Universal Stainless & Alloy Products Looks Undervalued, But This Downturn Is Brutal

There's really not much good news in the world of specialty alloys, particularly as recoveries in end-markets like aerospace, power gen, and oil/gas look like multiyear events. For companies like Universal Stainless & Alloy Products (USAP), Allegheny (ATI), and Carpenter (CRS), the recovery is not going to sharp or quick.

USAP shares are basically flat from when I last wrote about the stock, outperforming Carpenter, but lagging Allegheny and Acerinox (OTCPK:ANIOY). Management is doing what it can to contain costs and get the company through this chokepoint, but the near-term outlook is decidedly challenging. Major markets like commercial aerospace, power gen, and oil & gas won't be much help until 2022, at best, and comparatively stronger markets like auto tooling, semiconductor, and medical aren't big enough to carry the extra load. While I see some value here, this is a high-risk situation, and it's tough to see what will drive a quick cyclical turn.

 

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 Universal Stainless & Alloy Products Looks Undervalued, But This Downturn Is Brutal

Acerinox Running A Good House In A Bad Neighborhood

There's only just so much you can do as a metal producer when apparent demand in your key markets falls over 20% in a quarter, and I believe Acerinox's (OTCPK:ANIOY) during this downturn supports the general notion that they have high-quality assets and a good management team. Recoveries in markets like appliances and process industries does support a brighter outlook, but the next few quarters are still likely to be challenging.

Longer term, I still like Acerinox and the shares do look a little undervalued next to the quality steel producers in North America and Europe. Since my last update, these shares have lagged peers like Aperam (OTC:APEMY) and Outokumpu (OTC:OUTKF), though not by much with Outokumpu, as well as quality steel names like Steel Dynamics (STLD), but have outperformed others like ArcelorMittal (MT).

The addition of VDM gives the company some meaningful growth and synergy opportunities, and I think there is more management can do with its asset base once the market recovers. Steel, whether conventional or stainless, is really not a market that supports buy-and-hold, but I believe there is upside in Acerinox as a recovery cycle trade.

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Acerinox Running A Good House In A Bad Neighborhood

DBS Group Knocked Back On Rates, But Credit And Long-Term Opportunity Are Sound

No bank is getting through this cycle unscathed, and DBS Group (OTCPK:DBSDY) is no exception. Not only is DBS seeing significant spread compression from weakening loan yields, loan demand has moderated some. On the positive side, the company’s investments and efforts into building a stronger fee-generating business base are paying off, digitalization is helping reduce costs and maintain better business activity relative to less-digitalized peers, and the credit evolution has so far been pretty good.

These shares are down about 20% since my last update on this Singaporean money-center bank. That’s not the performance I expected in a pre-COVID-19 scenario, but it as at least better than the average American bank’s performance over that period, not to mention better than pretty much all of its peers, including United Overseas (OTCPK:UOVEY), Standard Chartered (OTCPK:SCBFY), Bank Rakyat (OTCPK:BKRKY), and Bangkok Bank (OTCPK:BKKLY), while it has basically been even with OCBC (OTCPK:OVCHY).

I continue to believe that DBS Group is a solid long-term holding to consider, as the bank has significantly improved itself over the last decade-plus. In addition to leveraging global trade growth, DBS is well-placed to benefit from the growth of retail banking in Southeast Asia, with a predominantly digital focus that keeps costs low and tends to attract younger, wealthier customers. With solid prospects for mid-single-digit core growth after the post-COVID-19 recovery, I believe DBS Group is undervalued below the $70’s.

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DBS Group Knocked Back On Rates, But Credit And Long-Term Opportunity Are Sound

Komatsu Still Offers Heavy Machinery Recovery Upside, But It Could Take Some Time

This has been a challenging downturn so far for suppliers of construction and mining equipment. Unlike most recessions, in which customers continue to operate at lower levels, this downturn saw a dramatic curtailment of activity. While parts and service demand has held up better for Komatsu (OTCPK:KMTUY) than new equipment, it has still been a sharp deterioration, and the outlook for the recovery is cloudy at best, particularly with weak trends in North America and Europe and an ongoing shift away from coal as a fuel source for electricity.

When I wrote about Komatsu a quarter ago, I had mixed feelings about the company, with the long-term/recovery valuation looking relatively appealing but the short-term outlook looking pretty poor. Since then the shares have appreciated some (up around 10%), but they’ve lagged peers and rivals like Caterpillar (CAT), Epiroc (OTCPK:EPOKY), and Hitachi Construction Machinery (OTCPK:HTCMY). I still see some upside in the valuation, but I’m more interested in mining companies with less reliance on coal than Komatsu.

 

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Komatsu Still Offers Heavy Machinery Recovery Upside, But It Could Take Some Time

Commercial Vehicle's Decision To Embrace New Opportunities Looks Like The Right Call

Investors do well to be skeptical when a company announces a major shift in its business and strategic focus. Then again, when a company has amply demonstrated that its legacy businesses just can't produce adequate long-term returns, it can be the beginning to a much brighter future. I have a lot of doubts and questions about Commercial Vehicle Group's (CVGI) decision to pivot toward new opportunities in warehouse automation, military electronics, and EV/logistics vehicles, but considering that the company really couldn't get anywhere with its legacy operations, it seems like a longshot bet worth taking.

I thought CVGI had significant potential upside on a cyclical turn, but I believe the near-tripling of the share price since that last article is driven more by this announcement that it will restructure its legacy operations and pursue new growth opportunities like warehouse automation. This shift makes valuation considerably more challenging, but the valuation isn't bad even if you just look at this as a restructured seating and wiring company, let alone factoring in the new growth opportunities.

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Commercial Vehicle's Decision To Embrace New Opportunities Looks Like The Right Call

Quarter By Quarter, BorgWarner Wears Down The Bear Arguments

Vehicle component suppliers are undeniably cyclical, and the upcoming shift toward hybrids and EVs has created understandable worry about which suppliers will be left out in the cold. Even so, it has seemed for some time to me that BorgWarner (BWA) doesn't really get the credit it deserves. Not only have I seen bears try to wave away the company's multiyear streak of growth ahead of underlying global production (all but one quarter since 2017), they've simultaneously criticized BorgWarner's R&D and M&A investments into electrification while fretting about whether BorgWarner will have the technology to make the transition.

Up more than 40% since my last update on the company, it looks like some of the panic has eased off, but I continue to see upside from here. There are certainly other names in the space worthy of consideration - including Dana (DAN), Valeo (OTCPK:VLEEY), and motor developer Nidec (OTCPK:NJDCY) - but I continue to believe that BorgWarner offers enough prospective return from here to be worth consideration.

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Quarter By Quarter, BorgWarner Wears Down The Bear Arguments

Ternium Biding Its Time Ahead Of Eventual Market Turns

I've been frustrated with the slow progress of Ternium (TX) as a long idea, as although the shares have done a little better lately compared to other North American and South American steel companies, I still see the shares at a low valuation relative to a troughing business. That's not entirely unfair, I'll grant, as Mexico's economy has deteriorated noticeably, and major Latin American markets like Argentina and Colombia have shut down to combat COVID-19.

The biggest near-term challenge for Ternium, apart from the risk of even more deterioration in Mexico and/or a weaker recovery in autos, is likely its exposure to flat steel. Long steel has generally been outperforming (a theme with Gerdau (GGB) and Nucor (NUE)), and Ternium has little of that - not that I think it would actually matter all that much given the state of Mexico's non-resi construction market.

I continue to believe Ternium shares are trading too cheaply. Between discounted cash flow, EV/EBITDA, and ROE-driven P/BV, I believe Ternium should trade at least in the low $20s, and I'd note that the low leverage ratio (relative to other steel companies, at least) does reduce some of the risk from a protracted downturn.

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 Ternium Biding Its Time Ahead Of Eventual Market Turns

Resilient Construction Markets Build A Better-Than-Expected Quarter For Gerdau

One of the interesting phenomena from the COVID-19 pandemic so far is that non-residential construction markets have held up quite a bit better than expected (likely due to the fact that it's a largely outdoor vocation and it's easier to keep greater distances between workers). That, in turn, has supported relatively better markets for long products and better opportunities for Brazil's Gerdau (GGB).

I liked Gerdau back in May, and the stock has shot about 60% higher since then, performing far better than Mexico's Ternium (TX), global player ArcelorMittal (MT), and U.S. competitors like Nucor (NUE). Although I'm bullish on "catch-up" investment in Brazil's non-residential construction sector, not to mention the significant margin leverage that can come from better utilization in Brazil, I have my doubts about the U.S. non-resi sector and the valuation looks more than fair today at a time when many other steel companies seem to be trading at pretty wide discounts to typical trough valuations.

 

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Resilient Construction Markets Build A Better-Than-Expected Quarter For Gerdau

Infineon Ready To Leverage Recoveries In Auto And Industrial Markets

As key markets start to turn, Infineon (OTCQX:IFNNY) has gotten more positive attention recently from analysts. Autos will still be down year over year in the next quarter (and quite possibly the one thereafter), but the trend is improving, and Infineon should see healthier auto, industrial, and appliance markets in calendar 2021. That, in turn, should drive better utilization and factory absorption, helping margins, while also taking in some of the expanded inventory.

I thought Infineon offered some relative value back in May, not to mention attractive revenue and margin upside tied to growth in auto and industrial markets. The performance since then has been mixed, with the local shares doing a little better than semiconductor sector as a whole, as well as NXP Semiconductors (NXPI) and Texas Instruments (TXN), while the ADRs have been considerably stronger. Relative to names I liked a little better, ON Semiconductor (ON) has done better, while STMicro (STM) has underperformed.

I don't see as much relative value in Infineon now, and I'd probably lean more toward STMicro, ON, and NXP. Not unlike ON, gross margins are a key driver now, and if Infineon can outperform here, there's certainly some upside to my base-case scenario.

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Infineon Ready To Leverage Recoveries In Auto And Industrial Markets

PRA Group Finds A New Gear On Record Collections

Business has been improving for several quarters at PRA Group (PRAA), and a "perfect storm" (or at least a fortunate combination of events) in the second quarter catapulted some performance metrics even higher. While management themselves don't believe that the cash efficiency ratio seen in the second quarter is anything like a "new normal", the improved collections efficiency is very promising ahead of what I expect will be a surge in charged-off paper over the next couple of years.

I saw upside into the $40's when I last wrote about PRA Group, and here we are now in the mid-$40s. I can certainly see more upside from here, particularly as improved collections efficiency should be intersecting with improved supply. The boom time won't last forever, but PRA Group will have an opportunity to generate above-trend results for at least a little while. The only "but" is that the price today anticipates a lot of that.

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PRA Group Finds A New Gear On Record Collections

As The Chip Industry Turns, ON Semiconductor Still Has Some Relative Value

I've had a love-hate relationship with ON Semiconductor (ON) for some time, loving the idea of what the company could become, but hating the long history of always coming up a little short. Management has a poor track record of hitting margin targets, and to that point I'd note that even though the company has shifted its mix toward more desirable markets, it hasn't helped gross margins.

I saw value in these shares back in May, and they've since appreciated almost 50% - well above the return of the semiconductor group and peers/rivals like Analog Devices (ADI), Microchip (MCHP), NXP Semiconductors (NXPI), STMicro (STM), and Texas Instruments (TXN). To some extent, I attribute that to the fact that in cyclical industries, it's often the operational laggards that benefit more from upturns, and the market is certainly thinking that the turn is in place.

Valuation is definitely a more mixed call. The shares don't look that interesting on free cash flow unless the company can reach and hold mid-teens FCF margins, but the shares do still look undervalued on the basis of near-term margins, and it's one of the few in the group I can say that about.

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As The Chip Industry Turns, ON Semiconductor Still Has Some Relative Value

In A Brutal Quarter, Manitex Held Up A Little Better

Manitex (MNTX), a small manufacturer of truck-mounted cranes (boom truck, straight-mast, knuckle cranes, and so on), industrial cranes, and specialized forklifts, didn’t have a strong second quarter in absolute terms, but the business did hold up comparatively/relatively well in a quarter that was brutal for almost all manufacturers of construction and access equipment. Management didn’t sound bullish on the near-term prospects, but cost-cutting and working capital releases should help manage the liquidity situation.

Manitex is up slightly from my last update on the company, underperforming both the larger industrial space and larger companies in the construction equipment space. While many larger names rebounded as investors got more comfortable with the reality of horrible near-term results and eventual recoveries, Manitex is virtually unfollowed and its small size and daily liquidity keep off the radar of most institutions. I continue to believe the shares are undervalued, and I believe the company will make it through this tighter squeeze, but this is really only a name suitable for more aggressive investors.

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In A Brutal Quarter, Manitex Held Up A Little Better

Parker-Hannifin Showing That It Really Is Different This Time

 Perceptions change slowly. Not only has Parker-Hannifin (PH) taken far-reaching steps to fundamentally improve its cost structure (leading to significant uplift in margins versus prior recessions), the company's M&A activity has created a less cyclical business better capable of growing through the cycle.

And yet, Parker is still a frequent flier on "short-cycle industrial" lists. I'm guilty of it too, referring to Parker in my last piece as, "probably always a cyclical short-cycle industrial". Now, Parker still IS cyclical and still leveraged to short-cycle markets, but it has improved its quality and full-cycle stability to a meaningful degree.

I liked Parker back in early May, and the shares have jumped by about a third since then, beating the industrial sector by a wide margin. I still really like this business, and the valuation is now on par with other high-quality industrials with a prospective return in the mid-to-high single-digits, but I don't like how the sell-side is straining to justify ever-higher price targets. I don't sell quickly out of winners in my own portfolio, but I won't pound the table as hard now for new buyers to consider this one.

 

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Parker-Hannifin Showing That It Really Is Different This Time

ING Holding Steady, But That's Not Enough To Move The Shares

 Given the chaos in the global economy, a relatively stable set of results from ING (ING), at least on an adjusted basis, is probably welcome. Considering the longer term, though, this is a bank that needs to prove to the Street that it can leverage heavy investments in digital technologies to break out of a general malaise that has hit more traditional banking-focused European operators and led to sustained weak valuation multiples.

ING shares have done okay since my last update, rising about 16% in the local market (closer to 25% for the ADRs) and handily outperforming the Europe 600 Banks Index. I continue to believe that these shares are undervalued even with a relatively weak long-term outlook for core growth. A key issue, apart from macro drivers like rates, is convincing investors that a primarily traditional banking operation can somehow break from the pack and generate attractive returns relative to the cost of equity, and I see that as a major to-do item for the new CEO.

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ING Holding Steady, But That's Not Enough To Move The Shares

Copa Shut Down For Now, But Offers Upside On The Eventual Rebound

 Even in the context of the dire and uncertain circumstances created by COVID-19, I thought Copa (CPA) was too cheap back in May, and the shares have since jumped more than 40%. Although Copa has seen a slower/longer path back to resuming operations, the company's cost-reduction/cash-preservation steps are working and management is being responsible with respect to capital and the company's long-term future.

Obviously, there are still significant operational uncertainties here - the primary one being whether the government of Panama will open the country and allow the company to restart operations in early September. The "good news" is that Copa could survive a shutdown through 2021, and I do believe that air travel will snap back relatively quickly, particularly given Copa's leverage to business travel. With Copa still priced to generate double-digit annualized returns to shareholders (with an elevated discount rate), I don't believe it's too late to own this name.

 

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Copa Shut Down For Now, But Offers Upside On The Eventual Rebound

Societe Generale Looks Very Cheap - Hamstrung With Respect To Growth

 I've warned in the past of the persistent risk of Societe Generale (OTCPK:SCGLY) ("SocGen") becoming a "value trap", with the company's management unable to craft a business plan that would lead to meaningfully higher returns on equity and drive a higher valuation. The COVID-19 pandemic has only complicated that issue, and the steps that management is taking to manage through the crisis may well only exacerbate that problem.

Societe Generale hasn't produced an acceptable return on its equity since the Global Financial Crisis and I'm increasingly worried as to whether it ever will. SocGen is primarily a European retail bank in an environment where that's a decreasingly profitable line of business, and efforts to improve other operations like trading, investment banking, and service business (asset management, etc.) have had little-to-mixed success at best. With that, while SocGen screens very cheap on even very low near-term expectations (as well as long-term core earnings), I'm worried that this bank is effectively hamstrung on growth/margin expansion and will trade at a persistent discount.

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Societe Generale Looks Very Cheap - Hamstrung With Respect To Growth

U.S. Steel Trying To Change On The Fly, While Weighed Down With Debt And Facing Headwinds

 The writing had been on the wall for a while that the company needed to change, and now U.S. Steel (X) management is attempting to execute on an expensive “best of both” strategy in the midst of serious steel industry headwinds and while weighed down with quite a lot of debt. While the basic idea of combining electric arc and upgraded/improved blast furnace assets under the same umbrella isn’t necessarily a bad one, it’s unclear at best as to whether U.S. Steel can earn a good return on the capital they’re going to consume in trying this strategic shift.

With so much changing about the business, U.S. Steel almost looks like a binary outcome – this will either work out and the shares are worth some hard-to-quantify “quite a bit more than this”, or the plan will fail, the company will go bankrupt, and equity owners will be left with basically nothing. While a better-than-expected steel market in the next few years would absolutely boost U.S. Steel, I see too many steel companies offering decent-to-good returns with much less risk to really want to take a flyer on this in my own portfolio.

 

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U.S. Steel Trying To Change On The Fly, While Weighed Down With Debt And Facing Headwinds

Hexcel Shares Have Shifted From Panic To Recovery

 I thought the panic around commercial aerospace left Hexcel (HXL) shares at an interesting valuation for long-term investors willing to accept elevated risk on an aerospace components play back in April. What I didn’t expect was the sudden shift in sentiment from “they’re doomed!” to “they’ll be fine!” in such a short period of time. While former merger partner Woodward (WWD) did even better (as did Howmet (HWM), not all components suppliers have enjoyed the run, including Spirit AeroSystems (SPR) and metal suppliers like Allegheny (ATI) and Carpenter (CRS).

I do still believe that air travel is going to recover over time, and with airlines using the downturn in demand and flight hours as an opportunity to retire older aircraft, the demand for new aircraft is still going to be there, and Hexcel is going to have its opportunities to benefit from growth at OEMs like Airbus (OTCPK:EADSY) and Boeing (BA). I’m still expecting a five-year path back, though, and today’s share price seems to capture that pretty fairly. At this point, I think Hexcel needs to see a faster return to normal to really merit a substantially higher share price.

 

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Hexcel Shares Have Shifted From Panic To Recovery

Valuation, Not Execution, Remains The Main Challenge With Globus Medical

 It's been a while since I've written on Globus Medical (GMED), partly due to the fact that there's only so much you can say when a story is following the path you expect - 2018 and 2019 revenue were within 1% of my model back in 2018 and the share price has tracked my concern of "valuation doesn't matter until it does", with the shares up just 5% since then, well below the returns of the S&P 500 and the wider med-tech space. If there has been a major deviation, it's been in lower margins, as the company has chosen to invest more in R&D and quite a bit more in SG&A to grow the business.

On the back of a strong second quarter relative to expectations and peers, it seems as though pull-through from the Excelsius robot is really starting to make a difference, and the company's willingness (and ability) to invest in growth throughout these challenging times should serve the company well over the longer term. Unfortunately, my perennial concern, valuation, remains very much relevant, as the shares already trade above what I believe the growth, margins, and cash flow can support.

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Valuation, Not Execution, Remains The Main Challenge With Globus Medical

Itau Unibanco Taking The Right Approach, But Needs A Healthier Underlying Economy

 I wasn't overly fond of Itau Unibanco (ITUB) back in the fall of 2019, and while COVID-19 wasn't on the radar then, Itau's performance since then has been lackluster - lagging the Brazilian exchange by more than 20% and Banco Santander (BSBR) by about 15%, while outperforming Bradesco (BBD) by about 10%. Competition from new non-traditional banking sources remains a significant issue, as does the government's handling of the economy, but I will say that Itau seems to be handling its credit exposures and costs more realistically and proactively than it has in the past.

I think Itau shares can likely produce a double-digit (mid-teens) return from here, but investors need to be aware of the well above-average volatility that will probably always go with investing in Brazil and the bank sector in particular. I like how Itau is handling this credit cycle, and my only real issue with a more forceful "buy" call is that I think there are American banks trading at even bigger discounts to fair value with lower risk profiles.

 

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Itau Unibanco Taking The Right Approach, But Needs A Healthier Underlying Economy

NXP Semiconductors Has Lagged Slightly, But Is Poised For A Stronger 2021

I thought NXP Semiconductors (NXPI) was too richly-valued after the last quarter, and the shares have since lagged the broader SOX index, as well as names I liked better including Broadcom (AVGO). While nothing has really gone wrong for NXP, expectations were running high going into this last quarter, and the company’s comparatively modest beat-and-raise just wasn’t quite enough for the Street.

To be clear, NXP hasn’t performed badly – only in the context of the exceptional recent performance of the semiconductor sector is a 20% gain “lagging.” What’s more, NXP is well-leveraged to a coming turnaround in auto production, as well as longer-term drivers like content gains in auto and new opportunities in 5G, IoT, and ultra-wide band (or UWB). Were there to be some sort of stumble not driven by fundamentals, this would definitely be a name to reconsider.

 

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NXP Semiconductors Has Lagged Slightly, But Is Poised For A Stronger 2021

Fifth Third Still Undervalued, But Mind The Weaker Pre-Provision Growth

 Since my last update on Fifth Third (FITB), the shares have outperformed the bank’s peer group. I thought then that the substantial discount to tangible book (20%) was too much relative to what looked like prudent/conservative reserving, and with another quarter in the books, the reserve position is looking pretty good relative to the peer group and my expectation of peak losses.

What I don’t like so much is the company’s somewhat thin cushion of capital and the likelihood that pre-provision profit growth will likely be lackluster for a little while – not an uncommon problem in the sector, but still a potential impediment to reaching fair value. I estimate a near-term fair value in the mid-$20’s, with more upside as the economy recovers, and while this isn’t my favorite bank, I think the valuation keeps it on my list as a name worth considering.

 

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Fifth Third Still Undervalued, But Mind The Weaker Pre-Provision Growth

Nucor Excels On Costs And Is Using Its Efficiency As A Strategic Weapon

 I turned bullish on Nucor (NUE) a quarter ago, largely on what I saw as a bottoming outlook/sentiment for steel and a relatively good valuation. At the same time, I preferred names like Steel Dynamics (STLD), Commercial Metals (CMC), and Ternium (TX), and while Nucor has done okay since that last piece, those names have done even better (CMC, in particular). I would say sentiment has marginally improved, as steel has gone from being disliked to largely ignored/overlooked.

Nucor remains a first-rate operator, and I don't prefer other names because I think Nucor is intrinsically inferior. In fact, I like the company's ongoing strategic investment policy of using cost and efficiency advantages to gain long-term share in select market categories. I just still see more upside in other names, and I'd note that while I do think steel should start to turn, Nucor isn't necessarily the best call - paradoxical as it may sound, inferior companies often outperform better companies in those upturns. So, I still think Nucor is a name you can buy here to play a rebound off the bottom, but I don't expect that it will be the best-performing name of the group.

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Nucor Excels On Costs And Is Using Its Efficiency As A Strategic Weapon

Ingersoll Rand Executing On Par With Its Peers, But A Cloudy Outlook And Relatively High Valuation Are Concerns

 These are "interesting" times for Ingersoll Rand (IR). Integrating the merger of the former Ingersoll Rand non-climate operations and Gardner Denver was already going to present some typical integration challenges, but now the COVID-19 outbreak and sharp industrial recession are going to make that job all the more difficult. On top of that, IR has some longer-standing, cost-reduction/efficiency initiatives that have to go well, and the company really needs to improve some of its offerings in compressors to compete more effectively with Atlas Copco (OTCPK:ATLKY).

I actually like the long-term prospects for Ingersoll Rand's business. What I don't like is how the Street already just assumes a pretty bullish set of outcomes. I thought the valuation was a little too rich back in May, and the shares have basically tracked the large industrial sector (where I don't see a lot of great bargains) since. I do see ways for Ingersoll Rand to outperform and drive higher estimates, but I wish the level of expectations were a little lower now.

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Ingersoll Rand Executing On Par With Its Peers, But A Cloudy Outlook And Relatively High Valuation Are Concerns

Outperformance Has Closed Some Of Emerson's Valuation Gap

 I thought that Emerson (EMR) was attractively priced back in April, even with challenges in the company’s energy-driven process automation markets that are likely to persist a while, and the shares have since outperformed the average industrial stock – though a few names in automation like ABB (ABB) and Rockwell (ROK) have done better (ABB on turnaround hopes, Rockwell because it’s Rockwell and everybody loves Rockwell…). With that outperformance, I see Emerson’s near-term potential as more “in line” than superior, but that’s not bad for a company that still has some relatively attractive long-term opportunities in automation.

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Outperformance Has Closed Some Of Emerson's Valuation Gap

Alnylam Managing Through Covid-19 Challenges And Executing Well

Look at the comments on past Alnylam (ALNY) articles, and you'll see a vocal cadre of readers who have an otherwise admirable commitment to the notion that Alnylam is going to stumble at some point and not get up … and yet, the company keeps on executing past those worries. While there were some "doom and gloom" comments about how hard COVID-19 would hit the company's lead drug Onpattro, and there certainly has been an impact, the company has been able to manage through that challenge and modestly beat expectations while hitting an all-time high a few weeks ago.

Alnylam will have a lot going over the next 12 or so months, with two expected approvals, and significant clinical data on multiple drugs/indications. I still calculate a near-term fair value of around $150/share, but data updates on vutrisiran, fitusiran, lumasiran, and cemdisiran could all build further value. With that, I still believe this is a good longer-term holding in the biotech space.

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Alnylam Managing Through Covid-19 Challenges And Executing Well

Johnson Controls Still Undervalued, But The Near Term Looks Turbulent

 Even with my concerns about weaker non-residential spending in 2021 and 2022, I thought Johnson Controls (JCI) was too cheap after fiscal second quarter results, as the company had some solid cost-cutting opportunities, as well as longer-term leverage to attractive trends in building automation and efficiency. Since then, the shares have risen about 35% - doing quite a bit better than the average industrial, but still lagging HVAC peers like Carrier (CARR), Lennox (LII), and Trane (TT).

A higher valuation does skew the risk-reward argument some, and I do still have concerns about the likelihood of weaker non-resi spending in 2021-2022, as well as whether companies that have had good success in cutting costs (like Johnson Controls) will face greater cost headwinds as demand recovers. I still think Johnson Controls has good prospects from here, but I wouldn’t be in quite as much of a rush to buy in as before.

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Johnson Controls Still Undervalued, But The Near Term Looks Turbulent

ArcelorMittal Outperforms On Costs As The Industry Deals With Absent Demand

 A laggard so far in 2020 and over the past year, ArcelorMittal (MT) has nevertheless shown some solid momentum since the company's unexpected capital raise back in May. All in all, despite pretty undemanding valuations for most steel names, the sector still hasn't followed the rally in shorter-cycle industrials as investors remain concerned about excess capacity and the likelihood of more sustained weakness in prices and margins.

Those concerns are valid, but also reflected in the price. What I think may not be so well-appreciated is the company's opportunity for further self-help (including asset disposals), as well as the improved liquidity position and improved agreement on the Ilva business. While ArcelorMittal isn't the best-run steel company (by a large margin), that's not really an impediment in cyclical upturns, and I see this as a name worth considering if investors want to start positioning themselves for a cyclical upturn.

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ArcelorMittal Outperforms On Costs As The Industry Deals With Absent Demand

COVID-19 Pushes POSCO's Steel Business Into The Red, But A Cyclical Bounce Will Come

 Investors warmed up to the idea of upcoming recoveries in many industrial markets in the second quarter, but that love didn't extend to the steel sector to nearly the same extent, even though mining companies like Rio Tinto (RIO) and BHP (BHP) have done quite well. I think there are valid reasons for this (overcapacity, weak pricing power, input cost pressures, et al), but I do think sentiment should start to bottom out relatively soon.

I had mixed feelings about POSCO (PKX) after the first quarter. I think this is a pretty good steel company, and the shares looked considerably undervalued. Still, I was worried about that sentiment issue. Since then, POSCO has done better than most other steel companies (including ArcelorMittal (MT)), but not as well as the S&P 500, and certainly not as well as the miners. At this point, I like the prospects for meaningfully better financial results in 2021 and 2022, and I don't think that's reflected in the share price. This will never be a buy-and-hold call, but I think this is a time to consider the name as cyclical rebound story.

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COVID-19 Pushes POSCO's Steel Business Into The Red, But A Cyclical Bounce Will Come

SKF Looks Undervalued For A Short-Cycle Play, But There Are Some Issues

 I thought SKF (OTCPK:SKFRY) had some appeal as a contrarian idea back in April, and the outcome of that call is a little convoluted. The local shares had been beating the multi-industrial peer group, but a disappointing second quarter result hit the shares and the point-to-point performance has been a modest underperformance. If you look at the ADRs, though, even with the post-earnings disappointment, the shares have risen almost 25%, beating the peer group and S&P 500 by a wide margin as the Swedish krona has moved significantly in the interim.

While SKF has participated to a point in the short-cycle rebound anticipation rally, the company's actual performance and guidance are worse than many peers and enough to cause some concern. On top of that, there are some earnings quality issues that I think need at least be discussed. On the other hand, management has been moving aggressively to cut costs and automate the business, the valuation is quite undemanding, and this is a very cyclical company leveraged to improvements in short-cycle manufacturing and automotive markets.

 

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SKF Looks Undervalued For A Short-Cycle Play, But There Are Some Issues

Alfa Laval Managing Costs Well, But Sector Exposures Are A Concern

 For a company with what would otherwise be looked at as undesirable end-market leverage, Alfa Laval (OTCPK:ALFVY) shares have been surprisingly strong, rising 15% over the last three months and falling about 12% year-to-date, keeping pace with the broader industrial group. Management's strong execution on cost reduction is certainly helping, but with Alfa Laval heavily leveraged to end-markets like ship building, oil/gas, and petrochemicals (around 50% to 60% of revenue) that are likely to be lower for longer, I find that performance pretty interesting.

Make no mistake - I still think Alfa Laval is a well-run company. But when a good company runs into bad market conditions, it's rare for the company to win. I do think Alfa Laval may be buying at or near the bottom with the Neles deal, and perhaps management is right that shipbuilding is troughing, but oil/gas headwinds could still be meaningful. Valuation isn't bad - I'd call the company "fairly valued" with an expected annualized return on the lower end of the high single-digits.

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Alfa Laval Managing Costs Well, But Sector Exposures Are A Concern

Texas Instruments Remains A Name To Trust Across The Cycle

 As much as it seems to annoy some readers, I still think valuation matters - even when we're talking about some of the best-run companies out there. Back in April, I thought Texas Instruments' (TXN) valuation wasn't bad, but also wasn't good enough to call it a clear-cut buy. While TI has continued to execute well, the 20% or move in the share price since then (hardly bad, by the way) is lower than that from SOX, as well as from names I preferred like Broadcom (AVGO) and STMicroelectronics (STM).

The entire chip space has gotten more expensive since April, and bargains are harder to find. Near-term prospective returns don't look so exciting for TI now, but I don't know that I'd be in a big rush to sell out if I owned the shares as there could be additional beat-and-raises as major end-markets like autos and industrials recover.

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Texas Instruments Remains A Name To Trust Across The Cycle

Carpenter Technology Now In The Teeth Of The Downturn

 Unlike short-cycle industrials, where the Street freaked out in March and then bid the stocks back up to about 90% of where they started the year (or even above, in the case of a few names like Rockwell (ROK)), companies with primary exposure to the aerospace industry have been knocked down and largely stayed down, with Carpenter Technology (CRS) shares down more than 50% year-to-date and basically flat since my last update on the company.

I wasn't bullish on Carpenter then, as I thought it was too soon to play the eventual recovery, and I'm hesitant to turn too bullish now. I still think short-term fair value is in the mid-to-high $20s, and I think the shares can go higher down the line, but there's not going to be much good news from the aerospace sector for a while, and this whole sector has done a pretty poor job of generating attractive long-term returns. Still, planes are going to get built again sometime, and Carpenter shares have generating strong trough-to-peak returns in the past, so if you think you can time this correctly, this is a name worth considering.

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Carpenter Technology Now In The Teeth Of The Downturn

Veeco Starting To Look A Little More Interesting On Data Center And Margin Strength

 Veeco (VECO) will probably never be an easy stock to own, at least not relative to some of the larger, better-established semicon tool companies, but management has made some definite progress on margins and the data center business remains a strong near-term driver. Although lower sales to Chinese customers are going to create some headwinds, growth opportunities in areas like 5G RF filters and VCSELs remain valid.

Having underperformed many of its peers, Veeco is definitely more interesting to me now on a relative basis, and the standalone value is also more compelling. This company doesn't really have the sort of "moat" I'd really prefer at this point in my investing life-cycle, but with prospective returns back in the double-digits, I think this is a name to reconsider.

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Veeco Starting To Look A Little More Interesting On Data Center And Margin Strength

Pacific Biosciences Looking Toward Labs Getting Back To Work

 The hits really have kept on coming for Pacific Biosciences (PACB) (“PacBio”). After regulators scotched Illumina’s (ILMN) proposed friendly acquisition and Oxford Nanopore (“ONT”) won a dubious patent case, COVID-19 struck hard, leading labs and other research facilities around the world to either significantly curtail their activities or close entirely, and then the CEO and CFO both announced that they were leaving the company.

Although PacBio has continued to place systems and sell consumables through this challenging time, COVID-19 has temporarily flattened what had been a rather encouraging ramp for the company’s Sequel II system. Still, I believe the company is past the worst with COVID-19, and I continue to believe in the long-term potential of the technology here. Finding a CEO to take the company to the next level is an extremely important item on the board’s to-do list, one not made any easier by the COVID-19 pandemic, but I believe the strength and potential of the company’s technology should enable them to attract appealing candidates.

While the risks here are well above average, so too are the potential returns if PacBio can truly establish itself as the platform of choice for long-read sequencing and if long-read sequencing fulfills its potential in areas like plant/animal sequencing, pathogen sequencing, diagnostics, and epigenetics.

 

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Pacific Biosciences Looking Toward Labs Getting Back To Work

Aptose: Boring Today, But Things Could Get Exciting Later This Year

Owning a biotech, particularly an early-stage biotech, can be a little like watching paint dry … while suspended very high up in the air and secured by a very thin cord. While management at Aptose (APTO) has been diligent about working with clinicians to keep its trials moving and advance both CG-806 and APTO-253 into higher dosing cohorts, the reality is that investors still have to wait a bit longer to see any meaningful updated efficacy data (likely early December at the ASH meeting), and even then the look at the data will be "through a glass, darkly", as it will be far from a complete picture on the efficacy of the drug(s) in question.

I've adjusted my cash and capital-raising model to account for Aptose raising more money at lower stock prices than I'd previously expected, and this has a modestly negative impact on my fair value. I don't fault the company for doing this, and I think it should be viewed in the context of constrained optimization - Aptose wants to maximize the value of its clinical assets (expanding into studies of other types of cancer), and improve its shareholder base, but can only go so far so fast with its cash.

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Aptose: Boring Today, But Things Could Get Exciting Later This Year

GenMark Leveraging The Testing Boom Created By COVID-19

 The poor control of COVID-19 in the United States has created an unprecedented testing opportunity for GenMark (GNMK), and so far the company is doing a good job of leveraging that opportunity to get hardware in the field and establish relationships with healthcare facilities that may well last well beyond this outbreak. Although the intense demand for tests is pushing the company to expand capacity as quickly as possible, it has also allowed the company to clean up its balance sheet on relatively attractive terms.

I thought GenMark still had near-term upside last quarter, and the shares have shot up almost another 70% as COVID-19 testing demand remains intense. There are still very valid concerns about what the post-COVID-19 operating environment will look like, but the company is definitely better-placed now than before and the valuation is not unreasonable on some shorter-term valuation approaches.

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GenMark Leveraging The Testing Boom Created By COVID-19

The Downturn Is Hitting Columbus McKinnon Hard, But The Company Is Holding Up Well

Material handling specialist Columbus McKinnon (CMCO) has done okay since my last update, with the shares slightly outperforming the broader industrial space. Relative to many of those peers, Columbus McKinnon has relatively lower short-cycle recovery exposure, but the company should benefit from recoveries in markets like autos and from a capex investment cycle in markets like steel. Valuation remains attractive, and I believe the Street continues to overlook this smaller name leveraged to increasing automation investment on factory floors.

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The Downturn Is Hitting Columbus McKinnon Hard, But The Company Is Holding Up Well

SPX Flow Has Been Improving Itself ... And Street Has Noticed

While I thought SPX Flow (FLOW) was undervalued three months ago, I was concerned that a lack of near-term drivers could limit Street interest. Clearly I needn’t have worried, as the shares have shot up almost 50% since then, with the Street apparently attracted to the mix of more stable food/beverage and personal care end-markets and short-cycle industrial leverage, as well as the steps the company has taken to improve its margins and balance sheet.

Valuation is decidedly more challenging now, as the shares don’t look nearly so cheap on free cash flow, but don’t necessarily look that expensive. The company also does have good leverage to a short-cycle “general manufacturing” recovery, not to mention balance sheet flexibility to do even more to improve the long-term revenue growth and margin leverage.

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SPX Flow Has Been Improving Itself ... And Street Has Noticed

ITT Inc.: Still Not Fully Appreciated (Or Understood) By The Street

Despite not having a lot of the traits that investors find most desirable today in industrials (short cycle exposure, leverage to ESG/climate/energy efficiency, and/or leverage to onshoring), ITT Corp. (ITT) has nevertheless shrunk some of the valuation gap I saw last quarter and outperformed its peer group by around 3% to 5% (depending on how you define the group).

I still believe that there's meaningful upside here and that the Street doesn't fully appreciate the story - from the "more short cycle than you might think" aspects of the Industrial Process business to the strong share growth opportunities in Motion and the multiple targets for margin improvement. With modeling assumptions that work out to a long-term revenue growth rate around 3% to 4% and an FCF growth rate closer to 7%, I believe ITT is still priced for double-digit annualized returns from here.

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ITT Inc.: Still Not Fully Appreciated (Or Understood) By The Street

Rockwell Automation Holding Up On Recovery And Reshoring Expectations

Rockwell (ROK) is a pretty well-loved industrial, and particularly when recovery themes take over (as has been the case for a few months). While industrials with short-cycle exposure like Parker-Hannifin (PH) can, perhaps paradoxically, see momentum fade when ISM moves back above 50, Rockwell’s past rallies tend to last a little longer. Add in investor expectations that Rockwell will benefit from a meaningful reshoring trend, and I can’t say I’m surprised that Rockwell shares have stayed pretty strong since my last update.

Valuation is a frequent issue for me with Rockwell. Even though I think quality companies deserve premiums (and Rockwell qualifies), settling for less doesn’t always work well in my experience. On the other hand, with interest rates likely to remain low for a while, maybe investors have to accept that 7% returns are the “new 10%” return and adjust expectations accordingly. Even so, compared to names like Dover (DOV), Honeywell (HON), and Lincoln Electric (LECO), Rockwell screens as relatively more expensive.

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Rockwell Automation Holding Up On Recovery And Reshoring Expectations

Lincoln Electric Beats Panic-Induced Expectations

Industrial stocks have done pretty well over the last three months on what I’m tempted to call “the Bob Marley trade” (“… cause every little thing gonna be alright…”), and in many cases, I think the rebounds in share prices have outpaced the likely underlying recovery. Be that as it may, I liked Lincoln Electric (LECO) back in late April (and since the decline began earlier this year), as I thought the downturn in Lincoln’s end-markets gave investors a rare window of opportunity to buy into a very well-run cyclical industrial. Since that last update, the shares have risen another 15% or so and slightly outperformed the broader multi-industrial group.

How much opportunity there is in Lincoln Electric depends a lot on how you view valuation in this “lower for longer” rate cycle. If you think 7% returns are “the new 10%” return, then I’d say Lincoln still has some relative appeal with a mid-to-high single-digit annualized total return potential from here. I do believe this is a well-run company and one well worth owning for the long haul, but I’d caution investors that Lincoln isn’t totally out of the woods yet and there are some longer-term issues that need fixing.

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Lincoln Electric Beats Panic-Induced Expectations

Ingrezza Remains Surprisingly Strong For Neurocrine

Neurocrine Biosciences (NBIX) is establishing at least some reputation and track record for “underpromising and overdelivering”, with yet another quarter of better-than-expected sales for lead drug Ingrezza. Whether it adds much value to the share price is another story, though, given the shares have largely just chopped around for the last couple of months, as the Street seems to feel that the Ingrezza story is well-understood and future pipeline catalysts are still a ways down the road.

I’ve been concerned all year that Neurocrine could drift a bit in 2020 given the absence of game-changing catalysts, and the shares have underperformed the sector by a noticeable amount. Still, I think the Street is undervaluing the moves the company has made to deploy capital toward building a diverse, deep early-stage pipeline, and I likewise continue to believe that the shares are undervalued below $140. Whether the 15% or so upside that implies is good enough for a profitable, cash flow-positive biotech is something investors will have to decide for themselves.

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Ingrezza Remains Surprisingly Strong For Neurocrine

Edwards Lifesciences Shows Surprising Resilience, And TAVR Remains A Growth Market

Edwards Lifesciences (EW) has been a growth star in the med-tech space for a while now, and with good reason, as the company’s leading transcatheter aortic valve replacement (or TAVR) offerings have driven double-digit growth for more than a decade, even with some bumps along the way. Making that growth all the more impressive is that it has come despite serious competition from companies like Medtronic (MDT), Boston Scientific (BSX), and Abbott (ABT) (to varying extents).

There has been a persistent debate as to the sustainability of growth in the TAVR market, and the bulls have a rather long winning streak there. Likewise, there have been fierce debates as to whether the $3 billion-plus opportunity expected in mitral and tricuspid repair/replacement will ever materialize after more than a decade of false starts. I have a few doubts or concerns about Edwards’ ability to execute, though I do see some risk of the TAVR funnel thinning out. What’s more, even if Edwards can continue growing at a mid-teens rate for a decade or more, that’s still arguably not enough to support the premium already priced into the shares.

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Edwards Lifesciences Shows Surprising Resilience, And TAVR Remains A Growth Market

Commerce Bancshares' Conservatism Serving Investors Well Today

I’ve complained for some time that I thought the premium on Commerce Bancshares' (CBSH) shares was just too high. During this downturn, though, the bank’s more conservative stance is serving the company well and the shares have outperformed the peer group by around 15% or so since the time of my last article. What’s more, while management has faced some unexpected challenges like managing a surge of low-cost deposits, it has handled these challenges quite well so far.

While Commerce has outperformed its peer group, the share price is still lower than when I last wrote, and the fair value hasn’t deteriorated as much. That puts the stock in a better valuation light for me, but it’s still not a “cheap” bank. Investors can fairly argue that quality deserves a premium, and I don’t disagree, but I still believe these shares trade around 10% above my fair value estimate.

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Commerce Bancshares' Conservatism Serving Investors Well Today

Siemens Healthineers Moves Back Into Oncology In A Big Way With Varian Acquisition

I don't think anybody will accuse Siemens Healthineers (OTCPK:SMMNY) (SHLG.XE) ("SHLG") of "half measures". Management of this large European healthcare company decided to address one of the major end-market gaps in the business (oncology treatment) in a big way, announcing a $16.4 billion cash deal for Varian (VAR), the global leader in radiation oncology systems.

Although some of the valuation multiples on the deal do in fact look quite robust, the deal really isn't that expensive when you consider Varian's superior growth rate, margins, and market share position in the radiation oncology space, not to mention the potential cost and revenue synergies. I see only a token risk that this deal does not go through, though I do think Siemens Healthineers' synergy expectations for the first 12-24 months could be a little ambitious, and I believe this is a good deal over the long term for SHLG shareholders.

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Siemens Healthineers Moves Back Into Oncology In A Big Way With Varian Acquisition

Volatile Markets And Flagging Fixed Income Pressuring AllianceBernstein

The last eight or so months have not been particularly easy for AllianceBernstein (AB), and the shares have been more of a middle-of-the-road performer compared to other asset managers like Artisan Partners (APAM), BlackRock (BLK), Janus Henderson (JHG), Invesco (IVZ), and T.Rowe Price (TROW), though the strong distributions have pushed up the total returns to above-peer levels.

While relatively weak fixed income fund performance is a concern, given the sheer size of the business, the ongoing growth and outperformance in active equity is an important offset. The move to Nashville will help on costs, but I would like to see the company to move to build up its offering in alternative investments (like requiring some modest M&A). All told, I believe AllianceBernstein is meaningfully undervalued today and offers an attractive distribution, but the recent distribution cut doesn't help sentiment, and volatility in the credit markets is going to continue to create some near-term challenges.

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Volatile Markets And Flagging Fixed Income Pressuring AllianceBernstein

Lattice Semiconductor Riding New Wins In Servers, 5G, Autos, And Industrial Markets

Lattice Semiconductor (LSCC), the little FPGA engine that could, continues to chug along, with the shares up another 40% in just the last three months since my last article and up over 60% this year - leaving the SOX far behind in its dust. There really hasn't been a secret formula here other than strong customer-focused product development (funny how listening to customers produces good results…) targeting secular growth markets like data centers (servers), 5G (base stations), and industrial automation.

Lattice is now in pretty rarefied air with respect to valuation, and management isn't giving the sort of guidance that would lead to significant upward revisions, but I do expect Lattice to generate exceptional (mid-teens) annualized revenue growth over the next five years, and exceptional growth stories can often support exceptional premiums (I'm thinking of names like Inphi (IPHI) and Silicon Labs (SLAB)). That's not a compelling enough argument for me to still strongly recommend this as a new position, but if I owned the shares I would be in no great hurry to head for the exit.

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Lattice Semiconductor Riding New Wins In Servers, 5G, Autos, And Industrial Markets

The Danaher Juggernaut Rolls On, Crushing Valuation Concerns Under The Wheels Of Growth

"Yeah, but the valuation!" hasn't gotten me very far with Danaher (DHR), as a combination of strong execution, healthy underlying secular market growth, and the Street's enthusiasm for exceptional acyclical (and high-margin) growth stories has pushed valuation aside as a reason not to buy. With that, the shares are up about 25% in just the last two months and up over 30% on a year-to-date basis.

Yeah, but that valuation … I love the markets that Danaher is in, and it's hard to find fault with management execution. Still, even if I assume that free cash flow will triple over the next decade (and keep growing at a mid-single-digit rate indefinitely), I have to drop the discount rate to about 6.5% just to get to today's price. I've learned not to bet against Danaher, but this is definitely a well-loved stock on the Street today, even if for valid reasons.

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The Danaher Juggernaut Rolls On, Crushing Valuation Concerns Under The Wheels Of Growth

Dover Proving That It Has Changed For The Better

There were questions going into the next downturn as to whether Dover (DOV) management really had restructured the company to be less cyclically-vulnerable and capable of producing better full-cycle margins. While nothing about the Covid-19 downturn has been normal, Dover's performance has converted a lot of analysts and investors into believers, and for good reason.

Dover was in the bucket of "really like the company, but the valuation is so-so" stocks for me after the first quarter. The shares have since done a little better than the average industrial, but names I liked better (including ITT (ITT), Johnson Controls (JCI), and Parker-Hannifin (NYSE:PH)) did still manage to do better. At this point, Dover's better-than-peer performance (particularly with incremental/decremental margins) has definitely supported valuation, and I like Dover's mix of short-cycle upside and acyclical long-term growth.

Valuation/upside here seems broadly similar to that of 3M (MMM) or Honeywell (HON), with 3M offering more short-cycle leverage (but more operational risk) and Honeywell offering a lot less (but arguably higher, long-term quality).

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Dover Proving That It Has Changed For The Better

Honeywell Doing Its Best, But The Headwinds Are Fierce

When I last wrote about Honeywell (HON), I said, "I think there are better risk-adjusted opportunities" in the industrial/multi-industrial space, and indeed there were better near-term performances from names I favored like ITT (ITT) and Johnson Controls (JCI).

Even so, given how poorly Honeywell fits with most of the current "themes", the 12% or so move in the stock since that last piece still isn't too bad. After all, this is a company that isn't really going to benefit from onshoring, it's not really short-cycle-sensitive, and over 50% of its sales are from end-markets (aero, non-resi, oil/gas) that I believe are looking at multi-year recoveries.

Valuation is still in that "okay, but not great" zone where I'd be happy to own it as a long-term holding, but where I'd probably try to hold out for a better entry price for a new position. Honeywell is clearly a well-run company, and its M&A optionality may be underestimated, but it is certainly facing some near-term challenges.

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Honeywell Doing Its Best, But The Headwinds Are Fierce

Lexicon Pharmaceuticals Returning To Its Pre-Revenue Biotech Days

Nothing about the Lexicon Pharmaceuticals (LXRX) story has been easy or conventional, and that includes the company's somewhat surprising decision to sell off its sole commercial product, Xermelo, and effectively return itself to a pre-revenue stage with a single asset in the clinic (LX9211 for pain).

The decision to monetize Xermelo makes some sense, though there are some curious aspects to the deal, and I can't say it dramatically increases the risk profile. That said, Lexicon's funding situation is still less than ideal, and the company's decision to put all of its near-term eggs in the pain basket is a risky one, given the industry's experience with pain as a therapeutic target. While there's some speculative appeal here again, everything rides on the clinical success of LX9211 at this point.

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Lexicon Pharmaceuticals Returning To Its Pre-Revenue Biotech Days

Cognex A Name To Watch If The Rebound Rally Fades

Automation enabler Cognex (CGNX) has continued its rally from the March panic lows, as investors warm to the idea that the COVID-19 recession won't linger on as long as feared and that short-cycle end-markets like autos will recover strongly. Add in the strong growth potential of automation in the logistics/warehouse market and the perception of Cognex as a play on onshoring/reshoring, and the shares have continued to perform well, though the spread relative to the overall industrial sector over the last three months hasn't been as wide as you might imagine.

My issue with Cognex remains the valuation and the strength of the recovery already priced into the shares. I have no problem with a low-to-mid teens long-term revenue growth rate and long-term FCF margins in the 30%s, but even those assumptions aren't enough to drive a particularly attractive fair value here. While I realize Cognex is a well-liked name with key automation-enabling technology (and a space that's somewhat hard to invest in), and I likewise realize that exceptional companies aren't bound by normal valuation rules, I'm just not eager to pay this much of a premium even if it is for an exceptional industrial growth idea.

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Cognex A Name To Watch If The Rebound Rally Fades