Danaher Adds A Jewel To Its Crown

It's not too often that you see an M&A transaction that sends the shares of both companies meaningfully higher, but Danaher's (DHR) acquisition of most of General Electric's (GE) Life Sciences business is a good move for both companies. For GE, the deal brings badly-needed cash that will help shore up the business as CEO Larry Culp tries to turn that hamstrung behemoth around. For Danaher, this is a crown jewel acquisition that meaningfully enhances the company's life sciences business (particularly in bioproduction/bioprocessing) and gives it even more exposure to a fast-growing acylical business with strong margins.

Although pricey, the GE Biopharma deal boosts Danaher's long-term growth rate and margins, and I believe management's synergy/accretion expectations are credible if not conservative. It's hard to say that Danaher is cheap, but considering the enhanced exposure to a very attractive market, I understand why the shares trade where they do.

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Danaher Adds A Jewel To Its Crown

When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

With Danaher’s (DHR) strong leverage to life sciences and diagnostics, and recurring revenue, the company is in a good place as the economy goes through its cyclical shifts. Moreover, the company has the luxury to invest for growth without really compromising its core quality, and the balance sheet leaves open the possibility for further growth-driving M&A. The “but” is that the company’s shares are typically richly valued and today is no exception. Although Danaher’s valuation isn’t so unreasonably by the elevated standards of life science tool companies, investors should at least realize they’re paying a premium for Danaher’s perceived quality and cyclical resilience.

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When It Comes To Danaher, 'More Of The Same' Is Usually Pretty Good

Wabtec Looking At A Value-Creating One-Two Punch

Accustomed as I am to thinking of Wabtec (WAB) as perennially richly-valued, which for a long time it was, it's a strange thing to be continuing to advocate for buying the shares and thinking that the market is underrating this one. I understand some of the market's skepticism and worry that the assets Wabtec is buying from GE (GE) aren't in great shape, but I believe this will be a transformative acquisition for Wabtec, and I also believe the timing couldn't be better, as the company is starting to see its freight rail markets recover.

Up about 10% from when I last wrote about the stock (and when I thought it was undervalued), I've since revised my estimates for the benefits of the GE acquisition and the ongoing recovery in the freight business (as well as some challenges in the transit business). The net effect is to boost my fair value range toward $115, with potentially more upside beyond that depending upon the strength of the freight recovery and Wabtec's ability to drive synergies from the GE deal.

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Wabtec Looking At A Value-Creating One-Two Punch

Emerson Seeing Very Healthy Process Markets And Reinvesting In Hybrid Competitiveness

The good times keep rolling for Emerson (EMR), as the company is enjoying a strong recovery/expansion phase in its core process markets, as catch-up spending on MRO, brownfield investments, and greenfield projects all combine for strong near-term revenue and margin improvements and a healthy outlook over the next year or two. At the same time, Emerson continues to reinvest in its business to better-position it for less cyclicality and better competitiveness in hybrid automation markets.

As was the case a few months ago, I see Emerson as a so-so value proposition, but a stronger near-term growth/momentum story. The shares don't seem unreasonably priced on forward EBITDA, but it's a little harder to see strong FCF-based undervaluation, and I think the share price performance is very much tied to ongoing momentum in orders, revenue, and margin leverage.

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Emerson Seeing Very Healthy Process Markets And Reinvesting In Hybrid Competitiveness

PTC Delivering On Its IoT Promises

There was plenty of skepticism, if not outright scorn, a few years ago regarding PTC's (PTC) plan to put its industrial IoT platform ThingWorx at the center of its growth plans. Fast forward back to the present, and not only has PTC continued to grow, the IoT business has grown to roughly parity with the legacy product lifecycle management (or PLM) software business on a new bookings basis. What's more, PTC has brought in Microsoft (MSFT) Azure and Rockwell (ROK) as partners to grow the IoT business, with partnering with Ansys (ANSS) to augment its legacy Creo CAD business with simulation capabilities.

I liked these shares back in the spring of 2017, and the 80% or so move since then has been gratifying to see, particularly as the business seems to be picking up momentum. Although my growth outlook is stronger now than before, in no small part due to the big-name partnerships PTC has added for ThingWorx, the growth in valuation has exceeded the growth in my expectations. Consequently, while I do still like this business and I fully acknowledge the potential that financial outperformance could drive higher multiples, I can't find the undervaluation to call this a good buy unless you're interested in trading more on momentum than value.

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PTC Delivering On Its IoT Promises

Wabtec Biggest-Ever Deal Should Be Transformative

Wabtec (WAB) has always been unusually acquisitive, but in merging with/acquiring General Electric’s (GE) Transportation business, Wabtec is bagging the biggest target available to the company. While big M&A carries big risk, Wabtec knows how to integrate deals and GE is an uncommonly opportunity-rich deal for Wabtec, as it brings the global leader in locomotives and a very strong player in services and digital/electronics to one of the leaders in components and equipment for trains. In addition to rich revenue cross-selling opportunities and expense synergies, I believe Wabtec is doing this deal at an attractive point in the cycle.

Modeling Wabtec’s post-deal financials requires more than a little guesswork, but I believe there is a solid chance that this company will be an enterprise with $10 billion in revenue and low-to-mid teen FCF margins in 2022, with mid single-digit revenue growth beyond that point. If those estimates are the right ballpark, Wabtec shares look undervalued below the triple digits.

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Wabtec Biggest-Ever Deal Should Be Transformative

ABB Plugs A Gap

Growth-oriented M&A is often more exciting, but using M&A to fill in gaps in the product line-up can be a very sound use of shareholder capital. Such will prove to be the case, I think, with ABB’s (ABB) acquisition of GE’s (GE) Industrial Solutions business. Although this deal does not generate a significant change in my fair value today, I believe this was a sound move that shores up the company’s low-voltage market presence. I continue to believe that ABB shares are somewhat undervalued, but this company hasn’t had the best execution track record in recent years relative to some peers like Schneider (OTCPK:SBGSY) or Rockwell (ROK).

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ABB Plugs A Gap

ABB Fills A Gap, But Has More Work To Do

At a 52-week high, ABB (NYSE:ABB) has nevertheless remained a relative underperformer next to peers like Siemens (OTCPK:SIEGY), Rockwell (NYSE:ROK), and Schneider (OTCPK:SBGSF), as investors fret over ABB's heavy exposure to end-markets like power gen, oil/gas, and mining and some of the gaps in its business coverage relative to its peers. Management has recently shown that it is willing to get back to M&A, though, and there is some relative undervaluation that may appeal to investors.

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ABB Fills A Gap, But Has More Work To Do

Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

Commercial aviation engine suppliers make up a relatively small world, as there are really only a half-dozen companies in North America and Europe that offer competitive solutions, and most of those don't compete across the board. Rolls Royce (OTCPK:RYCEY) is a name that is probably best known for a business it's not even in (the luxury car business is owned by BMW (OTCPK:BMWYY)), but this is the third-largest aircraft engine maker and a significant player in the markets for widebody and business/regional engines.

This is an interesting time for Rolls Royce, as the company is about to see new widebody programs ramp up (which isn't actually that good for margins), older programs wind down (which is bad for margins), and likely not much progress in non-aviation areas like marine. What's more, there are well-publicized challenges with widebody aircraft these days, as many operators are turning to more efficient, more capable next-gen narrowbody planes instead.

Although the next couple of years are likely to remain challenging, and an accounting change will hammer reported earnings (but not cash flow), I believe there's an argument to be made that Rolls Royce shares are priced to generate double-digit total returns from here.

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Rolls Royce Looking To New Civil Aerospace Deliveries To Lift Cash Flow

Honeywell Still Better Than The Market Wants To Believe

Honeywell (NYSE:HON) hasn't done badly since I last wrote about this conglomerate. In fact, among what I'd consider to be its peer group (including names like 3M (NYSE:MMM), GE (NYSE:GE), Dover (NYSE:DOV) and so on), Honeywell has done okay, with a nearly 10% improvement in its share price. That's not as good as the double-digit improvements at Illinois Tool Works (NYSE:ITW) or Dover, but it's not exactly a disgrace either.

Honeywell doesn't have the same upside to a near-term turnaround in the industrial economy that I would expect from ITW or Dover, but it is nevertheless well-positioned for long-term growth trends like automation, civil aerospace, industrial software and specialty chemicals. What's more, there's more than the normal level of negative chatter around Honeywell, with investors fretting about the CEO change and an entrenched (although not really supported, in my opinion) belief that Honeywell has underinvested in R&D and innovation. Provided that Honeywell can deliver mid-single-digit growth over the long term, I think a double-digit total return is possible from here, and I think Honeywell is still worth consideration as a potential buy.

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Honeywell Still Better Than The Market Wants To Believe

3M's Balanced, Diversified Portfolio Maybe Not The Best Play Today

I have been favorably inclined toward 3M (NYSE:MMM) for quite some time, and I continue to think that 3M's CEO Inge Thulin is doing a great job running this global conglomerate. 3M generates very strong margins, but continues to pursue initiatives that should boost them further over the next three years, and does so while continuing to spend sizable amounts on R&D. The company is also solid from a free cash flow perspective, and has been a relatively good steward of shareholder capital with management willing to sell businesses that no longer meet management's long-term returns targets.

The bad news is that 3M is not cheap and not necessarily the best-positioned company for the current circumstances. 3M's global leverage should be a positive as emerging markets recover and the company's net exporter status does give it some leverage to potential corporate tax changes in the U.S., but it's not all that leveraged to U.S. infrastructure, its tax rate is already pretty good, it would be vulnerable to a stronger dollar and/or trade wars, and its balance between defensive and growth-oriented industries doesn't give it huge leverage to a recovering U.S. economy. While I'm in no rush to sell 3M today, it's hard to argue for this name as a must-own.

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3M's Balanced, Diversified Portfolio Maybe Not The Best Play Today

Safran Building Toward Better Days

It hasn't been the smoothest ride for aerospace companies, but France's Safran (OTCPK:SAFRY) is nevertheless worth a closer look. Safran is a tier one supplier in the aerospace market, and through its alliance with General Electric (NYSE:GE), a leading player in narrowbody aircraft engines. While the launch of a new engine program will pressure margins in the short term, aftermarket sales should start improving and management seems focused on removing the company from underperforming business lines.

The sale of the security business is going to bring a lot of cash to Safran and there are still concerns about what management will do with that money. Although management hasn't sounded particularly eager for M&A, and there aren't many deals out there that would seem to really improve the company, the Street is still batting around various names as potential targets. While this potential M&A is a significant swing factor, mid single-digit revenue growth and improving margins can drive a fair value more than 10% better than today's price, making these shares worth a closer look.

Investors/readers should note that Safran's ADRs are rather liquid, and while the home exchange shares are even more liquid, there should be adequate liquidity with the ADRs for most investors' needs.

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Safran Building Toward Better Days

Emerson Transforming, But Is It Improving?

I haven't been a big fan of Emerson (NYSE:EMR) or its management team in recent years, and the stock's double-digit decline over the last three years does stand out next to the flattish performance of ABB (NYSE:ABB) and Siemens (OTCPK:SIEGY) and the stronger performance of Rockwell (NYSE:ROK) and Honeywell (NYSE:HON). All of these companies have been hurt to some degree by the sharp drop-off in process markets like oil/gas, power, mining/metals and chemicals, but Emerson has been hurt a little worse due to its overexposure to weak markets and some questionable execution from management.

With the sale of the Network Power business and part of the Industrial Automation business, the company certainly has some options to consider as it rethinks its future. Given some past poor decisions regarding M&A and an inability to meet past targets for growth and margin improvement, I think my skepticism toward management isn't unreasonable, and I think Emerson will struggle to replace what it has sold in terms of earnings/cash flow power. Emerson has done better than I thought it might since my last update (although it has still lagged ABB, Rockwell, Siemens, and Schneider (OTCPK:SBGSY)), but I'm just not comfortable with the valuation right now given the considerable challenges that remain.

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Emerson Transforming, But Is It Improving?

Seeking Alpha: Wärtsilä Down On Power ... For Now

These are challenging times for Wärtsilä (OTCPK:WRTBY) (WRT1V.HE), one of Finland's largest and oldest industrial companies. Orders for drillships, semi-submersibles, and supply ships have cratered alongside oil prices, and the demand for new cargo ships is hardly better. With that, the company's leading position in marine engines, automation, and propulsion doesn't look all that impressive. Likewise in the energy business, as emerging market orders for flexible baseload gensets has plunged on currency and commodity weakness.

It looks too early to be bullish on these shares, but I think this is a good time to get up-to-date with due diligence on companies like Wärtsilä. The company's biggest original equipment markets are weak, but the lucrative service business will help tide it over, and cyclical markets don't stay down forever. When demand for large ocean-going vessels and flexible electrical gensets recovers, Wärtsilä's niche leadership and operating leverage should serve investors well.

U.S. investors should note that Wärtsilä's ADRs are not especially liquid. Many brokers now support international trading, and there is more liquidity to be found buying these shares on the Helsinki Stock Exchange.

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Wärtsilä Down On Power ... For Now

Seeking Alpha: Wells Fargo Well-Positioned And Willing To Deploy Capital

While JPMorgan (NYSE:JPM) shrinks its balance sheet and expands its lending, BB&T (NYSE:BBT) works to integrate its M&A binge, PNC Financial (NYSE:PNC) works on improving its branch network, and Citi (NYSE:C) continues to run off past bad debts, Wells Fargo (NYSE:WFC) is keeping busy too. Not only has the company adjusting its rate sensitivity down a bit, the company has struck three deals with General Electric (NYSE:GE) to acquire commercial real estate loans, a railcar leasing business, and a sizable commercial lending and leasing operation that includes distribution and vendor financing and asset-based middle market lending.

Wells Fargo looks pretty attractive to me right now. Not only is the business simple enough to avoid the steeper G-SIB surcharges that will apply to JPMorgan and Citi, but there's a very attractive mix of commercial and consumer lending, a leading mortgage and auto lending business, growing card loans, and fee-generating businesses like the expanded leasing operation. I suppose I could ask for better reserves and faster NPA resolution, but those aren't huge negatives to me. This next year may not be the best in terms of reported results, but I believe Wells Fargo is well-placed for growth over the next three to five years and attractively priced below $60.

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Wells Fargo Well-Positioned And Willing To Deploy Capital

Seeking Alpha: Does 3M Have Enough Cards Left To Play?

The current management team at 3M (NYSE:MMM) has done a lot to address the issues that used to contribute to the stock's historical relative undervaluation. Management has streamlined the company and boosted margins, maintained a strong internal R&D culture, continued to diversify geographically (particularly into faster-growing emerging markets), levered up to buy back shares, and gotten active on strategic M&A.

The market has noticed, and over CEO Inge Thulin's tenure the shares have outperformed the S&P 500 by about 15%. The shares have also outperformed peers/comps like General Electric (NYSE:GE) while keeping up with the likes of Honeywell (NYSE:HON), Danaher (NYSE:DHR), and Illinois Tool Works (NYSE:ITW).

The question I have, though, is whether 3M has enough cards left to play to continue that run of outperformance. Next year is looking pretty rough for the "general industrial" markets that make up a lot of 3M's business, not to mention the emerging markets that contributes to about one-third of the company's sales. Along similar lines, 3M doesn't have a lot of exposure to commercial aerospace or construction and I'm not sure there's too much left to accomplish on the restructuring side. Large M&A is still a possibility, but a transformative deal that moves the company into new markets would frankly be a little out of character.

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Does 3M Have Enough Cards Left To Play?

Seeking Alpha: Cameron Coming Through In The Pinch

During this steep downturn in the energy space, Cameron (NYSE:CAM) has stepped up in terms of operating performance, market share, and order flow. That has not gone unnoticed, as the shares have sold off less sharply than those of National Oilwell Varco (NYSE:NOV), FMC Technologies (NYSE:FTI), Dril-Quip (NYSE:DRQ), and Forum Energy Technologies (NYSE:FET). Not only is the company's OneSubsea venture with Schlumberger (NYSE:SLB) really coming into its own, but also Cameron seems to be gaining share in markets like surface equipment.

Whether or not Cameron is a good stock to consider today depends in large part on your outlook for the energy sector. If you believe the major service companies that activity levels have bottomed in the North American onshore market and that the offshore markets will come back in another two or three years, Cameron should do well. I do believe that the next couple of years will be difficult in markets like drilling equipment, but modeling this as a three to four year recovery story still suggests upside toward $60 per share.

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Cameron Coming Through In The Pinch

Seeking Alpha: ABB Muddling Through Amidst Ample Skepticism

Swiss automation and power product company ABB (NYSE:ABB) has plenty of doubters and skeptics out there, and I don't think second-quarter results are going to be enough to bring them over to the bull side. The company should get credit for delivering a better result than was expected, but that has to be tempered by the fact that expectations have been heading lower with worries about demand in energy-related process automation and a slow bottoming out of the power end markets.

I'm more bullish on ABB's opportunity to turn around the power businesses and continue to deliver growth in automation through new opportunities like human-safe robots, smart buildings, and so on. The company lacks Rockwell's (NYSE:ROK) leverage to higher-value software and controls, but then it comes at a lower valuation and it still has balance sheet flexibility to add to its capabilities in those areas. ABB is a more of a turnaround story than a growth story, and on that basis, I still see some value here.

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ABB Muddling Through Amidst Ample Skepticism

Seeking Alpha: 3M's High Multiple Likely Magnifying The Disappointment

For some time now, it has been very challenging to call 3M (NYSE:MMM) a bargain on the basis of its probable future cash flow streams. Investors were willing to pay up for 3M's stability and strong margins, but a somewhat lackluster second quarter seems to have market participants reconsidering whether the company deserves that premium.

As I have said in the past, I'm willing to pay up for quality stories like 3M, but I'm not going to argue that you have to own this stock when Honeywell (NYSE:HON) and General Electric (NYSE:GE) appear to offer better relative value. I still think there are arguments for owning 3M in portfolios oriented for long-term performance, but second-quarter results should serve as a reminder that even a great company like MMM isn't shielded from short-term performance and market exposure worries.

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3M's High Multiple Likely Magnifying The Disappointment

Seeking Alpha: Dover On The Defensive

I closed my last article on Dover (NYSE:DOV) with the admonition that "how much worse can it get?" are maybe the most dangerous words in investing (although "it's different this time" is a top contender). Dover hasn't been a disaster since then; the shares are down about 8% and on par with Emerson (NYSE:EMR), but investors are right to wonder why management has apparently misestimated the scope of the energy decline. What's more, it would seem that opportunities like "close the case" in refrigeration aren't quite what they were cracked up to be.

I don't think that Dover is a bad or broken company, but I do think it is at least fair to ask whether this is a particularly well-run conglomerate. Valuation isn't demanding at this level, but energy could be weaker for longer, and there are some areas of concern in multiple industrial markets. Patient investors will probably do alright with Dover, but General Electric (NYSE:GE), Eaton (NYSE:ETN), and Honeywell (NYSE:HON) all seem undervalued to varying degrees and are at least worth a look before committing to Dover.

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Dover On The Defensive