First Horizon Seeing Ongoing Challenges In The Core Business

With some turbulence in the core business, rising competitive challenges in its core markets and a comparatively large short interest, First Horizon (FHN) is a more controversial stock than you might initially assume. Management has laid out its case for leveraging its specialty lending franchise to gain share in key growth markets like the Carolinas and Florida while also driving higher efficiency through its “bonefish” restructuring efforts. But the fact remains that spreads are still challenging and competition is still rising.

I believe that sentiment skews negative on First Horizon and that if the company can stabilize and improve, there could be decent rewards here for shareholders. The guide-down for NIM and ROTCE don’t help the case, but a long-term core earnings growth rate around 4% can still support fair value close to $18.

Continue here:

First Horizon Seeing Ongoing Challenges In The Core Business

Few Sour Notes For Honeywell

At the risk of drifting into the territory of a broken record, Honeywell’s (HON) performance continues to back up my view of the company as one of the best multi-industrials today. With Honeywell’s longer-cycle businesses hitting the sweet spots of their cycles, the company’s growth is finding another gear at a time when shorter-cycle results are likely to be choppier.

With its core businesses doing well (and with runways to do even better) and ample capacity to do more M&A, but no particular necessity, the only issue I have with Honeywell is, predictably enough, the price. It’s tough for me to push my valuation models beyond a fair value of $170 today, and I think Honeywell is now enjoying the status as a Wall Street darling and growth safe haven. Honeywell has earned this love and I wouldn’t advise stepping in front of this freight train, but it’s tougher to get excited about the returns on offer from this high level.

Read it all here:
Few Sour Notes For Honeywell

With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

Expectations have been relatively low for Wells Fargo (WFC) ever since the asset cap was put into place, but this large bank has nevertheless managed to disappoint, with the shares underperforming banking indices by about 12% over the last six months and 10% over the last three months. With a sizable number of Wells Fargo’s peers now having reported their first quarter earnings, a look back at Wells Fargo does not look so good for this struggling bank.

Read the full article here:
With More Earnings Reports In Hand, Wells Fargo Looking Even Worse

BB&T Basically On Track Ahead Of Its Game-Changing Merger

Despite the significant long-term potential benefits of BB&T’s (BBT) merger of equals with SunTrust (STI), the market is still generally against M&A in the banking sector, and BB&T shares have lagged regional bank indices a bit since the deal announcement (about 300bp of underperformance). I continue to believe this is a strong merger, though, and I think BB&T shares remain one of the more interesting values among banks in its weight class.

Read the full article here:
BB&T Basically On Track Ahead Of Its Game-Changing Merger

U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

As one of the best banks out there in terms of quality, U.S. Bancorp (USB) tends to be better as a “safe haven” or a long-term holding. When bank stocks were falling apart in late 2018, U.S. Bancorp held up a little better, but the shares have also lagged peers since the start of this year as banks have largely kept pace with the S&P 500.

I expect that it is going to be harder for banks to grow going forward, as I think net interest margins are peaking and credit costs are likely to head higher from here. Loan growth is healthy now, but I do still have some concerns about the overall economy. With that backdrop, I think organic growth drivers are going to be more important, and with U.S. Bancorp now free of its consent orders, it has more options to drive growth through organic expansion and branch rationalization. U.S. Bancorp isn’t particularly cheap now, but it’s definitely a name to watch for relative underperformance.

Read more here:
U.S. Bancorp Doing Fine And Ready To Start Making Some Moves

Dover Starts 2019 Right, But Can It Follow Through?

Dover (DOV) has been on a good run so far this year, up about 36% since the start of the year on a wider rally in industrials, but the performance gap has narrowed a bit over the three months. Still, Dover got off to a strong start in the first quarter, but margin leverage and order growth weren’t all that bulls might hope for, and it remains to be seen whether the general industrial/discrete manufacturing sectors that account for a lot of Dover’s revenue base will hold up as 2019 rolls on.

There aren’t so many bargains left in the multi-industrials now, and I include Dover in that group. I’ve liked the shares in recent months/quarters, but the strong move has soaked up the undervaluation that I saw and I’m still concerned about the level of expectations for the economy and corporate earnings going into the second half. I like the healthy results in fluids, product ID, and industrial businesses, not to mention the longer-term potential from restructuring, but I think the shares factor that all in now.

Click here for more:
Dover Starts 2019 Right, But Can It Follow Through?

Roche Showing Its Operating Strength Isn't Just A Fluke

With six straight quarters of revenue beats in the drug business (and a longer streak overall), I don't think you can call Roche's (OTCQX:RHHBY) operating performance a "fluke", though it is still fair to note that those beats are coming against lowered expectations that factor in greater biosimilar competition and weaker-than-once-expected sales for newer drugs like Tecentriq. Even so, drugs like Ocrevus and Hemlibra are doing well, and even former "disappointments" like Perjeta and Tecentriq are contributing more than expected, while the company continues to manage the biosimilar threat to its three largest drugs.

Roche still has a comparatively modest outlook for EPS growth over the next five years, and that does restrain valuation, but Roche has a deep pipeline with a lot of home run shots that don't factor significantly in most analysts' models. While the odds are slim that any one candidate will make it, collectively there could still be upside from the pipeline and the shares seem modestly undervalued below the mid-$30s.

Read more here:
Roche Showing Its Operating Strength Isn't Just A Fluke

ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

ABB (ABB) continues to be a relatively underwhelming, if not disappointing, player in the multi-industrial space, as the company largely missed out on the recent up-cycle due to various execution issues. While process automation and electrification are still performing relatively well, a global slowdown in discrete manufacturing and automation is creating some near-term challenges, and there is a lot left to do in M&A integration and margin improvement.

The announcement of the departure of the CEO could improve the tone somewhat, but this change is not coming from a place of strength and it is going to take time for the next CEO to make meaningful positive impacts – assuming the board lets that happen. While I do still see avenues for ABB to do better, the upside I see is certainly “at risk” and I don’t regard this as a core holding at this point.

Read more here:
ABB Balancing The Reality Of Familiar Problems And New Leadership Opportunities

VAT Sees Its Markets Bottoming, But The Market Is Already Counting On That

When I last wrote about VAT Group (OTCPK:VACNY) (VACN.S), a Swiss manufacturer of highly-engineered mission-critical valves used largely in semiconductor and display panel fabrication equipment, I said that the value proposition was precarious due to the prospects for weakening semi equipment demand. That concern played out, with the shares trading down about 33% relative to the price at that last article, as valve sales have since plunged about 40% since.

I also said that I’d be interested in the shares if they dropped another 20%, and while there still would have been some downside from there to the bottom, the shares have rebounded strongly (more than 40%) since the December lows on renewed enthusiasm of an order recovery starting in the second half of 2019. While I think this rally has gotten a little overheated, a pullback of say 10% or so would once again make this a stock to seriously consider given its leverage to what is likely to be strong long-term end-market growth.

Click here for more:
VAT Sees Its Markets Bottoming, But The Market Is Already Counting On That

The Rate Cycle Weighing More Heavily On Comerica

As one of the most asset-sensitive banks that I follow, Comerica (CMA) has a lot to lose from a flattening yield curve that is seeing deposit costs rise while LIBOR-based loan yield grow looks more restrained. Capital and credit quality are still above-average, but average loan growth in the face of rising spread pressure is a tough combination and pre-provision growth is likely to decelerate into the mid-single digits and exit the year in the low single-digits (and possibly stay there a little while).

I’ve felt similarly about Comerica and Citigroup (C) over the past year, insofar as I don’t really love either business, but at the right price there can be some opportunity. At this point, though, I’m concerned about Comerica’s vulnerability to sooner-than-expected rate cuts and its lackluster loan growth and I think it will be harder to answer the “why should I own Comerica?” question positively as core operating income growth stalls and capital returns moderate.

Continue here:
The Rate Cycle Weighing More Heavily On Comerica

M&T Bank Doing Fine, But Also As Expected

Buying quality can be a frustrating exercise, as M&T Bank (MTB) shares have shown over the last couple of years. Fairly regarded as a conservatively-run, high-quality bank, M&T Bank’s share price performance hasn’t really stood out as exceptional over the last year or two. I do believe there could be more separation from the pack when the economy slows further, though, and there’s another reckoning as to which banks did the best job of managing their credit exposures. As is, the shares look somewhat undervalued, more so in terms of the multiple to tangible book than on a discounted earnings basis, but JPMorgan (JPM), PNC (PNC), BB&T (BBT), and U.S. Bancorp (USB) offer similar or better prospective returns.

Continue here:
M&T Bank Doing Fine, But Also As Expected

Citigroup Making Slow Progress, Which Is Still Better Than What's Priced In

Being somewhat bullish on Citigroup (C), mostly in the “it’s really not that bad” sense, has felt a little lonely at times, but the shares do seem to have started reflecting a bit of the slow progress that has been underway here. The shares outperformed banking peers over the past year by more than 5% and by a similar amount over the last three months and management has reiterated its target for a return on tangible common equity of more than 13% by the end of 2020.

If we’re only talking about quality, I wouldn’t recommend Citi over JPMorgan (JPM), U.S. Bancorp (USB), PNC (PNC), or BB&T (BBT) (and that list could probably go on a while…). But factoring in the substantial apparent discount to value, and Citi looks like an interesting risk/reward proposition, particularly as the bank’s non-US banking exposure could help offset some of the cycle risk in the U.S. banking sector.

Continue here:
Citigroup Making Slow Progress, Which Is Still Better Than What's Priced In

Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Yaskawa Electric (OTCPK:YASKY) (OTCPK:YASKF) (6506.T) has been a surprisingly volatile stock over the last two years, although it has been one of the best-performing automation stocks over that time, but the 50% move since the start of the year is extreme even by that standard. While many automation stocks have done quite well on year-to-date basis (including Cognex (CGNX), Fanuc (OTCPK:FANUY), and Nidec (OTCPK:NJDCY)), Yaskawa has been the standout as investors apparently not only think that the worst is over, but that demand in markets like China is going to rebound sharply.

Much as I like Yaskawa as a company, I don’t share this view. China’s export-oriented sectors did better than expected in the first quarter, and I don’t see things getting substantially worse unless the trade friction with the U.S. gets worse, but I think a sharp V-shaped recovery is too optimistic given mounting challenges in North America and Europe. With today’s price already anticipating a major long-term acceleration in growth, it’s hard for me to see what can take these shares higher other than just raw momentum.

Read more here:
Yaskawa Electric's Rocket Ride Anticipates Smooth Sailing

Data On Givosiran And Lumasiran Should Help The Alnylam Story

Even as Alnylam (ALNY) works toward its second commercial drug filing, questions remain about the safety and efficacy of givosiran, not to mention the platform as a whole. But with good full Phase III data on givosiran and encouraging open-label extension data on lumasiran over the last few days, the story has gotten a little better in my view. These shares still remain undervalued, but there remain numerous risks including FDA approval, the efficacy and safety of the lead pipeline candidates, competition, and challenges related to commercialization, including identifying patients and securing reimbursement.

Read more here:
Data On Givosiran And Lumasiran Should Help The Alnylam Story

First Republic: Okay Quarter, But Valuation And Conditions Are More Demanding

Benchmarking companies and stocks against peers is a time-tested strategy, but what do you do when a company doesn’t really have many true peers? That’s one of the challenges with First Republic (FRC) and its differentiated high-service model focused on providing banking and wealth management services to high net-worth individuals and select lending clients like equity investors, non-profits, and schools. While “it’s different this time” are some of the most dangerous words in investing, it is a relevant to First Republic at least insofar as this model really is different.

These shares have modestly outperformed regional bank indices since my last write-up (when I thought the shares offered a relatively rare entry point at a reasonable price). I don’t think the shares are expensive now, per se, but I do think the valuation is fair and I think First Republic faces some increasing near-term headwinds that could dampen growth and raise a few more pointed questions about how much of a premium the shares really deserve.

Click here for more:
First Republic: Okay Quarter, But Valuation And Conditions Are More Demanding

PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

In the competition for best-run bank in the U.S., at least among the heavyweights, PNC Financial (PNC) brings a pretty strong case in its favor. While I haven’t always been excited about the valuation on the shares, I liked it back in January and the shares have outperformed the major regional bank indices since then, though the sector has continued to lag the S&P 500.

Looking at the bank again in the light of first-quarter earnings, nothing really changes in my mind. The better than expected loan growth is of course nice to see, and the increases in loan provision expense and deposit costs isn’t a surprise to me. I still have sector-wide worries that we’re descending from a peak and that is going to make share price outperformance more challenging, but this remains a worthwhile holding for those investors who are less inclined to try to time market cycles and would rather have a longer-term position in American banks.

Read the full article here:
PNC Financial Posting Healthy Loan Growth, But Cycle Peak Pressures Emerging

Commerce Bancshares Investors Pay For Better Than This

Given that I thought Commerce Bancshares (CBSH) shares were fairly expensive back in January, I’m not all that surprised that the shares underperformed the major regional bank indices since then, particularly as sentiment seemed to be shifting across the market a bit more towards “risk on”. Still, I was surprised to see the first-quarter miss. Seeing as how I believe that Commerce Bancshares’ premium is often justified by analysts and investors on the basis of superior quality and operating stability, I do worry that if this quarter is more than just an aberration, it could mean more significant underperformance for shareholders.

Click here for more:
Commerce Bancshares Investors Pay For Better Than This

Fastenal's Execution Remains Beyond Fault, But The Valuation And Macro Picture Are More Debatable

With investors feeling noticeably better about industrials over the last three months (the Industrial Select Sector SPDR (XLI) is up about 14%), I'm not altogether surprised that the shares of Fastenal (FAST) are up even more, though the 26% move is still exceptional. When industrials do well, Fastenal almost always does well, and at least, some investors certainly seem to be counting on a stronger second half in that sector.

I remain more cautious. I'm more cautious on the macro outlook for the U.S. economy going into this quarter, though I'd be more than happy to be proven wrong by strong beat-and-raise reports from the sector. I'm also cautious on what looks like a "take no prisoners" valuation that leaves no room for company-specific or more generalized headwinds for Fastenal, even though I do believe there are still growth opportunities in place that can drive above-sector mid-single-digit long-term revenue growth.

Read more here:
Fastenal's Execution Remains Beyond Fault, But The Valuation And Macro Picture Are More Debatable

JPMorgan Back On Track As One Of America's Best Banks

Investors are still generally skeptical about the earnings growth prospects for banks at this point in the cycle, and JPMorgan's (JPM) rare miss for the fourth quarter didn't help. I wasn't that concerned about the miss at the time, and with first quarter results coming in ahead of expectations despite somewhat weak lending, I'm still not all that concerned about JPMorgan's performance and prospects. While a broader slowdown in the U.S. economy would, of course, create new headwinds, and I do believe the bank sector is past the peak in terms of metrics like credit quality, these shares still look undervalued and have appeal as a longer-term core holding.

Read the full article here:
JPMorgan Back On Track As One Of America's Best Banks

Standing Up For MSC Industrial Getting Harder And Harder

I’ve been waiting for MSC Industrial (MSM) to show some meaningful signs of internal momentum for some time… and the wait just keeps going on. While management continues to tell a story of becoming a more integrated, mission-critical partner for customers and points to future benefits from pricing actions and sales force restructuring, the fact remains that this company has established a worrisome trend of underperformance and excuse-making.

I do still own MSC and I do still believe the shares are undervalued, but I now regard this position as a future source of funds if/when a better idea presents itself, and I’m not especially comfortable holding the shares in an underperforming manufacturing distributor going into what I believe is a slowdown.

Click here for more:
Standing Up For MSC Industrial Getting Harder And Harder

Alnylam Finds A New Partner For Its Next Phase

Alnylam (ALNY) was a very different company five years ago – Onpattro was in Phase II development, fitusiran was in Phase I, and there were still substantial doubts about the entire RNAi concept, as large pharma companies like Novartis (NVS) and Merck (MRK) were backpedaling out of the space. At that time, the deal Alnylam signed with Sanofi (SNY) was valuable not only from the perspective of the capital it brought into the business but also the perceived stability and support of a major pharmaceutical drug company. Now, five years later, Alnylam is in a very different place and it has different needs and expectations for its partnerships. Sanofi, too, has different needs and goals, and with that the two companies have elected to wind down their development partnership. At the same time, Alnylam has forged a new development partnership with Regeneron (REGN) that will help fund the company’s expansion into treatments beyond the liver.

I continue to believe that Alnylam is a high-risk undervalued opportunity, underpinned by a development pipeline that should see several FDA approvals and commercial ramps over the next few years, with multiple $1B+/yr revenue opportunities.

Click here for more:
Alnylam Finds A New Partner For Its Next Phase

A U.S. Bancorp - PNC Financial Tie-Up Could Be A Win-Win

Speculating on M&A is a tried and true way of passing the time between major news releases, and it’s overwhelmingly just a theoretical exercise, as the number of potential deals always dwarfs the number of deals done. That said, a recent turn toward mergers of equals in the banking space, including the large proposed tie-up of BB&T (BBT) and SunTrust (STI), adds a new element to the story.

Although I don’t think you can count it as any sort of “base case”, and both banks have expressed their disinterest in large-scale whole bank transactions, I believe a merger of equals (or near-equals) between U.S. Bancorp (USB) and PNC Financial (PNC) could not only be very interesting from an EPS and TBV accretion point of view, but also from the perspective of creating a truly national bank with strong positions in commercial and retail lending, payments, wealth management, and other fee-generating businesses.

I want to emphasize again that I’m not expecting such a transaction, and I do not recommending buying either U.S. Bancorp or PNC on the basis of M&A potential. Still, these are two high-quality banks traded below my estimates of fair value as is, and a transaction could create value for both shareholder groups.

Continue here:
A U.S. Bancorp - PNC Financial Tie-Up Could Be A Win-Win

Societe Generale's Ongoing Operating Malaise Still Weighs On The Valuation

I’ve flagged France’s Societe Generale (OTCPK:SCGLY) (“SocGen”) as a potential value trap for some time now, despite its low valuation and my own ownership of some shares, and the shares have borne that out – the local shares are down about 40% over the last year (the ADRs are down about 45%), underperforming French peers like BNP Paribas (OTCQX:BNPQY), Natixis (OTCPK:NTXFF), and Credit Agricole (OTCPK:CRARY), not to mention a host of European peers.

Although SocGen still appears significantly undervalued on many metrics, the fact is that the company’s performance continues to be uninspiringly weak and it’s difficult to see how management will change that in the foreseeable future. While very patient, very long-term-oriented investors may still find some value here, and valuation may well be bottoming out, the company’s ongoing restructuring efforts will continue to create headwinds for revenue and profit growth.

Read more here:
Societe Generale's Ongoing Operating Malaise Still Weighs On The Valuation

Turkcell Sticking To A Plan That's Working, While Turkey Continues To Churn

It has been a while since I've written on Turkcell (TKC), and much of what I said last time still applies. Taken in isolation, Turkcell continues to run itself well, with a business strategy focused on its higher-value services like 4G, digital services, and e-commerce. But at the same time, Turkey's macroeconomic challenges have not gone away, and Turkcell continues to face significant inflation and foreign currency headwinds and an overall lack of investor confidence/interest in Turkey.

You can't really fully separate the company-specific and macro factors here, as the U.S.-listed ADRs have fallen more than 40% over the past 12 months versus a roughly 20% drop in the locally-traded shares. What's more, I can't honestly tell readers/investors that this a stock that is worth the hassle and risk, particularly with the recent CEO change. Turkcell is undervalued even under what I believe to be conservative assumptions, and the company is well-placed to continue funding a healthy dividend, but with a lot riding on the overall health of the Turkish economy and investor confidence in the government, it's a tough recommendation to make.

Continue here:
Turkcell Sticking To A Plan That's Working, While Turkey Continues To Churn

Lexicon Pharmaceuticals Knocked Back By The FDA's Rejection Of Zynquista

Once again the FDA has shown that when it comes to new therapies for diabetes, particularly Type 1 diabetes, the agency believes in an abundance (perhaps an overabundance) of caution. To that point, Sanofi (SNY) and Lexicon (LXRX) announced on Friday March 22 that the FDA rejected the drug application for Zynquista, Lexicon’s SGLT-1/2 inhibitor for Type 1 diabetes.

Given the 50/50 split on the AdComm vote and that aforementioned precautionary principle that has long dominated the agency’s approach to diabetes, I had estimated the odds of approval at only slightly better than 50/50 and I cannot say that the rejection was a surprise. What makes evaluating the path forward more challenging, though, is the lack of information coming from the companies regarding the details of the CRL and the path forward from here.

With this rejection, and some modified expectations for what Zynquista could do in the market long term, I’ve lowered my fair value to around $10.50. Although there’s still some value here, I can’t call this low-hanging fruit for reasons I’ll go into a little later.

Read more here:
Lexicon Pharmaceuticals Knocked Back By The FDA's Rejection Of Zynquista

A Fresh Start For GEA Group, But Old Problems Linger

It is a little hard to believe just how bad things got under the now-former leadership of GEA Group (OTCPK:GEAGY) (G1AG.XE), as the company posted numerous profit warnings and misses over the last three years, the latest of which (just before new CEO Stefan Klebert took over) saw an adjusted EBITDA outlook for 2019 almost 20% below the prior sell-side average.

As it stands today, there's a lot of work that needs doing at GEA Group. From product design and quality control to a thorough portfolio review, to cost/efficiency initiatives to IT harmonization, almost everything at GEA Group needs to be fixed. That's a lot for any management team to take on, and GEA Group's new management doesn't come in with an established record of executing in turnaround situations. Fortunately, expectations are at a point now where I believe even "okay" performance on a turnaround can drive meaningful upside for patient shareholders. While there is certainly a risk that things get worse before they get better, not to mention a risk that they may not get better at all, and that risk makes the shares unsuitable for less aggressive investors, the weak sentiment relative to an established market presence in end-markets with attractive long-term characteristics makes this a name to consider.

Click here for more:
A Fresh Start For GEA Group, But Old Problems Linger

Eaton Makes Its Case For A Stronger Full-Cycle Performance

I’ve been bullish on Eaton (ETN) for a little while now, and the shares have partly rewarded that with a slightly better-than-average performance relative to other industrials. Part of the problem is cyclical risk, and Eaton’s recent Investor Day was management’s opportunity to make the case that the company is better-positioned to generate stronger results at all phases of the cycle. Although the undervaluation I see here suggests the Street doesn’t fully buy that idea, I think these shares still have some appeal even in the face of macro uncertainties.

Continue here:
Eaton Makes Its Case For A Stronger Full-Cycle Performance

With More Macro Uncertainty, Manitex's Ability To Execute Is Key To A Good 2019

Almost a quarter of the way into 2019, there’s still much more clarity about the health of the construction sector – a key component not only of the U.S. economy in general, but also a key driver of roughly half of revenue at Manitex (MNTX). While slower growth (but still growth) seems likely relative to 2018, a lot is riding on improved results in the second half of the year and sentiment is still fragile.

Specific to Manitex, end-market demand in key markets like construction, infrastructure, energy, and utilities should be good enough to drive another year of solid revenue growth, but management’s ability to execute on margins and continue to drive growth in the PM knuckle-boom business is crucial for the stock. The shares do still look undervalued, but investors should remember that this is a low-margin business serving cyclical end-markets and a riskier-than-average stock.

Continue here:
With More Macro Uncertainty, Manitex's Ability To Execute Is Key To A Good 2019

Broadcom Executing Well Despite Wireless Pressures

Broadcom (AVGO) has done alright since my last update on this leading semiconductor company, with the shares slightly lagging the big recovery in chip stocks since Christmas prior to the post-earnings jump. While wireless and storage both saw some weakness, neither was unexpected, and I believe this company has above-average growth drivers that can continue to propel the business. Valuation isn’t so compelling now as to make this a “must buy”, but I see enough reasons to continue to own it as a core holding.

Click here for more:
Broadcom Executing Well Despite Wireless Pressures

China Likely Bottoming For IPG Photonics, But Rising Competition Is A Threat

Shares of fiber laser specialist IPG Photonics (IPGP) have rebounded strongly from late December lows (up almost 45%) as investors are less fearful of a sharp decline in sales to China and overall industrial demand, as well as holding more optimism over future opportunities in core cutting/welding, 3D manufacturing, EV battery assembly, and so on. Although I do believe revenue could return to year-over-year growth in the second half of this year, I’m more concerned about the long-term margin consequences of increased competition from Chinese rivals and whether IPG can continue to find attractive new markets/applications for higher-performance lasers that would really allow the company to leverage its R&D and engineering advantages.

Read more here:
China Likely Bottoming For IPG Photonics, But Rising Competition Is A Threat

Despite Significant Turbulence, AerCap Still Looks Undervalued As Air Traffic Continues To Grow

Down about 25% since my last write-up, AerCap (AER) has been a lousy stock over the last six months and investors can’t even console themselves with “at least I’m getting dividends”, as AerCap management puts surplus capital to work through share buybacks instead of dividends. I think there are multiple issues affecting the stock, including worries over some recent airline bankruptcies, concerns about the health of the Chinese market, rising rates, increased competition in leasing, and near-term pressures on reported earnings metrics.

None of these issues impact my core long-term thesis on AerCap, though, and I continue to believe that these shares can and will reward long-term patience from shareholders.

Continue here:
Despite Significant Turbulence, AerCap Still Looks Undervalued As Air Traffic Continues To Grow

The FDA's Upcoming Decision On Zynquista Is Key To Lexicon's Performance

Lexicon Pharmaceuticals (LXRX) has long been a volatile stock, even by the standards of biotech, and whether it can move out of its current doldrums has everything to do with next week’s FDA decision on Zynquista for Type 1 diabetes (or T1D). With Xermelo relegated to an “is what it is” disappointment in carcinoid-related diarrhea and other clinical candidates in early stages of development, Zynquista is the key value-driver now.

I’m still guardedly optimistic that the FDA will approve Zynquista, albeit with warnings and risk mitigation strategies, but I don’t exclude the possibility of a rejection on procedural grounds or a requirement for a risk mitigation study. Still, with what I regard as overly-discounted expectations for Zynquista in both T1D and Type 2 diabetes (or T2D), these shares still look undervalued, albeit very risky, to me.

Read more here:
The FDA's Upcoming Decision On Zynquista Is Key To Lexicon's Performance

Commercial Vehicle Performing Well In A Plateauing Market

Taken in isolation, things are going well for Commercial Vehicle (CVGI), as the company’s management has executed pretty successfully on cost-optimization and business restructuring efforts. The company also has some future growth opportunities that could drive long-term revenue growth above build rates, as truck and off-road vehicle manufactures add more electrical components and systems to their vehicles. The “but” is that Commercial Vehicle’s primary markets appear to be plateauing and it may be hard for the shares to get ahead as near-term revenue growth prospects diminish.

Holding cyclical stocks through cyclical declines can be a painful test of patience. I do believe Commercial Vehicle remains undervalued, but it’s tough to say how much of the impending decline in truck production is already priced into the shares. Investors with a longer term orientation may not care, but the next year or so could be more challenging for the stock.

Read more here:
Commercial Vehicle Performing Well In A Plateauing Market

Alnylam Is A Step Closer To Its Second Approved Drug

The last twelve months haven’t been particularly good in terms of market performance for Alnylam Pharmaceuticals (ALNY), and that hasn’t really changed much over the last three months either, as the shares continue to lag biotech indices. With top-line Phase III givosiran data looking good on efficacy but leaving some questions as to safety, the ENVISION study hasn’t been much of a catalyst and that may be the case for a little while longer. I do believe these shares remain undervalued, though, and offer some attractive long-term upside.

Click here for more:
Alnylam Is A Step Closer To Its Second Approved Drug

Neurocrine Biosciences May Have Something Interesting With NBI-74788

It’s still very early, but Neurocrine Biosciences (NBIX) might have another compelling, largely underrated, drug in NBI-74788 for congenital adrenal hyperplasia (or CAH). Although Ph IIa data does little more than work to establish proof of concept at this point, I do believe it’s enough to get sell-side analysts and investors to start doing some due diligence on what I believe could be a meaningful contributor to Neurocrine down the road.

Neurocrine shares remain undervalued, but value-drivers are looking a little more limited in the short term. AbbVie’s (ABBV) “slow and steady wins the race” approach with Orlissa might be the right way to go long term, but it could lead to some near-term disappointments in terms of growth, and neither the opicapone program or the collaboration with Voyager (VYGR) are likely to generate much near-term buzz. Still, with the shares meaningfully below my estimate of fair value, I think it’s a name to consider.

Read the full article here:
Neurocrine Biosciences May Have Something Interesting With NBI-74788

Cognex Muddling Through Some Temporary Macro Challenges

I flagged Cognex (CGNX) back in early December as offering rare upside for a high-growth industrial, and though the shares had further to fall before bottoming on Christmas Eve, they’re still up about 20% since that early December article – outperforming its closest peer Keyence (OTCPK:KYCCF) and industrial stocks in general.

It’s a harder call to make now, though I still really like the machine vision space and continue to believe that Cognex has attractive addressable long-term growth opportunities in logistics, autos, and factory automation. I don’t believe my expectations of low double-digit revenue growth and mid-teens FCF growth over the next decade are conservative and I’m worried that there could still be another round of disappointment in consumer electronics and autos, though a negotiated trade agreement with China could brighten that outlook. I’d definitely look at Cognex again were it to pull back to mid-$40’s, but here it looks more like an attractive hold.

Read more here:
Cognex Muddling Through Some Temporary Macro Challenges

Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Ciena (CIEN) has been one of my preferred names whenever Wall Street skepticism starts ramping up and undermining the price, and the shares have chopped their way almost 50% higher over the past year and 70% over the past two years, handily outperforming rivals like Acacia (ACIA), Infinera (INFN), and Nokia (NOK) over those time periods. While I do think the valuation today is more demanding, or at least more reflective of Ciena’s strong execution and growing end-market opportunities, the share price isn’t unreasonable and this is absolutely a name to consider on pullbacks.

Read more here:
Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Keyence's Diverse Business Model Continues To Deliver

From a quality perspective, it’s hard to find many better companies in the automation-enabling space than Japan’s Keyence (OTCPK:KYCCF) (6861.T). A strong player in machine vision, sensors, control systems, and other precision equipment, Keyence is not only a leader in attractive areas like 3D vision and product ID, but it has a long history of “self-obsoleting” and moving out of increasingly competitive markets that are no longer willing to pay for innovation before they become commoditized.

The only problem with Keyence is that its qualities are well-known and typically well-reflected in the share price. I thought the shares were an okay pick back in mid-2018 for longer-term investors wanting a dependable play on automation, but I didn’t think they were particularly undervalued, and the shares have mostly just kept pace with the broader industrial sector, while underperforming Cognex (CGNX) but outperforming a fair few Japanese automation names. I think this recent run in many automation names may be underplaying the risk of further macro deterioration, and while I’d still stand behind Keyence as a long-term holding, I’d wait in the hope of a cheaper entry price.

Read more here:
Keyence's Diverse Business Model Continues To Deliver

More Mixed Numbers From PRA Group

Every company/stock has a “hassle factor” attached, and I’m increasingly wondering if PRA Group (PRAA) is worth that hassle factor. The nature of the business of buying charged-off debt and then collecting on it makes for complicated modeling and sometimes-confusing reports, but the underlying takeaway is pretty simple – PRA Group just doesn’t seem to be doing it as profitably as they used to, and I’m not sure the operating environment is going to get all that much better.

There are certainly are some things that could go well for PRA Group. I believe recent purchase should have higher yields than the generation right before it, and the company’s efforts to scale up legal collections and build up its call centers is a “pay today, profit tomorrow” sort of trade-off. Although I can see upside into high $30’s to low $40’s if things go well, I’m increasingly concerned that PRA may not have as much room to improve margins as I previously believed and that the potential gains may not be worth the headaches involved.

Read the full article here:
More Mixed Numbers From PRA Group

Slowing Orders At Hurco A Growing Risk

I always considered a cyclical slowdown at Hurco (HURC) a “when, not if” proposition, and it seems like the when is an increasingly near-term concern. Fiscal first quarter results weren’t bad, but a third consecutive decline in orders shouldn’t be ignored, particularly when major players in the machine tool market are calling for a double-digit decline in orders in 2019 and European demand appears to be weakening.

Hurco remains undervalued relative to industrial sector norms, but I’m pretty cautious about the outlook for a host of industrial sectors, including “general manufacturing” and it’s tough to get ahead owning even undervalued stocks in a weak cycle for the sector. Consequently, while I still like Hurco as a business and the valuation doesn’t appear demanding, it’s tough to recommend the shares unless you have a fundamentally more bullish view on the prospects for the North American and EU economies over the next 12-24 months.

Read more here:
Slowing Orders At Hurco A Growing Risk

BRF Underway With Its Turnaround, But A Lot Of Self-Improvement Remains

BRF (BRFS) has to be glad to put 2018 behind it, as the only real positives to come out of that year will likely be the hiring of Pedro Parente as the Chairman and CEO and the decision to launch a far-reaching deleveraging and divestment program. Management’s projections for 2019 still look a little on the bullish side, but the company does have a relatively solid base in Brazil and Middle Eastern halal markets from which to rebuild the business.

I do expect margins to improve from here, but it won’t be a fast turnaround and I believe the company faces ongoing challenges from competition within the Brazilian market and protectionist measures in key export markets like Saudi Arabia. Although a successful turnaround could likely support a fair value in the double digits some years down the road, I believe a fair value in the $6 to $7 range remains reasonable today.

Read the full article here:
BRF Underway With Its Turnaround, But A Lot Of Self-Improvement Remains

Driven By OXXO, The Core FEMSA Story Remains Attractive

FEMSA (FMX) isn’t the simplest company, nor does it offer the cleanest, most straightforward financial reports, but at its core this remains a well-run play on Latin American consumers. Underpinned by the OXXO convenience store business, I believe FEMSA has a long runway of attractive growth opportunities and the capital to further enhance its prospects. Currency moves and the health of the Mexican economy are key variables, but with a double-digit implied return on offer, I believe this remains a good candidate as a core holding for investors who want some emerging market exposure.

Read more here:
Driven By OXXO, The Core FEMSA Story Remains Attractive

ABB Still Has A Lot To Do And A Lot To Prove

Owning ABB (ABB) has not been a particularly rewarding experience. While the company's decision to sell its Power Grids business to Hitachi is a sound one, and the company has attractive opportunities across its business units, a long history of underperformance relative to the opportunities available is not something investors should just ignore.

Valuation, and the idea that ABB can be/do better than this, remain the best arguments for sticking with the stock, but that's an increasingly unconvincing argument to me, and I can't really say that you should favor ABB over Eaton (ETN), Schneider (OTCPK:SBGSY), and Honeywell (HON), let alone a long list of other industrial names.

Read the full article here:
ABB Still Has A Lot To Do And A Lot To Prove

Rexel Delivering On Its Turnaround, But Getting No Credit

In closing my last article on Rexel (OTCPK:RXEEY) (RXLSF), I commented that “turnarounds can test investor patience”, and that has certainly been true for this global electrical products distributor. The market hasn’t been too keen on many stocks in the distribution space since that last article, with stocks like Grainger (GWW) and Ferguson (OTCQX:FERGY) losing ground, but Rexel has done substantially worse, and likewise lagged the shares of electrical products companies like Eaton (ETN), Schneider (OTCPK:SBGSY), Legrand (OTCPK:LGRDY), Hubbell (HUBB).

I can understand investor concerns about slowing macro, as I too expect construction spending to slow in the EU and U.S. in 2019, and I can likewise understand concerns that Amazon’s (AMZN) efforts in the space will lead to lower margins over the long term. Still, those issues seem more than amply reflected in the share price, and I don’t think the valuation reflects the progress made in 2019, nor the benefits yet to be seen from exiting underperforming businesses and restructuring toward higher-value products.

Continue here:
Rexel Delivering On Its Turnaround, But Getting No Credit

Merck KGaA Crashes Into The Versum-Entegris Tie-Up

I liked both Versum (VSM) and Entegris (ENTG) in the fall of 2018, Entegris a little moreso, on the idea that the market was overreacting to the correction cycle in semiconductors and semiconductor equipment and that underlying chip production (a key driver for Versum) was unlikely to be impacted as much as seemed to be reflected in the prices. When Versum and Entegris announced their intent to merge in late January, I thought it made a lot of sense and would create a stronger new company, led by management team (Entegris) with a lot of experience in M&A integration.

Now Merck KGaA (OTCPK:MKKGY) has pushed itself into the conversation, making an unsolicited all-cash offer that is well above the upfront value offered by the Entegris deal. Although I can see why some shareholders may prefer a stock-for-stock bid and I believe there are some regulatory risks to the Merck KGaA offer, it’s hard to argue with an all-cash offer that is well above what Versum shareholders were otherwise expecting.

Click here for more:
Merck KGaA Crashes Into The Versum-Entegris Tie-Up

The Strong Look To Get Stronger As JPMorgan Continues To Target Growth

Already one of the best-run companies I follow, JPMorgan Chase (JPM) has shown an uncanny ability to leverage its strengths and maintain a steady pace of process improvement while looking for new growth opportunities. There wasn’t much that was all that new in JPMorgan’s Investor Day presentations (nor in the 10-K), but when you’re already executing very well on a very good plan, there’s not much reason to change.

JPMorgan's shares remain undervalued in my view, even though I believe banks are no longer in the best part of their respective cycle. With a high-quality business that still has meaningful long-term growth opportunities, I still regard this as a core holding and I think the upside potential still leaves it as a name to consider for new investment.

Click here for more:
The Strong Look To Get Stronger As JPMorgan Continues To Target Growth

Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Wright Medical (WMGI) has long been a challenging med-tech investment story. On the positive side, the company has been a share gainer in shoulders, still holds a strong portfolio (and market position) in foot/ankle, and is leveraged to an underpenetrated market that should support high single-digit revenue growth for some time to come. On the other hand, sales execution has been inconsistent at best, and the company is seeing renewed competitive vigor from rivals like Integra (IART) and Stryker (SYK).

On balance, I still think there’s upside in these shares from here, but management must execute on a consistent and reliable basis to build real long-term value for shareholders, and the jury is still out on whether they’re up to the task.

Click here for more:
Wright Medical Still Walking A Tightrope, But Growth Should Pick Up

Danaher Adds A Jewel To Its Crown

It's not too often that you see an M&A transaction that sends the shares of both companies meaningfully higher, but Danaher's (DHR) acquisition of most of General Electric's (GE) Life Sciences business is a good move for both companies. For GE, the deal brings badly-needed cash that will help shore up the business as CEO Larry Culp tries to turn that hamstrung behemoth around. For Danaher, this is a crown jewel acquisition that meaningfully enhances the company's life sciences business (particularly in bioproduction/bioprocessing) and gives it even more exposure to a fast-growing acylical business with strong margins.

Although pricey, the GE Biopharma deal boosts Danaher's long-term growth rate and margins, and I believe management's synergy/accretion expectations are credible if not conservative. It's hard to say that Danaher is cheap, but considering the enhanced exposure to a very attractive market, I understand why the shares trade where they do.

Continue here:
Danaher Adds A Jewel To Its Crown

Valeo Hits The Wall, And The Wall Falls On Top Of It

The last year was a tough one for auto parts suppliers in general, particularly after midyear and especially for European suppliers, but it was an abysmal year for Valeo (OTCPK:VLEEY) [VLOF.PA] as the shares lost about half their value on successive miss-and-lower quarters that eventually saw management's outlook for 2019 erode from double-digit growth to low single-digit growth with lower margins.

I don't believe that Valeo is fundamentally broken, but investor confidence in management clearly is, and I can't say that that is unfair. The magnitude of the guidance revisions has been significant, as has been the discrepancy with order growth and the large order write-off in China, all of which leads to ample uncertainty about the company's outlook. While I do believe that Valeo has assembled a very strong position and platform for electrification, that assembly has led to high upfront costs with the payoff coming further down the road. I do still believe that Valeo is undervalued, but this is a company that is deep in the doghouse and will need time to reemerge.

Read more here:
Valeo Hits The Wall, And The Wall Falls On Top Of It