ING May Be Through The Worst Point Of The Cycle

Not a lot has gone right for ING Groep (ING) in 2019. Despite being generally regarded as a well-run bank, ING has gotten caught up in and dragged down by most of the same macro challenges that have hurt other banks, including sluggish GDP growth across much of its operating area, political turbulence, and even weaker rates. At the same time, ING has been dogged by some more company-specific issues including higher compliance expenses, a high retail (and retail spread) skew, and a higher reliance on swap rates.

I’m not necessarily expecting 2020 to be dramatically better, but I don’t think it will be worse, and maybe the idea that earnings have finally been revised down far enough will be enough for ING to start performing a little better. These shares have risen more than 10% since my last update, but still remain undervalued if the company can muster just low single-digit long-term core earnings growth. With what I believe to be low expectations, a high dividend, and a sound capital structure, I think ING shares still have some appeal.

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ING May Be Through The Worst Point Of The Cycle

Jungheinrich Could Still Do Some Heavy Lifting

Investors have started positioning for an expected recovery in short-cycle industrial markets, but as is typically the case, it has left some names overvalued and others overlooked. Germany’s Jungheinrich (OTC:JGHAF) (JUN3.XE) isn’t going to be the easiest stock for some investors to own or follow, but for those who can, it’s a name worth considering as a nearly pure play on improving economic metrics in Europe over the next few quarters.

To be clear, I look at Jungheinrich as more of a trade than a long-term buy at these levels. Discounted cash flow suggests a return potential on par with other quality industrials, but the shares look undervalued on an EV/EBITDA basis and the company’s strong historical past leverage to economic upswings is the real near-term attraction here.

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Jungheinrich Could Still Do Some Heavy Lifting

IPG Photonics Struggling To Offset Weaker End-Market Demand And Stronger Competition

One of the most perilous times in a company’s publicly-traded life cycle is when it transitions from being a differentiated break-out growth story to a more “regular” type of company with more competition and less capacity for differentiation. Often there are many investors who are unable (or unwilling) to see the change and they’ll respond to any sell-offs or criticism with “just buy it and don’t worry”.

I’ve heard exactly that in response to past articles on IPG Photonics (IPGP) highlighting the increased competition the company is facing and the challenges in finding new markets where the company can really stand out with its technology (and garner premium pricing). And yet, the shares are down about 20% from my last update (where I suggested the valuation was too high), and estimates are quite a bit lower now as well.

I don’t hate IPG, and the valuation is a lot more reasonable now, but those core challenges with rising competition and more difficult differentiation remain in place. While there is still a long runway for laser adoption in a range of markets (including core welding/cutting), more and more of that opportunity is going to go to lower-priced rivals in China. Still, I like the company’s leadership in areas like high peak power lasers and its opportunities in markets like sensors, instrumentation, defense, and medical technology, and I think these shares are worth another look now.

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IPG Photonics Struggling To Offset Weaker End-Market Demand And Stronger Competition

FLSmidth Not Expensive, But Weakening Mining Outlook Is A Real Concern

As a play on the late-cycle mining sector, FLSmidth (OTCPK:FLIDY) (FLS.CO) has simply not worked since my June 19 article. In fact, this diversified supplier of equipment to the mining and cement industries has been among the worst performers of the mining stocks I follow, with Epiroc (OTCPK:EPOKY) the only name in the group I follow to outperform the S&P over that time period.

FLSmidth’s underperformance has been driven by multiple earnings downgrades, which in turn have been driven by weaker service uptake, mining project cost overruns, project delays, and weaker-margin mining orders working through the P&L statement. Although a bullish stance on FLSmidth could well be throwing good money after bad, and there are risks to the mining equipment demand outlook, FLSmidth appears to be trading at an undemanding valuation and a stronger global economy in 2020 would likely drive some rerating in this laggard.

Readers should note that the U.S.-traded ADRs are not especially liquid.

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FLSmidth Not Expensive, But Weakening Mining Outlook Is A Real Concern

Commercial Vehicle: Better-Placed For The Truck Downturn Than The Share Price Suggests

It has to be frustrating at times to be part of Commercial Vehicle’s (CVGI) management team. While this supplier of seating, wiring, trim, and other components to the global trucking and construction equipment market has actually undergone a pretty meaningful restructuring since the last peak in Class 8 truck builds, it doesn’t show up in the share price (which is basically flat since then). Of course, CVGI hasn’t executed flawlessly over that time either; many of the company’s growth plans have come up short, and I’ve taken issue with the approach to M&A over the years.

With the company on the edge of the cliff with respect to U.S. Class 8 truck builds, this is a tough stock to recommend. I do believe the shares are undervalued on a long-term basis assuming low single-digit revenue growth and mid-single-digit FCF growth, but cyclical stocks tend to trade more on near-term earnings prospects, and CVGI is likely to see a meaningful EBITDA decline in 2020.

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Commercial Vehicle: Better-Placed For The Truck Downturn Than The Share Price Suggests

ArcelorMittal Up Nicely Off The Bottom, But Substantial Uncertainties Remain

Valuations looked pretty washed out across the steel sector going into third quarter earnings, and my last article on ArcelorMittal (MT) was titled “ArcelorMittal Likely Approaching The Bottom”. Since then, the shares are up more than a third on renewed optimism that steel prices have bottomed, that margins likewise have bottomed, and that the company may walk away from its questionable decision to take over Italy’s Ilva.

What is ultimately going to happen with Ilva is anybody’s guess; ArcelorMittal has offered the Italian government a path toward a resolution, but sound decision-making may be too much to expect. I do still believe these shares are undervalued, but with the market arguably now leaning too positive toward the steel market, I’m not inclined to push my luck here.

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ArcelorMittal Up Nicely Off The Bottom, But Substantial Uncertainties Remain

Aptose Shoots Up As Investors Focus On Reversible BTK Inhibitors

I’ve written before that I consider Aptose Biosciences (APTO) to be a “speculation worth considering” on the strength of its two-drug pipeline for hematology, and between Merck’s (MRK) $2.7 billion bid for ArQule (ARQL) and encouraging early-stage data for the second-gen BTK inhibitor class at this past weekend’s ASH meeting, Aptose shares are having a great Monday – up about 30% as of this writing.

Is Monday’s move fair? As far as a one-day move after the ASH meeting and Merck’s bid, I would say it is probably an overreaction. Then again, this is a sparsely-followed early-stage biotech that I thought was trading meaningfully below its fair value (even incorporating the elevated risks), so more attention on the pipeline and some increased scarcity value for it should drive some upside. Even with this move, though, I still believe the shares trade at enough of a discount to fair value to be worth a look for investors who can take on the well-above average risks and odds of failure.

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Aptose Shoots Up As Investors Focus On Reversible BTK Inhibitors

Atlas Copco Riding High On Renewed Enthusiasm For Recovery Stories

I’ve long liked Atlas Copco (OTCPK:ATLKY), but there haven’t been all that many opportunities to buy in at what would normally be reasonable multiples. Between low rates leading investors to accept lower prospective returns and Atlas Copco’s ongoing well-deserved status as a reliable growth leader, though, it hasn’t hurt the share price performance – Atlas shares have significantly outperformed industrial peers over the last 5-year, 3-year, 1-year, and 1-quarter time periods.

Atlas Copco’s recent capital markets day didn’t offer up a lot that was new, but for a company like Atlas Copco, “more of the same” when it comes to new product development, end-market/addressable market expansion, and margin leverage, more of the same is just fine. I can’t see any way that Atlas Copco shares are cheap now, though, and the prospective mid-single-digit return is among the worst of the quality industrials I follow (if not the worst). I don’t expect Atlas to sell off just because the shares look expensive to me, but it’s not a stock I intend to chase at these prices.

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Atlas Copco Riding High On Renewed Enthusiasm For Recovery Stories

Alfa Laval's Resiliency Back In The Share Price

There are some stocks out there that always (or almost always) get the benefit of the doubt when it comes to valuation – names like Atlas Copco (OTCPK:ATLKY) and Danaher (DHR) spring to mind pretty readily – and then there are names where it seems like the market is more apt to just somehow “forget” the underlying quality of the business, and I think Alfa Laval (OTCPK:ALFVY) fits in that group. While there are undeniable cyclical parts to the business, I believe the volatility in the share price is outsized for a company with a good full-cycle track record when it comes to returns on invested capital, free cash flow, and other metrics.

I thought the market was overly spooked by second quarter results and guidance and that the shares looked appealing back in July. With a nearly 30% move in the ADRs since then, as part of a bigger rally in many industrial names, the undervaluation is more or less gone now and the annualized prospective returns seem more in line with the 6% - 8% range that is common now for quality industrials (Dover (DOV), Honeywell (HON), Rockwell (ROK), et al). As such, I think Alfa Laval is a decent hold and a name to consider adding on pullbacks along the way.

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Alfa Laval's Resiliency Back In The Share Price

Dana Slogging Through Some End-Market Challenges, But The Longer-Term Outlook Is Better

While I’ve thought Dana (DAN) shares looked undervalued, I also thought that the choppy trends in many of the company’s end-markets, including heavy-duty trucks and off-road vehicles, would add volatility to these shares. Since my last update, the shares have traded over $20 and below $12, and while the company’s capabilities in electrification are getting more recognition, the outlook for 2019 is still dicey and management has been cutting back guidance.

Dana isn’t a good name for nervous investors, but I see a lot of value here. I think the Street may be overestimating the negative impact of lower Class 8 truck builds in 2020, and likewise may be underestimating the potential uplift of electrification in busses and medium-duty trucks in the relatively near future. Although Dana isn’t my favorite auto/truck supplier in terms of pure quality, the valuation is hard to ignore.

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Dana Slogging Through Some End-Market Challenges, But The Longer-Term Outlook Is Better

ITT Inc. Executing Well, But End-Market Weakness Could Create Opportunities For Investors

Industrials don’t move in lockstep through their cycles, and multi-industrial ITT Inc. (ITT) continues to benefit from both a stronger skew to process industries and company-specific share-gain drivers, not to mention better than expected margin leverage. With that, the stock has been a notable outperformer over the past year, beating its peer group by over 20%, with a strong run since reporting third quarter earnings.

Although I’m concerned that ITT could still see slowdown in the business (orders have been negative for two quarters), I think the nature of the company’s business mix will lead to a shallower, shorter slowdown than what many industrials are seeing. On top of that, the company appears to have more options to drive better operating margins over the next couple of years. I can’t say that ITT is all that cheap now (though a high single-digit expected return isn’t terrible), but if the company were to stumble a bit over the next few quarters on weakness in short-cycle markets, chemicals, or so on, it would definitely be an opportunity to reconsider these shares.

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ITT Inc. Executing Well, But End-Market Weakness Could Create Opportunities For Investors

Societe Generale In A Position To Switch From Stabilization To Actual Growth

Shareholders of Societe Generale (OTCPK:SCGLY) (“SocGen”) have endured more than a decade of substandard performance, with the bank underperforming not only relative to other French banks like BNP Paribas (OTCQX:BNPQY) and Credit Agricole (OTCPK:CRARY), but to a wider set of quality European banks as well. SocGen’s problems have been legion, putting the company into a very poor capital position and necessitating numerous defensive asset sales and restructuring efforts.

At long last, though, there are more than just signs of progress. SocGen’s capital improvement in the third quarter may have been helped by timing factors, but the bank’s capital position is nevertheless in a much better place and most of the heavy lifting on restructuring is likely done. If SocGen can avoid any major missteps, and if the global economy doesn’t deteriorate too much from here, this long-troubled bank may finally be in a position to go from defense to perhaps actually pursuing growth again.

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Societe Generale In A Position To Switch From Stabilization To Actual Growth

Silicon Labs Executing On Its IoT Opportunity, With Infrastructure Likely To Get Better In 2020

Maybe valuation does matter, at least a little. When I last wrote about Silicon Labs (SLAB) I wrote that I’d at least somewhat thrown in the towel on valuation where this stock was concerned – investors prize the company for its focus on IoT and likely for its M&A takeout as well – but the shares have since underperformed the broader semiconductor space by about 10%. Then again, it could just be a reallocation of some resources in the sector, with other chip companies stumbling (if not crawling) toward the end of their correction cycle and investors wanting to establish positions for the broader recovery.

Whatever the case may be, the shares are still richly-valued, even on a hybrid EV/sales approach that factors in a takeout premium (based upon what companies like Infineon (OTCQX:IFNNY), NXP Semiconductors (NXPI), and ON Semiconductor (ON) have paid for wireless assets). I do believe Silicon Labs is still well-placed for above-average growth, particularly when the timing business recovers and as opportunities in auto mature, but paying premium prices for growth is not really my favored investment strategy.

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Silicon Labs Executing On Its IoT Opportunity, With Infrastructure Likely To Get Better In 2020

A Beat-And-Raise Has Shifted Sentiment On BorgWarner

I liked BorgWarner (BWA) back in late August and thought sentiment was much too negative on this balanced play on internal combustion and electric powertrains, but I didn’t expect the roughly 35% snap back in the share price in such a short time. That’s Wall Street in a nutshell, though, as a share price that’s driven to unreasonably low levels on little more than fear can quickly rebound when sentiment shifts.

Although the valuation isn’t so deep in what I consider to be a “can’t miss” range, I do still think BorgWarner shares are undervalued, and I do still believe that this company is one of the best-placed plays on increasing efficiency and emissions standards, as well as the eventual migration to hybrid and EV models. A greater focus on its manufacturing costs would be welcome, and I’d note that there’s still risk to the backlog, but this is still a name to consider even after this run.

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A Beat-And-Raise Has Shifted Sentiment On BorgWarner

AerCap Sticking With A Value-Creating Strategy

I can’t complain as much these days about the Street not really giving AerCap (AER) shares their due. True, I still think the shares are undervalued and I think the Street undervalues the company’s ability to create value through its leasing operations, and I’d note the implied private value of the company’s fleet is above the market valuation, but I’d also note that the shares are up more than 15% from my last article on the company.

I’m still bullish on AerCap and I still believe this is a good core holding for patient investors. Some readers will no doubt be frustrated by the company’s preference for buybacks over dividends, but I believe the long-term potential rewards are worth it. More competitive lease rates are definitely worth watching, but I believe there is still money to be made from these shares.

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AerCap Sticking With A Value-Creating Strategy

Delphi Technologies Dinged By Near-Term Challenges

There has been quite a bit of variation in the fortunes of leading powertrain suppliers this year, as Valeo (OTCPK:VLEEY) and BorgWarner (BWA), two companies I’ve written favorably about, have performed noticeably better than Delphi Technologies (DLPH). While I believe some of this can be tied to inflated past optimism about Delphi’s merits as a fuel efficiency and EV play, the reality is that Delphi’s recent performance has been lackluster, with worsening trends relative to the improvements at BorgWarner and Valeo.

A lot of sell-side ink has been spilled on which company (or companies) have the best components for hybrids and electric vehicles, but the reality will be that no one company dominates the market, or at least not for long. To that end, I believe Delphi is likely to be a long-term winner in the market, and I believe the current share price reflects a great deal of the near-term risk to weaker vehicle production rates and slower hybrid/EV migrations, but not much upside from that eventual migration.

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Delphi Technologies Dinged By Near-Term Challenges

Turkcell Continues To Execute, But Macro And Strategic Concerns Remain

Turkey's leading mobile services provider Turkcell (NYSE:TKC) has had a mixed performance run since my last update on the shares. Operationally, the company continues to do quite well, with relatively stable share in the mobile business despite aggressive pricing and ongoing growth in ancillary services. While the shares have risen more than 10%, they've lagged the broader Turkish market a bit, and I'd say the performance is relatively lackluster, given the heightened macro risk.

Although I still think Turkcell shares are undervalued, I likewise still think that macro issues tied to Turkey's economy and international relations loom large. I would also note that there seems to be some uncertainty in the market regarding the company's new strategic priorities regarding business and fintech growth - priorities that are going to demand investment spending. Turkcell pays a decent dividend, and its cash flow will likely support improved dividends from here, so at least, there's a "get paid to wait" argument in play for Turkcell shareholders.

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Turkcell Continues To Execute, But Macro And Strategic Concerns Remain

Veeco Seeing New Opportunities Develop, But Valuation Is More Equivocal

Veeco (NASDAQ:VECO) has definitely had its challenges, as the company has not only had to deal with a slowdown in the semiconductor industry but also a significant shift in its long-term end-market opportunities. Veeco has turned away from the LED tool business that was quite significant to the company and has instead embraced emerging opportunities in EUV, VCSEL, and hard drives, as well as maintaining the LSA and lithography businesses it acquired with Ultratech.

The extent to which Veeco can stitch together an attractive long-term opportunity from these new markets remains to be seen, but a greater focus on front-end semi tools should help margins. Profitability, too, remains challenging, with the company likely to report quarterly net losses into 2021. Valuation is something of a toss-up now, but returning to double-digit year-over-year revenue growth could bring some positive attention back to the shares.

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Veeco Seeing New Opportunities Develop, But Valuation Is More Equivocal

Neurocrine Partners With Xenon To Add New Early-Stage Pipeline Assets

I’ve noted before that for all of the positives of the Neurorince Biosciences (NBIX) story, the company has never had an especially dynamic or productive R&D operation when it comes to generating new clinical candidates. With Ingrezza driving the company to profitability and positive free cash flow, management is augmenting its internal R&D efforts by actively looking for licensing and acquisition candidates, and the company announced another such deal earlier this week.

Neurocrine’s agreement with Xenon Pharmaceuticals (XENE) is fairly typical for an early-stage licensing and development agreement. Xenon doesn’t really have the resources to go it alone, and has chosen to partner out certain assets to Neurocrine to better fund other programs, while Neurocrine pays a relatively low entry price for a risky but promising portfolio of compounds for various forms of epilepsy. While the Xenon assets are too early in development to make a meaningful impact on Neurocrine’s valuation, I consider this a worthwhile use of assets for the company and consistent with the strategy management has previously laid out for investors.

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Neurocrine Partners With Xenon To Add New Early-Stage Pipeline Assets

Lexicon Waiting For Clarity On Its Diabetes Franchise

Lexicon Pharmaceuticals (LXRX) is now in a “hurry up and wait” limbo, as the company waits for clarity on its dispute resolution petition with the FDA regarding Zynquista in Type 1 diabetes and as investors wait for more information and clarity on the clinical profile of Zynquista in Type 2 diabetes and Lexicon’s efforts to re-partner the drug.

For now, I believe $4/share is still a pretty fair value for Lexicon shares. A manageable path to approval of Zynquista in Type 1 diabetes would be a significant value-driver for the shares, as would any improvement in the apparent clinical profile of the drug in Type 2 diabetes. Favorable data from the Xermelo biliary tract cancer study or LX9211 in pain would likewise be positives.

Said differently, there are a lot of things that could go right (and go right relatively quickly) for Lexicon and drive a much higher share price, but I believe shareholders need to go in with their eyes open to the downside risk if those favorable outcomes don’t develop.

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Lexicon Waiting For Clarity On Its Diabetes Franchise