Steel Dynamics Getting No Love Despite Excellent Margins And Cash Flow

These remain tough days for the steel sector. Although protectionist policies and healthy end-markets have significantly improved the price environment for U.S. producers like Steel Dynamics (STLD), Nucor (NUE), and ArcelorMittal (MT), prices have softened and meaningful capacity expansions are now on the board. With Steel Dynamics planning the biggest expansion so far announced, there are renewed risks that this marks the peak of the cycle, even though the capacity expansion makes a lot of sense for the company for the long term.

When I last wrote about steel stocks in late September, I was concerned that the risk/perception of peaking steel prices and EBITDA would make it difficult for these stocks to get ahead, even though I thought Nucor looked a little too cheap relative to Steel Dynamics and other steel stocks. Since then, both stocks have weakened further, but Nucor has noticeably outperformed Steel Dynamics over that limited time period. The nearly 25% pullback in Steel Dynamics does make the stock more interesting today, and the “stronger for longer” bull argument could still prove valid, but this looks like a tough place to earn market-beating returns.

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Steel Dynamics Getting No Love Despite Excellent Margins And Cash Flow

Where Does Lundbeck Go After A Brutal Round Trip?

I had suggested investors lighten up on Danish drugmaker H. Lundbeck A/S (OTCPK:HLUYY) (LUN.KO) earlier this year, and I wish I had fully followed my own advice and sold out my position, rather than just meaningfully reducing it. Between ongoing disappointments in the performance of its new drug portfolio and the crushing disappointment of its only novel late-stage asset, Lundbeck shares have plunged almost 50% from the mid-year high and now sit down about 10% for trailing 12 months (and back where it was at in late 2016).

At this point I think there is an argument that Lundbeck shares are undervalued, but that will be a tough argument to sell to the Street given the company’s virtually empty late-stage cupboard and the ongoing challenges in its portfolio of recently-approved drugs. On the plus side, Lundbeck has a clean balance sheet and should generate significant cash flow in the coming years, giving management a better set of options to boost the portfolio and near-term performance.

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Where Does Lundbeck Go After A Brutal Round Trip?

Rockwell Automation Still Poised Between Excellence And Uncertainty

Looking into 2019, Rockwell Automation (ROK) seems to be in familiar territory – nobody’s really questioning the operational excellence of this leader in discrete automation, but there are plenty of concerns about end-market health, where industrials sit in the cycle, and whether Rockwell is as well-positioned for the next phase of automation as it was for the last.

I typically shoot for double-digit returns when I invest, and Rockwell doesn’t seem priced to deliver that unless you think long-term FCF growth can reach that grey area between mid-single-digits and high single-digits – a level of performance that’s not impossible, but certainly not conservative to expect. Although I’m tempted to call today’s potential returns “good enough” for a stock that seldom gets all that cheap unless/until industrial stocks really go fan-ward, I do believe there could be another round of angst and stock weakness early in 2019 that could be an opportunity to pick up high-quality industrials like Rockwell.

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Rockwell Automation Still Poised Between Excellence And  Uncertainty

ams AG Decimated On Further Apple Shortfalls

It’s been a brutal stretch for companies exposed to 3D sensing, with ams AG (OTCPK:AMSSY) (AMS.S) and IQE (OTC:IQEPY) having a particularly rough year. Recent weakness tied to Apple (AAPL) has hit the sector hard (including Lumentum (LITE) ), and weak volumes, underutilized capacity, and price pressure have all combined to savage ams’s near-term earning prospects and share price.

Sell-side analysts have slashed their price targets for ams by two thirds over the past four months, with one analyst going from a target of CHF 190 to CHF 23.60, and it remains to be seen just how quickly Android adoption of 3D sensing will develop and whether OEMs will favor the structured light technology where ams is strongest. Although the shares do look undervalued even after a sharp revision to expectations, this isn’t a hill I’m particularly eager to die on and investors need to weigh the potential of 3D sensing adoption against the risk that the adoption curve will be long enough that ams’s advantages will be whittled away by lower-priced Asian suppliers.

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ams AG Decimated On Further Apple Shortfalls

Societe Generale Going Nowhere Fast

There are a few exceptions here and there, but you can’t really win a game by playing defense. Societe Generale management (OTCPK:SCGLY) (SOGN.PA) has had to spend a lot of time cleaning up past messes, but the reality is that the multiple disposals needed to shore up capital have compromised revenue growth. Coupled with a very challenging core French retail banking market, Societe Generale is going nowhere fast and it’s increasingly difficult to see how that changes, as ongoing investments in IT aren’t likely to drive meaningful outperformance.

Societe Generale shares continue to trade at what may look like an unreasonably-low price/TBV, but this bank doesn’t earn its cost of equity capital and doesn’t seem very likely to do so over the next decade. That doesn’t mean that there may not be value here, but it’s hard to get very bullish about a perennial underperformer that simply lacks impressive earnings growth drivers.

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Societe Generale Going Nowhere Fast

Apple (And China) Taking Another Bite Out Of Cognex

Given the multiples and elevated growth expectations, I think you could argue that the market has actually been somewhat restrained in its negative reaction to Cognex’s (CGNX) challenging 2018 and a weaker outlook for 2019. Granted, the shares are down about a third over the past year (much worse than machine vision rival Keyence (OTCPK:KYCCF) ), but we’re still talking about a company trading at a forward EV/EBITDA in the low-to-mid 20’s.

I don’t think Cognex has necessarily seen the worst of the slowdown, and I do have some concerns that growth expectations and mulitples could have further to fall. By the same token, though, Cognex is a rare high-quality, high-growth asset in industrial automation and a significant player in a key enabling technology. Whether on its own or as part of a larger automation company, I believe Cognex’s business will be significantly larger 10 years from now, and that leads me to lean in favor of not getting too cute trying to time the bottom of this recent downturn.

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Apple (And China) Taking Another Bite Out Of Cognex

AxoGen Still In The Doghouse, But The Opportunity Is Compelling

The going hasn’t gotten any easier for AxoGen (AXGN). This up-and-coming med-tech company specializing in nerve repair has spooked growth investors with regard to its revenue growth rate and investors have also grown more concerned over the possibility of more intense competition from companies like Integra (IART) and Baxter (BAX) in the nerve repair market. While all that’s been going on, there seems to have been a general shift away from higher-growth (and higher-risk) stories in the med-tech space.

I’m still bullish on AxoGen, as I believe it addresses a large and under-served market with better products, but sentiment won’t turn around overnight. The 30%-plus long-term revenue growth I expect from AxoGen is hardly conservative, but I do believe these shares can outperform as surgeons become more familiar and comfortable with the procedure/products and increase their orders in the coming years.

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AxoGen Still In The Doghouse, But The Opportunity Is Compelling

Aptose Restarts Its Long Journey

Biotech investors have a lot to contend with just in terms of the risks that go along with novel drug development, but market sentiment is an often-overlooked component as well – one that can cause every bit as much frustration for investors. I was worried a few months ago that Aptose Biosciences (APTO) shares could be at the not-so-tender mercies of the volatile biotech market in the absence of real thesis-changing news, and the shares have continued to fall (another 30% or so) on what has been a generally worsening sentiment in biotech, and particularly for riskier names.

Aptose just announced the enrollment of the first patient in its restarted Phase Ib study of APTO-253, though, and the initiation of CG-806 studies should follow in 2019. Both drugs hold meaningful potential in hematological oncology, but both also face a very long road of clinical and commercial development; a road that swallows up the large majority of candidates. I do believe these shares are back at an interesting price, but will again re-emphasize that this is an early-stage biotech with well-above average risks.

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Aptose Restarts Its Long Journey

JPMorgan Humming Along, But The Market Wants More Than Consistency

JPMorgan (JPM) hasn’t had a bad year (it has outperformed various bank stock indices by 10% or more), but it seems as though the market has had its fill with the sector for at least this part of the cycle. When one of the best in the space is likely to only generate mid single-digit core earnings growth from this point on, I suppose I can see their point, but I believe JPMorgan remains undervalued even on the assumption of slowing macro drivers in the coming years.

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JPMorgan Humming Along, But The Market Wants More Than Consistency

Honeywell Looks Well-Positioned In A More Uncertain Environment

As multiple short-cycle industrial sectors appear to be slowing, Honeywell (HON) looks like a pretty good option going into 2019. This conglomerate’s third-quarter earnings had a lot of moving parts, but the aerospace, safety, productivity, automation, and specialty chemical operations all appear to be in good shape, and the company continues to make progress with its free cash flow conversion. With management taking renewed aim at fixed costs and very likely to deploy significant capital into additional M&A in 2019 and beyond, I like Honeywell’s positioning as both a shorter-term safe haven and longer-term winner.

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Honeywell Looks Well-Positioned In A More Uncertain Environment

Neurocrine Biosciences Smacked On Rising Expectations And Fraying Nerves

The last few months have not been kind to Neurocrine Biosciences (NBIX). The last three months have seen the stock double the roughly 11% pullback in the Nasdaq Biotechnology Index, with the last month being particularly brutal (a 22% drop versus a 7.5% drop). Although sales of Neurocrine’s lead drug continue to develop nicely, the scale of outperformance is shrinking. At the same time, the company has a major make-or-break data release on the way, and investors have also had to contend with some concerns about growing adverse event reports.

My view is that Neurocrine has largely been a victim of its own success and sharp deterioration in sentiment for biotech. Although I can understand some investors want to lighten up ahead of the Tourette’s data, I believe the worries about the rising number deaths in patients taking Ingrezza are overheated. Although I do see the Ingrezza pediatric Tourette’s read-out as a risky event, I still believe these shares are undervalued whichever way that update goes.

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Neurocrine Biosciences Smacked On Rising Expectations And Fraying Nerves

BB&T Committing To Tech Over M&A To Drive Growth

In a relatively short of period of time, both the operating environment and operating philosophy of BB&T (BBT) seem to have changed in meaningful ways. Management has now gone out of its way to make clear that its priorities lie with organic, tech investment-driven growth versus M&A, while the regulatory environment seems to be moving in a direction that will allow BB&T to run a leaner, higher-yielding balance sheet.

While not all of BB&T’s recent updates were universally positive, and my fair value is not really changing at this time, all told I believe BB&T is on a good path. Although I do still believe that there are a few more deals in BB&T’s future, I can’t argue with a management strategic that is focused on being leaner and more responsive while exploiting the bank’s existing specialty capabilities.

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BB&T Committing To Tech Over M&A To Drive Growth

Lenovo Now Getting A Fairer Assessment From Investors

Two out of three isn’t bad. Lenovo (OTCPK:LNVGY) appears to be having some ongoing success in rejuvenating its PC business, while its server/data center business continues to grow on the back of its SDI and hyperscale efforts. Mobile is still a challenge, but the company has seen some shipment growth improvement in North America and has had some success with stripping costs out of this business.

Lenovo’s improving performance hasn’t gone unnoticed, and even with a sharp dive connected to worries about Chinese-government sponsored “hacking”, Lenovo has outperformed many of its consumer tech peers like Apple (AAPL) and HP (HPQ) since my last update on the company. While expectations are still relatively low for Lenovo, I don’t see the valuation as so unreasonable anymore, and I believe the next leg in the company’s performance will have to be driven by better margin performance in the non-PC operations.

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Lenovo Now Getting A Fairer Assessment From Investors

A Sluggish Start With Onpattro Is Not What Alnylam Shareholders Needed

There’s not much any company can do about a bad tape, but Alnylam (ALNY) has seen sentiment sour pretty sharply since late 2017 despite the approval and launch of its first drug Onpattro. Between worries about greater competition (moreso from Pfizer (PFE) than Ionis (IONS)/Akcea (AKCA)), competition in other disease indications, longer clinical timelines, overall drug pricing, and so on, Alnylam added one more worry to the mix with a disappointing initial quarterly launch number for Onpattro.

While it’s true that a single quarter doesn’t tell you much of anything about a drug’s future, it’s still not the beginning that investors wanted for a highly-valued biotech that made the choice to take on more commercial responsibility ostensibly to maximize the value of its pipeline. I’m still a believer in Alnylam, but the Onpattro launch could well be less like Ionis/Biogen’s (BIIB) Spinraza, Alexion’s (ALXN) Strensiq, or Vertex’s (VRTX) Kalydeco than investors had hoped, and further disappointment is just not what the stock needs right now.

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A Sluggish Start With Onpattro Is Not What Alnylam Shareholders Needed

As Expected, Evolution, Not Revolution, From 3M

When I previewed 3M’s (MMM) capital markets day in my last article on the company, I said that I expected a presentation that was more or less “more of the same”. It’s not really in 3M’s corporate DNA to make major course corrections, and besides, I think there is a lot of wisdom in following an approach of “if it’s not broken … don’t break it”. 3M more or less fulfilled those expectations, laying out a five-year plan that looks a lot like the company’s recent history, albeit with what I believe is a more growth-conscious focus.

Between a “steady as she goes” investor day and a disappointing third quarter hurt by what I’d call non-structural issues, there’s not a particularly strong case for liking 3M if you didn’t already like it. The valuation is not really in bargain territory and next year looks challenging given slowdowns in a lot of significant markets (including autos, electronics, and “general industrial”). Still, as a high-quality name and one of the most R&D-focused multi-industrials, I have no problem with holding on to 3M today as part of a long-term core portfolio.

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As Expected, Evolution, Not Revolution, From 3M

Atlas Copco's CMD - Not All Bad, But Not Exactly Cheerful

In contrast to the ever-sunny, “what, me worry?” attitude of some corporate management teams that would have you imagining them smiling broadly even as the car rockets over the edge of the cliff, Atlas Copco (OTCPK:ATLKY) has a reputation for playing things pretty straight. That doesn’t mean that they’re always right, but it does mean that investors can generally trust them to give as accurate an assessment of the situation as possible.

To that end, Atlas Copco’s Thursday Capital Markets Day wasn’t exactly the sort of event that’s going to get investors feeling a lot better about this stock anytime soon. While management seems to believe the downside risk in Vacuum Technique is less worrisome than some of the more bearish sell-side analysts, and Power Technique could be a bigger contributor to growth than previously expected, all in all I’d say the tone was pretty conservative for the near term.

Atlas Copco shares have fallen roughly 50% from the start of the year and I have to admit getting more and more tempted to take a position, even given the risks around key markets like semiconductors and autos. While there is definitely a risk of things getting worse before they get better, and valuation still isn’t what I’d call cheap, buying these shares on sharp pullbacks has worked out pretty well in the past and I believe that will be the case again here.

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Atlas Copco's CMD - Not All Bad, But Not Exactly Cheerful

MSC Industrial Looking To A Restructured Sales Effort To Drive Better Results

As I've discussed (and lamented) on more than one occasion, MSC Industrial's (MSM) track record over the past couple of years has not been up to snuff, with the company underperforming other distributors like Fastenal (FAST) and Grainger (GWW) in both operational and stock performance terms. Although MSC's fiscal fourth-quarter results weren't all that great, expectations had ratcheted down going into the quarter, and it looks as though a long and surprisingly disruptive sales force restructuring/retraining process should start leading to better results in the coming quarters.

Valuation on these shares is mixed, and I don't think they're a screaming bargain, though I can support an argument that the company's profitability and return on capital (and assets) justify a price into the mid-to-high $90s. The biggest issue for the stock, though, is whether MSC can start delivering better organic sales growth and drive some of the long-awaited incremental operating leverage that investors have been waiting on for some time now.

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MSC Industrial Looking To A Restructured Sales Effort To Drive Better Results

A Painful Reset As PRA Group's Performance Remains Lumpy

Even in the best of times, PRA Group (PRAA) isn't the easiest stock to own or follow. The accounting for this large collections company is challenging to learn, and the company itself can't control key performance drivers like credit quality, charged-off receivables supply, or debtors' ability to pay. On top of that, the company is in the middle of a transition period where significant investments in operating costs have yet to be recouped by improved collections across its core and insolvency portfolios.

I model PRA Group with a higher discount rate than I would normally use for a company with its track record, largely to account for the greater uncertainty in modeling. With disappointing results in the third quarter, my fair value range falls from the high-$30s to mid-$40s, down to the mid-$30s to low-$40s, but there are still multiple potentially favorable drivers in play - including increased collections efficiency, improved operating leverage, and growing receivables supply.

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A Painful Reset As PRA Group's Performance Remains Lumpy

ABB Still Spinning Its Wheels

Every investor has their “enough” point, and I’m getting there with ABB (ABB). Despite a pretty healthy environment for electrical and automation products in general, and strong market positions in many of those markets, ABB has spent a lot of its recent history going nowhere fast, pulled down by weakness in the Power Grids business, weak utility demand, and a series of ongoing restructuring and M&A integration initiatives. Comparisons to companies like Honeywell (HON) aren’t really fair, but it has been a while since ABB investors really had a lot to cheer about, and third quarter results don’t really seem to represent a break with that trend.

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ABB Still Spinning Its Wheels

Schneider Electric's Business Is Outperforming, But The Stock Really Isn't

I can’t say that Schneider Electric (OTCPK:SBGSY) has been a terrible call this year, but I expected better from this European specialist in electrical and automation products than just sector-matching performance. Even though Schneider continues to outperform its peers in terms of its financials, and management continues to offer a pretty solid near-term outlook, the Street is most definitely not all-in on this name, as concerns about the health of end-markets like commercial construction and utilities remain in place and concerns are building about factory automation demand.

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Schneider Electric's Business Is Outperforming, But The Stock Really Isn't

Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

It’s not exactly news that the market has turned its back on the auto/commercial vehicle parts sector. Allison (ALSN) is a rather glorious exception, with the shares up about 13% over the past year, and Cummins (CMI) has done better than many (down about 13%), but Commercial Vehicle Group’s (CVGI) roughly 30% decline over the past year has been pretty close to the norm for the sector, as investors worry about the near-term impact of higher input costs and the looming cliff in large truck orders and production rates.

Although I do believe that the market is discounting the future cyclicality of CVGI’s revenue and profits too harshly, it’s tough to argue with the tape and the lack of institutional coverage for this name certainly doesn’t help. I do believe the shares are significantly undervalued, but investor sentiment will likely need to improve first for autos and CVGI still needs to prove that it can maintain margin leverage in trucks and execute on long-standing plans to diversify and grow the business.

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Commercial Vehicle Not Getting Much Love At The Peak Of The Cycle

Eaton's Challenges Look More Sector/Sentiment-Specific

The call I made earlier this year for preferring Honeywell (HON) and Eaton (ETN) in the industrial/multi-industrial space had been working pretty well through October, but looks more “okayish” now that more machinery-oriented industrials like Eaton have lost some luster. Eaton’s third quarter results had some air bubbles in it, but overall there wasn’t much that worried me and I still think this is an above-average idea in the industrial space. That said, there are growing signs that the cycle is slowing and liking Eaton now means fighting the tape to at least some extent.

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Eaton's Challenges Look More Sector/Sentiment-Specific

BRF's Third Quarter Had A Few Positives

Brazil’s BRF SA (BRFS) is only just starting its turnaround process, so investors shouldn’t expect quick fixes or huge improvements in financial results right away. Likewise, I wouldn’t get too concerned about near-term challenges like a currency-driven jump in the debt ratio. Importantly, the two key profit centers (Brazil and the halal business) both had some positive news and results should improve in the coming quarters.

I continue to believe that fair value for BRF shares today is in the $6’s, but with upside into the double-digits in a couple of years if and when the company executes on its turnaround strategy. Success is far from guaranteed, though, and investors need to aware not only of the company-specific execution risks, but also the commodity and currency risks that impact this business.

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BRF's Third Quarter Had A Few Positives

Multi-Color Takes A Big Step Back On Weaker Volumes

The situation at Multi-Color (LABL) continues to erode, but in a frustrating “death by a thousand cuts” sort of way. The Constantia deal is still far from proving to be a worthwhile use of shareholder capital, and in the meantime there are valid questions emerging about management’s plan as well as their grasp of the current situation. Although I still own some shares here, and I still see a path where the shares could be worth meaningfully more down the road, it’s tough to ignore the repeated disappointments and the clearly weaker near-term growth prospects. The shares do look meaningfully undervalued, even after another cut to expectations, but investors need to realize that this under-followed company is now deep in the doghouse and probably needs at least a year to dig itself out of the hole it made for itself.

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Multi-Color Takes A Big Step Back On Weaker Volumes

Wright Medical Coming Through With Better Performance

Wright Medical (WMGI) hasn’t delivered the most consistent track record that an investor could hope for, but once again there seems to be improving momentum in the business. Not only did this extremity-focused orthopedic company deliver a decent beat relative to third quarter expectations, but management raised guidance and it looks as though the company’s efforts to improve its sales execution in lower extremities are paying off.

Wright Medical shares have been chopping upwards since the spring of this year, and it’s a little harder to make a valuation call now. There is room for the lower extremity business to outperform on better sales execution, along with ongoing strong performance in upper extremities, and I believe the injectable form of Augment could still exceed expectations, as could the recently-completed Cartiva acquisition. Likewise, it’s at least conceivable that M&A speculation could fire up again. On the flip side, steady execution has proven elusive for the company and rivals like Stryker (SYK) aren’t going to let up.

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Wright Medical Coming Through With Better Performance

A Renewed Spark At Accuray, But Follow Through Is Critical

One of the perennial challenges in investing is maintaining a healthy balance of skepticism and realism while still allowing for the possibility of upside (and avoiding poisonous cynicism), and that can be particularly challenging when you’re dealing with companies with spotty track records. Accuray (ARAY) has had moments in the past when it looked like the story was finally coming together and the company was poised to generate meaningful forward progress, but those moments were all too brief and the company has struggled to post any real growth since the merger of TomoTherapy and Accuray in 2011.

Accuray’s fiscal first quarter got things off to a good start and there are credible reasons to believe that this fiscal year could be the start of a long-awaited meaningful improvement in the company’s financials. Even modest growth expectations would support a price above $5.50 and a fair value into the high single-digits is not unreasonable, but successful execution and delivery has long proven elusive for this company and I’m not confident enough to go all-in recommending Accuray shares on a “it’s different this time … really!” thesis.

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A Renewed Spark At Accuray, But Follow Through Is Critical

Manitex's Orders Need To Be Watched, But Progress Is Evident

Manitex (MNTX) shares have inarguably been weak since my last update on this manufacturer of mobile cranes, as the shares are down about 30% and have underperformed a generally weak sector (Terex (TEX), Manitowoc (MTW), and Palfinger (OTCPK:PLFRY) are all down about 15% to 25% over the last three months). Some of that has to be the broader weakness in the market as well as growing concerns about the heavy equipment cycle, and I didn't think that Manitex was particularly cheap when I last wrote about it.

Still, I think Manitex has made a lot of progress, and although I can't dismiss the risk that the cycle is ready to roll over, I believe Manitex's margin structure and balance sheet are in much better shape now. What's more, while a roll-over in heavy equipment demand would be inarguably bad, I still like the long-term growth story of Manitex gaining share with its knuckle-boom offerings in North America in the coming years and leveraging its still-new partnership with Tadano.

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Manitex's Orders Need To Be Watched, But Progress Is Evident

Veeco Seeing A Cyclical Slump Exacerbated By End-Market Capacity Challenges

Veeco (VECO) has hardly been my favorite name in the semiconductor equipment and tool space, but I didn't expect another one-third drop in the price of the shares since my last update. While my worries about LED equipment demand seem to be playing out, weakness in advanced packaging is getting worse, and positive drivers like VCSEL and EUV tool demand seem to be playing out a little slower.

Whether it is companies/stocks like Veeco or Rudolph (RTEC) that I don't like so much or companies/stocks like Advanced Energy (AEIS) and VAT Group (OTCPK:VACNY) that I do like, it's tough to buy these stocks going into order weakness, as you never really know how steep the correction phase of the cycle will be. Although I do believe that Veeco looks undervalued even with a sharp revision to 2019 expectations, the possibility of further downward revisions can't be ruled out, and I don't like the risk/reward balance here.

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Veeco Seeing A Cyclical Slump Exacerbated By End-Market Capacity Challenges

FirstCash In A Lull, But This Should Be A Pause That Refreshes

Third quarter results from FirstCash (FCFS) were okay, but don’t suggest a particularly powerful surge or shift in operating performance anytime soon. That’s okay though, as I believe management is making several modest “course corrections” that will keep the company on a trajectory for healthy long-term growth. The U.S. operations remain a good source of cash flow with further improvement potential in the Cash America store base, while Mexico and Latin America continue to offer a long-term runway of exceptional growth potential with relatively few major competitive threats.

Valuation is still a mixed bag. I think my long-term estimate of mid-single-digit revenue growth (and low double-digit FCF growth) could have some upside, but I don’t want to make the mistake of overstating/overestimating the growth potential of Latin America as the Mexican business and matures, nor the impact of the slower-growing U.S. business. Still, with a total potential annualized return of around 10%, this isn’t a bad buy-and-hold idea.

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FirstCash In A Lull, But This Should Be A Pause That Refreshes

Lexicon Still Heavily Dependent On Its Pipeline

Although Lexicon Pharmaceuticals (LXRX) has done what many biotechs fail to do, getting a drug through the clinical trial and FDA approval processes and onto the market, the commercialization of Xermelo really hasn’t helped the company or the stock, as the shares are quite a bit lower than when the drug was first approved and launched. At the same time, Lexicon has seen other pharmaceutical companies announce relatively solid data for their SGLT-2 drugs in Type 1 diabetes, the same market that Lexicon hopes to target (in partnership with Sanofi (SNY)) with sotagliflozin (or “sota”).

I continue to believe that the market is undervaluing the opportunity Lexicon has in the diabetes space with sota, but investors are in no mood to give the benefit of the doubt to a company that has long tested their patience. Accordingly, while I do see value here (potentially significant value), this may not be the easiest way to generate alpha, particularly as the launch of sota could be more challenging than once hoped.

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Lexicon Still Heavily Dependent On Its Pipeline

Pacific Biosciences Bows Out Gracefully

After many frustrating years of commercial execution lagging the potential of the technology, Pacific Biosciences (PACB) (“PacBio”) investors have a reason to be a little more cheerful this Friday. After the close on Thursday, the company and Illumina (ILMN) announced that Illumina would buy the company in a cash deal for $8/share, a roughly 75% premium to Thursday’s close and the highest price for the shares since late 2016.

I expect at least some PacBio shareholders to be disappointed with this sale, as there certainly are arguments supporting a much larger market down the road for long-read sequencing, and PacBio has been making progress on commercial execution. Even so, I think this is a decent exit valuation, but also a good opportunity for Illumina to add long-read sequencing technology to complement its very strong position in short-read sequencing.

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Pacific Biosciences Bows Out Gracefully

Atlas Copco Hits An Air Pocket On Weaker Vacuum Results

I was worried about the possibility of weaker semiconductor orders and slowing industrial activity when I last wrote about Atlas Copco (OTCPK:ATLKY) in July, and those worries are looming even larger now. There’s no longer any real debate about weakness in the semiconductor equipment space; the argument is now about how bad it will get and how long it will last. Likewise, I think it’s becoming increasingly apparent that there are more than a few industrial end-markets that are seeing meaningful decelerations.

None of this is good news for Atlas Copco in the short-term, and there are risks of further negative revisions into 2019 if the semiconductor down-cycle turns uglier and if industrial end-markets slow further. Counterbalancing that is the reality that Atlas Copco is one of the best companies out there, and a company that I believe can do well by shareholders over the long term. The shares are still above my revised DCF-based fair value, and I don’t dismiss the risk of industrial stocks derating further, but this looks like a pretty classic watchlist opportunity to me.

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Atlas Copco Hits An Air Pocket On Weaker Vacuum Results

FEMSA Offers A Strong Core Amid Market Wobbles

As a leading consumer/retail business in Mexico, there’s no getting around the fact that currency matters to the valuation and day-to-day performance of FEMSA (FMX). The trick, if I can call it that, is balancing the usually shorter-term impacts of currency volatility with the longer-term core operating fundamentals and quality of the business. So while the recent currency pressures (not to mention greater caution regarding emerging markets) is certainly relevant, I wouldn’t lose sight of the long-term quality of this business.

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FEMSA Offers A Strong Core Amid Market Wobbles

BRF Lays Out A Good Restructuring Plan, But No Quick Fixes

Investors, as a group, aren’t often the most logical creatures, so maybe there will be some disappointment at the restructuring plan that BRF SA (BRFS) management laid out on October 8 during its Brazil-based Investor Day (with a New York-based day to follow on October 10). Management didn’t offer up any quick fixes or any reason to think that the business will suddenly turn on a dime. What they did offer, though, was a very sound and credible strategy for building a stronger-for-longer company with substantial upside in both its home market of Brazil and its large foreign markets.

Valuation remains tied to the eventual long-term outcomes of this restructuring plan. If and when the restructuring activities start showing the expected benefits in 2019/2020 and beyond, I fully expect the multiple to expand again. Likewise, through that process the company will put some ugly near-term annual FCF results in its rear view mirror. While the current share price looks basically fair for what BRF is today, a more bullish outlook on that restructuring plan supports worthwhile upside for long-term investors.

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BRF Lays Out A Good Restructuring Plan, But No Quick Fixes

Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

Ciena (CIEN) has been on a roll. Revenue rose 12% in the fiscal third quarter (beating expectations by 3%), gross margin was stronger than expected, and the company has been on a multiyear market-share-building run in both its core WDM market and in webscale. All of that has fueled a market-beating 33% run in the stock over the past year, so of course now some eager beavers on the sell-side are trying to beat the rush and downgrade early.

Wait, what?

It’s not all that uncommon to see calls that otherwise might look bold come out around this time, as there’s not much else to talk about in the weeks before third quarter earnings, and there are some near-term drivers that could weigh on Ciena’s growth. How management sets expectations coming out of this next quarter will clearly be important, as the run in the shares has somewhat emptied the tank for positive drivers.

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Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

For ABB, It's About Cycle, Self-Improvement, And Sentiment

A laggard for some time among the industrial automation and electrification players, ABB (ABB) has at least been a little “less bad” of late as sentiment has started giving the company some credit for its later-cycle end-market exposures. Now the question is whether those promising-looking exposures will deliver actual orders in the second half of the year and drive better revenue in 2019. At the same time, there is still more than casual interest in ABB’s willingness and ability to execute on some self-help moves that would largely involve slimming down and simplifying the business.

I’ve long been an owner and supporter of ABB, and I can’t say that it has done right by me. Still, compared to peers like Emerson (EMR) and Rockwell (ROK), the valuation is undemanding and offers some upside if ABB can deliver on those sentiment-shifting improvements in orders and portfolio composition.

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For ABB, It's About Cycle, Self-Improvement, And Sentiment

Air Transport Group: Warning, Contents Have Shifted In Flight

Air Transport Group (ATSG) has chosen to alter its business in a pretty significant way with the $845 million acquisition of Omni Air. With this acquisition, Air Transport will be far more exposed to passenger-oriented ACMI and charter services, and the company will also add Boeing (BA) 777s to its owned and operated fleet.

I’m not unreservedly bullish about this deal, as I believe it adds operating complexity to a company that already had a track record of so-so execution in its core operations. It also likely takes an Amazon (AMZN) acquisition off the table (however likely that really was) and could lead Amazon to turn more toward Atlas (AAWW) as its provider of choice for future air cargo expansion needs. Adding government-funded charter services does help mitigate some of the ongoing cargo demand risks, though, and I do believe the shares remain undervalued below the mid-to-high $20’s.

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Air Transport Group: Warning, Contents Have Shifted In Flight

China Takes Another Bite Out Of IPG Photonics

When your prime market, the market where you generate close to 50% of your revenue, is in trouble, it’s tough to work around that. Such is the situation for IPG Photonics (IPGP), and this once high-flying leader in fiber lasers has gotten pummeled over the last three months on revenue and earnings weakness due to China. The latest blow came on Friday, with the company announcing that third quarter revenue and EPS were going to come in about 5% or so short of where expectations were a week ago.

IPG’s China-related risks showed up in the second quarter, and clearly they are continuing to linger, putting near-term revenue and margins very much in doubt. What’s more, it’s at least plausible to me that this period of trade squabbling between the U.S. and China is going to give a boost to Chinese fiber laser companies like Han’s Laser and Wuhan Raycus and improve their profile with Chinese manufacturing customers. Although IPG shares do look undervalued, and the multiples are lower than they’ve been in quite some time, anybody considering the shares today needs to be prepared to withstand further near-term losses until the situation bottoms out.

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China Takes Another Bite Out Of IPG Photonics

AXA Delivering On Its Pledges, And The Market Is Starting To Notice

It’s been a rough year for European insurance companies, though AXA (OTCQX:AXAHY) (AXAF.PA) seems to finally be getting a little interest. While other European insurers like Aviva (OTCPK:AVVIY) and Prudential (PUK), both of which I still happen to like, have done better over the past 12 months, the gap is shrinking and AXA has outperformed over the last six months (including meaningful outperformance relative to Generali (OTCPK:ARZGY) and Zurich Insurance (OTCQX:ZURVY) as well). I believe this renewed interest in coming as investors start to appreciate the long-term benefits of the XL Group deal, as well as the company’s commitment to execute on longer-range capital deployment plans.

I believe AXA is undervalued by a wide enough margin to be worth a serious look now, as I see double-digit appreciation potential on just mid-single-digit long-term earnings growth. Capital redeployment is a key unknown, particularly with respect to whether AXA will deleverage, return cash to shareholders, reinvest in organic growth initiatives, and/or engage in further M&A. While the late November investor day is an opportunity for management to lay out its plans for capital deployment in more detail, expectations do appear to be rising and management needs to deliver.

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AXA Delivering On Its Pledges, And The Market Is Starting To Notice

BancorpSouth On Track, With More Growth Opportunities Ahead

Since my last update on BancorpSouth (BXS), this Mississippi-based regional bank has managed to close three significant M&A transactions and meaningfully expand its lending franchise in Texas. At the same time, the bank still maintains an uncommonly good mix of low-cost core deposits and solid credit quality, as well as meaningful fee-generating businesses.

At the time of that last article, I didn’t think the valuation of BancorpSouth shares was all that exciting or likely to lead to outsized gains. Since then, the shares have basically tracked the performance of regional banks in general with surprisingly little deviation from either the SPDR S&P Regional Bank ETF (KRE) or the iShares U.S. Regional Banks ETF (IAT). And the story is largely the same today – while I do believe BancorpSouth scores well in most of the quality metrics that matter, and I believe there is significant opportunity for tuck-in/fill-in M&A within its footprint, the core growth potential isn’t exceptional and the current share price seems pretty fair at a time when banks are looking at a turn in the operating environment.

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BancorpSouth On Track, With More Growth Opportunities Ahead

Versum Leveraged To Chip Volume Growth And Innovation

On the whole, I like pick-and-shovel plays and Versum Materials (VSM) is a good example in the chip space, as this producer of specialty chemicals, gases, and other materials is heavily leveraged to ongoing growth in chip production volume and ever-increasing chip design complexity. Although Versum has some modest exposure to equipment and some volume risk from improving yields, the general outlook for Versum is healthy as a critical supplier to fabs.

Relative to Entegris (ENTG), though, I’m not quite as interested in the value proposition offered by these shares. I do think Versum is modestly undervalued, and it’s more of a play on direct chemical/material demand, but expectations might still be a little high for 2019 and I still see ongoing risk of the market being indiscriminate in selling off semiconductor-related names if (“when”, in my view) the outlook for equipment demand in 2019 worsens.

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Versum Leveraged To Chip Volume Growth And Innovation

A Rough Summer Has Knocked Calyxt Down

So far, not so good for my late June high-risk/high-reward call on Calyxt (CLXT). The “high risk” part has certainly come through promptly, but shareholders have seen the shares sell off about 25% after a summer that certainly offered more bad news than good, highlighted by the surprising resignation of the CEO in late August only a couple of months after the equally-surprising resignation of the CFO, and a decision in Europe that puts the acceptance and development of gene-edited crops at risk.

Assessing these developments is not easy. Both executives may have had disagreements with the board of directors and/or Cellectis (CLLS), which still controls the company, and those disagreements may have included the unusual business model Calyxt is pursuing with its high-oleic soybeans and other consumer-oriented products. It is also possible that they saw fundamental issues with the technology and/or its path to commercial acceptance. Unfortunately there’s really no way to know at this point, and the one remedy I do have is to increase my discount rate to account for greater risk and uncertainty.

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A Rough Summer Has Knocked Calyxt Down

Lexicon Likely Looking At Even More Competition In Type 1 Diabetes

As more and more competitor data accumulate, it’s looking like Lexicon (LXRX) is going to face significant competition in the market for SGLT inhibitors in Type 1 diabetes. Granted, it has long been my base-case assumption that Lexicon would see serious competition for its drug sotagliflozin (an SGLT-1/-2 dual inhibitor) in this large and underserved indication, but recently-presented data from Lilly (LLY) suggests that Jardiance (or empagliflozin) will be a meaningful potential threat in addition to AstraZeneca’s (AZN) Farxiga (dapagliflozin) and off-label use of SGLT-2 inhibitors already approved for Type 2 diabetes.

Lexicon could really use some good news, as the company has seen sentiment on sotagliflozin fade due to concerns about diabetic ketoacidosis (or DKA), a potentially serious side effect of SGLT inhibitor therapy, and has come up short of expectations multiple times already in the short commercial life of its only approved drug Xermelo. Although I believe Lexicon shares remain undervalued on the basis of just the potential value of sotagliflozin in Type 1 and Type 2 diabetes with partner Sanofi (SNY), shareholders could really use some positive clinical data on new compounds and a better sales trajectory for Xermelo.

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Lexicon Likely Looking At Even More Competition In Type 1 Diabetes

Smiths Group Going Nowhere Fast

It's never fun, but sometimes companies force you to conclude that your prior assumptions were just wrong (or you can take the time-tested bagholder approach of "I'm not wrong, I'm early!"). In the case of Smiths Group (OTCPK:SMGZY) (SMIN.L), I thought earlier this year that management was on the cusp of delivering the sort of results and portfolio transformations that would show a true break from its not-so-charming past trend of weak growth and questionable capital allocation/portfolio management. Since then, I just haven't seen the sort of follow-through I need to see to maintain that optimism.

To be sure, Smiths isn't a disaster, and fiscal 2018 was the first upturn in organic growth in some time. Moreover, there is still some apparent undervaluation based on what I think are fairly undemanding assumptions. If management can get its "stuff" together - drive better margins in John Crane, turn around or sell Medical, improve Detection, and lay out a more coherent strategic portfolio plan - there's still room for this stock to do better. But in the short term, I believe the disappointments of the past few weeks and months will continue to weigh on sentiment and valuation.

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Smiths Group Going Nowhere Fast

With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

If you wrote up a list of outperforming auto and commercial vehicle component stocks, it would look for all intents and purposes like you were writing in invisible ink. A few companies like Aptiv (APTV) and Magna (MGA) have been less-bad than average, and Allison (ALSN) and tiny Commercial Vehicle Group (CVGI) are up strongly over the past year, but for the most part, this has been a pretty awful sector as investors have written off the passenger vehicle market for the near term, priced in the commercial truck fall-off, and continued assuming that internal combustion engines are doomed.

There might be a little hyperbole there, but not too much, and Tenneco (TEN) certainly continues to get almost no benefit of the doubt. Although second-quarter margins and margin guidance weren't great, the Street seems to be pricing these shares for ugly future margins and cash flow. Likewise, the idea that spinning off the Ride Performance and Aftermarket business will unlock any value seems to be largely dismissed at present. I really can't say that Tenneco is a top-notch idea now, but sector-wide valuations seem to be washing out, and this is a name worth watching for an eventual recovery opportunity.

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With Or Without Federal Mogul, The Street Just Doesn't Care About Tenneco Now

Teradyne's Cobot Opportunity More Than Just Hype

What makes Teradyne (TER) interesting is the combination of a high-share, margin-rich, cash-flow-generating semiconductor test business with an emerging growth story in collaborative robots (or "cobots"), a high-potential new segment of the robotics market where Teradyne has established a strong initial market share and a business plan and ecosystem that may make it harder for established robot players like Fanuc (OTCPK:FANUY), Yaskawa (OTCPK:YASKY), and ABB (ABB) to muscle Teradyne aside and replicate their traditional shares of the robotics market.

Although there will be some above-trend years and Teradyne is a net beneficiary of increasing chip content and complexity, I believe the core semiconductor test business is a solid but not spectacular business. The cobot business, though, has legitimately exciting potential and should be the key driver of what I expect to be high-single-digit long-term revenue growth and double-digit FCF growth over the next 10 years.

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Teradyne's Cobot Opportunity More Than Just Hype

MinebeaMitsumi Looks Seriously Undervalued, But There Are Significant Upcoming Challenges

Japan’s MinebeaMitsumi (“Minebea”; also sometimes written as “Minebea Mitsumi”) (OTCPK:MNBEY) (6479.T) is certainly not a household name to most investors, but this odd mix of precision machined and electrical components is a strong leader in several attractive markets, and has uncommonly robust opportunities to drive improved operating and product synergies in the coming years. At the same time, though, the company is facing some significant product cycle risk and there are no guarantees that the synergy efforts will pan out.

Minebea looks undervalued on the basis of long-term revenue growth of just 3%, but revenue could be choppy over the next several years and the margin/FCF generation improvement I expect may prove to be beyond management’s capabilities. I’d also note that these ADRs are not very liquid at all, so investors should factor that into their evaluation process (the Tokyo-listed shares are quite liquid, for investors who wish to pursue that option).

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MinebeaMitsumi Looks Seriously Undervalued, But There Are Significant Upcoming Challenges

Allison Transmission Running Over The Bears

Whatever the future may look like for Allison Transmission (ALSN) and its role in a post-electric truck world, the company is executing remarkably well today. With solid growth in its core North American truck business augmented by improving demand from energy and mining applications, as well as share gains in trucks outside North America, Allison is posting exceptional incremental margins and forcing bearish sell-siders to trot out “we’re not wrong… we’re just early” calls.

I’m not in the “the sky is going to fall” camp with Allison, but it’s a tough story to model out given the likelihood that electric trucks eventually will grab share in strong core Allison markets like dump trucks, refuse trucks, and other vocational applications like drayage. I believe a key question is whether Allison can continue to gain share in overseas markets (where penetration is low) and whether they can fight off competition from other transmission alternatives like the Cummins (CMI)/Eaton (ETN) JV.

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Allison Transmission Running Over The Bears

Crane Highlights Its Payment Growth Opportunities, While Fluid Handling End-Markets Improve

Above-average exposure to later-stage markets like aerospace, chemicals, energy, and municipal water is certainly not hurting Crane Co. (NYSE:CR) these days, even though the performance of its Fluid Handling business left something to be desired in the second quarter. I thought I saw some value in Crane shares when I last wrote about the company after second-quarter earnings, but I didn’t foresee the 12% jump the shares have delivered in such a relatively short time.

Management’s recent Investor Day focused on the Payment and Merchandising Technologies (or PMT) business certainly won’t hurt sentiment, as management laid out some good arguments for above-average growth. What’s more, Crane’s valve business (the bulk of Fluid Handling) should see improving results as companies like Emerson Electric (NYSE:EMR) continue to report healthy demand from key process automation end-markets like oil/gas, chemicals, and so on. I don’t find the valuation particularly cheap now, but the company’s market exposures should give it a better-than-peers chance of beat-and-raise quarters for a little while yet.

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Crane Highlights Its Payment Growth Opportunities, While Fluid Handling End-Markets Improve

Honeywell Continues To Invest In A Faster-Growing, Higher-Margin Future

Honeywell (HON) management has made no secret of its game plan for the future, nor its desire to be a leader in markets with above-average potential for revenue growth, margins, and returns on capital. In keeping with that plan, the company has already spun out Garrett Motion (GRX), will be spinning out Resideo, and just announced another promising acquisition for its warehouse automation business.

Between its very strong process automation business, its rapidly-growing warehouse automation business, underrated operations in specialty materials/chemicals and safety, and a solid (if generally well-understood) aerospace business, I find it hard not to like Honeywell. Valuation is not exactly low, but with the company consistently repositioning itself toward higher-growth, higher-margin businesses, and particularly ones where it's establishing strong market share, I continue to like Honeywell as a long-term holding.

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Honeywell Continues To Invest In A Faster-Growing, Higher-Margin Future

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

Dana Looks Pinned Under The Wall Of Worry

I was tentatively bullish on Dana (DAN) in late May of this year, but auto and commercial vehicle suppliers continue to weaken in the market, and the shares are down another 15% since then. Maybe I’m missing something big here, but I see Dana as a company with at least decent ongoing leverage to passenger vehicles, an improved position in electrification, and a solid global presence in commercial/off-road vehicles, particularly with the Oerlikon (OTCPK:OERLY) transaction. And yet, the Street continues to price this one as if there’s going to be serious long-term erosion in the business.

I freely admit that Dana doesn’t have the greatest operational track record with respect to margins, FCF generation, and/or ROIC, but the company has improved in recent years and is seemingly getting no credit for that. In a market where many auto and commercial vehicle suppliers appear to be trading below long-term fair values investors certainly have choices, but I continue to believe this name is worth a look.

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Dana Looks Pinned Under The Wall Of Worry

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

Turbulence Still Hitting Copa Holdings Hard

One of the last things I said about Copa Holdings (CPA) in my last article on the company was that "adverse forex and higher fuel costs could get worse before they get better", and those twin headwinds are primarily responsible for another 5% decline in the share price since the time of that article. What's more, management's recent investor day offered up a lot of evidence to support a "soft" guidance reduction for the second half of the year - in other words, investors shouldn't be surprised to see some weakness in the third quarter results and some downward margin guidance for the fourth quarter.

It's tough to recommend a stock while expectations are still moving down, particularly when sector valuations are generally predicated on the next 12 months' financial performance. I don't think Copa is the greatest idea out there for investors who need a quick gain and/or who can't or won't accept near-term losses for longer-term gains. On a longer-term basis, though, I continue to believe the valuation is pretty interesting and even those investors not willing to accept the risks and uncertainties today should keep a closer on this one for signs of stabilization over the next three to six months.

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Turbulence Still Hitting Copa Holdings Hard

Improving End-Markets And Market Share Not Enough For Cummins

Investors are definitely conflicted about machinery stocks these days, with mining and ag doing well, but a lot less enthusiasm for construction and trucking as investors worry about how the end of the cycle will play out. I didn’t see enough upside in Cummins (CMI) to want to dive in back in late May, and the market-lagging return since then doesn’t exactly have me regretting that call (though Cummins has done comparatively better than most heavy machinery names over that time).

I can’t say that I feel all that differently about Cummins now. The North American truck cycle looks like it has longer legs (into 2019), but that doesn’t really change the fundamental long-term valuation picture. Likewise with the long-awaited recovery in power gen and strength in markets like mining and oil/gas. Although the shares do look a little undervalued on a near-term basis and I like the company’s ongoing moves to invest in electrification products/technology, I just don’t see the upside to warrant taking a new position now.

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Improving End-Markets And Market Share Not Enough For Cummins

Strong Mining Markets Could Help FLSmidth Finish Strong

The mining sector has definitely recovered, but that doesn't automatically make every player in the mining sector a good pick. I wasn't too excited about the near-term trading prospects for Danish mining and cement equipment company FLSmidth (OTCPK:FLIDY) (FLS.KO) back in June, and I'm not surprised that the shares have been flat since then, while Epiroc (OTCPK:EPOKY), Komatsu (OTCPK:KMTUY), Caterpillar (CAT), and Metso (OTCQX:MXCYY) have headed higher on stronger orders and improving margins.

Although FLSmidth's second-quarter margins were oddly weak, the order recovery was solid, and there have seen been a lot of corroborating data points on the strength of the mining sector and the opportunities over the next couple of years for equipment supplies like FLSmidth. I don't find these shares cheap enough to have a lot of appeal as a long-term holding, but I think circumstances are setting up for a better performance for the shares in the last quarter of the year and more trading-oriented investors may want to take another look. For longer-term investors, visibility on better margin leverage would be/is a key gating factor to a more robust valuation.

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Strong Mining Markets Could Help FLSmidth Finish Strong

Maxwell Continues To Sorely Test Investor Patience Ahead Of Commercial Ramps

It has been clear for a while that 2018 wasn’t going to be a great year for Maxwell Technologies (MXWL), but bulls could take some solace in the idea that 2019 would see the start of meaningful ramps in long-awaited opportunities like auto ultracapacitors. While that is still a valid bull thesis in my view, the reality is that 2018 has been tougher than expected, including a higher cash burn that forced the company to move faster with a dilutive financing.

I’m frankly torn on these shares. I do genuinely believe that the company is going to see meaningful auto revenue starting in 2019 from platform wins in active suspension and ADAS backup systems and grow from there, and I do also believe in the potential in areas like rail. On the other hand, this is not a company whose execution track record leads me to want to lend any of whatever credibility I have to them. Accordingly, while I do think these shares are undervalued on the potential of the launches in 2019 and beyond, this is a consummate “caveat emptor” stock and one where you really need to do your own careful due diligence.

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Maxwell Continues To Sorely Test Investor Patience Ahead Of Commercial Ramps

Lydall Needs To Complement Good M&A With Better Internal Execution

Well off the beaten path and certainly not a strong performer over the past year, Lydall (LDL) is an interesting name to look it for what the company could be worth if management can improve their internal execution and drive some long-promised margin improvements. Lydall has a good track record with M&A, including the recent acquisition of Interface Performance, but between the challenges of the auto industry, material cost inflation, and execution issues, the company has not been performing up to its capabilities.

Betting on a company to get itself together and improve its operating performance always involves risk, and it is entirely fair for readers to question why they should bother unless and until the segment-level margin performance at least stops getting worse. That said, the valuation would seem to offer some upside based upon what I consider to be fairly conservative assumptions that leave room for upside if and when management delivers better results.

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Lydall Needs To Complement Good M&A With Better Internal Execution