I've basically let this page go fallow, as I was encountering various issues that I just didn't have time to address. Apologies for that.
I may take another swing at this in 2024 to see if I can make this site more usable. What is more likely, though, is that I will migrate to Substack. Much of what I do there will be like what I do here - links to articles published on other sites - but I think I may start putting some original content there (and that will probably be behind a paywall).
If anybody is still reading here and has thoughts about this, feel free to share.
I wish everyone a very happy, healthy, and prosperous New Year!
Wednesday, December 27, 2023
Hey Everyone!
Wednesday, January 25, 2023
Synovus Delivering On Growth And Leverage
There have long been vocal doubters on Synovus (NYSE:SNV), and the company’s share price performance over the last couple of years has lagged its peer group, but with above-average fourth quarter results and guidance for 2023, Synovus is getting a little more positive attention lately. While I do think some of management’s growth targets for 2023 could prove challenging (if not ambitious), 3% to 4% core growth can drive a respective target price and anticipated return from here.
Read the full article here:
Friday, January 20, 2023
Consistency Carrying Commerce Bancshares
I believe that at least part of the reason that investors are willing to bid up Commerce Bancshares (NASDAQ:CBSH) to above-average multiples is that this bank is built to weather the ups and
downs of normal banking cycles without much drama. And so it would seem
to be the case in the fourth quarter as well, as the bank continues to
see solid, but not spectacular, results.
Commerce shares are up a bit from my last update, outperforming peers in a market where there is still a lot of angst as to what banking earnings will look like in 2023 due to rising deposit costs and more limited operating leverage prospects. As much as it surprises me to say this, I don't find the valuation all that bad, at least relative to what passes for normal with Commerce, and while I can't really recommend it wholeheartedly as a bank stock likely to generate substantial outperformance, I think it is a name for investors who want less drama and volatility.
Click the link to continue to the full article:
Truist Looks Better Placed Than Many Banks For Better Growth In 2023
Banking is all about leverage, and Truist (NYSE:TFC)
looks to be better-placed than most peer banks to drive rate and
operating leverage in 2023, setting the bank up for relatively better
operating performance. In the context of what I think
is a still-too-low valuation, that's a positive set-up for investors
looking for names in the still out-of-favor banking sector.
Truist had been outperforming its peer group since my last update, and a well-received earnings report certainly didn't hurt. While I would be careful not to project too much onto a company that has struggled to meet expectations since the transformative combination of BB&T and SunTrust, it does seem as though this bank may finally be getting its legs under it, and I still see opportunities to drive growth and value creation from here. Below the mid-$50's, I think this is a name to consider.
Click here to continue:
Truist Looks Better Placed Than Many Banks For Better Growth In 2023
UnitedHealth Seems Curiously Undervalued Given Multiple Growth Drivers
In a business where scale is king UnitedHealth (NYSE:UNH)
has all the scale that an investor could ask for and more. What’s more,
the company has actively built and pursued attractive growth
opportunities outside of
its traditional (and more heavily regulated) medical insurance/benefits
business, including its OptumHealth provider business, OptumRx PBM, and
OptumInsight analytics/information systems businesses.
I like where UnitedHealth sits going into 2023. Normalization of healthcare utilization will be a modest headwind, but the company’s vulnerability to inflation and a potential recession are quite modest, and higher rates benefit the business. On top of that, the company still has opportunities to drive growth from its OptumHealth and Medicare Advantage businesses. While there are some challenges on a straight P/E-based valuation, I do think these shares are undervalued on a longer-term core earnings basis.
Click here to continue:
UnitedHealth Seems Curiously Undervalued Given Multiple Growth Drivers
Fulton Financial Could Use More Core Growth Leverage
It’s still early in the fourth quarter reporting cycle, but so far
the bank sector is not having the easiest time. The main drivers aren’t
all that surprising to me – I’ve been writing about the threats
presented by rising deposit betas, weaker operating leverage, and slowing loan demand for some time, but it seems as though the Street is taking it more seriously now.
Fulton Financial (NASDAQ:FULT) came up short on fourth quarter results and 2023 guidance, although the bank is actually performing well with respect to its deposit beta. Leveraging the Prudential Bancorp deal will be an important driver in 2023, as will the health of the economy in the Philadelphia region, but this remains a bank that has something to prove to the Street where operating leverage and organic growth are concerned.
These shares have fallen about 10% since my last update, more or less matching regional bank peers. I do think the shares are likely undervalued here, but with a challenging 2023 ahead and not a lot of clear positives to tie a bullish thesis to, I can’t really muster that much enthusiasm today.
Read the full article here:
First Republic Planting The Seeds For A Later Harvest
It may be an exaggeration to say that 2023 is a lost year for First Republic (NYSE:FRC), particularly in mid January, but I don’t think it’s an exaggeration to say that the results this bank will post this year
will not be representative of the real long-term earnings power of the
business. First Republic is going to take a hit from much higher funding
costs, but the bank is willing to pay that short-term cost to reap the
long-term benefits of continuing to build a base of high net-worth
customers that can continue to support above-average loan growth and
profitability over the longer term.
First Republic shares have done pretty well in the brief time since my last update, climbing more than 12% in the last six weeks and outperforming peers (particularly smaller regional banks). The call on this stock is a fair bit more challenging today – while I think the shares are undervalued for investors looking for a long-term buy-and-hold name, I do think there's a better-than-average chance of another chance to buy at more attractive levels this year, particularly if the Fed maintains a harder line on rates through the end of the year.
Follow this link for the full article:
JPMorgan Executing Well In Challenging Times And Still Undervalued
This year is likely to be one where management and business quality, as well as past strategic decisions, really show up in the results of bank companies. Most banks will likely see net interest margins peak between Q4’22 and Q2’23, operating leverage will be harder to come by, deposit costs will rise and so too will credit costs. With above-average funding, loan growth and market share growth prospects, and fee-generating businesses, I think JPMorgan (NYSE:JPM) is better placed than most, though I do acknowledge that operating leverage could still prove to be a headwind for this large bank.
My last update on JPMorgan was fairly recent, but the shares have continued to outperform since then, as well as outperforming over the past six and 12 months. My core assumptions haven’t changed that much, though my 2023 numbers are a bit higher now. I’m expecting long-term core growth in the 4% to 5% range, driven not only by fee-generating businesses like its payment operations, but share gains in commercial lending as well. Below the high-$140s to low-$150s I believe these shares are worth consideration.
The full article can be found here:
JPMorgan Executing Well In Challenging Times And Still Undervalued
Keysight Technologies Offers Enough Quality Growth To Support A Robust Valuation
There are plenty of sayings (and cliches) regarding valuation and
quality in the investment world, but it is nevertheless true that
quality, value, and price are all distinct characteristics. I mention
this because I think it’s an important backdrop for looking at Keysight
Technologies (NYSE:KEYS).
This leader in electronic design and test and measurement tools isn’t
conventionally cheap, but I do think the less-cyclical nature of the
business, the quality of the business, and the longer-term growth and
margin potential combine to make a stronger value call than the
multiples might otherwise suggest.
I’m not saying that Keysight is cheap, but I do think investors can expect to get solid value for the money here. I do see some risk that macro headwinds could prove stronger than the Street expects in calendar 2023, but I like the company’s long-term leverage to macro trends like data traffic growth, connectivity, and electrification. At $165 or below this would feel like an easier (or safer) call, but even at today’s price I think long-term investors can reasonably expect to be happy with the long-term returns.
Read more here:
Keysight Technologies Offers Enough Quality Growth To Support A Robust Valuation
Cirrus Logic's Current Valuation Seems Less Than Completely Logical
A carefully cultivated skepticism can be an investor’s best friend, and when a stock looks too cheap, it’s absolutely a good idea to wonder why. In the case of Cirrus Logic (NASDAQ:CRUS), I understand concerns about the company’s heavy reliance on Apple (AAPL) and a soft outlook for smartphone units in CY’23, but even with those concerns accounted for, the share price here looks surprisingly attractive.
I like the efforts the company has taken to diversify beyond its long-held strength in audio, and I think there is still plenty of room for the High-Performance Mixed Signal (or HPMS) business to grow from here. I likewise think additional M&A deals are more likely than not. All things considered, then, I think this is a name where readers might want to consider some due diligence and investigation of their own.
To continue reading, follow this link:
Cirrus Logic's Current Valuation Seems Less Than Completely Logical
Penumbra Riding Higher On Upcoming Launches And Rerating
When I last wrote about Penumbra (NYSE:PEN) in August of 2022 I was bullish on the company based on the prospects for meaningful upcoming product launches and a material rerating for the shares. This has largely panned out since then, with the company recently launching the Lightning Flash in the U.S. and seeing valuation multiples expand again on more bullishness around the company’s ability to hit 20% revenue growth in 2023.
The shares are up more than 35% since that last article, handily beating the Dow Jones Select Medical Equipment Index over that time, as well as rival Inari (NARI). Valuation is never completely straightforward with growth med-tech like Penumbra, but at this point I see the valuation as much less of a bargain, but I don’t discount the possibility of even further positive rerating if Penumbra can log some beat-and-raise quarters on the back of Lightning Flash and other new products heading to the market this year.
Follow this link to the full article:
Power Integrations Seeing A Temporary Brownout
Even differentiated growth stories are often bounded by the
performance of the underlying markets they serve, and so it seems with Power Integrations (NASDAQ:POWI). After a soft third quarter that saw 13% sequential revenue contraction, management guided to even weaker
fourth quarter results and the company is likely to see a
year-over-year decline in 2023 as the company sees inventory corrections
across much of its business.
Even so, the shares have held up pretty well, only declining about 7% over the past year and outperforming the semiconductor industry index (the SOX) by more than 20%. Performance compared to other power-heavy semiconductor stocks has been more mixed, with onsemi (ON) and Analog Devices (ADI) outperforming and Infineon (OTCQX:IFNNY) underperforming. Pull the comparison out to three years and Power Integrations has done a little better than the SOX, a little worse than Analog and Infineon, and nowhere near as well as onsemi, which I attribute at least in part to POWI’s robust valuation in years past.
Looking at the investment case, I see some similarities with names like Lattice (LSCC) and Silicon Labs (SLAB) where valuations have gotten a little less demanding but where it’s still hard to call them conventional bargains. I’m not a big believer in “ignore valuation and just buy”, but if you want a solid multiyear growth semiconductor story this is a name to look at today.
Read more here:
Cosan: Volatility In SEE Markets Only Adds To The Complexity
Brazilian conglomerate Cosan (NYSE:CSAN)
is a complicated story in the best of times, as this company pursues a
holding company structure to invest in a wide range of businesses,
including its Raizen joint venture with Shell (SHEL)
in sugar, ethanol, and retail fueling, its Rumo rail operations, and
other businesses like natural gas distribution, lubricants, and land
development. On top of this “chosen” complexity, the company is now also
dealing with a more volatile environment for its core sugar, ethanol,
and energy (or SEE) operations, with weaker ethanol prices in Brazil and
more risk in the sugar market.
Cosan is a difficult stock to recommend in some respects, as there are a lot of moving parts to track and this isn’t the easiest investment for investors to assess. I do believe management has built a track record of value creation, but it looks as though the business will only get more complex and diversified over time. I do believe this pullback in the shares is an opportunity for investors who can look past increased near-term volatility, but this isn’t really a “sleep well at night” sort of stock.
Click the link for the full article:
Cosan: Volatility In SEE Markets Only Adds To The Complexity
S&W Seed: Trying To Thread The Needle With A Refreshed Product Lineup And Growth Strategy
It's been a while since I've written about S&W Seed Company (NASDAQ:SANW)
and the intervening period has not been particularly kind to this small
ag-tech company. The company has continued to struggle to get farmers to use its higher-value improved alfalfa varieties and a distribution agreement with Corteva's (CTVA)
never really produced the hoped-for benefits; likewise with a venture
into sunflower seed development. Management hasn't given up, though, and
the company is hoping that new efforts in sorghum and stevia, in
addition to better execution in the alfalfa and forage/cover crop
businesses, can finally drive some momentum in the business.
This is an exceedingly risky proposition, and the company now has the dreaded "going concern" warning in its financial filings. It does seem that the new Double Team herbicide-resistant sorghum product is gaining some traction, but the company is pressed on liquidity and has only a narrow path forward, particularly as growing the sorghum business will require reinvestment. I can see meaningful upside from here if management can thread that needle, but readers should realize that this is an exceptionally speculative stock.
Read the full article here:
S&W Seed: Trying To Thread The Needle With A Refreshed Product Lineup And Growth Strategy
SKF's Rally Into 2023 Seems Overdone
Industrials have certainly recovered of late. With investors feeling
more confident that the impending downturn will be mild and that rate
hikes are close to an end, the industrials have climbed about 20% over
the last three months, and Sweden’s SKF (OTCPK:SKFRY) has gone along for the ride, though the shares are still down about 20% over the last year.
I think this rally may prove to be too much too soon. With global PMIs falling and the company likely to see weaker end-market demand coupled with price/cost pressures, 2023 isn’t going to be an easy year and if the market is wrong about a mild slowdown, there could still be meaningful downside to estimates. I don’t think SKF is particularly expensive now (and my near-term expectations are below sell-side averages), but I see a relatively unfavorable risk/reward balance going into the fourth quarter reporting season.
Read more here:
EnPro Becoming A Slimmer, More Profitable, And Less Cyclical Multi-Industrial
EnPro (NYSE:NPO)
management has been transparent about its intentions to continue to
remake the company into a more niche-oriented multi-industrial focused
on less-cyclical, faster-growing markets, and with a product portfolio
more skewed to high barriers to
entry driven by engineering and sticky customer relationships. With the
sale of GGB done, EnPro goes into 2023 focused on its specialty Sealing
Technologies and Advanced Surface Technologies businesses, both of
which offer better growth and margins than the company's historical
trends.
These shares have done well since my last update, appreciating more than 15% and beating both the S&P 500 and the wider industrial group.
I do see some near-term sentiment risk for EnPro, as the company is heavily dependent upon the semiconductor industry and still has meaningful exposure to cycle markets like heavy-duty trucks and short-cycle "general industrial". While 2023 likely won't be a banner year, I do think the company is well-placed for organic growth in the mid-single-digits and strong EBITDA and free cash flow margins. The shares aren't particularly cheap now, and I'd rather wait in the hopes of a pullback, but I like the strategy management is following, and I think EnPro can be a long-term outperformer in the multi-industrial segment.
The full article is available here:
EnPro Becoming A Slimmer, More Profitable, And Less Cyclical Multi-Industrial
Teleflex Already Getting A Pretty Good Benefit Of The Doubt
Teleflex (NYSE:TFX)
goes into 2023 needing to prove that the company can get the business
growing back to a level more in line with investor expectations, and
that includes the key UroLift product. The company
has faced challenges including disrupted office visit trends and supply
shortages, but the market is not going to be particularly forgiving if
the business doesn’t start showing real acceleration over the next few
quarters.
I can’t say that I’m all that bullish on the shares today. I think reaccelerating the UroLift business may be more challenging than management believes, and I’m concerned that the company is going to find itself challenged to meet Street growth expectations. M&A remains a wild card, and management has a good track record here, but I just don’t see the combination of growth and margins that would lead me to get all that excited about today’s valuation.
Read the full article here:
Adecoagro Hit Hard By A Weakening Outlook For Ethanol And Sugar Production
Brazil’s Adecoagro (NYSE:AGRO)
is a good case-in-point that a commodity company can do everything
right (or at least do many things right) and still see larger commodity
and economic trends, and investor worries about those trends, undo that
hard work. Adecoagro, for its
part, as long been a low-cost producer of sugar and ethanol (or SEE) in
Brazil, as well as a low-cost producer of grain and other agricultural
products in Argentina, but it has meant basically nothing for long-term
investors, as annualized returns over the last three, five, and 10 years
is basically flat to negative.
I was bullish on the prospects for Adecoagro to leverage attractive energy, sugar, and crop prices into solid cash flow that would be returned to shareholders in the wake of completing a major multiyear investment program. While the company has indeed instituted a dividend and buyback, the shares are still down about 15% since that last update – outperforming Cosan (CSAN) and Sao Martinho, but still down (and worse than the performance of other ag names like Cresud (CRESY) and SLC Agricola (OTCPK:SLCJY)).
The trouble with assessing Adecoagro today is that whenever you find yourself asking “how could it get worse?” with a commodity company, the market has an uncanny way of showing you just exactly how it could get worse. I do think that Adecoagro’s valuation is low, but with real concerns about ethanol and sugar prices over the next 12-18 months, as well as crop yields and profitability, this is a tough place to go bargain-hunting.
Continue reading here:
Adecoagro Hit Hard By A Weakening Outlook For Ethanol And Sugar Production
Housing Turbulence Could Open A Window Of Opportunity With Rayonier
While it’s true that timberlands can be a good investment category
over time (if bought and managed properly), it doesn’t automatically
follow that timber REITs are a can’t-miss investment opportunity, as the
market has frequently assigned robust multiples to these businesses. In the case of Rayonier (NYSE:RYN), for instance, an investor who bought the shares on the day after the spinoff of Rayonier Advanced Materials (RYAM) and reinvested the distributions would have an annualized return of around 3.5%, while an investment in Weyerhaeuser (WY) would have returned around 3.4%, and PotlatchDeltic (PCH) would have returned around 6.7%.
Still, for almost any going concern, there’s a price where it makes sense to consider (or reconsider) the investment case. I don’t think Rayonier is quite there today, but were the shares of this timber REIT to sell off on weaker near-term results due to the temporary downturn in U.S. housing, it’s a name I’d certainly consider, particularly for investors who want some resource/commodity exposure.
Click here to continue:
Housing Turbulence Could Open A Window Of Opportunity With Rayonier
Acuity Continues To Execute, But Weaker Non-Resi Trends Seem To Be Weighing On Shares
One of the more frustrating investment situations to be in is to see a
company executing a little better than expected, but see the shares
drift lower anyway. Such is the case with Acuity Brands (NYSE:AYI),
where two decent quarters (relative to sell-side expectations) and
inline guidance for FY’23 hasn’t been enough to maintain investor
enthusiasm. Down about 5% since my last update
on the company, Acuity has modestly outperformed the S&P 500 but
underperformed the broader industrial space, including other
non-resi-skewed comps like Allegion (ALLE), Hubbell (HUBB), Johnson Controls (JCI), and Otis (OTIS).
I’ve written in the past about the risk of “boredom” with this stock; it’s not well-covered and the long-term growth potential in the core business (lighting) isn’t very exciting. Still, while recognizing risks like increased competition from overseas lighting manufacturers and overpaying for growth-oriented M&A (for the Intelligent Spaces Group, or ISG), not to mention my weaker-than-the-Street outlook for non-resi activity in 2023/24, the share price does look too low to me and this may be a name for value-driven investors to consider.
Read the full article here:
Acuity Continues To Execute, But Weaker Non-Resi Trends Seem To Be Weighing On Shares
Alnylam Pharmaceuticals Starts 2023 With In-Line Revenue And A Full Slate Of Clinical Read-Outs
This will be another busy year for Alnylam Pharmaceuticals (NASDAQ:ALNY),
as this leading RNAi biotech expects to release clinical updates on
five different clinical programs, in addition to anticipated updates
from partnered programs and multiple potential IND filings. Though the
company has a relatively thin late-stage pipeline, positive early-stage
updates from programs with large addressable markets could be enough to
maintain a positive level of investor enthusiasm.
Alnylam shares have continued to outperform since my last update, besting the SPDR S&P Biotech ETF (XBI) by about 10%. Some minor adjustments to my model take my fair value above $240, and while that isn’t especially robust return potential given the risks with biotech investing, I would note that clinical and regulatory milestones during the year could meaningfully add to that fair value. Still, I would characterize today’s price more as “good, not great”, even though I am a big believer in the company and its core technologies.
Follow this link to the full article:
Alnylam Pharmaceuticals Starts 2023 With In-Line Revenue And A Full Slate Of Clinical Read-Outs
Cycle Worries Weighing On Renesas Electronics And Creating A Bargain Valuation
Semiconductor stocks are off their lows, but I certainly wouldn’t say
that sentiment is particularly healthy – lead-times have started to
shrink and companies have started openly acknowledging customers
inquiring about pushouts (if not outright cancelations). With declining
ASPs likely to push total industry revenue into contraction next year, valuations have retreated to the low end of historical ranges.
Japan’s Renesas Electronics (OTCPK:RNECF) (OTCPK:RNECY) (6723.T) has been holding up relatively well with respect to reported results since my last update, and the shares haven’t done too badly – more or less keeping pace with peers like NXP Semiconductors (NXPI) and ON Semi (ON), though modestly lagging Microchip (MCHP) and Texas Instruments (TXN), and lagging SiC-driven rivals like Infineon (OTCQX:IFNNY) and STMicro (STM) more significantly.
At this point I continue to believe that Renesas shares are meaningfully undervalued. Auto chip demand is holding up better and inventories are not particularly robust heading into a year where many OEMs are looking to catch up on deferred production schedules. I don’t ignore the risk of a steeper decline in the non-auto business, but I like Renesas’s leverage to auto MCUs and ADAS, as well as longer-term opportunities in industrial MCUs and integrated solutions, and I think today’s valuation is too low.
The full article can be found here:
Cycle Worries Weighing On Renesas Electronics And Creating A Bargain Valuation
A Turn In Short-Cycle Industrial Demand Only Adds To IPG Photonics' Challenges
IPG Photonics (NASDAQ:IPGP) has continued to have a difficult time of it. Russia’s invasion of Ukraine, and the sanctions that followed, were always going to make 2022 more challenging for the company, but IPG Photonics has also had to deal with interruptions in China’s economy from its COVID-19 policies, as well as emerging weakness in many short-cycle industrial markets.
I thought IPG Photonics had some high-risk contrarian attributes roughly a year ago, but the shares have lost another quarter of their value, lagging the broader industrial space, but performing more in line with nLIGHT (LASR) and Chinese laser rivals Han’s Laser (002008.SZ) and Raycus (300747.SZ). At this point, I do see elevated risks to short-cycle demand, but I also think the share price discounts a lot of that. I’m reluctant to double-down on a “buy” call that has failed, but mid-single-digit growth can support a double-digit return from here, and I don’t think that’s an overly demanding outlook.
Read the full article at Seeking Alpha:
A Turn In Short-Cycle Industrial Demand Only Adds To IPG Photonics' Challenges
Beaten-Down MaxLinear Starting To Look More Interesting
The last year has been a rough one for MaxLinear (NASDAQ:MXL),
with the shares down about 46% (underperforming the broader
semiconductor market by almost 20%) despite strong growth in the
company’s WiFi connectivity business. Not only have investors become
more cautious on chip
stocks in general, but there are greater concerns now about potentially
slowing cable net-adds in 2023 hurting the Broadband business as well as
ongoing concerns about the proposed Silicon Motion (SIMO) deal.
Down more than 40% since my last update on the company, the shares are quite a bit more interesting now even with those fears around cable subscriber growth. I’m not particularly positive on the Silicon Motion deal, and I think the company continues to overstate the opportunity in PAM-4, but I think a lot of bullishness has been beaten out of these shares and I think the longer-term potential in home connectivity and 5G is enough to support the shares from here, with any progress in optical interconnect and the Silicon Motion deal constituting upside beyond that.
Click the link to continue:
Cycle Worries Have Opened A Window Of Opportunity At Shin-Etsu Chemical
Even the best companies aren’t immune to macro challenges, and that’s certainly the case these days at Shin-Etsu Chemical (OTCPK:SHECY) (4063.T) (“Shin-Etsu”). One of the best-run companies I know in the broader chemical space (and perhaps
irrespective of industry grouping), Shin-Etsu shares have come under
pressure on worries about the impact of weaker housing on polyvinyl
chloride (or PVC) prices/margins, as well as concerns about weakness in
the semiconductor and electronics markets.
Concern is appropriate, and Shin-Etsu is very likely to see weaker profits over the next 12-18 months, but I think the downturn needs to be kept in context. Namely, this remains the world leader in PVC cost structure and North American capacity, and the U.S. housing market should resume growing after this upcoming correction. Likewise, while I do see some risk to semiconductor demand, demand for leading-edge chips is unlikely to weaken substantially for long. Even with some risk to earnings expectations over the next 12 months, I believe the shares are priced for attractive long-term returns.
Read the full article here:
Cycle Worries Have Opened A Window Of Opportunity At Shin-Etsu Chemical
Saturday, January 7, 2023
A Mostly Clean Quarter Drives A Better Valuation For AngioDynamics
At least some of the sharp decline in AngioDynamics (NASDAQ:ANGO)
after its disappointing fiscal first quarter report in October of 2022
could be tied to fears that there was another shoe to drop, and
likewise, the solid rebound
in the shares on basically in-line fiscal second quarter results likely
has at least something to do with relief that there were no similar
surprises this time around. With that, the shares are up a strong 20%
since my last update.
It doesn't take particularly demanding assumptions to get to a $20-plus fair value for AngioDynamics (35%-plus upside from here), and there are legitimate growth opportunities here. There are still risks, though, including a single-digit revenue growth rate that falls short of what the Street often demands of smaller med-tech names and a history of inconsistent execution on once-promising opportunities in a range of markets. In my last article, I acknowledged that it was likely futile to downgrade when the damage had already been done; while I do still see upside here (potentially meaningful upside), another quarter of in-line or better results would be welcome.
Click the link for more:
A Mostly Clean Quarter Drives A Better Valuation For AngioDynamics
Hurco Closes The Fiscal Year Strong, But Not Quite In The Clear Yet
The industrial sector has been a more interesting place of late.
While there are still troubling signs for 2023, including higher rates,
contracting manufacturing PMI, and weakening business confidence, the
market has been more willing to look for "buy the dip" opportunities and
the sector has done well
over the last three months. That said, there has still been a gap
between the broader industrial space and sub-sectors like metalworking
where there are still risks about short-cycle weakness and where Hurco (NASDAQ:HURC) has modestly underperformed the sector since my last update (up around 4% versus 11% for industrials) while beating the S&P 500 and other machine tool companies like DMG Mori (OTCPK:MRSKF) and Okuma (OTC:OKUMF) and metal tools company Kennametal (KMT).
Hurco's better-than-expected fourth quarter results are encouraging, but I'm not willing to sound the "all clear" at this point given increasing pressures on smaller manufacturers. That said, I do think the reshoring trend still has legs and I believe management has the company in good shape to weather whatever remains of this downturn. I do still see double-digit annualized return potential from here, but I would again remind investors of the risk of a worse-than-expected short-cycle slowdown in 2023, particularly with numerous quarterly reports and 2023 guidance calls on the way in this sector over the next six weeks.
Click the link to continue:
Hurco Closes The Fiscal Year Strong, But Not Quite In The Clear Yet
MSC Industrial Lagging Despite On-Target Performance
Industrial stocks have held up rather well over the last three
months, with investors apparently more confident that the risks to 2023
are priced in now and that the Fed’s efforts to stomp out inflation
won’t lead to significant demand destruction. Despite that generally healthy backdrop, MSC Industrial (NYSE:MSM) and other industrial distributors have lagged the industrial sector since my last update, with MSM shares selling off more noticeably in response to fiscal first quarter earnings that weren’t really all that bad.
I do still see risk in the short-cycle industrial outlook, but metalworking-heavy sectors like aerospace, autos, and energy should be healthy, and heavy machinery is likely to hold up at least through the first half of the year. What’s more, the company continues to execute on growth strategies like in-plant sales, vendor-managed inventory, and diversification beyond metalworking. Weaker price and margin leverage remain risks, but MSC Industrial’s valuation is not demanding at this point.
Read the full article here:
Constellation Brands: Demand And Margin Concerns Drive A Selloff
There has long been above-average volatility at Constellation Brands (NYSE:STZ)
around quarterly earnings reports, and going into this fiscal third
quarter report there were some elevated concerns about slowing volume
growth. With weaker-than-expected depletions and worse
cost guidance from management, Constellation's earnings/guidance report
was disappointing, leading to sharp underperformance (around 800-900bp)
relative to the S&P 500 and the consumer staples group.
While I had written about some risks going into this quarter a month ago, Constellation's performance was weaker than I'd expected. Still, I believe these are short-term issues that while not trivial, don't impair the long-term thesis for the company or stock. I still see Constellation as a share grower (with long-term revenue growth in mid-to-high single-digits) with meaningful untapped opportunities in improved retail and on-premise distribution. I do still have some concerns about FY'24 guidance (which I'll discuss), but I think this is a name well worth considering.
Read more here:
Constellation Brands: Demand And Margin Concerns Drive A Selloff
Texas Instruments Well Placed For The Long Haul, But Not Especially Cheap Today
Texas Instruments’ (NASDAQ:TXN)
(“TI”) track records of exceptional margins and market share are no
accident, and management has not been afraid to break from the pack to
chart its own course (including decisions to build inventory when others
cut production, using price
to gain share, and eschewing distributors for more direct
relationships). Over the long term, this has served investors well, with
above-sector performance and a reputation as more of a safe haven in
the semiconductor space.
I liked Texas Instruments back in October near the end of a slide that took the shares from the $180s to the $150s, and the shares have done reasonably well since then as the broader semiconductor space also has picked up off its lows. I do see elevated ongoing risk to the sector for at least another three to six months, though, and I don’t expect TI to be as much of an outperformer when the markets go back to a “risk-on” positioning with chip stocks.
An OK hold at these levels, I’m more neutral on the stock as a near-term buy, but I would keep an eye out for the upcoming fourth quarter earnings/guidance cycle as a potential opportunity to pick up shares on a pullback.
Follow the link for the full article:
Texas Instruments Well Placed For The Long Haul, But Not Especially Cheap Today
Performance Food Group Has Ample Scale, But Margins Need To Get Better
Distribution is a tough business, but one that rewards scale and
particularly scale combined with efficiency. This is something that
giant food distributor Sysco (SYY) understands well, but that other rivals like Performance Food Group (NYSE:PFGC) and US Foods (USFD)
have struggled to match. While there are still opportunities to benefit
from share gain and share-of-wallet gain across the large food service
and convenience store markets, I need to see more evidence from
Performance that it can really drive attractive leverage from the
business.
Performance Food has been doing well with respect to reported versus expected earnings, with a multi-quarter run of better-than-expected EBITDA results, including a sizable beat-and-raise in the fiscal first quarter (the calendar third quarter). Still, this looks like a situation where meaningful long-term margin improvement is already in the stock and management will have to continue beat-and-raise performances to drive further outperformance.
Read the full article here:
Performance Food Group Has Ample Scale, But Margins Need To Get Better
FB Financial: It's Going To Get Worse Before It Gets Better
With the Fed hiking interest rates another 50bp as of this writing
and signaling a willingness to go even further, it's going to be even
harder to be in the banking business over the next several quarters. Tennessee's FB Financial (NYSE:FBK)
is a case in a point, as management has already said they're going to
pull back on lending in the face of rising deposit betas, and with
little help coming from mortgage banking or credit, pre-provision profit
growth is going to get harder to come by.
I believe FB Financial's operations in Tennessee do have some value, given the above-average growth in the region, but I believe today's price pretty fairly reflects that value. Mid-to-high single-digit core earnings growth can support a fair value in the mid-to-high $30s, but the stock is less attractive on multiples-based valuation and I frankly see more things that could go worse over the next 12 months relative to expectations than go better.
Continue here:
The Rebound At Terex Should Have Legs
While the 2023 outlook for many industries is getting more frightful, the recent trading in Terex (NYSE:TEX) and other heavy machinery names has been pretty delightful, with Terex up more than 65% from its summer lows and leading in trailing 6-month performance over other machinery names like Caterpillar (CAT) (up 15%), Deere (DE) (up 36%), Metso (OTCPK:OUKPY) (up 18%), and Oshkosh (OSK) (up 2%).
Relative to many other industrials, demand for equipment used in markets like aggregates, agricultural, environmental (recycling, et al.), forestry, mining, and so on should hold up better, particularly given strong backlogs to start the year. While I do see some risks around private non-residential construction, overall, I think Terex is well-placed, and I don't think the stock is necessarily played out yet.
To read the full article, follow this link:
Smith & Nephew: Potential Only Has Value If You Can Execute
Long a laggard in the ortho space, I was more bullish on Smith & Nephew (NYSE:SNN)
last September on what I thought were cogent plans from a relatively
new management to address and reverse this long-term pattern
of underperformance. While a year and change may not be giving them
enough time, particularly given the disruptions created by the pandemic,
the reality is that the company hasn’t made the expected progress and
isn’t getting the job done in either revenue growth or margin
improvement.
With that ongoing disappointing run of performance, the share price has suffered, falling another 25% or so since my last update and underperforming peers/rivals including Stryker (SYK) and Zimmer Biomet (ZBH), but managing to outperform Enovis (ENOV). While the shares do look undervalued even without significant near-term improvement, I think it’s hard to make an argument for owning them without more evidence of real traction with the self-improvement initiatives.
Follow the link to the full article:
Cadence Bank: Better Growth And Betas, But It Will Get Harder From Here
The early returns from the merger that created the new Cadence Bank (NYSE:CADE)
have been mixed - while the bank is performing well operationally, the
stock has been lagging the regional banking group and has seen a sharper sell-off over the last week or two. With that, the stock is down more than 20% since my last update, basically doubling the declines of the regional bank group.
While I can understand investor nervousness on the sector to a point, particularly as funding costs start to accelerate and the macro outlook for 2023 starts to deteriorate, but I think the reaction is overdone in this case. With a strong Net Promoter Score (a reflection of customer satisfaction), an attractive geographic footprint leveraged to many growing metro areas, and better-than-average funding and fee-generating bases, I do believe Cadence should be valued more highly than it is today.
Click here to continue:
Cadence Bank: Better Growth And Betas, But It Will Get Harder From Here
Atlas Copco: Still Excellent, Still Expensive, And Maybe A Bit Vulnerable
There may be better industrial companies out there than Atlas Copco (OTCPK:ATLKY),
but the number of entries above them on that list is going to be
relatively few. Few companies have matched Atlas when it comes to a
margin-rich, asset-light
model predicated on driving share growth through both strong engineering
and distribution and expansion into adjacent markets, and the valuation
typically reflects tat.
Since my last update, Atlas shares have modestly outperformed the broader industrial space (by a couple of percentage points), but have outperformed the S&P 500 by a wider margin. By comparison, other industrials I hold in similar regard like Eaton (ETN) and Honeywell (HON) have done a little better, while Parker-Hannifin (PH) has done a little worse, and Ingersoll Rand (IR), a direct competitor in compressors, has outperformed Atlas more meaningfully (by around 400bp).
I have no issues with Atlas Copco from a long-term perspective, but I do see some challenges in the coming quarters as short-cycle industrial markets slow down and the entire industrial group deals with an uncommon combination of elevated backlogs, high inventories, high costs, and weakening demand. Likewise, the nature of Atlas’s business could lead to relative financial outperformance in FY’23, but underperformance in FY’24. Should the shares sell off during this turbulence, strongly consider adding them.
Read the full article here:
Atlas Copco: Still Excellent, Still Expensive, And Maybe A Bit Vulnerable
Tuesday, December 13, 2022
Constellation Brands: Executing Well And Gaining Share, With More To Come
My positive thesis on Constellation Brands (NYSE:STZ) back in August of 2021 was predicated on meaningful volume share growth potential for the company’s Modelo and Corona brands, as well as further improvement potential in the wine
business, and this has played out well over the last 16 months, with
Constellation continuing to gain share in the U.S. market, while the
shares have outperformed (up almost 11%) other beer rivals like Molson Coors (TAP) (by 300bp), ABI (BUD) (by about 1,100bp), Heineken (OTCQX:HEINY) (by over 2,300bp), and Carlsberg (OTCPK:CABGY) (by about 2,700bp), as well as the broader consumer staples space.
Constellation is still under-leveraged on national distribution and under-leveraged to on-premises, but management continues to work at both, with evident progress over the last year (and beyond). While trade-down and tougher comps are an emerging risk, and I do see some margin vulnerability in the short term, Constellation still looks undervalued to me and worth a closer look.
Click the link for the full article:
Constellation Brands: Executing Well And Gaining Share, With More To Come
Sensata Technologies Beaten And Battered By Macro And Margins, But Still Leveraged To Electrification
This has been another tough year for companies leveraged to the
passenger vehicle market. The year started off with projections of
mid-to-high single-digit unit growth in vehicles for the U.S. market,
but semiconductor and component shortages have decimated that forecast,
with actual year-to-date sales
trending down about 9% (this is production-driven, as inventories are
still thin). At the same time, electronic component shortages and other
inflationary drivers have made life difficult on the margin side for
many companies.
Sensata Technologies (NYSE:ST) has seen its share price fall a little more than 20% since my last update. While I suppose that’s not terrible next to other broadly comparable suppliers to the auto and commercial vehicle markets, including Aptiv (APTV), Dana (DAN), and TE Connectivity (TEL), it’s not the year I expected for this sensing and controls company, and 2023 isn’t offering much in the way of macro certainty.
I do think that Sensata looks undervalued, but I also thought that in the high-$50’s. Now Sensata is looking at a potentially softer auto demand environment, as well as weaker trends for highway/off-road business and industrial markets. Provided that mid-single-digit growth is still viable, which I believe it is given the company’s higher EV content and its growth opportunities elsewhere in electrification, these shares offer a worthwhile return at today’s price.
Read more here:
Hammered By Input And Launch Costs, Nidec Is Worth Another Look
The last year and a half has been a brutal one for Nidec (OTCPK:NJDCY) (6594.T), with the local shares down more than a third and the ADRs down closer to 50% since my last update.
Nidec has been hit hard not only by a downturn in high-margin spindle
motors for hard disk drives (or HDDs), but also much higher input costs
and launch costs for its emerging EV auto business (e-axles). If that
wasn’t bad enough, a weaker outlook for motors used in appliances and
HVAC systems is also weighing on sentiment.
The investment case for Nidec used to be more of a battle about the right multiple to pay, as Nidec shares historically traded at rich multiples. While the sharp pullback has helped the longer-term valuation argument, the shares still remain pricey on more conventional short-term multiples-based approaches. While I do like Nidec’s leverage to vehicle electrification, a weaker market for consumer electronics could persist and Nidec has significant sentiment headwinds to overcome.
Follow this link for the full article:
Hammered By Input And Launch Costs, Nidec Is Worth Another Look
Cognex Languishing Through A Painful Reset Of A Major Growth Market
It would have been difficult to be more wrong about Cognex (NASDAQ:CGNX)
than my call back in April that, despite challenges in the logistics
market (warehouse automation), this machine vision company would still
manage double-digit growth in 2022.
In fact, Cognex is likely looking at not only a revenue decline in 2022,
but quite possibly a decline in 2023 as well given weaker macro trends.
With weaker end-market demand (and a fire at a manufacturing partner),
Cognex is on pace for far less in terms of profitability and cash flow
than I’d expected, and it may not be “business as usual” until
2024/2025.
Down about a third since my last ill-fated update, Cognex has been a notable laggard in an otherwise flattish market for other automation names like Datalogic (OTC:DLGCF), Fanuc (OTCPK:FANUY), Keyence (OTCPK:KYCCF), Rockwell (ROK), and Yaskawa (OTCPK:YASKY), though KION (OTCPK:KIGRY), another logistics-driven name, has been even weaker. While I do see long-term value in the name here, it’ll be difficult for sentiment to turn with logistics revenue likely down 20%-plus again in 2023, particularly if other end-markets weaken more than seems to be baked into sell-side expectations.
Continue here:
Cognex Languishing Through A Painful Reset Of A Major Growth Market
High Costs And Macro Worries Drag Cemex Down
My bullish call on Cemex (NYSE:CX) in February
was predicated on strong volumes and pricing in the U.S. driving better
profits and cash flow, with a healthy outlook for increasing
infrastructure spending supporting the longer-term view. While U.S.
demand and pricing have both been
healthy, the market has become considerably more nervous about 2023 and
Cemex has fallen short on profitability, leading to a 20% drop in the
stock price and underperformance in an admittedly lackluster cement
sector (though Eagle (EXP), GCC, and Martin Marietta (MLM) have held up better).
I’m increasingly concerned about what look like structural cost issues at Cemex that seem likely to lead to longer-term underperformance in profitability. That said, I do think infrastructure demand is likely to remain quite supportive and today’s price seems to reflect an overly bearish outlook for the company. Management has most definitely not earned the benefit of the doubt here, but if the company can manage something on the order of 4% long-term EBITDA growth, I do think there is some value here.
Read the full article here:
Subscribe to:
Posts (Atom)