Honeywell Better-Placed Than Most To Take On Next Year's Challenges

In a market that is increasingly worried about what 2023 will hold for the global economy in general and short-cycle industrial markets in particular, Honeywell (NASDAQ:HON) stands out. There are a few parts of Honeywell's business that likely won't be at their best next year, but a solid two-thirds of the business should be seeing strong demand at a time when many other quality industries will be struggling with weaker conditions.

When I last wrote about Honeywell, I lamented the Street's fickle treatment of the shares and thought it was a name to consider if the shares pulled back further. While the shares are now up about 5% from that time, investors did have two opportunities to pick up shares in the $170s (or about 15% below today's price). Right now I see a bit of a split between the valuation and the secular appeal of the shares - I don't see the stock as all that cheap (it seldom is), but I do think it is better placed than most, and could earn a sustained premium to its peers through 2024.

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 Honeywell Better-Placed Than Most To Take On Next Year's Challenges

Dana: Past The Worst On Costs, But Volumes In 2023 Are The Next Worry

This has been an interesting year for Dana (NYSE:DAN). This large supplier of driveline, thermal, and sealing products to the passenger vehicle, commercial vehicle, and off-highway markets has done well on revenue, boosted by strong commercial truck and off-highway equipment demand, but has been hit hard by input cost inflation and unrecoverable costs tied to erratic production schedules at their OEM partners.

With all that, the shares are down about 10% since my last update; not terrible relative to the market, but also not all that exceptional relative to the sector. Looking ahead, Dana should see some cost-related tailwinds in 2023, but will also likely see growing headwinds from weaker commercial and off-highway markets. Even with those concerns, I believe Dana is an undervalued play on long-term commercial vehicle electrification and margin recovery across its segments.

 

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Dana: Past The Worst On Costs, But Volumes In 2023 Are The Next Worry

Spirit AeroSystems Making Underappreciated Progress, But Orders Are Still Inadequate

While there are certainly aerospace supplier stocks that have returned to, or surpassed, their pre-pandemic levels, Spirit AeroSystems (NYSE:SPR) is most definitely not among them, as the shares have given back a lot of the rally that they, and other suppliers like Hexcel (HXL), Howmet (HWM), and Safran (OTCPK:SAFRY), enjoyed from late 2020 to around mid-2021. Management here has been implementing a range of improvements, but they haven't really taken full force yet, and the company continues to be undermined by a weak ramp in 737 MAX production at Boeing (BA).

I do believe that the company's efforts to diversify further into defense and aftermarket sales will pay off, as well as efforts to broaden/diversify the customer base and incorporate more automation and digitalization in the manufacturing and logistics processes. I also believe that the shares are meaningfully undervalued based upon the long-term benefits of those improvements and the eventual production increases at Boeing. The trick, as it were, is that investors are going to have to be patient for a while longer and there are still downside risks to that production normalization thesis.

 

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Spirit AeroSystems Making Underappreciated Progress, But Orders Are Still Inadequate

J.M. Smucker Still Looks Appetizing

These are interesting times for consumer staples companies, as high prices have been hitting consumers hard and leading to trading-down (or reducing consumption), but the alternative of just absorbing the hit to margins is hardly better. J.M. Smucker (NYSE:SJM) (“Smucker”) has navigated this better than many, leading to above-average performance over the last year relative to other packaged foods companies, but sticking the landing and ratcheting back pricing when (hopefully “when” and not “if”) cost inflation subsides will be an important test for management, as will capital allocation in the coming years.

Valuation is often tricky with stocks with Smucker, especially in periods of weak market sentiment, as investors will often bid them up on the expectation of their acyclicality and more durable earnings. Up close to 20% over the past year, I can still see upside into the high-$150s for Smucker, but I’d rather wait for a sale before making a large commitment to the shares.

 

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J.M. Smucker Still Looks Appetizing

Columbia Bank Closing Strong Ahead Of The Merger With Umpqua

Mergers of equals between banks usually garner a fair bit of skepticism from investors, and the stocks often don't until there are actual synergies evident in the reported results - a process that can take a year or more from the close of the deal. Add in the unusual delays and uncertainty around bank merger approvals now, and I can understand why Columbia Bank (NASDAQ:COLB) shares have underwhelmed since the announcement of the merger with Umpqua (UMPQ) a little more than a year ago, underperforming the average regional bank by a few percentage points.

I still like this merger, and I like that both Columbia and Umpqua have posted fairly strong results heading into the close of the deal. Here of late, Columbia has shown some strong results in growing their commercial lending business and leveraging their high-quality deposit base, and I believe that will serve both companies well in the future.

 

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 Columbia Bank Closing Strong Ahead Of The Merger With Umpqua

Axalta Gaining Share, But Still Seeing Punishing Cost Pressure

My bullish call on Axalta (NYSE:AXTA) back in April of 2021 was the wrong call, as the shares have dropped about 20% since then - slotting in between PPG (PPG) (worse) and Sherwin-Williams (SHW). While my thesis of leveraging recovering volumes wasn't entirely off-base, the reality is that passenger vehicle volumes were hit harder than I expected by semiconductor shortages. On top of that, Axalta saw a punishing level of cost pressure that it couldn't fully offset with price.

I may be a glutton for punishment here, but I still think there's a buy argument for Axalta. The company has been gaining share in most of its major categories (refinish, light vehicle and commercial vehicle), and while there's a long way to go to recoup cost inflation, any meaningful easing of input costs (more likely in a slowing economy) would have a very positive effect on margins. Between low-single-digit revenue growth, high-teens EBITDA margins, and mid single-digit FCF growth, I think Axalta is undervalued now.

 

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Axalta Gaining Share, But Still Seeing Punishing Cost Pressure

Sector Fears Shadowing Broadcom Despite A Differentiated Outlook

It’s tough to own a nice house in a declining neighborhood, and I think that’s largely the reason that Broadcom (NASDAQ:AVGO) shares are down another 20% since my last update. While Broadcom has continued to outperform the broader sector (as reflected through the SOX), investors are finally waking up to the reality that the semiconductor industry is still cyclical and that 2023 is likely to see slowdowns in many sub-sectors.

I do see areas of concern for Broadcom over the next 12 months, but I think the underperformance is likely overstated given the company’s strong leverage to advanced data center and cloud spending, as well as the more stable enterprise software operations. Valuations across the sector got overheated on the way up though, so there is a reckoning process here for sentiment that Broadcom cannot escape. Even so, mid-to-high single-digit long-term revenue and FCF growth now support a double-digit annualized potential return, making this a name to consider as a buy-the-dip.

 

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Sector Fears Shadowing Broadcom Despite A Differentiated Outlook

New York Community Bancorp Hit Hard By Uncertainty And A Liability-Sensitive Balance Sheet

Conditions have not improved for New York Community Bancorp (NYSE:NYCB) since my last update on the shares. The company’s liability-sensitive balance sheet is a significant vulnerability during a period of rising rates and there is still substantial uncertainty around the proposed Flagstar (FBC) deal – not just in whether the deal will be a synergistic positive, but whether the deal will even happen. On top of that, a high deposit beta and softer loan demand just further worsen the near-term sentiment.

Down about 20% since my last article, NYCB has significantly underperformed regional banks as a group, even though the bank’s core performance hasn’t been quite that bad. At this point, the story remains the same – there are a lot of positive things happening at this bank, but it’s not well-positioned for the current environment and the Flagstar deal remains a huge source of uncertainty. I still see value in the shares, but the underperformance over the last couple of years has been brutal and I can understand why investors may want nothing to do with the name.

 

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New York Community Bancorp Hit Hard By Uncertainty And A Liability-Sensitive Balance Sheet

A Sharp Swing In Sentiment At Dover Looks Like A Long-Term Opportunity

The vagaries of institutional investor sentiment can drive you nuts, but it can also create opportunities for the patient investor. When I last wrote about Dover (NYSE:DOV) in March of this year, I was concerned about the valuation and the extent to which it seemed like sell-side analysts were scrambling for ways to make the stock appear cheap. Since then, the market has soured pretty dramatically on shorter-cycle industrial names, and Dover shares are down about 20%, more than doubling the broader decline in industrial stocks.

I’m not suggesting that there is no risk to the outlook for Dover in 2023/2024, but I do think the cyclicality/short-cycle exposure is perhaps a bit overstated and that the company isn’t getting credit for its diversification and opportunities for longer-term organic growth. I still believe Dover can generate long-term revenue growth in the neighborhood of 4%, with FCF growth of roughly double that, and while I wouldn’t call Dover “super-cheap” now, it’s a name to consider for investors willing to step in front of poor sentiment in pursuit of quality long-term holdings.

 

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A Sharp Swing In Sentiment At Dover Looks Like A Long-Term Opportunity

Knight-Swift Transportation: It's Scary To Swim Where You Can't See The Bottom

I was concerned about being too bullish on Knight-Swift (NYSE:KNX) in my last article, as the company was heading into what I expected will be a significant correction in the trucking and logistics/shipping sector Those concerns have proved reasonable, as the shares have underperformed since then - losing about 13% of their value and underperforming Heartland (HTLD) and Werner (WERN), while outperforming J.B. Hunt (JBHT), Schneider (SNDR), and U.S. Xpress (USX).

My bullishness was based on the fact that while revenue, EBITDA, and cash flow would decline in FY'23, that decline would be cushioned by the diversification efforts undertaken by management and the overall quality of the business. I still think there's an argument for owning the shares, but I can't rule out even worse erosion in rates and sentiment, and there is a risk that buying Knight shares today is essentially reaching to grab a falling knife.

 

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Knight-Swift Transportation: It's Scary To Swim Where You Can't See The Bottom

Associated Banc-Corp Is Starting To Convince Its Skeptics Through Good Execution

For many years, Associated Banc-Corp (NYSE:ASB) was basically an also-ran bank with an okay deposit base, but a poor record relative to peers in terms of net interest margin, efficiency ratio, PPNR growth and margin, and credit quality. New management has brought in new strategies, though, and Associated Banc-Corp ("Associated") is starting to build credibility around the idea that this new approach will drive sustainably better results over the long term.

I'd describe valuation today as more "okay" than compelling, as long-term growth on the high-end of the mid-single digits supports a mid-$20s fair value. That said, as the company executes, it will argue for lower discount rates and outperformance could be reinvested in the growth of the business, leading to a long-term compounding effect that makes today's valuation look quite a bit more compelling.

 

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Associated Banc-Corp Is Starting To Convince Its Skeptics Through Good Execution

Umpqua Executing Well, But Momentum Is Slowing

All good things come to an end, and many of the tailwinds that have aided Umpqua’s (NASDAQ:UMPQ) earnings momentum are starting to fade. The bank still has positive asset sensitivity, a strong deposit base, and attractive loan growth opportunities, as well as growth opportunities in fee-generating businesses, but loan demand is starting to ease off and deposit costs are going to head higher.

Still, I like the fundamentals at Umpqua and I like the outlook for the combined post-merger Umpqua and Columbia Bank (COLB), and that deal should close in the first quarter of 2023. I still believe in a mid-single-digit post-deal core earnings growth rate, and that still supports a double-digit long-term annualized return at today’s valuation.

 

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Umpqua Executing Well, But Momentum Is Slowing

MSC Industrial Executing Better, And The Street Has Noticed

I’ve been highly critical of MSC Industrial (NYSE:MSM) management at times, but I have to acknowledge that this latest round of strategic initiatives – initiatives that include expanding and highlighting value-added services for customers, pursuing new channels, expanding the portfolio, and streamlining expenses – have not only been executed adroitly, but have produced real benefits. With that, the shares have continued to outperform Fastenal (FAST) since my last update (and over the past year), though Grainger (GWW) and Applied Industrial (AIT) have done better still.

I believe that 2023 is going to see MSC Industrial’s improving execution collide into a more challenging macro environment that will see weaker short-cycle operating conditions as well as improving supply conditions that reduce some of the value provided by top distributors like MSC and Fastenal. While MSC shares do look undervalued on mid-single-digit revenue growth and further margin leverage (as well as on margins and returns), holding an industrial supplier into a period where metrics like ISM and industrial production could decline is a riskier proposition.

 

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MSC Industrial Executing Better, And The Street Has Noticed

 

Crane: Many Moving Parts, But Underlying Value Worth Considering

This may be the year of the tiger in the Chinese zodiac, but it’s been a year of the duck for Crane (NYSE:CR) – while things may look relatively calm at the surface level, there’s a lot of activity going on beneath the waterline. Not only has the company been navigating some challenging cross-currents in multiple businesses, as well as a still-tough supply situation, the company has pushed forward with a business reorganization and an offloading of asbestos liabilities.

It's fair to note that Crane’s organic growth has lagged the broader industrial sector this year so far, but I do think there’s more of a “coiled spring” here heading into a more challenging 2023 than for many industrials. The shares are down about 11% since my last update, outperforming the broader industrial group a bit, but I do still see some worthwhile value here now.

 

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Crane: Many Moving Parts, But Underlying Value Worth Considering

Bank Of Hawaii: Down The Fairway Results, But Valuation Sets A High Bar

There’s a lot to like about Bank of Hawaii (NYSE:BOH), and that’s been the case for some time. With concerted efforts to drive share gains through service quality bearing fruit in terms of deposit and loan share growth over the past five years, not to mention solid records of respectable core earnings growth and capital returns to shareholders, Bank of Hawaii has a lot of core holding attributes for a small bank.

Valuation is high here, though, and it takes pretty robust expectations to drive a compelling fair value. Given a shaky outlook for sentiment on bank stocks for at least a few more quarters and a pre-provision growth outlook over the next three years that doesn’t really stand out from the pack, I can’t say that Bank of Hawaii is a compelling idea for me here today.

 

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Bank Of Hawaii: Down The Fairway Results, But Valuation Sets A High Bar

Cracking Open Coca-Cola FEMSA Could Prove Refreshing For Investors

Despite a multi-quarter run of better-than-expected results, Coca-Cola FEMSA (NYSE:KOF) still isn’t getting its due in the market. The company has had to deal with input cost inflation, economic turbulence in multiple markets, and more distant challenges like labeling and taxation changes and a sometimes-contentious relationship with Coca-Cola (KO), but the company has executed strongly in recent quarters and if anything is better-leveraged to easing input costs than vulnerable to higher costs.

Mid-single-digit revenue and FCF growth can support a double-digit return from here, and the shares likewise look undervalued on an EV/EBITDA basis given the company’s growth, margins, returns, brand value, and strategic opportunities.

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Cracking Open Coca-Cola FEMSA Could Prove Refreshing For Investors

With Asset Sensitivity Waning, Zions Bancorp Needs To Reassure The Street On Core Growth

In a difficult market for banks, the performance of Zions Bancorporation (NASDAQ:ZION) has been mixed. The shares had enjoyed a solid period of outperformance since my last update on the shares in July of 2021, outperforming regional banks by more than 30% at some points, but enthusiasm has waned as the interest rate theme plays out and Zions doesn’t look as differentiated on its growth prospects for the next phase of the cycle.

I still like Zions, but I do think the bank has work to do to convince the Street that past efforts to accelerate growth, including aggressive participation in the PPP and customer-facing IT investments, will pay off. My core growth expectations still aren’t all that aggressive though, and if Zions can unlock some sentiment drivers (better core deposit retention, better operating leverage, and so on), I could see the shares outperforming again.

 

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With Asset Sensitivity Waning, Zions Bancorp Needs To Reassure The Street On Core Growth

Kirby Reaping The Benefits Of A Tighter Market

Healthy demand for petrochemicals and a more rational supply situation has benefited Kirby (NYSE:KEX), with the combination of strong refinery capacity utilization and limited new supply driving good utilization and much higher day rates for the company’s barge fleet. At the same time, increased demand for engine and transmission maintenance and overhaul from trucking, power gen, and oil/gas has helped the Distribution & Services (or DES) business perform better.

These shares are up about 3% since my last update; not a great performance, but not bad relative to the average industrial or transportation company (Kirby doesn’t have any good direct comps), and Kirby has actually outperformed oil since that last update (Kirby shares and oil often trade together, given Kirby’s reliance on oil and oil-based refined products). While I do see some clouds on the horizon with the economy, the valuation is still reasonable for a company that has in the past enjoyed a robust premium.

 

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Kirby Reaping The Benefits Of A Tighter Market

Banner Posting Attractive Growth On Excellent Funding Trends

At a certain point, smaller banks all sort of blur together, with only modest differentiation in areas like geographic footprint, operating efficiency, and loan growth priorities. Banner (NASDAQ:BANR) is an exception, though, as this smaller bank not only serves an attractive customer profile and geographic footprint (smaller businesses in the Pacific Northwest), but has a credible efficiency drive underway, strong credit quality, and very strong funding.

The bad news, if you can call it that, is that Banner’s performance hasn’t gone unnoticed, and the bank has separated itself from the broader regional bank group on a one-year, two-year, and five-year basis, with the shares outperforming other regionals by around 20% over the last year or so. While I don’t think that Banner is overpriced now, it’s not a huge bargain and its appeal is more of the “growth at a reasonable price” variety.

 

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Banner Posting Attractive Growth On Excellent Funding Trends

Lindsay On A Hot Streak With Differentiated Underlying Drivers

As investors are increasingly worried about the broader economic outlook in 2023, markets with acyclical or counter-cyclical characteristics are more in favor. Agriculture and construction would be candidates to consider as part of that theme, and the shares of Deere (DE), Lindsay (NYSE:LNN), and Valmont (VMI) have been rather strong over the past year at a time when industrials as a group have lost about 15% of their value.

Higher rates are a risk, but farmer incomes and budgets are strong here of late, and irrigation equipment doesn't seem to have the same bottlenecks that other agriculture equipment has. Moreover, Lindsay offers good leverage to increasing activity on the road construction/repair side - a trend that should be countercyclical for a couple of years. At the same time, though, I do have concerns about Lindsay's weak historical FCF generation and lack of sustainable margin leverage. I do like the macro backdrop here, but I'd view this more as a trade than a core holding given valuation concerns.

 

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Lindsay On A Hot Streak With Differentiated Underlying Drivers

PacWest Battered As Deposit Betas Shoot Higher

This has been a bad year for growth banks in general, and particularly those banks with sizable venture capital and/or private equity lending businesses. The market has likewise been merciless with banks showing vulnerability to higher than expected deposit betas and weaker growth leverage in FY’23 and beyond. With PacWest (NASDAQ:PACW) ticking all of those boxes, it’s been a brutal run since my last update on the stock, with the shares down about 50% against a roughly 10% drop in the larger regional bank group – SVB Financial (SIVB) and Signature (SBNY) have done similarly poorly, but that’s cold comfort at best.

I’ve been very surprised by the performance challenges at PacWest this year, as I thought management would be better able to leverage low-cost deposits to fund loan growth and drive better operating results. At this point I’m tempted to think that the worst of the damage is done, but it’s going to take visibility on better spread performance and operating leverage, as well as more confidence in the outlook for private equity/VC lending demand, before the Street is likely to reconsider this name again.

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PacWest Battered As Deposit Betas Shoot Higher

Washington Federal Sees Strong Positive Leverage, But The Cost Of Doing Business Is Rising

Washington Federal (NASDAQ:WAFD) (“WaFed”) has done well since my last update, rising almost 7% (and beating regional banks by around 12%), with the stock getting a big boost on strong fiscal fourth quarter results, including excellent operating leverage and credit quality. The bank likewise posted healthy loan growth and decent deposit performance at a time when these metrics are getting closer scrutiny by the Street.

I still like WaFed, but operating conditions are going to get more challenging from here. The bank is going to have to rely more heavily on more expensive sources of funding for its loan growth, and that’s going to impact profitability. At the same time, I don’t see how credit can get much better for the bank. On the flip side, there are still opportunities to drive attractive loan growth in markets like Texas, Arizona, Nevada, and Utah, and I believe the shares do still offer some upside from here.

 

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 Washington Federal Sees Strong Positive Leverage, But The Cost Of Doing Business Is Rising

Hurco Treading Water As The Cycle Turns

The last few months have done little to dispel concerns that short-cycle industrial demand is slowing, and that certainly hasn't helped small machine tool manufacturer Hurco (NASDAQ:HURC). While the shares have held up okay relative to the broader industrial space and other shorter-cycle names like DMG Mori (OTCPK:MRSKF), Fastenal (FAST), Kennametal (KMT), and Sandvik (OTCPK:SDVKY) (though Kennametal has done better) since my last update, the reality is that the current outlook is not particularly strong for an already-overlooked short-cycle industrial.

In light of the last Hurco earnings report and reports from other companies and third-party information sources (like the Japanese Machine Tool Builders' Association or JMTBA), I've pulled forward my expectations for Hurco's cyclical correction. The shares do still look undervalued and positioned for a double-digit long-term annualized return, but it's hard to see investors getting excited about short-cycle names again until mid-2023 at best, as the rate cycle has yet to play out and inflation remains stubborn, while business confidence erodes.

 

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Hurco Treading Water As The Cycle Turns

Synovus Hit Hard On Concerns Over Core Growth Drivers

Synovus (NYSE:SNV) had been making real progress in changing investors' minds that the company really had made changes for the better and that the bank was on much better footing for long-term growth. Between a more efficient cost structure, improved underwriting, and new growth drivers (both in and outside of core banking), there were solid reasons for a stronger growth outlook. Then came the Fed rate hike cycle and a third quarter report that included guidance suggesting that the good times aren't going to last.

Synovus shares are down about 25% since my last update, far worse than the average regional bank over that period. I believe that this is an overreaction, but I also believe that there is still significant uncertainty around how far the Fed will go, what the impact of these rate hikes will be on the economy, and how well Synovus will stave off intensifying competition in its core Southeastern markets. I do believe that Synovus is priced for attractive long-term returns now, but I also think investors may have to wait a bit for the clouds to clear over this sector.

 

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Synovus Hit Hard On Concerns Over Core Growth Drivers

F.N.B. Delivering Where It Counts

When I last wrote on F.N.B. (NYSE:FNB) in March of this year, I liked what I thought was an investment story starting to inflect toward growth, with F.N.B. poised to leverage above-average asset sensitivity and loan growth, as well as organic growth opportunities in its core Mid-Atlantic and North Carolina markets. I saw beat-and-raise quarters as a gating driver for the stock, and those beats have started coming through, driving the shares up about 10% since my last update against a roughly 8% drop for regional banks in general.

I'm still bullish on these shares. I like the mix of organic growth opportunities driven by lending and deposit market share gains and branch expansion in markets like Baltimore and Washington, D.C., as well as the tuck-in M&A opportunities across its footprint. The shares aren't quite as undervalued as they used to be, and I'm a little concerned about slowing core growth in 2024, but I think the risk/reward balance here is still pretty favorable.

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F.N.B. Delivering Where It Counts

Commerce Bancshares: In Tougher Times, The 'Platinum Tortoise' Outperforms

I've criticized the premium multiple of Commerce Bancshares (NASDAQ:CBSH) in the past, but in tougher times like these, the Street certainly seems to appreciate the quality core deposits and demonstrated underwriting competence of this conservatively-run Midwestern bank. To that end, the shares are almost flat since my last update, a period during which the average regional bank stock lost around 10% of its value.

I'm not excited about paying over 16.5x my forward EPS estimate for CBSH, and likewise, a long-term discounted core earnings model doesn't suggest a great bargain today. That's par for the course with these shares, though, and I suspect long-term holders of these shares won't be bothered by it. I do think banks, as a sector, are undervalued now and as sentiment turns, I don't expect Commerce to continue to outperform given the more moderate growth outlook and the already-robust valuation.

 

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Commerce Bancshares: In Tougher Times, The 'Platinum Tortoise' Outperforms

SL Green Realty Meets Expectations, But Office Conditions Could Still Get Worse

These are challenging days in the office segment of commercial real estate (or CRE), as an economic slowdown threatens weaker employee headcounts and space demand in 2023, work-from-home remains difficult to predict over the next few years, and rising rates are squeezing liquidity and expected project returns.

SL Green (NYSE:SLG) is a high-quality option in the office REIT space, and I think high-quality names are good ones to own in tougher times, but I’m cautious for now. The shares do trade at what appears to be a large discount to net asset value (or NAV), but I do see risk to NAV estimates over the next six to 18 months and the combination of elevated leverage (and interest costs) and weaker net operating income (or NOI) could pressure the payout in the short term. There will be a good time to buy SLG again, but I don’t think this one is a must-buy right now unless you have a meaningfully more bullish outlook for the economy in 2023.

 

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SL Green Realty Meets Expectations, But Office Conditions Could Still Get Worse

Texas Instruments Should Be Well-Placed To Navigate 'Interesting Times' For The Semiconductor Sector

As the Street has come around to the idea of weaker demand in 2023, semiconductor stocks have had a rougher go of it lately, and Texas Instruments (NASDAQ:TXN) ("TI") is no exception. While TI has held up better than the average chip company (fair, given its quality), falling about 10% since my last update versus the 25% drop in the SOX index, the shares have moved into that $150’s range that I said I would find more interesting.

I do see some risk of a greater slowdown in auto and industrial demand in 2023, but I believe the longer-term outlook for TI is unchanged – while the last couple of years have been unusual in terms of demand and supply trends, I believe the increased electrification seen across numerous end-markets is not some temporary aberration. With that, I expect healthy mid-single-digit long-term revenue growth from TI as well as strong margins. The shares now look attractively-priced, though readers should be aware of the overall risk that a higher, sharper peak in this last semiconductor cycle could well be followed by an unusually sharper trough before a stronger recovery in 2024.

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Texas Instruments Should Be Well-Placed To Navigate 'Interesting Times' For The Semiconductor Sector

FEMSA Following Its Plan, No Matter The Cost To Sentiment

There are a lot of things about FEMSA (NYSE:FMX) that I find interesting, but over the last two or three years, one of the most interesting things here is the growing gap between management's view of their strategic plan and the Street's view of that plan. FEMSA's management clearly sees value in allocating capital to a global conglomerate strategy, including a recent foray into European convenience stores, but the Street seems to prefer that the company just "stick to its knitting" and reinvest in proven operations.

You go against the Street at your own risk, at least in the short term, and FEMSA shares have continued to lag despite better-than-expected earnings so far this year and a reasonably healthy operating environment in Mexico and Latin America. With the local shares down about 20% and the ADRs down closer to 15% since my last update, valuation (adjusted) is at a multiyear low. I understand the Street's frustration, at least to a point, and there's definitely elevated execution and sentiment risk here, but I do see value here for investors patient enough to let management prove out its strategy.

 

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FEMSA Following Its Plan, No Matter The Cost To Sentiment

First Horizon Leveraging Rate Sensitivity, Credit Quality, And M&A Synergy Ahead Of The Expected TD Bank Deal Close

It helps to have powerful friends, and in the case of First Horizon (NYSE:FHN), increased confidence in the likelihood of Toronto-Dominion Bank (TD) closing its deal for First Horizon has helped First Horizon outperform in what has been a poor year for regional banks (and banking in general). At the same time, First Horizon hasn’t hurt its standalone credentials (should the deal somehow fall apart) with signs of improved execution over the last few quarters.

I believe TD Bank will get the final go-ahead from regulators to close its acquisition of First Horizon over the next three months or so, and I think there’s a reasonable chance that the close will be after the November 27 deadline that triggers additional payments to shareholders. While the current spread between today's price and the deal price doesn't promise a scintillating return, it's not bad for investors who don’t have more pressing ideas today.

 

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 First Horizon Leveraging Rate Sensitivity, Credit Quality, And M&A Synergy Ahead Of The Expected TD Bank Deal Close

Macro Risk Is Rising, But Nordson's Diverse, High-Margin Niche-Oriented Businesses Should Be More Resilient

This is a tricky time to invest in industrials, and Nordson’s (NASDAQ:NDSN) multi-market diversification doesn’t really help now given the growing concerns about end-markets like semiconductors, consumer electronics, short-cycle industrial, and consumer non-durables. Likewise, this tends to be a capex-driven business with relatively little cycle visibility. On the other hand, this is a niche-oriented business with a proven track record of performance, and I like the company’s focus on managing for long-term performance (and not short-cycle optimization).

When I last wrote about Nordson, I wasn’t sold on the valuation, but thought the shares were worth watching. The shares subsequently declined about 10% through June before a sharp rebound and another recent fade that has left the share price more or less unchanged while the average industrial has lost about 10% of its value. I do remain concerned about valuation, particularly in the face of what could be a noticeable decline in capex investment over the next 12-18 months (especially in semiconductors and electronics), but this is definitely a name to keep on a watchlist and reconsider at/below $200.

 

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Macro Risk Is Rising, But Nordson's Diverse, High-Margin Niche-Oriented Businesses Should Be More Resilient

Fastenal: Relief Today, But Pressures Building

We're now at that point in the cycle where earnings pre-announcements in the industrial space are skewing negative, and with rates shooting up and basic materials companies starting to warn, concerns are growing that the economy is going to slow more significantly in 2023, possibly even into a mild 1990's-style recession. At the same time, data from the non-residential construction space is mixed at best.

None of this great for Fastenal (NASDAQ:FAST), as the company is a major supplier of fasteners, tools, and other components to manufacturing and non-residential customers. At the same time, price/cost seems to be turning, suggesting that gross margin leverage has peaked. It's not so surprising, then, that the shares had been drifting lower since my last update until a better-than-feared third quarter earnings report.

This is a tough time to get really bullish on Fastenal given those macro/sector pressures. I have no concerns or issues with the quality of Fastenal, and I believe efforts like customer-located sales and an ongoing shift away from traditional stores will benefit the company, but I don't think the Street is comfortable yet with the 2023-2024 outlook for manufacturing and non-residential construction. Given that, and the premium that the Street gives these shares, it's a name that I'd keep up-to-date on to take advantage of more pronounced pullbacks, but not one I'd jump into aggressively now.

 

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Fastenal: Relief Today, But Pressures Building

Citigroup Beats, But Systemic And Idiosyncratic Risks Remain Significant For Sentiment

Not all earnings beats are created equal, and in the case of Citigroup's (NYSE:C) third quarter results, the stronger-than-expected net interest income growth is offset at least in part by the company having talked down expectations during the quarter (beating a lowered bar, in other words). What's more, the primary drivers of the beat (rate leverage and credit costs) seem unsustainable at this point in the cycle, and the company's lack of operating leverage is likely to loom larger over sentiment.

I do think that Citi is undervalued, and I think the Street gives the bank (and its stock) too little credit for the transformative actions underway. That said, this turnaround has been long in coming and investors are understandably skeptical that the bank is finally on the right track. Moreover, with weak prospects for near-term operating leverage and growing risks to the macro environment in 2023, I can see why institutional investors aren't rushing to step into what is still a multi-year self-improvement story.

 

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Citigroup Beats, But Systemic And Idiosyncratic Risks Remain Significant For Sentiment

Braskem Buoyed By A Buyout Offer

The climb down from record-high petrochemical spreads in 2021 has been a painful one for Braskem (NYSE:BAK), with the ADRs of this large Brazilian chemical company down over 30% over the past year – worse than peers like Alpek (OTC:ALPKF) and LyondellBasell (LYB). Not only has Braskem taken a hit from higher feedstock prices and higher industry supply, but the company has also seen unhelpful developments in its ongoing Alagoas liabilities and from Brazilian government tax and tariff actions.

As I said back in August of 2021, Braskem shares aren’t a particularly attractive option in the face of weaker spreads and weaker EBITDA, and that’s a situation that could persist for a while longer. By the same token, the shares recently hit decade-plus valuation lows (in terms of forward EV/EBITDA), and this is still a profitable, free cash flow-generating company with a respectable future. While the recently reported bid from Apollo Global Management (APO) isn’t necessarily a blockbuster offer, it could help restore confidence in the long-term outlook for this beaten-down chemicals company.

 

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Braskem Buoyed By A Buyout Offer

Johnson & Johnson Looks Undervalued Heading Into Third Quarter Earnings

Johnson & Johnson (NYSE:JNJ) (“JNJ”) has been following the overall negative trend in the market since April of this year, but all things considered, JNJ hasn’t performed badly relative to the S&P 500, large-cap pharmaceuticals, and/or large-cap med-techs over the last year, nor since my last bullish write-up on the shares about two years ago. The performance of JNJ hasn’t been spectacular, but it has shown a lot of the GARP attributes that I had expected to see.

Looking at the upcoming third quarter earnings release, I think expectations are dialed in to a point where the bias should be positive for the company and stock. The average earnings estimate has come down about 5% over the last three months, and I think this is a reasonable reflection of pressures from currency (a strong dollar), ongoing inflation, and certain market disruptions like staffing shortages in hospitals. I do expect a relatively upbeat tone, however, with more visibility on improving margins and market share growth in 2023.

If you’re looking for a get-rich-quick name, I don’t think JNJ is really ever going to be the stock for you. If you’re looking for a name that should generate returns in the neighborhood of the S&P 500 with some counter-cyclical positives, not to mention potential upside from more active management, this is still a name to consider.

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Johnson & Johnson Looks Undervalued Heading Into Third Quarter Earnings