to have some patience here.
Click here to continue:
Hartford Financial Continues To Outperform With Its Differentiated Model
Given aircraft production schedules and guidance from major OEMs like Airbus (OTCPK:EADSY) and Boeing (BA), I believe USAP is about to see a significant ramp in revenue and expansion in margins. On top of that, the company is poised to benefit from recovering oil/gas activity, as well as efforts to upgrade the product portfolio (including participating in “hot side” engine components). Even at a significant multiple discount to ATI or Carpenter (CRS), I see upside into the low-to-mid teens as USAP delivers on the growing demand from aerospace customers.
Readers should note that USAP is very small (less than $100M in market cap), fairly illiquid (fewer than 20K shares traded per day, on average), and not followed by Wall Street analysts. Consequently, it’s fair to assume that this is a riskier stock.
Read the full article at Seeking Alpha:
Universal Stainless & Alloy Products Ignored On The Runway As Business Starts To Take Off
I still like the long-term prospects for the bank. Mergers of equals (or MOEs) always carry above-average execution risk, but the synergy and cross-selling opportunities seem legitimate and likely to build value. Not only will the combination extend both banks' operating footprints, but it will also create complementary product offerings in commercial lending as well as enhanced operating scale. At a point where banks are still generally out of favor, I like what I see with double-digit long-term annualized return potential at today's price.
Read the full article:
Hexcel has done better than I expected on margins ahead of reacceleration in widebody production, but that outperformance doesn’t drive a big enough change in my model to fundamentally alter my valuation view. If you’re the type of investor who is less sensitive to valuation and more confident that the shares can see another run as widebody activity accelerates, there’s a case to be made for the shares. For me, though, I need a line of sight on better long-term financials or a lower entry price.
You can read the full article here:
Hexcel Continues To Execute Well Through A Challenging Period Ahead Of A Widebody Production Ramp
Since my last article, the shares (the U.S. dollar-denominated ADRs) have done a little better than the SOX, and I think today’s valuation is attractive. The biggest caveat now is the upcoming downturn or at least “adjustment process” in the semiconductor sector, as inventories are catching up and order cancellations are starting to appeal. That could make for a turbulent 12-24 month period (which arguably started eight months ago), but I think patient investors will like what Renesas does over time.
Continue reading here:
Growth Opportunities At Renesas Still Being Underappreciated
I believe Kemper can return to profitability in FY'23 and double-digit ROE in FY'24, but is still going to require further rate hikes, and there's no guarantee that regulators will cooperate. Better-than-expected losses don't appear to be enough for the Street for now, and I do think the company will need to announce more progress with rates in California to really shift sentiment. For long-term value hounds, I still see some attractive long-term upside, but the risk of these shares heading back to $40 or below before that recovery is not insignificant.
Read more here:
Kemper Managing Through A Tough Situation, But Catalysts Still Lacking
It’s easier to be bullish on Credicorp at this lower valuation, though I still see economic and political risk as major factors in the investment analysis. Weak business confidence and low real wage growth aren’t great underlying trends for the near term, nor is a 20% approval rating for the president or a significant increase in the price of credit default swaps for Peru since the start of the year. All in all, I like the double-digit prospective returns here, but investors need to go in with their eyes open with respect to the above-average risks and volatility here.
To read the full article, follow this link:
Progress is a relative term, though, and this is still a bank that will be earning single-digit returns on tangible equity for at least a few more years, and as U.S. investors have seen with Citigroup (C), the market is not particularly eager to reward under-earning banks with material reratings. The low level of expectations built into the valuation today suggests patient shareholders could be well rewarded down the line, but “how far down the line” is a very fair question to ask, and Societe Generale may yet struggle to establish itself as more than a trailing rival in the majority of its key markets.
Continue reading here:
The Frustrating Wait Goes On For Societe Generale To Be Rewarded For Its Progress
DBS Group is always going to be a higher-risk investment than a bank like Bank of America (BAC) given the company’s exposure to multiple economies, including more volatile markets like China, India, and Indonesia, but I wouldn’t ignore the strong returns on capital that this bank has generated over full cycles, nor the efforts that the company has invested toward establishing itself as a significant digital banking presence in multiple growth markets. I believe the shares are at least 10% undervalued today and priced for a long-term total annualized return in the low-to-mid-teens.
Read the full article at Seeking Alpha:
DBS Group Undervalued As Investors Fret About Macro Scenarios
A weakening outlook for the Canadian economy in general and consumer spending in particular seems to be weighing more heavily on TD, and I wouldn’t be surprised if there were some concerns tied to the extended review process of the bank’s proposed acquisition of First Horizon (FHN). At the same time, though, TD is one of the better-reserved banks in its peer group and still offers the highest asset-sensitivity of its peer group.
Given where it is trading on a P/TBV and P/E basis relative to expected near-term results, I do believe TD Bank is undervalued, but I also believe sentiment is a tough headwind for the shares now given the worries about the Canadian housing market. I do see longer-term value here, but there are other options (particularly U.S. regional banks) where earnings momentum and sentiment seem more in favor of investors over the next six months.
Click the link to continue reading:
Growing Concerns About The Consumer Overshadowing Toronto-Dominion Heading Into Fiscal Q3 Results
Money center banks clearly aren’t in favor right now, but I believe strong earnings growth should drive improved sentiment later this year, particularly as the banks build capital and get closer to a point where significant returns of capital to shareholders can resume. With Bank of America still offering above-average rate leverage, loan growth potential, and earnings growth leverage, I think the shares still have appeal at this lower level.
Read the full article here:
Strong Earnings Growth Should Bring Bank Of America Back Into Favor
Down about 25% since my last update against a roughly 10% decline for the medical device sector, it's going to take time, money, and management attention to get Smiths Medical into proper shape. Wall Street is not a particularly patient place in the best of times, and the significant hit to FY'22 and FY'23 margin assumptions is a tough headwind to overcome. I do still think that the logic of the deal is sound and that better, more profitable, days lie ahead of ICU Medical, but investors will have to exercise some patience before those benefits are reflected in the shares.
Read the full article here:
ICU Medical Hit Hard As Smiths Medical Needs Significant TLC
There's no better way to quiet doubters than to consistently execute well, and despite challenges from stressed supply chains and some volatility in end-market conditions, Acuity Brands (NYSE:AYI) has been executing rather well, surpassing expectations on multiple occasions since my last update on the shares about two years ago.
AYI shares are up more than 75% since that last article, handily outperforming the average industrial stock and other industrials with significant non-residential exposure like Allegion (ALLE), Carrier (CARR), Hubbell (HUBB), Johnson Controls (JCI), and Trane (TT). Even with that strong performance, I wouldn't necessarily say that the shares are getting their full due, as they still appear undervalued on both cash flow and margin/return-driven EBITDA.
Continue here:
Since my last update, wherein I thought the performance prospects of the shares were good but not great, the stock has fallen about 12% - a fairly average performance on balance. At this point, though, I'm getting more interested in the shares. There are a lot of banks trading too cheaply ahead of what I expect will be strong earnings in FY'23, but if Comerica can in fact make some positive adjustments to its operating strategy, I think there's a better case for long-term ownership.
Read the full article here:
Comerica Could Be Assembling The Pieces For Better Long-Term Returns
WaFed still doesn't look like a remarkably cheap bank, and there are some risks to the outlook (including management's own guidance for slowing loan growth). The company has made good progress on costs, though, and I can see a clearer path now toward a higher-quality, lower-cost deposit base to support a quality, growing loan portfolio. An economic slowdown over the next 12 to 18 months is certainly a risk (particularly in key states like Texas), but I do lean more positively on this under-followed company.
Continue reading here:
Operational Execution And Strategic Risk-Taking Is Benefitting Washington Federal Meaningfully
This underperformance can be tied back to the supply chain and component availability issues that are affecting the entire sector, reducing companies' ability to ship to demand and weighing heavily on margins. Not only that, some of the bloom is coming off of key end-markets, as spending from cable, cloud, and telco providers seems likely to slow in 2023.
Against that perhaps gloomy backdrop, I still see an argument for owning Ciena shares. The company has about a year's worth of revenue in its backlog and I believe the company has passed at least the halfway point in its supply challenges. Moreover, as the company gains share from Huawei and sells follow-on products into its base, I see more room for margin expansion. Priced for a double-digit long-term annualized return, I think this is a name to consider, albeit with some elevated near-term (two or three quarters) risk remaining.
To continue, click here:
Ciena: Valuation And Opportunity Vs. Supply Chain And (Storm) Clouds
FormFactor shares are down about 6% since my last update, with the shares chopping lower throughout 2022 on growing concerns about the imminent end of this unusually strong chip cycle. Relative to the broader SOX index and leading customers like Intel (INTC) and TSMC (TSM), that decline hasn’t been so bad.
I do believe that FormFactor will be fine over the long term, even with increased competition from Italy’s Technoprobe (TPRO.MI), as leading-edge nodes requiring increasingly sophisticated probe cards that will further narrow the market to the top suppliers and support both healthy revenue growth and margins.
Click here to continue:
FormFactor Drifting Lower As Cracks Appear In Leading-Edge Chip Demand Trends
I believe this is relevant Penumbra (NYSE:PEN) today. Down about 25% since my last update, the company has not underperformed to any meaningful extent. Instead, valuation multiples have come down for many high-growth med-tech names, with stocks like DexCom (DXCM), Inari (NARI), Intuitive Surgical (ISRG), and SI-BONE (SIBN) down around 15% to 20% as well, largely on market rerating.
None of this automatically makes Penumbra conventionally cheap – the shares do still trade at over 6x FY’23 revenue and the company will need to generate considerable revenue and cash flow growth over the next decade (and beyond) to drive attractive appreciation. I believe they can and will, though, and I think this may be a reasonable time to consider these shares again.
Read more here:
These shares have fallen another 45% since my last article, dramatically underperforming the SOX over that time. Although these shares don’t look expensive at this point, the impact of losing 3D sensing business at Apple (AAPL) and a lack of traction thus far in other growth projects makes for a challenging buy call. I do see opportunities for ams to be a stronger company (and stock) in the future, and I like the idea of buying in at a price where sentiment is ugly, but investors considering this name need both high risk appetite and patience.
To read the full article, click here:
ams-OSRAM Hammered On Weak Near-Term Performance And Longer-Term Competitive Doubts
Cosan is always going to be a complex, challenging company to model and own – not only due to its participation in commodity markets, but also its holding company structure and diverse operations. That said, this management team has created value for shareholders over time, and I believe they will continue to do so. Between organic and inorganic growth opportunities, I continue to expect mid-to-high single-digit long-term revenue growth from Cosan and believe these ADRs should trade in the low-to-mid $20’s.
Click the link to continue:
Cosan Batted Around By Commodity And Macro Challenges, But The Core Investment Case Remains Solid
I’m not quite as bullish at this point, though. Traffic has started decelerating at the stores, comps are getting more challenging for the supplements business, and I’m concerned about more challenges to margins given those traffic trends. I still see Natural Grocers as capable of high single-digit revenue growth over the long term with improving margins, but with fair value in the high teens, I don’t see quite the same upside at this point.
Read the full article:
Natural Grocers: Executing On Margins, But Decelerating Growth Needs To Be Monitored
While American Axle has been looking stronger of late, and I applaud the company’s ability to adjust its expense structure to lower volumes, the investment case is quite a bit more difficult now. High leverage makes valuation sensitive to even relatively small changes in long-term growth rate or margin assumptions, and the company is still facing a difficult ICE-to-EV transition. I don’t think it’s a stretch to argue for a mid-teens fair value today, but I’d be careful about an extended commitment to this name.
Continue here:
American Axle Looking Underappreciated Today, But The Uncertain Future Is A Major Overhang
The shares of this spine-focused medical device company do look undervalued today, but they've looked undervalued for a while. Although the shares have slightly outperformed the broader medical device space since my last update and outperformed names like Alphatec (ATEC) and SeaSpine (SPNE) while recently starting to lag Globus (GMED), they still haven't done anything to celebrate over the last five years.
NuVasive is salvageable, but the company's management needs to offer more than what is apparent today - investors need to have a reason to believe in growth drivers beyond the cervical portfolio and that long-awaited margin improvement will actually materialize. While this could happen, there's a real risk that "okay, but not great" growth and margins keep a lid on the share price performance at NuVasive.
Click here to continue:
NuVasive Likely Undervalued, But It's Hard To Find Catalysts
It’s certainly true that trees don’t grow to the sky and AIT cannot maintain a high-teens revenue growth pace for much longer. Still, the company remains strongly leveraged to the ongoing “catch-up cycle” as companies work to deliver on their backlogs, as well as longer-term secular growth drivers like automation and decarbonization. Share price outperformance has shrunk some of the discount to fair value here, but I believe this remains a well-run and under-known small/mid-cap industrial with above-average growth potential.
Read more here:
Applied Industrial Technologies: Still An Underappreciated Industrial Growth Story
It's harder to find strong arguments for a bullish stance on BRF today. While the situation in Brazil seems to be stabilizing, there's still quite a bit of uncertainty in key foreign markets. What's more, rivals like JBS (OTCQX:JBSAY) have more flexibility when it comes to pricing and assortment. Maybe the best bullish argument at this point is that expectations have come down for this stock and the shares don't look all that expensive; if the company can execute on its multiyear turnaround strategy, there is greater upside potential, but execution has been pressured here of late.
Continue here:
BRF SA Muddling Through And Still Weighed Down By Debt And Capex
Wells Fargo (NYSE:WFC) is no exception, and I do believe the shares are priced for an attractive double-digit annualized return at today's price. That said, investors shouldn't be lulled into thinking this is a risk-free opportunity. While I do like Wells Fargo's leverage to "Main Street banking" (and its lack of exposure to capital markets), whether the Fed can bring inflation to heel without pushing the economy into recession remains to be seen, and Wells Fargo is likely to see more pressure on its funding costs as the cycle goes on.
To read the full article, click this link:
Wells Fargo Looks Undervalued Ahead Of Earnings Acceleration
Investor sentiment for the chip space may not be what it was, but the reality is that fabs are still looking to spend large sums to increase capacity, particularly at leading-edge nodes. Moreover, Veeco continues to have attractive leverage to emerging opportunities like extreme ultraviolet (or EUV) lithography, multiple gallium-based substrates, and advanced tool/technology adoption in areas like microLEDs, power semis, and storage.
I'm a little less bullish on the near-term margin outlook for Veeco given supply-chain and mix pressures, and that does take a toll on my cash flow-based and margin-based fair value estimates, but I think the overall outlook for this under-followed equipment supplier is still positive and it's a name worth considering.
Read the full article at Seeking Alpha:
Amidst Industry Turbulence, Veeco Instruments Still Seeing Solid Demand
There is ample cause for skepticism on Accuray; despite several important product/technology advances and progress in the under-penetrated Chinese market, there has been almost no revenue growth over the past decade ($430M versus $409M) and profitability is still inadequate.
On the other hand, those technological and product improvements aren’t trivial, and the radiation oncology market is changing more than some investors may appreciate. The Chinese market should improve as lockdowns ease, and changes to both Accuray’s product line-up and the rad-onc market should drive above-market performance.
All of that said, I completely understand investor skepticism on this name. Although the shares look undervalued (even on low expectations), I will not quibble with investors who want nothing to do with this name, and it’s one that I’d only recommend for more risk-tolerant investors willing to accept the risk that nothing ever really changes here.
Continue reading here:
At this point, I remain concerned that the AFF deal will drag on results in the near future, though I do still see the logic of entering the point-of-sale financing/lease-to-own business with an asset-light model. I also still expect some lag in the performance of the Mexican pawn stores relative to the U.S. operations, and I continue to believe that expanding the Latin American store footprint would be a good use of capital.
Between a better outlook for the core pawn operations and a weaker outlook for the POS/LTO operations, my model and valuation don't change all that much. I continue to believe that FirstCash shares are undervalued and worth considering, but I also acknowledge that the AFF acquisition has added execution/capital allocation risk to the story, and some investors may prefer other plays on themes like inflation and lower-income consumers.
Read more here:
FirstCash Seeing A Strong Core Pawn Recovery, But Point-Of-Sale Is Lagging
The second quarter improvement in Ingrezza sales was certainly welcome, but the negative clinical update on NBI-827104 in essential tremor was disappointing (although not a big surprise), and there isn’t likely to be a lot of thesis-changing information from the company outside of Ingrezza sales for the next couple of quarters.
All of this complicates the investment case a bit. While I like Neurocrine, and I do see upside in the pipeline, the reality is that I think the valuation is pretty fair today on a risk-adjusted basis. Clinical read-outs in 2023 could drive some meaningful upside to my fair value, and that keeps me directionally positive on the shares, but I can’t say this is a superior bargain in the sector today.
Click here to continue:
Neurocrine Is Seeing A Very Welcome Pick Up In Ingrezza, But Pipeline Catalysts Are Thin
The APOLLO-B study wasn't a make-or-break trial for Alnylam, but it was nevertheless a highly significant, high-risk/high-reward study for this leader in RNAi biotechnology. This successful outcome, assuming eventual FDA approval in 2023, brings substantially more addressable revenue into play with a market (hereditary ATTR amyloidosis characterized by cardiomyopathy, or hATTR-CM) that is at least 2x and quite possibly 3x or larger than the current hATTR polyneuropathy market that Onpattro serves.
I was already relatively bullish on Alnylam going into this trial read-out, so the impact to my fair value is perhaps less dramatic than for other analysts, but with a fair value of around $230 and multiple clinical read-outs over the next two years that could unlock more value, I believe these are still shares worth owning for investors willing and able to take the elevated risk that goes with biotech investing.
Read the full article here:
APOLLO Hits A Bullseye, And Alnylam Logs Another Major Clinical Win
It’s been a hard slog for Conagra (NYSE:CAG) shareholders for a while. Though there have been attractive pullbacks that have created good investment opportunities (particularly late 2018), long-term investors don’t have a lot to show for their patience, as the returns have lagged the S&P 500 by a pretty significant amount over the last five, 10, and 20 years. The performance has been better relative to packaged foods industry and consumer defensives sector, but still not exceptional.
Unfortunately, I don’t see much evidence that the trend is likely to change in investors’ favor any time soon. Concerns about brand equity seem at least partly valid, and while initiatives like modernizing plants would likely pay off down the road, it’s hard to see much reason to pay up for the shares and today’s price looks quite fair.
Click here to continue:
I do believe that the market is still heavily discounting the odds of clinical success here, but given the history of oncology drug development, and Aptose's own shaky clinical progress, that's not exactly unfair. I can still see a path toward a substantially higher fair value, but the reality is that investors are likely going to need to wait a year or more for sentiment-moving data.
Read more here:
Aptose Biosciences Continues To Drift Without Thesis-Changing Data
I do believe that U.S. Bancorp shares look undervalued today for longer-term shareholders. I expect bank stocks to remain under a cloud a little while longer, particularly with so much uncertainty about the economy in 2023. Like PNC (PNC), though, I think U.S. Bancorp is a more conservatively-run “Main Street”-focused bank that has operating leverage drivers and opportunities to post above-average loan and fee income growth even in a tougher environment.
Find the full article here:
There are still challenges in the P&C business, including increasing loss severity in both auto and home lines, and Progressive's loss ratios are higher than pre-pandemic trends, though still broadly within targets. The real issue here is valuation - Progressive seldom looks cheap, and that makes sense given superior returns on equity and growth potential, but it's hard for me to call the shares a bargain today.
Click the link to continue reading:
Progressive Seeing Improvements In The Business, Growth Opportunities Remain
Not much surprised me in this quarter, including considerably above-average commercial lending growth and managements relatively more conservative view on the larger economy. With the company still poised to reap long-term benefits from the BBVA deal, as well as this strong lending environment, I think solid mid-single-digit core earnings growth is still in the cards, and with the shares now cheaper, it’s a name worth reconsidering.
Read more here:
PNC Financial Benefiting From A Hot Main Street And Valuation Is Better
With marketing efforts now less restrained by pandemic restrictions, I believe Neurocrine could rebuild some momentum in Ingrezza sales and build on the better-than-expected first quarter results. I also believe that the upcoming Phase II read-out of NBI-827104 in essential tremor could get some positive attention if the data are good enough. A good result with ‘104 could add $5/share or more to the fair value, while improving momentum in Ingrezza should quell some of the concerns about market size/saturation. With a current fair value of $110 and a line of sight to $120, I think these shares are still worth consideration, particularly ahead of what could be a very significant year of clinical data in 2023.
Follow this link for more:
Better Ingrezza Sales And A Clinical Trial Read-Out Could Reignite Neurocrine Shares
The data that management have presented over the years suggest that Onpattro should hit the mark in APOLLO-B, but there’s a reason that the FDA and clinicians insist on clinical trials and prior signals of efficacy and post-hoc analyses aren’t substitutes for a positive statistically-significant outcome. I believe that Alnylam shares are meaningfully undervalued below $200/share, but investors buying in ahead of the APOLLO-B data must appreciate the risk of a sharp correction if the study results don’t live up to expectations.
Continue reading here:
