Columbus McKinnon Under Pressure Now, But The Longer-Term Opportunity Is Intriguing

In an already-tough market for capex-oriented industrials, Columbus McKinnon (NASDAQ:CMCO) hasn’t done itself any favors with an outlook that led sell-side analysts to lower their short-term expectations for both revenue and margins. With that, the shares have lost about a third of their value since my last update on the company, underperforming not only the industrial sector, but other plays on industrial motion/automation as well.

I don’t believe the long-term story at Columbus has changed as dramatically as the valuation, but it’s clear that the market isn’t interested in capex plays at a time when industrial orders are contracting, margins are still under pressure, and demand is likely to cool off noticeably in the second half. While margin worries are going to understandably weigh on sentiment for a while longer, I do think this is a beaten-down name worth another look.

 

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Columbus McKinnon Under Pressure Now, But The Longer-Term Opportunity Is Intriguing

Lundbeck Gets A Much-Needed Win, But The Investment Case Is Still Not Clear-Cut

Shareholders of Danish pharmaceutical company H. Lundbeck (OTCPK:HLUBF) (OTCPK:HLUYY) finally had something to celebrate recently, as the company followed up on better-than-expected first quarter earnings with positive clinical trial results in a key study of Rexulti in the treatment of Alzheimer’s-associated agitation. This clinical success opens up a market worth potentially more than $1 billion in revenue and gives the company some much-needed positive news from its pipeline.

The outlook for Lundbeck is better now than it has been in a while, but there are still significant challenges to consider. The pipeline is overwhelmingly early-stage, the company still has significant exposure to old, off-patent products, and management’s behavior hasn’t been what I would consider “shareholder-friendly”, particularly with a recent move to cancel the sponsored ADR program. While I do think the shares are undervalued, I’m not sure I can make a compelling argument that this is an investment option that is worth the hassle for most U.S. investors.

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Lundbeck Gets A Much-Needed Win, But The Investment Case Is Still Not Clear-Cut

Fastenal Not Exactly Cheap As Tailwinds Start To Moderate

What inflation can give to industrial distributions like Fastenal (NASDAQ:FAST), pricing power namely, deflation can eventually take away, and that's a growing concern for industrial distributors as pricing is likely to become less of a benefit from here on. What's more, while underlying business activity and demand are still rather healthy, there is evidence that some of that strength is tapering off.

I'm not concerned about Fastenal from a long-term perspective; this is an uncommonly well-run company, and management's efforts to grow e-commerce, vending, vendor-managed inventory and the like will serve the company well in the coming years. That said, Fastenal still sports a premium multiple at a time when investors are increasingly skittish about industrial names, and I would be cautious about jumping in today - I do think a "buy the pullback" opportunity is forming, but I think it may be a little early to jump in today.

 

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Fastenal Not Exactly Cheap As Tailwinds Start To Moderate

Hurco Already Hit Hard In Anticipation Of Weaker Capex Spending

What I thought back in March may have just been a “pothole” for Hurco (NASDAQ:HURC) has started looking more like a sinkhole, as orders have turned down and investors have grown considerably more worried about the health of short-cycle industrial names, particularly those exposed to capital equipment budgets.

Time will tell if we get a true cyclical downturn in the next few quarters or whether this is a shorter “correction” in response to inflationary and labor pressures (not to mention the chaos created by the pandemic). In any event, it’s clear that short-cycle industrials are by and large not in favor right now, and while I do think Hurco’s valuation is too low now, the reality is that the market can often overcorrect and investors looking to take advantage of the pullback have to at least be aware of the risks of further declines before the outlook and sentiment stabilize.

 

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Hurco Already Hit Hard In Anticipation Of Weaker Capex Spending

AngioDynamics: Growth Is Encouraging, But Margins Still A Work In Progress

It’s not exactly “business as usual” yet for the healthcare sector, but procedure counts have continued to recover as the pandemic pressures ease, with recoveries in elective procedures particularly notable. Unfortunately, while this recovery has been well-anticipated by the market, there is still evidence that margin pressures may be weighing on the sector more than expected.

Specific to AngioDynamics (NASDAQ:ANGO), the company closed the fiscal year on a strong note with respect to revenue growth, but margins remain challenging and seem likely to remain pressured into FY’23. There’s a lot to like about the company’s growth potential in areas like thrombectomy, atherectomy, and oncology, but it will take time to develop and nurture that growth, and near-term margin pressures are likely to limit multiple expansion unless/until the company can exceed revenue growth expectations by a more meaningful extent.

 

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AngioDynamics: Growth Is Encouraging, But Margins Still A Work In Progress

MSC Industrial Logs Another Very Good Margin Result, But Cycle/Economy Fears Are Front And Center

MSC Industrial (NYSE:MSM) management appears to be making real progress on multiple self-improvement initiatives – something I’ve been skeptical/critical of for some time – but that progress is coming at a time when investors have become considerably more cautious about economically-sensitive names (and stocks in general). While the shares may not be benefiting in the short term from the company’s progress, and I do think cycle/economic risk is relevant, an improved long-term margin profile would certainly be a net positive.

MSC shares are down about 15% since my last update in April, slightly outperforming the average industrial stock, and the shares have likewise outperformed the industrial sector since I went positive in late February (outperforming by around 700bp); the shares have likewise modestly outperformed the S&P 500. Although I think there’s still more room for growth from the company’s industrial customer base, and a lot of bullishness has come out of the industrial space, I do think there are opportunities to shop around in the current market environment.

 

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MSC Industrial Logs Another Very Good Margin Result, But Cycle/Economy Fears Are Front And Center

Lexicon Pharmaceuticals: Encouraging Signs Of Efficacy In Pain, But Still Looking For A Clear Win

The incomplete and somewhat ambiguous results that Lexicon Pharmaceuticals (NASDAQ:LXRX) reported in late June from its Phase II RELIEF-DPN-1 study of LX9211 ('9211) are, unfortunately, par for the course for a company that has a long record of struggling to deliver hoped-for results for its shareholders. That said, as a proof-of-concept study it was a success, and it continues to support the notion that there may be enough upside from this high-risk/high-reward biotech to merit attention from aggressive risk-tolerant biotech investors.

The story today at Lexicon basically boils down to two key opportunities and uncertainties - can the company effectively market its SGLT-1/2 drug sotagliflozin ("sota") in the heart failure market (assuming approval, of course), and can LX9211 generate enough high-quality data to coax a larger pharmaceutical company into a development partnership? There are legitimate bear arguments to be made with both questions, but also enough upside in a favorable outcome to make this worth ongoing attention.

 

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Lexicon Pharmaceuticals: Encouraging Signs Of Efficacy In Pain, But Still Looking For A Clear Win

The Fed Adds Some Stress For Investors In The Largest Banks

This year’s Fed stress test for banks offered one fairly simple takeaway – it’s not the best time to be a money center bank. While super-regionals like Fifth-Third (FITB), PNC (PNC), Truist (TFC), and U.S. Bancorp (USB) had pretty undramatic results and capital market specialists like Goldman Sachs (GS) and Morgan Stanley (MS) came out well, it wasn’t such a smooth process for the largest money center banks like Bank of America (NYSE:BAC), Citigroup (NYSE:C), and JPMorgan (JPM).

The net result of new stress capital buffer requirements is that the largest banks in the country are largely going to be on the sidelines when it comes to significant capital returns to shareholders for the next six to 12 months. While the underlying operating environment is still a good one for banks (loan growth, higher rates, et al) provided that the economy can thread the needle and avoid recession, the lower near-term capital return prospects are going to be another hurdle for these already-pressured shares to surmount.

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The Fed Adds Some Stress For Investors In The Largest Banks