ON Semiconductor Performing Well As The Cycle Ages

Like a lot of chip companies, ON Semiconductor (ON) has seen its share price slide over the last few months as investors have become more worried about lengthening lead times and the prospect that the cycle is peaking. I wouldn’t advise ignoring that risk (it’s really never different this time, and semiconductor demand is still cyclical), but ON’s leverage to growth opportunities in auto and industrial end-markets and ongoing synergies from the Fairchild deal can still support a worthwhile outlook. I’d also note that expectations aren’t exactly robust – mid single-digit free cash flow growth would be enough to support a higher share price.

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ON Semiconductor Performing Well As The Cycle Ages

Integrated Device Technology Doing Okay For Now

Investors who’ve chosen to sit on the sidelines and wait and haven’t lost out on much when it comes to Integrated Device Technology (or “IDT”) (IDTI), as the shares are down about 6% from when I last wrote about the company. Quite frankly, though, that’s been true for the sector as a whole and investors would have done better with IDT than with Broadcom (AVGO), Maxim (MXIM), ON Semiconductor (ON), Sensata (ST), or the SOX in general over the last three months, as investors have grown more concerned about whether there’s enough demand growth to sustain this extended run that chip companies have enjoyed.

My basic outlook on IDT really hasn’t changed much. Between its strong positions in data center memory interfaces and wireless handset charging, growth opportunities in sensors, and longer-term opportunities in communications, I believe IDT can outgrow many of its peers while generating good margins. With a fair value in the low $30s and some appeal as a buyout candidate, I think these shares are still worth considering even if it is getting late to play the semiconductor space.

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Integrated Device Technology Doing Okay For Now

Accuray Moves Back From A Spark To A Damp Squib

Accuray’s (ARAY) consistently inconsistent performance means that I can’t honestly say I’m surprised that its fiscal third-quarter results were disappointing, but it does continue a very frustrating trend. Accuray continues to struggle to attain and maintain any momentum in the slow-growing radiation oncology market, despite solid clinical data and some attractive system performance characteristics. While the earnings-driven sell-off does take the share price back below my estimates of fair value, these shares really aren’t going to work unless and until the company can show that it can achieve operating profitability and something more than just low single-digit revenue growth.

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Accuray Moves Back From A Spark To A Damp Squib

Neurocrine Reaping The Benefits Of A Methodical Approach

As biotechs go, Neurocrine (NBIX) has always been a little different - management is methodical, relatively conservative, and not very promotional. Instead of steadily churning out low-probability drug candidates, the company is careful about what it puts into human studies and management puts in the extra work to lay the groundwork for long-term commercial success. While that can lead to some frustration with what looks like a relatively thin pipeline (a complaint I've had from time to time), Neurocrine seems to understand what goes into developing successful drugs, as seen with the ongoing success of Ingrezza in tardive dyskinesia (or TD).

The biotech space has become more volatile lately, but I continue to see value in Neurocrine shares below $100. Ingrezza makes up more than 60% of my fair value estimate, with most of that coming from the already-approved and marketed TD indication, but elagolix should see FDA approval this year and investors will soon learn if the company's drug for CAH has a future.

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Neurocrine Reaping The Benefits Of A Methodical Approach

Illinois Tool Works's Ability To Drive Growth And Margin Leverage Getting Tested

Even the best-run companies are still subject to the laws of gravity, and valuations got pretty high among the top-tier multi-industrials early this year. Illinois Tool Works (ITW) was one of the more expensive names then, but I’m still surprised that the subsequent correction has seen it underperform some industrial peers like Ingersoll-Rand (IR) and Dover (DOV).

Looking ahead, 2018 is likely to be a year where ITW’s ability to drive organic growth and ongoing margin leverage is going to get tested a little more strenuously. I do have great respect for the quality of ITW’s operations, and its options to grow through M&A, but I do have some concerns that sell-side margin expectations are aggressive. Valuation being what it is, I would lean more toward names like Honeywell (HON) and Eaton (ETN), but if the shares were to fall into the $130s without a significant deterioration in the economic environment, I’d take another look.

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Illinois Tool Works's Ability To Drive Growth And Margin Leverage Getting Tested

Roche Drifting Without Perception-Changing Data

Once tapped as the future belle of the ball due to its deep pipeline of potential add-on/combo oncology therapies, Roche (OTCQX:RHHBY) has continued to lag rivals like Merck (MRK) as investors grow more concerned that Roche's PD-L1 antibody Tecentriq will have trouble standing out from the crowd and become yet another disappointing offset to looming biosimilar erosion.

It's still early (a familiar fallback position for disappointed bulls), but Roche really needs strong data to close the gap with Merck's Keytruda, even if it is at least in part a perception gap. Roche could also really use another blockbuster or two from its pipeline, particularly one that doesn't have abundant competition. Although I continue to believe that the market is not giving Roche its due, the reality, for now, is that looming biosimilar-driven revenue erosion is a hard cloud for Roche to get out from under and it is likely to take time for perceptions to shift.

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Roche Drifting Without Perception-Changing Data

FirstCash's Balanced Growth/Value Model Continues To Work

FirstCash’s (FCFS) headline results don’t look all that impressive, but there good things going on with this large pawn lender. The company’s Latin American operations continue to generate strong growth, while the integration of a large U.S. acquisition is on pace to generate better margins and cash flows in the years to come. At the same time, lending options for FirstCash’s core customer base continue to remain relatively limited, giving the company a good addressable market to drive future growth. 

FirstCash shares have done a little better than I’d expected, but I continue to believe there’s a reasonable trade-off in place between risk and reward. Although I do not believe that the shares are shockingly cheap, I believe the prospect of high teens EPS growth and high single-digit long-term FCF growth can support a decent return.

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FirstCash's Balanced Growth/Value Model Continues To Work

FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

FEMSA’s (FMX) performance over both the past few months and the past year has been decidedly mediocre, as the company continues to work through some restructuring efforts at Coca-Cola FEMSA (KOF) while building up its Health (drugstores) and Fuel (gas station) operations. Add in foreign currency volatility and undeployed capital from a partial sale of its Heineken (OTCQX:HEINY) stake, and there are a lot of moving parts working against the bottom line.

I continue to believe that FEMSA is a well-run conglomerate that offers good exposure to Latin American, and particularly Mexican, consumer spending growth, but challenges in Mexico, Brazil, and the Philippines are likely to keep a lid on performance in 2018. A fair value in the neighborhood of $105 still makes this a name worth considering, but I expect the shares to mark time at least until the elections in Mexico are decided.

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FEMSA Offers Long-Term Value, But 2018 Won't Be A Banner Year

Lincoln Electric Doing Its Part, But The End-Market Outlooks Are Getting Murky

Welding market leader Lincoln Electric (LECO) has gone nowhere fast over the past year, as the market seems to be uncertain about the prospects for ongoing recoveries in the industrial markets that the company serves. Lincoln Electric is also dealing with input cost inflation while working to integrate its Air Liquide acquisition and continuing to build out its automation offerings.

Although metalworking demand still seems to be relatively healthy, I can understand investor caution regarding heavy industry and general fabrication markets, as this recovery cycle has been going on for a little while. Lincoln Electric is a very well-run company, typically producing mid-to-high teens ROICs, but it remains cyclical, and investors seem to be more and more cautious toward cyclical industrial stocks right now.

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Lincoln Electric Doing Its Part, But The End-Market Outlooks Are Getting Murky

3M Stumbles, And The Knives Come Out

If 3M (MMM) had in fact been benefiting from the unwind of General Electric (NYSE:GE) as the go-to multi-industrial name and a change in perception that it was no longer so sensitive to short-cycle movements, a lot of that has unwound since late January. 3M still has quite a lot of exposure to sectors like autos and electronics, not to mention "general industrial", and investors are increasingly worried that those businesses are now past their peaks. Add in growing worries about margin leverage, 3M's inability to cover input cost inflation, and a high valuation, and institutional shareholders are scrambling for the exits.

As I wrote in prior articles on 3M, the shares got too high on overheated enthusiasm about the economic cycle, and there is definitely a risk that perception will overcorrect in the other direction. 3M isn't yet at an obviously cheap level yet, though the shares are getting back to a high single-digit long-term implied return, provided that mid-single-digit FCF growth remains a valid long-term assumption.

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3M Stumbles, And The Knives Come Out

Turkcell's Digital Push Continues To Drive Better Growth

You wouldn't know it by the share price, but management's plans and efforts to drive growth, and more profitable growth, at Turkcell (TKC) are working well. Turkcell continues to leverage its network superiority to generate postpaid subscriber growth as well as increased data consumption, and the results are showing up in the revenue and margin performance. Turkey's overall economy remains a risk factor, as does the company's fractious ownership group, but the shares continue to look undervalued.

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Turkcell's Digital Push Continues To Drive Better Growth

TCF Financial's Specialty Lending Business Should Help Ease A Big Transition

It takes time for banks to remake themselves, but TCF Financial (TCF) is underway with what will be a multiyear process of becoming a more focused, higher-quality bank focused on middle-market depositors and specialty lending. Although there will be some headwinds from this transition, TCF's above-average asset sensitivity will ease some of those challenges. My biggest issue with TCF at this point is the valuation - while I'm on board with the idea of paying more for asset-sensitive banks at this point in the cycle, TCF has enjoyed a very strong run over the past year and banks like Comerica (CMA) and First Horizon (FHN) have fewer issues for similar premiums relative to fair value.

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TCF Financial's Specialty Lending Business Should Help Ease A Big Transition

Schneider Electric Still Not Getting Full Marks For Its Performance

The performance of French automation and electrical equipment manufacturer Schneider Electric (OTCPK:SBGSY) (SCHN.PA) remains a little confounding. The company has been producing good growth recently in comparison to peers/rivals like ABB (ABB), Eaton (ETN), Emerson (EMR), and so on, but the share price performance over the last year hasn’t been all that impressive – a little better than ABB and in line with Eaton, but certainly nothing special next to Rockwell (ROK), Emerson, or Honeywell (HON).

Of course, one-year performance numbers can only tell you so much, and comparisons to conglomerates like Honeywell aren’t entirely fair, but Schneider’s recent performance doesn’t seem to reflect much confidence in the company’s outlook.

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Schneider Electric Still Not Getting Full Marks For Its Performance

Roper Technologies Comes Through Again

Investors continue to appreciate Roper’s (ROP) M&A-driven growth and its leverage to higher-margin product categories like SaaS (including medical software), metering, and controls/instrumentation. Although industrial conglomerates on the whole haven’t had an especially good run since the fourth-quarter earnings reporting season, Roper has continued to outperform both the market and many of its peers. With good underlying market drivers, strong cash flow, and upcoming M&A deployments, the underlying drivers for Roper still look to be very much in place.

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Roper Technologies Comes Through Again

Danaher's Growing Leverage To Life Sciences Improves The Long-Term Outlook

As investors have become a little more concerned that the industrial recovery story has peaked, Danaher's (DHR) far larger skew towards health and life sciences has started looking better and better. At the risk of oversimplification, I think the greater skew toward health care/life sciences can partly explain why Danaher and Roper (ROP) have outperformed peers like 3M (MMM), Honeywell (HON), and Illinois Tool Works (ITW) over the last three months (although industrial-heavy Fortive (FTV) has led the group, so it's not a flawless hypothesis…).

Danaher doesn't look especially cheap, but that's been the norm for much of the company's history and it hasn't prevented the company from outperforming the S&P 500, as management continues to apply a proven successful model. With greater exposure toward long-term growth opportunities like diagnostics and bioproduction, I like Danaher's mix even if the valuation is not scintillating.

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Danaher's Growing Leverage To Life Sciences Improves The Long-Term Outlook

Stanley Black & Decker Looks Undervalued, But Growth And Margins Are Decelerating

I've said it many times before and I'll say it again - "buying the dip" sounds like great advice, but it can be tough to follow in practice. Outside of market-wide freak-outs (which still require a certain amount of long-term confidence and patience), those dips often come because of issues that don't necessarily look temporary or quickly solvable at the time. And so it is with Stanley Black & Decker (SWK), as the shares are off about 20% from their January high, but there has been a noticeable slowdown in the business and that second-half recovery is not assured.

I'm a little nervous that I'm expecting too much long-term FCF leverage, and there's definitely meaningful downside risk if Stanley Black & Decker can't improve FCF generation from recent levels, but I don't believe my underlying assumptions are all that aggressive and I believe growth in the Tools and Industrial segments can support a higher fair value than today's price offers.

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Stanley Black & Decker Looks Undervalued, But Growth And Margins Are Decelerating

Grainger's Strategy To Drive Better Volumes Showing Good Results

I haven’t been all that impressed with Grainger’s (GWW) strategy in recent years, and I think strategic issues are at least in part responsible for the stock’s underperformance relative to other distributors like MSC Industrial (MSM) and Fastenal (FAST) over the last three to five years. But credit where it is due – management’s most recent initiatives appear to be working out well, and the stock is quickly closing those performance gaps, having outperformed MSC, Fastenal, and HD Supply (HDS) over the last two years and especially in the last 12 months.

It remains to be seen whether Grainger can continue to leverage these improvements into ongoing sales and margin expansion. Amazon (AMZN) looms large as a threat and I think the entire industrial distribution space may find margin expansion to be more challenging than the Street expects.

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Grainger's Strategy To Drive Better Volumes Showing Good Results

Honeywell Offers Attractive Leverage To Multiple Healthy Markets

Having more or less tracked the S&P 500 lower over the past three months, the valuation on Honeywell (HON) is looking a little better these days. Not only did the company's recent investor day give more insight into long-term growth initiatives, particularly those concerning software, but also many of its major end-markets are still in attractive stages of their cycle. I wouldn't say that Honeywell's valuation is at a can't-miss level here (particularly for investors focused on the short term), but it looks pretty good to me on a long-term basis.

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Honeywell Offers Attractive Leverage To Multiple Healthy Markets

With Weak Asset Beta And Rising Deposit Beta, Signature Bank Must Drive Loan Growth

Deposit beta is getting more and more attention these days with bank stocks, but asset betas are also important, and in the case of Signature Bank (SBNY), I’m worried about the company’s net-negative leverage to further rate increases. With little-to-no juice on the NIM line and no real fee income-generating business to speak of, Signature Bank’s growth is tied to its ability to grow the loan book. Luckily for investors, there are a lot of small(ish) privately-owned businesses that feel underserved by larger banks, and Signature is taking its show on the road and looking to open private banking offices on the West Coast.

Signature Bank is a different sort of bank, but there’s only so far “different” goes in terms of valuation. I’d pay a little more for a bank that is likely to earn 14% ROTCE in 2018 and generate double-digit earnings growth over the long term, but I worry that Signature may remain out of favor a little while longer as taxi medallion credit issues and asset sensitivity weigh on sentiment.

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With Weak Asset Beta And Rising Deposit Beta, Signature Bank Must Drive Loan Growth

Rebounding Petrochemical Demand Heating Up Chart Industries

Chart Industries (GTLS) was already looking at a stronger 2018, as recoveries in the oil/gas and industrial gas markets started pushing more and more orders into the company’s backlog. On top of that, the company stands to benefit from the ongoing integration of Hudson and the expansion of its service operations. Even with a good outlook heading into 2018, Chart’s first quarter results were stronger than expected, giving another boost to a story that already had some good momentum. While I believe it is still hard to argue that Chart is significantly undervalued, better than expected financial performance can certainly raise the bar and I expect to see strong reported results for a couple more quarters (at least).

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Rebounding Petrochemical Demand Heating Up Chart Industries