Mellanox Is Taking Some Hits, But The Pessimism Seems Overdone

When I last wrote about Mellanox (NASDAQ:MLNX) in March, I ended with the following:

"The good news is that these shares seem to routinely post 25% pullbacks that give patient investors a chance to reload. At this point, I'm more inclined to wait for one of those freakouts than chase the shares today."

Since then, the shares have pulled back a little more than 25%, with a big drop in late April/early May around earnings, a rally, another decline in July/August around earnings, and an attempted rally from mid-August to mid-September that hasn't held.

Nothing much has really changed in how I view (or value Mellanox). Intel (NASDAQ:INTC) is making plenty of noise with Omni-Path, some potential Mellanox customers are adopting it, and that is having an impact on Mellanox. But that was always expected (at least by me) - the bigger question is whether Intel is really changing the game in a more meaningful way, and I don't think that's the case. I believe Mellanox will continue to be volatile, but I still believe in the basic story and that the mid-$50's is a reasonable fair value.

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Mellanox Is Taking Some Hits, But The Pessimism Seems Overdone

F5 Networks - Where Do We Grow From Here?

I have run hot and cold on F5 (NASDAQ:FFIV) over the years, but that's largely because the Street plays a cat-and-mouse game with the shares based on the near-term prospects for product revenue growth. I liked the shares back in late January when skepticism was running high, and the nearly one-third move in the stock since then has been gratifying to watch.

That said, F5's problems with product growth remain and I don't share the confidence of the bullish sell-side analysts that a new product cycle is going to lead to a sustainable growth recovery, or that a move towards security is the panacea for what ails F5. I do believe this is a well-run business with a sticky, high-margin software/service component, not to mention a lot of options for M&A. Below $100, I'd seriously consider these shares again, but above $120, I'm not a big fan.

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F5 Networks - Where Do We Grow From Here?

Seeking Alpha: XPO's Painful Climb Toward The Top

It has been a little over a year since I last wrote on XPO Logistics (NYSE:XPO), and I'd like to say that time flies when you're having fun, but that's not the case. As it concerns XPO, the company has used that intervening time to take a very big step toward its goal of being a market share leader along the waterfront of logistics and freight service, but at the cost of significant investor angst and a sharp re-evaluation of the "right" multiple for the business.

The share's value has fallen close to 40% since I last wrote, and my $50-plus fair value at that time was predicated on the company remaining a growth-oriented asset-light third-party logistics company. Instead, the company has pivoted toward a much more balanced asset-heavy/asset-light mix. While that isn't necessarily a bad strategic move, it does change the long-term complexion of free cash flow generation, the volatility of those cash flows, and the multiple the market will be willing to pay for the shares.

There seems to be a recurrent communication issue between the Street and the company, and that concerns me. I don't know if it stems from management being more freewheeling and flexible in its long-term plan than previously thought, or whether there's more of a "making it up as we go along" element to it. In any case, while I do see meaningful value here, management has a lot of work to do to reassure investors about its long-term strategy and about the true synergies of mixing asset-heavy and asset-light businesses in the transportation and logistics space.

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XPO's Painful Climb Toward The Top

Seeking Alpha: Copa's Stock Recovery Has Outpaced The Business Recovery

It's pretty much a given that the Street will take stocks far too low in bad times and far too high in good times, so I can't say I'm surprised Copa Holdings' (NYSE:CPA) shares are up more than a third since my write-up in late December, when I thought the shares looked undervalued but still vulnerable to ongoing weakness in major South American economies.

It looks as though 2016 will be the bottom for Copa, but it is hard to feel a lot of confidence that the economies of Brazil, Colombia, and Venezuela are going to stage a strong, fast turnaround. That said, the company has been increasing its exposure to healthier economies like the U.S., while doing a good job of responsibly managing capacity and expenses. I still believe Copa can generate over $4 billion in annual revenue in 2024 and good cash flow, but my fair value hasn't moved nearly as much as the share price, so I don't see the same opportunity that I did in December.

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Copa's Stock Recovery Has Outpaced The Business Recovery

Seeking Alpha: Chart Industries No Longer Left For Dead

Back in January, I thought investors had the sort of opportunity I love to find in the market - the chance to buy a stock that had been pounded because a major growth driver seemed to be evaporating, and pounded to a point where the less exciting, but still profitable, base business more than justified the share price. Such was the case with Chart Industries (NASDAQ:GTLS) back in January, and the shares have come back nicely since then, even though the LNG growth story is still in trouble.

I continue to believe that Chart Industries is a good company in the industrial gas/energy space. With the rebound in the shares, though, I think the dramatic undervaluation has been mopped up and investors now have to have more conviction and optimism about the future of the LNG business to drive a substantially higher fair value. I do believe that the company stands to generate hundreds of millions of dollars from LNG export/import facilities in the coming years, but the move toward a more significant LNG-based transportation chain in the U.S. is farther off and less certain in my view. Chart still looks like an okay stock in my view, but there will be a lot of bumps in the road over the next couple of years, and I think investors should typically shoot for better than "okay".

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Chart Industries No Longer Left For Dead

Seeking Alpha: Orchids Executing Well, But The Valuation Already In Bloom

Orchids Paper Products (NYSEMKT:TIS) continues to be a company that has rewarded investor patience with solid execution. As a growing player in the large private label market for paper personal care products (paper towels, toilet paper, tissues, etc.), Orchids has not only been focusing on expanding its geographical reach and customer base, but also its product line up. Even more importantly, at least from my point of view, the company has continued to find ways to drive costs out of its processes and improve operating efficiencies.

Management's performance has not gone unrewarded, with the shares up another 20% since my last write-up and up close to 50% over the past year. Better still, there are solid reasons to feel good about the company's future - the expansion into the West Coast with Fabrica has gone better than expected, a new plant in Barnwell will be coming on line (in segments) this year, and Orchids is still only a small player in a large market (annualized revenue in the $200 million range out of a total private label addressable market opportunity in excess of $3 billion). Moreover, this is not a company I'd bet against when it comes to finding better ways to make better margins from its business.

All of that said, the valuation is no longer what I'd call a clear bargain. I never like to bet against good companies, and I'm definitely NOT recommending exiting a position here, but even double-digit annualized revenue growth and mid-teens FCF margin projects don't support a substantially higher fair value. I'll be the first to acknowledge that good companies deserve premiums and that a company like Orchids can outperform expectations, but I think the margin of safety here is smaller than I personally like for new positions.

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Orchids Executing Well, But The Valuation Already In Bloom

Seeking Alpha: Novadaq Technologies Growing, But The Market Doesn't Care

Novadaq Technologies (NASDAQ:NVDQ) is a good case in point as to why buying high-multiple med-tech stocks early in their life cycle can be very dangerous. Novadaq has actually been executing well, but concerns about disruptions to sales, a different revenue model, competition, and long-term adoption trends have pounded the stock back down into the single digits - down 30% over the past year and down around 60% from the all-time high.

I don't want to create the impression that Novadaq's success is assured, because it most certainly isn't. Doctors can be shockingly resistant to change, and there is always the risk of a better mousetrap down the line. That said, I think it's pretty interesting that a company that should generate more than $100 million in revenue in 2017 (at a 30% year-over-year growth rate) would be trading below 4.0x that 2017 revenue on an EV/revenue basis (and under 5.0x estimated 2016 rev) when high-growth med-techs routinely get multiples of 6.0x or higher.

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Novadaq Technologies Growing, But The Market Doesn't Care

Seeking Alpha: Rudolph Technologies Riding Powerful New Chip Trends

The semiconductor industry is a tough place to play, but the semiconductor equipment industry is even worse, as the cycles swing even higher and lower, and as the timing of orders is difficult to predict (and can have huge impacts on the stocks in the meantime). What's more, you're talking about an industry where the key customers are keenly focused on trying to improve their own free cash flow, leading to a "do more with less" philosophy with equipment than can pressure suppliers.

What's the best defense? A good offense, or in this case, compelling technology and products that offer end users real advantages in throughput, production costs, and/or total cost of lifetime ownership. Rudolph Technologies (NYSE:RTEC) is trying to bring new technology to areas like advanced packaging, inspection, and metrology and use it to leverage real growth in new packaging technologies and RF and MEMS production.

While I'm an owner of Ultratech (NASDAQ:UTEK), a Rudolph competitor, I do think Rudolph's valuation is interesting. Product acceptance/adoption, order timelines, underlying demand for chips, and competition are all real issues (and difficult to forecast in their own right), but I believe mid-single digit revenue growth over the long term and peak margins in the mid-to-high 20%'s can justify a fair value in the mid-to-high teens today, with upside into the $20s if things go well.

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Rudolph Technologies Riding Powerful New Chip Trends

Seeking Alpha: Manitex Prioritizing The Right Things During The Downturn

I think it is fair to say that Manitex (NASDAQ:MNTX) was too ambitious and too aggressive when breakneck North American onshore energy expansion fueled an unsustainable demand for cranes. Management significant stretched the balance sheet in the interests of empire-building, expanding into non-core areas like trailers and liquid storage tanks. When the cycle turned, Manitex found itself with a lot of debt, not a lot demand, and questionable synergies between the units.

All of that can certainly explain why the stock has been hammered worse than other lifting equipment companies like Terex (NYSE:TEX), Manitowoc (NYSE:MTW), Manitou, and Palfinger since 2014, but it doesn't necessarily make the shares untouchable now for aggressive investors. Management has pivoted from a growth-by-acquisition model to more of a value-creation model, with a stronger focus now on cost control/reduction, cash flow generation, and sustainable growth in high-potential businesses like knuckle cranes and the ASV product line.

I'm not as bullish on a meaningful rebound in the North American energy market as I once was, but I don't think it will much worse and I think construction (residential, commercial, and civil) can be a driver for this business. I don't see Manitex struggling to pay its interest, and I do believe further debt reduction efforts can unlock some value. My current estimates call for long-term revenue growth in the mid single-digits and peak FCF margins in the mid-to-high single-digits, supporting a fair value of $7.50 that could go higher if/when energy really recovers and/or management shows that it can build its knuckle crane and ASV operations into disruptive players.

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Manitex Prioritizing The Right Things During The Downturn

Seeking Alpha: PRA Group Struggling To Adapt To A New World

A lot has changed for PRA Group (NASDAQ:PRAA) over the last few years. The company has become one of the largest collectors of defaulted credit card receivables at a time when supply has been reduced by the absence of three of the largest sellers of charged-off receivables. The company has also seen a decidedly harsher regulatory environment, as new rules and ample uncertainties have dramatically changed how lenders approach the sale of charged-off receivables and how operators like PRA Group and Encore Capital (NASDAQ:ECPG) can go about collecting them.

The net effect to PRA Group has been a marked decline in reported profits, cash flow, return on equity, and forward growth expectations. Whereas management once boldly projected 20% ROEs into the future, the market is now pricing in a long-term ROE closer to 14% and management's own projections call for a mid-single digit GAAP growth rate without a more conducive operating environment. While I think PRA Group remains undervalued, my expectations have shrunk significantly, and there are outsized execution risks both for getting the U.S. business back on track and getting real value out of the increasingly expensive-looking move into Europe. There may yet be value here, but this is another example of trying to make money the hard way.

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PRA Group Struggling To Adapt To A New World

Seeking Alpha: Accuray Still Stuck In Med-Tech's Twilight Zone

What do you do with a company that isn't growing anywhere near fast enough to be a growth stock, doesn't have the margins or cash flow to be a value stock, but has enough innovation and market potential to still be a disruptive factor in the industry? Unfortunately for Accuray's (NASDAQ:ARAY) shareholders, while the company has definitely been making progress, the pace of that progress keeps it stuck in an underwhelming valuation range, and there are still considerable doubts about whether it can take the sizable step forward it needs to be a long-term viable third player in its market.

I continue to approach Accuray with what I consider to be optimistic skepticism. I think the company has good technology and has really been focusing on addressing the past and current deficiencies of its systems. That said, this is a slow-growing market with a huge entrenched competitor and it is far from clear whether Accuray can establish a big enough market share footprint to drive the margins it needs to create long-term shareholder value. I think a fair value around $7.50 to $8.50 is fair today, with underlying upside if the company can demonstrate its ability to get and hold a double-digit market share before 2020.

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Accuray Still Stuck In Med-Tech's Twilight Zone

Seeking Alpha: BRF S.A. Not So Appetizing Yet For Nervous Stomachs

When I last wrote about BRF S.A. (NYSE:BRFS), I warned that investors were likely in for a bout of elevated volatility - a prediction that, when made in reference to almost any Brazilian company, is a little like predicting that jumping into the ocean will make you wet. The shares have indeed jumped around since that last article and the shares have underperformed not only the Bovespa, but other Brazilian food players like Marfrig (OTCPK:MRRTY), JBS (OTCQX:JBSAY), and Minerva (OTCQX:MRVSY).

Whether BRF shares are a good idea now rests in large part on your time horizon. The company is doing a lot of smart things - relaunching a complementary value-priced brand in Brazil, prioritizing higher-margin processed/packaged foods, and using M&A to acquire local production and distribution to capture more value from international sales. Along the way, though, there have been frequent management shake-ups and there is still a lot of volatility in the business model due to commodity inputs, protein prices, currency, and so on.

I do believe that BRF can eventually achieve its goals of becoming more like Hormel (NYSE:HRL) or Nestle (OTCPK:NSRGY) and achieving EBITDA margins in the high teens or even 20%, and I do like the company's efforts to improve ROIC in recent years. That said, getting volume growth going again is a clear must-do and investors can certainly be forgiven for thinking that BRF is too risky and too volatile to mess with today. I believe the fair value for the ADRs is still above $17, but it's going to take a healthier, or at least more stable, environment in Brazil for these shares to do meaningfully better.

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BRF S.A. Not So Appetizing Yet For Nervous Stomachs

Seeking Alpha: Uncertainties And Wait Times Not Helping Neurocrine Biosciences

These aren't easy times for biotech, but that's not exactly news to investors in that sector. Neurocrine Biosciences (NASDAQ:NBIX) has gotten caught up in the sector-wide funk, though the shares have declined less since my last update than the biotech indices.

Neurocrine still looks promising to me. There are significant uncertainties about potential pricing for the company's lead drugs, not to mention the amount of effort that will have to go into building prescription-driving awareness. That said, this is still a company with multiple compounds with $1 billion-plus revenue potential that have largely proven their efficacy and safety in clinical trials. With the shares possibly undervalued by 50% or more, I would suggest this is still a worthwhile stock to consider for aggressive investors willing to put up with the risks and long waits that go with biotech.

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Uncertainties And Wait Times Not Helping Neurocrine Biosciences

Seeking Alpha: When The Dust Settles, Microsemi Should Continue To Stand Out

Microsemi Corp. (NASDAQ:MSCC) hasn't done that well since my last update on the company. While the shares were at least up in that intervening period, they've underperformed the PHLX Semiconductor Index by a little and particular names like Texas Instruments (NASDAQ:TXN), Semtech Corp. (NASDAQ:SMTC), and Silicon Labs (NASDAQ:SLAB) by a whole lot more. To a limited extent, maybe this is just "Microsemi being Microsemi" - I've owned and/or followed this name for a long time, and it always seems to zig when others zag. On the other hand, investors may be legitimately concerned about the level of debt the company has to manage now as well as the uncertainties regarding revenue, margins, and cash flows as the company moves through its initial stages of integrating PMC-Sierra.

My post-earnings model adjustments lead to a lower fair value, which is bad, but I still believe the shares are undervaluing what can be a strong mid-teens FCF growth story for many years to come. With a fair value range from the high $30s to the low $40s, I still think these shares offer enough upside for investors to consider.

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When The Dust Settles, Microsemi Should Continue To Stand Out

Seeking Alpha: Lundbeck Continues To Rebuild Its Reputation

It may be good advice to not look a gift horse in the mouth, but it's also a pretty good idea to not get overly excited about unreliable financial performance drivers. I'm still generally bullish on Denmark's H. Lundbeck A/S (OTCPK:HLUYY, LUN.CO) (or "Lundbeck"), but my enthusiasm is tempered by revenue beats that are coming largely from declining businesses, difficult marketing environments for key drugs, and a pipeline that may be hard-pressed to drive a lot of near-term pop.

I want to make it clear that I'm talking about the difference between tapping the brakes and diving out of the car entirely. I still think Lundbeck is a worthwhile idea as a long-term holding, but I think the sentiment has shifted from unduly (if not absurdly) negative a year or so ago to perhaps a little too positive in the near term. I still believe $38-42 is a reasonable fair value range for the ADRs, with potential upside from high-risk clinical programs where the value is presently heavily discounted, but I'm a little less excited about the near-term outperformance potential from the core drug business.

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Lundbeck Continues To Rebuild Its Reputation

Seeking Alpha: Ultratech Still Predictably Unpredictable, But Orders Are Improving

Ultratech (NASDAQ:UTEK) is never going to be Honeywell (NYSE:HON) or Coca-Cola (NYSE:KO), so if you're looking for a consistent, predictable company without a lot of quarter-to-quarter surprises, please look elsewhere. What Ultratech does offer, though, is leverage to what looks like an improving semiconductor order cycle, as well as leverage to specific drivers like advanced packaging for logic chips, 3D metrology, and perhaps the ongoing move to smaller FinFET nodes.

These shares have done pretty well since my last write-up, with Ultratech's roughly 20% move ahead of the SOX Index (up about 12%), though not as strong as the 25% move at Applied Materials (NASDAQ:AMAT) and Rudolph (NYSE:RTEC). Valuation remains tricky; if the company could regain the 20%-plus operating margins and 15%-plus FCF margins of prior upswings, there would still be upside, but UTEK faces a lot of competition in its key markets, and there are legitimate questions about its ability to execute.

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Ultratech Still Predictably Unpredictable, But Orders Are Improving

Seeking Alpha: Good Performance Helps Ease Some Of The Tension At Wright Medical

Wall Street hates uncertainty and there are still a lot of unknowns at Wright Medical (NASDAQ:WMGI). The full cost of the company's hip litigation has yet to be determined and there are still outstanding questions regarding the adoption of the Augment biologic product, competition from the likes of Stryker (NYSE:SYK), and management's ability to successfully integrate Tornier and become a strong extremity-focused specialty orthopedics company.

Good performance can help ease some of those concerns, and Wright Medical's first quarter results were good. There's still an above-average level of skepticism regarding smaller med-tech in the market, and that keeps Wright Medical shares priced at a discount. Given the growth prospects for the existing product portfolio and the opportunities to leverage further product development, these shares are worth a look from more aggressive investors.

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Good Performance Helps Ease Some Of The Tension At Wright Medical

Seeking Alpha: Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

In some respects, Commercial Vehicle Group (NASDAQ:CVGI) is seeing results from its protracted turnaround attempts - the company's gross margins have improved, there is a credible plan in place to reduce operating costs further, and management seems to be well aware of the need to carefully manage its manufacturing footprint to preserve margins. On the other hand, 2016 is likely to be a horrible year for Class 8 truck orders (and particularly the linehaul trucks that offer the most content and best margins), and the company's long-standing efforts to diversify into off-highway markets still haven't borne much fruit.

Although I think Commercial Vehicle's shares remain undervalued on the basis of the cash flows that the company can generate, I don't know how anyone could have a lot of confidence regarding the likelihood that it will generate those cash flows - and a significant industry down-cycle is not often the time to take big swings on risky ideas. So while I do suggest that investors looking for risky deep-value turnarounds could/should dig into this story, and I will continue to hold on to my tiny position, this is most definitely an example of trying to generate alpha the hard way (something that, in keeping with my sloth-like torpor, I generally avoid).

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Declining Markets Add New Challenges For Commercial Vehicle's Turnaround

Seeking Alpha: Lexicon Moving Forward, But Nobody Really Seems To Care

Years of disappointment and misleading guidance from prior management put Lexicon Pharmaceuticals (NASDAQ:LXRX) in a deep hole with respect to Street sentiment, but the company's execution is helping it slowly dig its way out. This year (2016) should see the company get its first product approved by the FDA, as well as key pivotal data on the Type 1 diabetes program.

While I'd certainly count myself in the camp of "long-suffering investors", I'm still generally more bullish on Lexicon than the sell-side. I believe sales of the company's lead drug telotristat etiprate can total more than $500 million at peak, supporting a fair value above today's price on its own. There's considerably more room for debate about the potential (and potential value) of Lexicon's Sanofi-partnered (NYSE:SNY) diabetes program, not to mention Lexicon's future R&D development plans, but these shares look like a risky play with an interesting skew to outsized potential gains.

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Lexicon Moving Forward, But Nobody Really Seems To Care

Seeking Alpha: Semtech Needs To Translate Expected Growth Into Shareholder Value

It is hard to argue that Semtech (NASDAQ:SMTC) has historically served its investors particularly well. The 10-year performance of the stock (up about 25%) lags not only the PHLX Semiconductor Index by a meaningful amount (the SOX is up more than 70% over the past decade) and the Nasdaq, but other chip companies like Microsemi (NASDAQ:MSCC), Integrated Device Technology (NASDAQ:IDTI), and Texas Instruments (NASDAQ:TXN), and the five-year comps are even worse.

What's more, the internal value creation isn't impressive at first blush either, with tangible book value per share down almost 75% since 2007 (a CAGR of around negative 13%). Gross margins have been generally healthy over that time and free cash flow has always been positive, but metrics like operating margin and ROIC are less exciting.

I'm not looking to bury Semtech, as I do think the company's technology for enterprise datacenters, wireless communication, sensors, and power management can grow the business. Moreover, there would seem to be opportunities to improve operating leverage through tighter management of SG&A and R&D expenses.

When it's all said and done, though, I believe the semiconductor industry is transitioning away from a valuation philosophy of "as long as you grow, it's all fine" to one more centered around margins and value creation. With that, I believe it is very important for Semtech to not only show solid revenue growth trends, but also that it can translate that growth into long-term shareholder value.

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Semtech Needs To Translate Expected Growth Into Shareholder Value