RenaissanceRe's High-Quality Model Serving It (And Investors) Well

Hard times tell you a lot about companies, and the combination of a very soft pricing market and recent catastrophe losses have highlighted a lot of what is good about RenaissanceRe (NYSE:RNR). While the shares have certainly lagged the S&P 500 over the past year, and lagged rival/peer Arch Capital (NASDAQ:ACGL), RenRe hasn't done poorly relative to other insurers like Everest Re (NYSE:RE), Aspen (NYSE:AHL), or Validus (NYSE:VR). Throughout this tough period, RenRe's underwriting standards, strong balance sheet, and business flexibility have served the company well, despite some erosion in underwriting profitability.

RenRe is trading at a premium relative to long-term valuation norms. Some of that can be attributed to what I believe is a legitimate and well-earned quality premium, but I do have some worries that investors have been too eager to factor in the benefits of harder insurance markets. While I do still see some upside for shareholders from here, I'd be cautious about establishing a big new position at these levels.

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RenaissanceRe's High-Quality Model Serving It (And Investors) Well

FirstCash Looking Forward To Value-Creating Opportunities

FirstCash (FCFS) shares have done well since my last update in August, with the shares rising about 14% as the company continues to execute very well with its Mexican pawn stores. Looking not all that far ahead, the company should start reaping the benefits of integrating its Cash America stores and converting them to FirstCash’s more sophisticated and efficient IT system as well as expansion into a new Latin American market (Colombia).

Valuation is more of a challenge for me now. I’m very willing to acknowledge that there’s no end-all/be-all approach to valuation, and the market is often happy to overpay for growth, but the risk/reward ratio now is more in keeping with a good hold than a “must buy.”

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FirstCash Looking Forward To Value-Creating Opportunities

Buoyed By The Industrial Recovery, Automation The Next Driver For Lincoln Electric

Managing expectations is an underappreciated part of the investor relations process, but it is all the more challenging when the company in question has earned more than just the benefit of the doubt through years of above-average execution. Lincoln Electric (LECO) has long been an excellent company, but the reactions to the last few earnings releases (significant sell-offs) underline the high expectations that accompany this leader in the welding industry.

I like the long-term prospects for Lincoln Electric. The acquisition of Air Liquide makes the company even more competitive with Colfax (CFX) outside the U.S., and the company's investments in automation and specialized applications like hard-facing should pay off with above-market growth for many years. The "but" is the level of expectations already built into the stock - while I believe Lincoln Electric can deliver long-term FCF growth in the high single digits, I'd need a share price in the low $80s (or below) to get to an attractive total expected return.

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Buoyed By The Industrial Recovery, Automation The Next Driver For Lincoln Electric

Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Economic troubles in key commodity-driven markets like Brazil, Colombia, and Venezuela certainly hurt Copa Holdings (NYSE:CPA) in the recent past, as the shares dropped around 75% from their peak in early 2014 to their low in the fall of 2015 and accompanied a 20% drop in revenue driven by weaker yields. Since those 2015 lows, though, investors have come back to these shares in a big way - the shares are within 15% of their prior peak (and up more than 50% so far this year) as yields have started to recover and the company has been expanding capacity.

There are a lot of positives that I see with Copa. The challenges in 2014-2016 forced the company's management to take a more critical look at their operations, and I believe efforts to control costs, improve revenue yield, and re-emphasize profitable expansion will pay off down the road. What's more, the company remains well-placed in a critical hub location (Panama's Tocumen airport) and continues to focus on low-traffic routes that don't lend themselves to profitable direct competition. Add in numerous future expansion opportunities and the recovery potential of Brazil and Colombia, and I believe Copa can look forward to strong growth for a number of years.

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Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Alnylam Pharmaceuticals Wins Another Round

Alnylam Pharmaceuticals (ALNY) scored another big win Thursday morning, with the company's detailed presentation of clinical data on patisiran showing strong efficacy and safety relative to future competitor Ionis's (IONS) data on inotersen in patients with hereditary ATTR amyloidosis with polyneuropathy (also called familial amyloid polyneuropathy, or FAP).

Alnylam's data were quite good, but not a knock-out blow against Ionis's inotersen, as you can expect Ionis to build its marketing message around an easier and more tolerable administration and perhaps compete on price. Still, for Alnylam, this head-to-head competition went about as well as could be expected and should raise the hopes of getting an advantageous label from the FDA.

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Alnylam Pharmaceuticals Wins Another Round

Neurocrine's Ingrezza Launch Continues To Exceed Expectations

To quote from the A-Team, "I love it when a plan comes together." Although it is still very early, Neurocrine Biosciences (NBIX) is executing well on the launch of its wholly-owned drug Ingrezza, and its partner AbbVie (ABBV) continues to move elagolix closer to the finish line for both endometriosis and uterine fibroids - indications that could both support more than $1 billion in royalty-generating sales. Additionally, Neurocrine continues to develop its clinical pipeline, with the company having started a new Phase IIb study for Ingrezza in pediatric Tourette's and planning to move its drug for congenital adrenal hyperplasia (or CAH) into a Phase II proof-of-concept study.

The market is reacting quite positively to the much better than expected revenue for Ingrezza, and the strong initial launch is encouraging, but the next few quarters could be a little more volatile as Neurocrine will have to contend with a competitive launch from Teva (TEVA), sampling, and shifts between the 40mg and 80mg doses. Even so, I believe the shares are undervalued now, with multiple clinical events on the horizon.

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Neurocrine's Ingrezza Launch Continues To Exceed Expectations

Execution Risk Back On The Table At Wright Medical

Orthopedic extremity specialist Wright Medical (WMGI) continues to be a frustrating "two steps forward, almost two steps backward" story, as fiscal third quarter results came in below expectations, and management lowered guidance on ongoing execution issues in the lower extremity business. Although the strength of the shoulder business is a meaningful positive, and the lower extremity business is hardly beyond repair, the company's inability to drive consistent execution relative to its own targets remains frustrating and an impediment to the stock.

I've previously said that Wright Medical is a stock to consider buying in the mid-$20s and selling in the mid-$30s, and I believe that remains the case. While the latest reset to expectations is disappointing, Wright Medical still has the potential to grow revenue at a high single-digit long-term rate and drive FCF margins into the 20%s. "Potential" is one of the dangerous words in investing, though, so investors have to at least consider the risk that Wright Medical's ongoing execution issues remain in place, and/or that rivals like Stryker (SYK) steal the company's thunder in the still-fast-growing extremities market.

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Execution Risk Back On The Table At Wright Medical

Better Late Than Never For MSC Industrial

One of the recent concerns about industrial maintenance, repair, and overhaul (or MRO) supply distributor MSC Industrial (NYSE:MSM) was why this leading distributor of metalworking tools (among other MRO supplies) was not seeing more benefit from the emerging industrial recovery in North America. Those concerns should ease a bit with the strong daily sales reported for the fiscal fourth quarter, but the company's long-term margin leverage remains a key question, and increased competition from Amazon (NASDAQ:AMZN) and now Berkshire Hathaway (NYSE:BRK.A) shouldn't be ignored.

I've owned MSC Industrial for some time, and I've written many times that when there's a conflict between "good company" and "good valuation", I go with the former. That said, there are legitimate arguments as to whether MSC is as good of a company as it used to be and whether today's valuation already captures a lot of what can go right for the business. Although I'm not rushing for the door, and there aren't a lot of clear bargains in the industrial space, it's hard for me to make a buy-case on the stock beyond a play on improving trends (momentum) in metalworking and related industries and at least a few more beat-and-raise quarters.

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Better Late Than Never For MSC Industrial

3M Comes Back Strong In The Third Quarter

With its high valuation multiples and above-average visibility, 3M (MMM) needed a better result than what it delivered in the second quarter – a quarter that was marked by average organic revenue growth, rare pricing weakness, and weak margin performance. Fortunately, for shareholders, 3M came through and delivered a quarter that, while not perfect, was still quite strong on a relative basis.

Valuation is still problematic. I can’t really come up with a set of circumstances whereby these shares look cheap, so I suppose the argument comes down to some version of “almost of all of its peers are expensive, so if you have to own an expensive stock, why not this one?” I still own these shares myself (but it is not a large part of my portfolio), and I think management still has moves to make to drive better results, but I do worry that today’s valuation is setting the stage for unimpressive returns down the line.

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3M Comes Back Strong In The Third Quarter

Renewed Operating Leverage From U.S. Bancorp Nice To See

Long one of the best-run banks out there, U.S. Bancorp (USB) has an interesting long-term challenge – as the performance of the “pack” continues to improve, does U.S. Bancorp still have levers to pull that can continue to allow it to stand out? This is, after all, a conservatively-run, very efficient, not especially asset-sensitive operation that already has sizable (and lucrative) fee-generating, non-banking businesses.

I thought U.S. Bancorp's shares were pretty richly valued at the start of the year, and the year-to-date performance, though positive, has lagged the S&P 500 and rival banks like Bank of America (BAC), PNC (PNC), JPMorgan (JPM), Citigroup (C), and SunTrust (STI). I expect profitability to improve next year, as the AML/BSA issue resolves, and asset sensitivity has been improving, but the shares still aren’t cheap. I wouldn’t suggest that long-term investors need to consider bailing out, but I do think the total return prospects are relatively modest.

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Renewed Operating Leverage From U.S. Bancorp Nice To See

Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Comerica (CMA) is something of an odd duck in its pond. Big enough to have to go through the CCAR process and operating across an extended geographic footprint, CMA is nevertheless quite a bit smaller than the likes of U.S. Bancorp (USB), PNC Financial (PNC), BB&T (BBT), and Fifth Third (FITB). It’s also uncommonly asset-sensitive and committed to business lending – residential mortgages and consumer loans make up less than 10% of the loan book – but has long struggled to achieve attractive operating leverage.

Odd isn’t always a bad thing, though, and Comerica is reaping the benefits of higher rates and a thorough restructuring effort. If U.S. growth can accelerate from here, driving better commercial loan demand, Comerica could really enjoy a run of strong earnings growth. That said, the share have shot up more than 50% in the last year, and more than 75% in the last three years, and it is difficult to see much undervaluation unless you factor in some combination of higher-than-expected rates, 3%-plus U.S. GDP growth, less regulation, and/or meaningfully lower corporate taxes.

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Asset Sensitivity And Cost Restructuring Have Brought Comerica's Groove Back

Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

I wasn’t overly fond of the short-term prospects for Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) (or “OMA”) back in July, as I was concerned about how the shares would respond to further weakness in traffic and headline risk around NAFTA, not to mention longer-term concerns regarding the Mexican economy, the next election cycle, and changes to air traffic patterns within Mexico. The shares are down about 20% in that short window since July, with rivals/peers Grupo Aeroportuario del Pacifico (NYSE:PAC) and Grupo Aeroportuario del Sureste (NYSE:ASR) down roughly similar amounts. 

Traffic growth has continued to weaken, and not just because of multiple natural disasters. Worse yet, there are particular pockets of weakness (like the non-aero revenue per passenger trends in Monterrey) that still concern me. As I already expected weaker results, the changes to my model are mostly tied to currency moves, and my fair value is still above today’s price. While the apparent undervaluation is tempting, buying into shaky traffic trends and problematic per-passenger revenue is uncomfortable for me and I’m inclined to keep watching this name from the sideline.

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Grupo Aeroportuario Del Centro Norte Still A Tough Call As Traffic Weakens

Not Much Going Right For Wells Fargo Yet

When I last wrote about Wells Fargo (WFC) earlier this year, I thought the shares were undervalued, but that the company was going to need time to pull itself out of the hole it created with its fraudulent sales/account processes. Since then, the shares have continued to underperform peers like Citigroup (C), Bank of America (BAC), JPMorgan (JPM), PNC (PNC), and U.S. Bancorp (USB), as the bank's performance continues to underwhelm on multiple fronts.

Although the shares do still seem undervalued (in a relatively expensive banking sector), the weak trends in loan growth, interest margin expansion, and key fee-generating businesses are a concern to me. I do believe Wells Fargo's huge deposit base and strong market share across a wide swath of the country should, and does, count for something, as well as the bank's sizable middle market and asset-backed/equipment finance operations. For patient investors who can live with near-term underperformance, these shares are still worth consideration.

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Not Much Going Right For Wells Fargo Yet

Monsanto Ending On A Position Of Strength

For a company that has been around for a while and leads its industry, there’s an odd cyclical quality to Monsanto (MON) where sell-side analysts seem to get ahead/behind of the company’s growth curve, leading to multi-quarter periods of out/under-performance relative to expectations. Monsanto looks to be late in the game with another outperformance cycle, but that likely matters much less now that the company should be approaching the end of the line as a publicly-traded company.

It remains to be seen if Bayer (OTCPK:BAYRY) will get all of the final approvals it needs to acquire Monsanto. No insurmountable obstacles have appeared yet, but there is still a risk that regulators could dig in their heels and/or demand concessions that Bayer finds unacceptance. Although there’s still about 5% upside between today’s price and the deal price, that’s not really out of line relative to the remaining risk (and time). Consequently, I’m more inclined to look for the exit with my Monsanto position and find new investment ideas.

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Monsanto Ending On A Position Of Strength

PNC Financial Producing Balanced, High Quality Growth

PNC Financial’s (PNC) management is relatively conservative in many respects, but that is not keeping the company from posting good numbers as spreads increase and credit remains benign. Better still, there are plans on the table with respect to expanded commercial lending and improved retail banking efficiency that should support additional incremental growth in the years to come.

Although Bank of America (BAC) has outperformed PNC over the last year, PNC’s share price performance has been quite strong relative to peers like Citigroup (C), JPMorgan (JPM), Wells Fargo (WFC), U.S. Bancorp (USB), and BB&T (BBT). Looking ahead, PNC has above-average growth prospects, but the shares do seem to already reflect a lot of that. Changes to corporate tax law and/or bank regulation could support higher growth rates, but the shares look more or less fairly-valued on the assumption of 6% to 7% long-term growth. That said, in a banking sector without a lot of clear bargains, I do believe PNC is an incrementally better option.

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PNC Financial Producing Balanced, High Quality Growth

For Citigroup, Slow And Steady Could Still Win The Race

Even though Citigroup (NYSE:C) has left something to be desired with respect to the pace of its recovery (particularly next to peers like JPMorgan (NYSE:JPM)), the shares’ 48% rise over the past year and 43% rise over the past three years is hardly embarrassing. Although shareholders of JPMorgan, Bank of America (NYSE:BAC), and PNC Financial Services Group (NYSE:PNC) have fared better over that longer time period, Citi has nevertheless outperformed U.S. Bancorp (NYSE:USB), BB&T (NYSE:BBT), and Wells Fargo (NYSE:WFC).., and could yet have the opportunity to do meaningfully better in the years to come.

I don’t believe Citi has really earned the benefit of the doubt when it comes to management’s performance targets out to 2020, and I do believe there are some optimistic assumptions in there, but I nevertheless believe that expectations are still relatively low. If Citi could generate long-term earnings growth in the range of 5% a year (a little higher than my base case), the shares would look undervalued on the basis of my discounted earnings model. Likewise, if the company can do better in terms of generating return on tangible equity (or if the Street decides to penalize lower-return banks less than it has), there would be upside on a ROTE-P/TBV basis.

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For Citigroup, Slow And Steady Could Still Win The Race

JPMorgan: Another Quarter, Another Beat

The idea of “core” earnings can seem a little wobbly when it comes to large banks, but JPMorgan Chase (JPM) has been executing well relative to expectations for almost three years now. Not only has JPMorgan maintained a strong position in areas like trading and credit cards, it has shown that it can grow share in retail banking, commercial banking, and commercial services. With that, JPMorgan shares have done quite well over that same time period – handily beating Citigroup (C), U.S. Bancorp (USB), and Wells Fargo (WFC), and outperforming Bank of America (BAC) and PNC (PNC) too, although just barely in the case of PNC.

Although the shares no longer look like a clear-cut bargain, that’s a common issue across the banking sector (if not the market as a whole). It does still look as though the shares are priced for mid-to-high single-digit returns, so I wouldn’t be in a big hurry to sell – particularly as I believe JPMorgan still has opportunities to drive worthwhile revenue and earnings growth in the coming years.

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JPMorgan: Another Quarter, Another Beat

BorgWarner Delivering The Content Growth

BorgWarner (BWA) has had a good year. I last wrote about the stock around the time of its 2016 investor meeting and thought then that the stock was undervalued and that the Street was overly pessimistic about the company’s positioning for the eventual transition away from internal combustion engines. It also didn’t help matters that the company hadn’t been doing a great job with its quarterly financial results vis a vis management guidance and analyst estimates. Since then, organic growth has improved significantly and the company has made a pretty compelling case for how and why it will continue to be a leader throughout the process of electrifying passenger vehicles. The shares have certainly responded – rising nearly 50% since that last article.

It’s harder for me to bullish now given the valuation. I don’t think the company is likely to get the FCF margin leverage it needs to validate today’s price on a DCF basis, though I freely acknowledge that content/share growth and margin leverage are more important drivers to the shares of auto components companies in the short run. This is back on a watchlist for me now, though, as I would like a better balance of opportunity and risk before committing funds to a position.

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BorgWarner Delivering The Content Growth

Dana Doing The Right Things And Reaping The Benefits

Finding an undervalued stock with a solid story behind it is always good, but finding that story getting better with time is even better. That's what appears to be happening with Dana (DAN), as this diversified supplier of components for passenger, commercial, and off-highway vehicles continues to execute well on its plan to grow content, improve margins, and position itself for the evolving demands of its end-markets.

It can be deceptively easy to get caught up in and taken along with Wall Street's short attention span-driven boom-and-doom cycles. With that in mind, I've been cautious about fundamentally overhauling my long-term growth and profitability assumptions for the business. I do like Dana's prospects for value-adding M&A, margin self-improvement, and leveraging a better mix (including more power tech products down the line), but I don't believe Dana is going to suddenly become a FCF-generating machine in an industry where mid-single-digit margins are generally the best that even great companies (like Cummins (CMI)) can do. To that end, while a fair value in the $20s seems reasonable, and I'm comfortable modeling exceptional cash flow growth, today's valuation already seems to be pricing in a lot of progress.

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Dana Doing The Right Things And Reaping The Benefits

Tenneco Generating Above-Sector Growth While The EV Future Looms

It’s commonly accepted that stock prices are, at least in part, a product of discounted future expectations. The trick here is that how far investors will try to look into the future, and how they view that future, is almost always in flux. And so it is with Tenneco (TEN) – while this leading provider of emissions control and ride performance products is enjoying above-sector growth on the back of increasing content, the shares have gotten smacked around from time to time on worries about Tenneco’s place in the future evolution of passenger vehicles.

Electric vehicles (and battery-powered vehicles in particular) are almost certainly coming, but how quickly they become the predominant vehicle type on the road is an open question and has a lot of ramifications for modeling out Tenneco’s cash flow. Assuming 10% annual erosion in the emissions business starting in the late 2020’s still gives me a fair value around $60, making these shares more of toss-up after this strong rally from the low $50’s.

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Tenneco Generating Above-Sector Growth While The EV Future Looms