Increased Focus On Better Margins Driving More Value At Lattice Semiconductor

Lattice Semiconductor (LSCC) has been doing alright. Up about 20% since my last update and up close to 40% over the last year, Lattice has not only outperformed the SOX by a good margin but also a number of high-quality chip names like Silicon Labs (SLAB) and FPGA competitor Xilinx (XLNX). Some of this outperformance is due, I believe, to management simply stabilizing the business in the wake of the collapse of the Canyon Bridge deal, the deterioration of the Silicon Image business, and challenges in the mobile/consumer business. More recently, though, management has taken more definitive steps toward enhancing the margin profile of this business, and as margins are a prime (if not principal) driver of semiconductor stock valuation, this enhanced margin focus has upgraded the value proposition at Lattice.

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Increased Focus On Better Margins Driving More Value At Lattice Semiconductor

Semtech Outperforming As The Pieces Come Together

With stronger than expected results in industrial, handsets, data center, and optical, the pieces of Semtech’s (SMTC) growth story have come together a lot quicker than I’d expected. Add in some operating margin leverage and the shares are up about 15% in just the last three months (and up close to 60% over the last year), handily outperforming the SOX index and peers/rivals like Maxim (MXIM), MACOM (MTSI), Inphi (IPHI), and ON Semiconductor (ON) over those time periods.

I didn’t expect this level of outperformance so soon from Semtech, but I can see why the Street is bullish on the prospects for the second half of the year, given the company’s leverage to data center and optical, as well as improving trends for handsets and the ongoing growth opportunity in Long Range Access (or LoRa). I’m not completely comfortable paying more than 5x forward revenue for Semtech today, those margins are improving and this is shaping up as a relatively rare double-digit revenue growth story with M&A support.

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Semtech Outperforming As The Pieces Come Together

Broadcom Beats, But Rebuilding Confidence Takes Time

Short of repudiating the CA (CA) acquisition and announcing a huge buyback, there’s really not much Broadcom (AVGO) could have done with its fiscal third quarter results that would restore enthusiasm for the shares back to its pre-deal announcement levels. And frankly, I’m not sure that would have done it either, as the shares had been trending down since late November anyway.

There are still a lot of positives to the Broadcom story, including a very strong market position in switch silicon, underrated (still) capabilities in heavy-duty AI ASICs, and cash-generating businesses in areas like networking ASICs and enterprise storage. Add in a possibly improving Wireless business and an undemanding valuation, and I believe Broadcom shares still have a lot of appeal. Set against that appeal are the concerns about Broadcom going too far out of its area of expertise with the CA deal and a wider slowdown in the chip space.

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Broadcom Beats, But Rebuilding Confidence Takes Time

Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

If fiscal third quarter results are a fair indication, it looks like my concerns about a slowdown in business at Hurco (HURC) ahead of a major fall tradeshow were misplaced. Although Hurco did see some sequential slowdown in orders, that’s not uncommon in the summer and the business overall seems to be in good shape, while industrial customers continue to look to add production capacity.

Experienced investors know that the good times for Hurco, DMG Mori (OTCPK:MRSKY), Milacron (MCRN) and other industrial equipment manufacturers won’t last forever, but this latest earnings cycle has offered more positive commentary compared to earlier this year and many manufacturers are bumping into capacity constraints. While global trade tensions are a threat, and I wouldn’t go too far out on a limb to chase Hurco, I don’t think the cycle is over just yet.

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Hurco Keeps Delivering, But The Cycle Appears To Be Slowing

Nigeria Once Again Turning The Screws On MTN Group

It wasn’t as if South Africa-based, pan-Africa mobile services provider MTN Group (OTCPK:MTNOY) didn’t already have enough challenges, what with the company fighting for market share and margins with Vodacom (OTCPK:VDMCY) in a weak South African economy, facing renewed sanctions on Iran, and having some challenges in other operating areas. Now the situation has gotten considerably uglier with the government of Nigeria looking to take $10 billion from MTN for what it claims are underpayment of taxes and violations of currency controls.

At this point it is harder and harder to argue for patience with MTN Group. While new management may be able to drive better long-term performance, and the long-term potential of the African market (as a whole) is significant, the issues with Nigeria and Iran are significant and won’t go away quickly. MTN Group is likely trading below, if not well below, a reasonable estimate of fair value, but the risks to the Nigeria business are substantial and that creates significant overall uncertainty as to valuation and long-term potential.

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Nigeria Once Again Turning The Screws On MTN Group

K2M Shores Up A Weak Spot For Stryker

One of the best med-tech names out there, Stryker (SYK) doesn’t have many weaknesses, but the company’s spine business has been one notable exception. With a portfolio that has been lacking in innovation or differentiation, Stryker has seen its market share in spine drift lower against the likes of NuVasive (NUVA) and Globus (GMED) in recent years. Acquiring K2M (KTWO) is a strong step in shoring up the weakness of Stryker’s spine business, and while some investors may question Stryker’s decision to “double down” in a tough business, the long-term benefits of the move could be larger than they first appear.

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K2M Shores Up A Weak Spot For Stryker

Renesas And IDT - It May Or May Not Be True, But It Makes Some Sense

Once a hotbed of M&A activity, deal activity in the semiconductor sector has cooled off considerably this year as buyers are digesting their meals and potential acquirers are trying to make sense of the current market, given lengthening lead times in many product categories, rising trade tensions, and some concerns about deal approval criteria. Even so, I’ve continued to maintain that Integrated Device Technology (IDTI) is a “when, not if” seller and Japan’s Renesas (OTCPK:RNECY) is a “when, not if buyer,” and while I hadn’t previously tied these two together, there’s a rumor now that Renesas is close to a deal to acquire this high-quality mid-cap growth semiconductor company.

Although I wouldn’t call Renesas a prime strategic acquirer of IDT, I can see how the company’s capabilities in auto sensors, power management, and wireless power would hold a lot of appeal, not to mention the strong growth outlook for IDT in other markets like memory interfaces, industrial sensors, and wireless charging. Assuming a normal level of post-deal cost savings, I believe Renesas could pay something in the low-to-mid $40s for IDT and still reap worthwhile (double-digit) long-term returns on the deal.

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Renesas And IDT - It May Or May Not Be True, But It Makes Some Sense

Ciena Converting Skeptics And Finding Its Groove

Ciena (CIEN) has been a patience-testing call at times, as the market has been unwilling to trust this optical equipment provider given a not-so-great history and reputation for its sector. While there are still too many subscale players in optical transport, Ciena is doing well on Tier 1 metro spending, growth overseas in markets like India and Japan, and data center growth. Margins are still a bit of a sensitive subject, but I think management has made a good case for why margins should rebound over time.

With the big post-earnings jump (up more than 10%), it's harder to call Ciena a bargain, though I don't think the upside is tapped out yet. I'm a little concerned that Ciena could disappoint on gross margins in the next quarter and shake some of this newly-won confidence, but this is definitely a name I'd look at again if it were to slide back into the mid-$20s.

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Ciena Converting Skeptics And Finding Its Groove

Infineon Facing Near-Term Ordering Risks, But Attractive Long-Term Growth Opportunities

These are interesting times for the semiconductor industry. End-market demand is still pretty healthy, and with many suppliers at or near capacity, lead times have lengthened and double-ordering has become more commonplace. That's a threat to companies like Infineon (OTCQX:IFNNY) (IFXGn.XE), ON Semiconductor (ON), and STMicroelectronics (STM), as the industry has struggled in the past to exit gracefully from periods of extended lead times and deal with what is often an over-capacity situation in the immediate aftermath.

I do believe the near-term outlook for Infineon has some risks to it (and I would say the same for ON, STM, and Renesas (OTCPK:RNECY)), but I like the company's long-term growth opportunities in areas like auto, factory automation, renewables, and appliances, as it leverages its very strong position in power and looks to grow share in microcontrollers (or MCUs).

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Infineon Facing Near-Term Ordering Risks, But Attractive Long-Term Growth Opportunities

Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Focused and disciplined, Employers Holdings (EIG) isn’t likely to ever be a fiery growth stock, but then I think you could argue that aggressive growth in insurance doesn’t often work out so well. Instead, Employers has delivered consistent shareholder value growth since going public by staying focused on its core market opportunity of underwriting workers’ comp insurance for small businesses in industries with low-to-medium hazard risk.

I’m less than comfortable making a big leap into a pure workers’ comp play today, though. The industry has benefited from an extended period of lower losses due in part to the benefits of the ACA and rates have come under pressure in recent years as a result of lower losses and strong returns. Worsening loss trends are a threat, as is a slowdown in employment growth, and more insurers are trying to target the smaller business markets that Employers has targeted. While I do think the shares are modestly undervalued today, another dip toward $40 would certainly get my attention.

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Employers Holdings A Well-Run Play On Small Business Growth Through Workers Comp

Disruptive Innovation And Generally Good Execution Driving Globus Medical

Although there was a little hiccup in June, Globus Medical (GMED) has continued to outperform in a hot med-tech market, as investors have been fired up by the company’s disruptive innovation (particularly in robotics) and prospects to leverage meaningful share gains and pull-through in the coming years. At the same time, the company’s “core” spine business has continued to gain share in what may finally be a recovering U.S. market for spine procedures.

Up close to 80% over the past year, valuation remains my biggest concern with the shares. Ongoing beat-and-raise quarters should be able to support the stock (if not drive it higher), but the stock does appear to be carrying multiples in excess of what the business can support, and I believe that ups the risk.

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Disruptive Innovation And Generally Good Execution Driving Globus Medical

Sandy Spring Offers Quality And Value, But Mind The Funding Risk

By and large, there aren't a lot of great bargains in the banking sector today, and most of those that look to be bargains to me are having some "hair" on the story right now. I suppose bears can point to some near-term issues and challenges with Sandy Spring Bancorp (SASR), but on the whole I believe this metro DC bank is a high-quality proven operator with a good mix of quality and growth, and a decent value story as a nice little kicker.

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Sandy Spring Offers Quality And Value, But Mind The Funding Risk

Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Relative to the skepticism that prevailed two or three years ago, Carlsberg (OTCPK:CABGY) (CARLb.KO) has executed well – not only against its self-improvement plan, but against a pretty challenging market environment. Management has exceeded its cost-cutting/savings goals, successfully introduced new products, and shown that it can drive revenue and profit growth from “premiumization” in mature markets, while building its business in emerging markets.

Carlsberg shares have outperformed most of its peer group over the past two years, handily surpassing ABInBev (BUD), Molson Coors (TAP), and Heineken (OTCQX:HEINY), though not matching the stellar performance of CR Beer. Valuation is mixed, with the shares not looking so appealing on discounted cash flow, but offering more upside on EV/EBITDA, and management still faces considerable challenges with a mature footprint and rising competition in some of the most attractive emerging markets.

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Carlsberg Has Exceeded Expectations, But There's Still More Work To Do

Improving Rates And Capital Deployment Should Better Support Ship Finance's Dividend

Through the severe ups and downs of the shipping industry, Ship Finance (SFL) has managed to roll with the punches better than most. Although the annualized total return over the past decade including dividends isn’t so impressive next to the S&P 500, the company has done considerably better than the “average” shipping company (more than a couple of which went bankrupt) and has consistently paid a dividend despite significant disruptions at major client companies.

Ship Finance has also evolved with the time, and I believe the company is in fairly solid shape today. Not only is the company placed to benefit from rising rates in containerships and dry bulk, the company has been actively deploying capital into cash flow-generating assets and could likely deploy several hundred million dollars more into productive assets. Although I don’t think the shares offer all that much appreciation potential, I believe the dividend will be increasingly better-supported by cash flow in the coming years and I think the yield offers a decent return relative to the risk.

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Improving Rates And Capital Deployment Should Better Support Ship Finance's Dividend

Nektar Therapeutics Offers A High-Potential But Controversial Pipeline

It has been a while since I updated my thoughts on Nektar Therapeutics (NKTR), and a lot has happened with this biotech over the past year, including a huge development deal with Bristol-Myers (BMY), mixed trial data at ASCO, and ongoing progress with additional compounds in the oncology pipeline. On top of all that, Nektar has a pain asset with potentially impressive upside, an exciting early-stage anti-inflammatory asset, and a significant amount of cash.

Nektar shares sold off hard after the disappointing ASCO results, but have since recovered 40%. At this price, I don’t necessarily think Nektar is seriously undervalued relative to the development risk. That’s a key caveat, though, as better clinical data on the NKTR-214 (or ‘214) melanoma program at the November SITC could restore some bullishness here and there is a lot of potential value in ‘214, NKTR-358, NKTR-262, and NKTR-255 that could be unlocked with future clinical successes.

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Nektar Therapeutics Offers A High-Potential But Controversial Pipeline

An Unexpected Leadership Transition Likely Won't Faze Roper

It’s hard to find much to pick at with Roper (ROP). Sure, the ROIC/CROCI could be a little higher, but this tech and software-driven multi-industrial has “out-Danaher’ed” Danaher (DHR) over the past 15 years with a 20% annualized return driven by well above-average revenue growth, operating margins, FCF growth, and FCF margins. What’s more, the company’s transition toward niche-based, asset-light, SaaS-driven recurring revenue puts the company in a sweet spot with respect to many of its more cyclical peers.

Roper investors got a negative surprise on Friday, though, as the company announced that Neil Hunn would be assuming the CEO position effective on September 1, with Brian Jellison stepping down. While this transition is coming about three years sooner than expected, Hunn has been groomed for this position for some time. Rising valuations and ample capital left to deploy will test Hunn early in his tenure, but my basic viewpoint today is that Jellison established a model that can continue to generate strong results without him.

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An Unexpected Leadership Transition Likely Won't Faze Roper

Approval, Labeling, Pricing, And Competitor Data All Give Alnylam Pharmaceuticals A Wild Ride

It’s been an interesting period of time to be an Alnylam (ALNY) shareholder, as the company got its first FDA approval (Onpattro), but with a narrower label than hoped and a somewhat confusing price structure. On top of that, a key potential competitor that wasn’t even seen as much of a player just a year ago has come out with data that, while strong, doesn’t exactly lock the door on Alnylam.

I’m finding that relatively conservative expectations have helped me out with Alnylam; the company’s announced net pricing was 1.5% lower than my estimate, and I never had modeled any revenue for Onpattro from more cardiomyopathy-oriented hATTR patients. While data from Pfizer’s (PFE) tafamidis does set a high bar for Alnylam’s ALN-TTRsc02 (or “sc02”), here too I haven’t been expecting Alnylam to run away with the market. All told, I’m still feeling relatively comfortable continuing to own these shares and with a $150 fair value estimate.

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Approval, Labeling, Pricing, And Competitor Data All Give Alnylam Pharmaceuticals A Wild Ride

Can Acerniox Deliver A Stronger Second Half?

One of the strongest bullish arguments for Acerinox (OTCPK:ANIOY) has been that the company’s strong leverage to the U.S. market (40% of production capacity) would significantly improve its pricing outlook and shield it from at least some of the risks of import competition in markets like Europe. Although that has been the case, and Acerinox has outperformed other stainless steel names like Outokumpu (OTCPK:OUTKY) and Aperam (OTC:APEMY), as well as other European steel names like voestalpine (OTCPK:VLPNY) and ArcelorMittal (MT) (which is really more of a global steel company), the shares are still down a bit from my last update and flat for the year as my worries about playing a mature steel cycle have apparently come to pass.

As is the case with voestalpine, it’s hard to recommend Acerinox shares now even though they do look meaningfully undervalued. European steel prices should recover in the second half of the year, but “should” is not a guarantee, and it’s tough to see what’s going to drive a significantly better outlook for these companies. While I do thing the value argument here is legitimate, and peak EBITDA could still be some distance away, investors need to at least consider the risk that Acerinox turns into a value trap.

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Can Acerniox Deliver A Stronger Second Half?

Wright Medical Does A Deal Both Opportunistic And Defensive

For a company that many investors are certain that the CEO is going to sell at some point in the not-so-distant future, Wright Medical (WMGI) continues to show that it is very focused on building its business. To that end, the company announced Monday morning that it would be acquiring privately-held ortho implant company Cartiva for $435 million in cash. Although Wright is paying a high price for Cartiva, the valuation isn’t unreasonable relative to the growth and Wright is adding an uncommonly profitable product with meaningful growth potential.

Given the price Wright Medical is paying, executing on this transaction is essential. While the acquisitiveness of Wright could, perhaps, prompt some investors to question the real underlying health of the company’s portfolio, I think Cartiva was a rare opportunity for Wright Medical to meaningfully augment its growth potential.

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Wright Medical Does A Deal Both Opportunistic And Defensive

Value And Operational Quality Aren't Enough To Get Voestalpine Moving Up

It’s been something of a boilerplate warning for me when I’ve written about steel stocks this year, but one of my biggest concerns with the companies in this sector has been whether there’s anything left in terms of themes or catalysts to drive these stocks higher. In the case of voestalpine (OTCPK:VLPNY) (VOE.VI), the shares have been disappointingly weak since my last update (down about 14%, underperforming the sector by about 10%), as worries about tariffs, end-market exposures, and cycle/price risk outweigh what have been pretty good operating results.

I do believe voestalpine shares are trading meaningfully below fair value, but what’s going to change that? Valuation itself is very rarely a catalyst, and I don’t know that there’s much desire in Washington, D.C. to ease up on tariffs ahead of midterm elections. Accordingly, while I do think that voestalpine is a very good steel company trading at too low of a price, there is a real risk that this is a value trap at a time when the sector is likely plateauing.

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Value And Operational Quality Aren't Enough To Get Voestalpine Moving Up