Turkcell Under Pressure On All Sides

 

Nothing has really improved for Turkcell (TKC) since my last update, as the inept handling of the Turkish economy by the government continues to send the value of the Turkish lira spiraling ever lower. While Turkcell management has done a good job of managing its core operations, that’s cold comfort when the currency deprecation utterly undermines what progress there is.

It would be bad enough if it were just the incompetence of Turkey’s government impacting Turkcell – it’s not good to own a house on block that’s on fire – but that’s far from the only challenge here. In addition to a potentially restive major shareholder, Turkcell is facing significant capex in the coming years as it will need to participate in upgrading to 5G while still spending to upgrade its fiber offerings. On top of that, inflation is driving operating and subscription acquisition costs higher, but it’s unclear if pricing can continue to keep pace.

Considering all of this, the upcoming capital markets day, where management will discuss its new three-year plan, is going to be a critical event for the stock. While the shares do still look undervalued, the reality is that until and unless some stability returns to Turkish economy, whatever Turkcell can accomplish on its own will likely be for naught as far as the share price goes.

 

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Turkcell Under Pressure On All Sides

Lenovo More Than Holding Its Own, And Built-In Expectations Seem Low

 

Shares of Lenovo (OTCPK:LNVGY) have been nothing special since my last write-up, losing about 15% of their value, underperforming not just the NASDAQ, but peers like Dell (DELL), HP (HPQ), and Hewlett Packard Enterprise (HPE) by wide margins. This underperformance comes despite the company more than holding its own in the PC space and showing improvements in its enterprise and mobile units, as well as launching a distinct, high-margin services unit.

It’s not that unusual for Lenovo to trade below what would seem like fair value, and Lenovo shares have long been climbing that “wall of worry”. Still, in this case, I think it may be excessive. Even allowing for some slowing in the business and management coming up a little short of some of their goals, it’s hard to reconcile the very weak performance that seems to be priced into the shares.

 

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Lenovo More Than Holding Its Own, And Built-In Expectations Seem Low

AerCap: Street Awaits First Meaningful Post-Merger Guidance, Long-Term Outlook Good

 

Now the hard work begins. AerCap (AER) closed its deal for GE’s (GE) aircraft and engine leasing business (GEACS) back on November 1, and now the company is underway with the task of integrating and “rightsizing” the operations, a process that will probably take a couple of years and include selling non-core assets on an opportunistic basis. At the same time, the global air travel industry continues a slow road back to normal, and AerCap remains well-placed to be the partner of choice for airlines who can’t, or choose not to, own their fleets outright.

These shares haven’t done that much since my last write-up, rising about 5% and underperforming the S&P 500 over that time. At this point, the worst things I can find to say about AerCap is that rates are going up (which could actually help them), they don’t pay a dividend (nothing new, and unlikely to change), the air travel recovery may be a longer, rockier process, and the stock is already well-liked and widely respected. Even so, while I don’t necessarily think AerCap is a top call for the next 12 months, I still see meaningful long-term value, with double-digit long-term annualized potential and double-digit short-term potential as well.

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AerCap: Street Awaits First Meaningful Post-Merger Guidance, Long-Term Outlook Good

Advanced Energy Industries Needs To Reassure The Street And Rebuild Sales Momentum

 

Maybe the best thing I can say about Advanced Energy Industries’ (AEIS) performance since my last update is that it could have been worse. Down marginally, the shares have outperformed the weak NASDAQ, and haven’t done any worse than comps/rivals like Comet Holdings (COTN.SW), MKSI (MKSI), and VAT Group (OTCPK:VACNY), despite what I believe are valid ongoing concerns about market share loss.

It’s that possible market share loss that concerns me most. The supply chain issues that are hitting margins and preventing AEIS from shipping to demand are a problem, to be sure, but one that I believe will resolve over time. Fundamental share loss, though, is harder to deal with in the short term and is certainly more alarming when it comes to projecting future revenue and profit growth.

I don’t believe my long-term growth assumptions are overly bullish (mid-single-digit revenue growth and modest margin improvement), but management has some work to do here to reestablish AEIS’s credentials as the leader in its space and a go-to name in the semi-equipment space. I’m still bullish on balance, but this is definitely a “Buy” with an asterisk and a name really only suited to more adventurous investors.

 

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Advanced Energy Industries Needs To Reassure The Street And Rebuild Sales Momentum

BRF SA - The Long Wait For Self-Improvement Goes On

 

Writing about BRF (BRFS) in May of 2021, I said that the shares of this Brazilian poultry and processed food producer were a borderline call over the near-term due to margin pressure, but that the long-term potential of its self-help program kept me at an overall “Buy”. Since then, those margin pressures have intensified even more than I expected, and the ADRs have lost almost 30% of their value.

The long-term value and potential are still there, but it’s going to take literally years for the improvements to manifest. That’s a long time to wait, and a lot can go wrong in the meantime – including the current set-up of flattish prices with still-high costs. Still, I like what the company has already accomplished in the pet food space and its ongoing plans for more localization in key markets like Turkey/Mideast and Asia.

With a fair value range of around $4.50 to $5.25 for the ADRs, very patient investors willing to accept weaker near-term results may yet see enough reward down the line to make the holding period worthwhile.

 

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BRF SA - The Long Wait For Self-Improvement Goes On

PACCAR A Battleground Between Strong Demand And Concerns About Margins And A Near-Term Peak

 

Cyclical stocks can be challenging in the best of the times, and forecasting gets especially interesting when established rules about the cycles appear to be changing. That’s the issue I see with PACCAR (PCAR) – the pandemic and supply shortages that started in 2021 have absolutely altered the normal trajectory of the heavy truck cycle, but so too may be the ongoing growth in e-commerce. On top of all that, while orders are looking healthy, it remains to be seen how fleet operators will respond to what could be double-digit price increases in 2022.

When I last wrote about PACCAR (roughly a year ago), I wasn’t excited about the potential and I said it was a name to reconsider on a meaningful pullback. The shares then declined about 15% through the fall before beginning a rebound that has brought the shares back to where they were at the time of that last article.

I’m more bullish than a year ago, but not bullish enough to want to own the shares here, as the Street is still concerned about peaking orders and the ongoing impact of component shortages and input cost inflation. I think fair value is in the high $90’s to low 100%’s ($97 to $102), but I would like either a wider margin of safety (a share price in the $80’s) or a little more visibility on the 2023 book before getting more bullish.

 

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PACCAR A Battleground Between Strong Demand And Concerns About Margins And A Near-Term Peak

PPG Industries Plowing Through Ongoing Headwinds, But Valuation Is Getting Interesting

 

Roughly six months removed from my last update on PPG Industries (PPG), it’s clear that, bearish as I was on cost trends across the industry, even I underestimated how much worse the raw material cost pressures would get, to say nothing of the additional challenges created by labor difficulties (COVID and other factors), logistics difficulties, erratic customer order patterns, and so on.

I believe PPG management is doing a job of controlling (or at least managing) what is in their power to influence, but there are a lot of pressures on the business that they can’t do a lot about. On a brighter note, I do think the top-line progress and pricing power will prove more sustainable long term, leaving PPG in a good position whenever the cost headwinds ease.

These shares are down about 9% since my last update, and others in the coatings space (Akzo (OTCQX:AKZOY), Axalta (AXTA), and Sherwin-Williams (SHW)) have fared pretty similarly. While I do have some concerns that it could be too early for sentiment to turn, and there are still risks that initial FY’22 expectations are too high, the valuation is making this a more tempting idea for a later-stage recovery play.

 

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PPG Industries Plowing Through Ongoing Headwinds, But Valuation Is Getting Interesting

RenaissanceRe Executing, But The Street Doesn't Care

 

It’s getting harder and harder to see what would change the Street’s mind in a more positive direction where RenaissanceRe (RNR) (“RenRe”) is concerned. I don’t think anybody seriously questions whether this isn’t among the best (if not the best) in the reinsurance business, but it doesn’t seem as though the market wants to give much credit to the value of the company’s 3^rd party business, the efforts to growth the Casualty and Specialty businesses, nor the beneficial impact of upcoming rate increases.

RenRe shares have gone almost nowhere since my last update, nor have they done much over the last five years. It doesn’t take much to drive attractive fair value targets here, and I see nothing concerning in the model as currently constructed, but investors attracted by the apparent potential value here had best be prepared for a long wait for their contrarian call to work out.

 

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RenaissanceRe Executing, But The Street Doesn't Care

National Instruments Looks Like It May Be Building Toward Something More Interesting

 

Opportunity is a tricky thing to evaluate with stocks, as opportunity without execution means nothing more than disappointment. National Instruments (NATI) has the opportunity to benefit from some strong secular trends in wireless and electric vehicles, as well as a shift in value within testing equipment from hardware to software. The company also has a significant opportunity to improve its operating cost efficiency and drive meaningfully better profit and FCF growth.

But will they? I think that’s the real crux of the investment debate on NATI right now. In wireless, millimeter wave (or mmWave) has been slow to catch on, and while NATI has built a differentiated software-based approach to testing, translating high gross margins into strong operating margins has been frustrating.

There’s definitely a bullish case here if you believe that the company’s efforts to reposition its go-to-market strategies will eventually drive operating margins closer to rivals like Keysight (KEYS) or Viavi (VIAV). Should the company come up short, though, the shares are likely to underperform.

 

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National Instruments Looks Like It May Be Building Toward Something More Interesting

Webster Financial Offers An Appealing Menu Of Positives For This Next Cycle

 

Even though the Street still has its issues with banks doing large M&A, sentiment has definitely improved around Webster Financial (WBS), with the shares outperforming its peers (and the S&P 500) by a healthy margin since my last update. I'd like to think that the Street is waking up to the longer-term strategic and financial advantages of the deal, but I suspect it has more to do with Webster having above-average asset sensitivity going into a tightening cycle.

With the Sterling deal now done, I think there are a lot of positives for the coming years. I like the increased focus on commercial lending, and I think there are good specialty niches that Webster can exploit in this up-cycle. I also like that above-average rate sensitivity, as well as the prospects for post-deal cost synergies, though that will be a two or three-year process to fully realize. With double-digit annualized return potential from here, I think Webster is still a stock worth considering as it becomes one of the largest players in its footprint.

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Webster Financial Offers An Appealing Menu Of Positives For This Next Cycle

SouthState Bank Has The Growth Potential, But Improved Profitability Would Be A Big Help

 

The past year was a challenging one for SouthState Bank (SSB), and that's reflected in a share price that has lagged its peers by 10%-25% over the past year (depending upon how you define the peer group). A big second quarter pre-provision miss spooked a lot of investors, and the subsequent announcement of its intent to acquire Atlantic Capital (ACBI), while consistent with the long-term strategy, seemed to fuel some questions about whether SouthState management needs to hit pause on inorganic growth for a bit and improve internal metrics.

I do think SouthState's lagging return metrics (below-average ROA, for instance) are a fair point of criticism, but I'd also note that this is a highly rate-sensitive bank with a meaningful drag at present from excess liquidity. Moreover, I think the bank has also been building itself to be a bigger bank over the longer term - trading some nearer-term inefficiencies for longer-term benefits.

I believe SouthState is set for strong mid-single-digit long-term core earnings growth, and I do think the company's leverage to growing Southeastern markets and rate sensitivity give it beat-and-raise upside. That said, it's a stretch for me to call this a bargain at today's price even with the relative underperformance.

 

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SouthState Bank Has The Growth Potential, But Improved Profitability Would Be A Big Help

Sensata Not Enjoying The Best Sentiment, But Sensitized To Future Electrification Growth

 

Sensata Technologies (ST) is doing its part.

FY 2021 revenue at this leading sensing and controls business was within a fraction of a percent of my expectations and EBITDA and FCF were both better, and the company continues to post wins in its electrification portfolio and in other growth/diversification efforts like telematics. And yet, the shares have nothing to show for it, trading down very slightly from my last update. For what little it helps, Amphenol (APH) and TE Connectivity (TEL) haven’t done meaningfully better over that same time.

I can see a few reasons for near-term skepticism. Sensata’s track record with quarterly guidance isn’t the best, and conservative guidance may be spooking investors who expect they’ll miss the lower bar. I also expect some “turbulence” as auto OEMs transition from internal combustion engines (diesel in particular) to electric, and efforts like telematics are still unproven. Still, those would be issues if the shares were expensive, and that’s not the case. Given the company’s underappreciated leverage to electrification (vehicles and elsewhere) and telematics, I think this is an overlooked name worth a second look.

 

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Sensata Not Enjoying The Best Sentiment, But Sensitized To Future Electrification Growth

Apparently, It's Not So Hard To Stop A Trane

 

Okay, that title is admittedly a little harsh, particularly as there’s not really a core fundamental issue at Trane (TT), but if a company is going to use a marketing slogan like “It’s Hard To Stop A Trane”, it does invite a little ribbing when things turn down for the stock, and such has been the case at Trane, with the shares down around 20% since my last update. That decline is quite a bit steeper than the 4% decline in the industrial sector and the flattish performance of the S&P 500, but most of the peer group (Carrier (CARR), Lennox (LII), and Daikin (OTCPK:DKILY)) is clustered down there with Trane, while Johnson Controls (JCI) has outperformed.

I understand at least some of the concerns hitting the stock – current expectations are very much reliant on supply chain improvements in the back half of the year that will lead to better output and margins, and the North American residential replacement market is likely to see a reset down to the long-term replacement trend line after two strong years.

Still, I’m starting to think the reaction may be overdone, particularly with a healthy U.S. residential new-build market and ongoing opportunities to leverage global efficiency initiatives through the commercial HVAC business. My biggest concern now is no longer valuation but theme rotation and “fighting the tape”; owning yesterday’s hot thing can be a painful experience as seemingly cheap-looking stocks get even cheaper.

 

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Apparently, It's Not So Hard To Stop A Trane

The Going Will Get Tougher, But Graco Will Keep Going

 

The last six months or so have seen a rerating process among industrial stocks. Whether that’s being driven by expectations of higher rates, slowing end-markets, other factors, or “all of the above”, valuations for some frequent high-flyers are getting more reasonable. Of course, “more reasonable” doesn’t mean conventionally cheap, and investors have to weigh that opportunity against the risk that companies will start coming up short as comps get tougher and short-cycle momentum starts to weaken.

Graco (GGG) shares are down a bit from my last update, slightly underperforming the broader industrial space. I don’t think there’s anything wrong here other than the aforementioned concerns about slowing end-market growth, but I think the company should have another year of high single-digit revenue growth in it, and still above-market growth in 2023 as well. Add in a history of demonstrated excellence and some M&A optionality (as well as capital returns), and although these shares aren’t conventionally cheap (trading nearly 27x forward earnings), I think this is an increasingly tempting name.

 

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The Going Will Get Tougher, But Graco Will Keep Going

Rockwell Automation Facing A Slowing Cycle, High Expectations, And Sector Rerating, All While Sporting A Hefty Valuation

 

Maybe it’s premature, but it finally looks as though the rerating I had been expecting in the industrial sector is finally happening (and no, I’m not saying I was early, I’m saying I was wrong). Rockwell (ROK) is one of the names seeing that, with the shares underperforming the industrial group by around 10%, while the wider industrial group itself has modestly lagged the S&P 500 since my last update on Rockwell.

This is going to be a really interesting year to watch at Rockwell. The Street expects a lot of short-cycle industrial end-markets to start decelerating over the next few quarters, but there are some secular drivers at Rockwell that could offset that. By the same token, expectations are high and management seems to be guiding to a near-term order peak. Against a still-high valuation, that’s a challenging set-up.

My issues with valuation are the biggest concern with Rockwell. Companies like Siemens (OTCPK:SIEGY), Schneider (OTCPK:SBGSY), Emerson (EMR), ABB (ABB) and others are going to be meaningful competitors for years to come, but I like a lot of the strategic moves Rockwell has made. I don’t really expect to see Rockwell become a “value stock” unless something goes grievously wrong, but I do think this pullback is worth watching if you’ve been thinking about Rockwell but are concerned about valuation.

 

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Rockwell Automation Facing A Slowing Cycle, High Expectations, And Sector Rerating, All While Sporting A Hefty Valuation

Honeywell Underperforming As Wall Street Once Again Shows It Will Eat Its Darlings

 

Whatever may be the apple of Wall Street’s eye today, it’s a safe bet that the clock is ticking on how much time is left before it's relegated to apple sauce in the cafeteria. That would seem to fit the recent performance of Honeywell (HON), as what was one of the more popular large multi-industrials earlier in the cycle has underperformed the space by about 10% since my last update and now sports quite a few more “hold/neutral” ratings than before. I understand this … to a point. Honeywell benefited from a run back to names leveraged to aerospace and process automation, as well as warehouse automation and building controls, and there were expectations of more capital deployment. Now, though, the aero and process cycles are known entities and the Street is looking for names with more near-term sizzle.

Valuation is still a concern; while Honeywell’s valuation has shrunk more than its sector, sector valuations are still above long-term averages and I am concerned that there could be further contraction. I’m not worried about the quality, though, and this is a name to consider if this slide continues.

 

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Honeywell Underperforming As Wall Street Once Again Shows It Will Eat Its Darlings

Umpqua In Good Shape Long Term, But The Pending MOE Will Test Investor Patience

 

Umpqua (UMPQ) is a good bank in good long-term shape but in a tough near-term set-up. It’s no exaggeration to say that the Street is quite skeptical about large mergers of equals (or MOEs) and has generally taken a “show me” stance on the purported revenue and cost synergies; not an altogether unfair position given that some MOEs in the past have encountered outsized cultural integration issues and struggled to come through on the expected benefits.

I think the investment case around Umpqua right now revolves around your patience and time horizon. I think there’s double-digit long-term total annualized return potential at today’s price, but I’ve seen stocks undergoing MOEs stagnate for frustratingly long periods of time. If you’re a patient investor that doesn’t care as much about near-term performance, this may be a good opportunity, but do be aware that the Street may take some time to warm up to the long-term benefits of the deal and/or will likely do so on an unpredictable schedule.

 

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Umpqua In Good Shape Long Term, But The Pending MOE Will Test Investor Patience

UMB Financial Still Offering A Rare High-Quality Mix And Capital Deployment For Longer-Term Investors

 

It's been an interesting year for UMB Financial (UMBF), and one with some choppy quarterly performances, but overall more good than bad and this Midwestern bank starts 2022 on a pretty good foot with a diverse commercial lending and fee-generating service portfolio that I believe will hold up well across the next cycle. While the asset sensitivity isn't all an investor might want, at least initially, I think the significant deployable capital here remains an important asset.

I had mixed feelings on UMB Financial a year ago, leaning positive due to the quality of the business and the surplus capital, but also having some concerns about the timing on the deployment of that capital. The shares are up about a third since then - outpacing smaller banks in general by more than 10% and the company's self-selected peer group (which can be viewed on the last page of the quarterly earnings presentation) by a more modest four points or so.

Valuation complicates the investment discussion a little more than last time and leaves less "wiggle room". I can support today's share price without much angst, but I don't see as much near-term undervaluation as for other names. Again, though, that excess capital is a significant swing factor and I don't like getting too negative on businesses and managements I like just because the valuation is less obviously compelling. Said differently, I'd typically rather own a good bank with an iffy valuation than an iffy bank with a good valuation.

 

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UMB Financial Still Offering A Rare High-Quality Mix And Capital Deployment For Longer-Term Investors

Applied Industrial Technologies Applying The Throttle To A Good Growth Story

 

A broad recovery across multiple end-markets continues to benefit Applied Industrial Technologies (AIT), as does the company’s internal offsets to inflationary pressures and focus on higher value-added product and service mixes. On top of all of this is an attractive automation kicker, as AIT is well-positioned as a design partner and integrator of automation technology for its broad industrial customer base.

I liked AIT back in September largely for its leverage to a continuing broad industrial recovery in 2022 and its underappreciated margin strength and leverage to automation. Since then, the shares have risen around 13%, good for a solid beat versus the S&P 500, a better beat against the roughly flat industrial sector, and better than other distributors like Fastenal (FAST), MSC Industrial (MSM), and Genuine Parts (GPC), but not quite as good as Grainger (GWW).

Although the stock performance has outpaced the underlying improvement a bit since that last article, I still like the story and the stock, particularly as I see more potential beat-and-raise quarters in the future and less vulnerability to shorter-cycle slowdowns (if we get one…). With near-term double-digit appreciation potential and long-term annualized total return potential close to the double-digits, this is still an underfollowed and undervalued name worth considering.

 

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Applied Industrial Technologies Applying The Throttle To A Good Growth Story

With Rates Set To Rise, Washington Federal Looks To Leverage Better Growth

 

Writing about Seattle’s Washington Federal (WAFD) back in October of 2020, I wasn’t all that impressed with what I found. I was concerned about the bank’s deposit franchise, as well as its ability to compete head to head with larger banks to grab a larger share of commercial lending in its more attractive markets. There were also issues like expense efficiency to consider, with an ongoing consent order related to Bank Secrecy Act / Anti-Money Laundering (BSA / AML) shortfalls impacting results.

Since then, the shares have outperformed the S&P 500 handily, but have underperformed its smaller-bank peer group by more than 30%, so I don’t really regret my call that there were many other more compelling ideas out there.

Since then, the bank has made some improvements, including a noticeable improvement to the deposit mix and some interesting shifts in the loan book. I’m more bullish on the growth outlook now, but it’s a stretch for me to get to a near-term fair value much above the high-$30’s, making this more of an “improving hold” to me than a clear buy now.

 

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With Rates Set To Rise, Washington Federal Looks To Leverage Better Growth

Accuray Once Again Hits The Reset Button On Its Progress

 

Some things just never change, and Accuray’s (ARAY) inability to string together sustained success is one of them. Sympathizers will note that the latest issues hitting the company (supply chain costs/disruptions) are outside their control, and I largely agree, but it doesn’t change the basic fact that calendar/fiscal 2022 was supposed to be the start of real evidence of the new and improved Accuray on multiple fronts – product quality, order intake, market share, and in the financials.

I’ve long since made my peace with what Accuray is (and what it isn’t), I still believe the market undervalues the stock – the progress here has been frustratingly slow, and with many cases “two steps forward, and almost-two steps back”, but I do believe there has been progress. Moreover, compared to a lot of med-techs with lackluster growth prospects (and not as many potential long-term drivers of upside), I believe Accuray’s travails are more than compensated for in the discounted share price.

 

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Accuray Once Again Hits The Reset Button On Its Progress

M&T Bank Is Charting A Different Course For The Early Part Of The Tightening Cycle

 

Even with some noisy quarters, delays in moving forward with the People’s United (PBCT) deal, and odd guidance for 2022, M&T Bank (MTB) has done alright since my last update, as I believe investors have come back around to the value creation and growth opportunities in front of the bank across the upcoming tightening cycle.

With the shares up about a third and outperforming the peer group by over 20% since my last update, I definitely can’t make quite the same relative value call as before. I do still believe in a mid-single-digit core earnings growth rate after the PBCT deal, and I still think the shares are priced for a double-digit long-term annualized total return that is comfortably above the long-term norms for banks and likely still market-beating. That said, the nearer-term undervaluation is less dramatic now, and this would be more of a “hold” now if not for the longer-term potential I see in the post-PBCT model.

 

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M&T Bank Is Charting A Different Course For The Early Part Of The Tightening Cycle

Fastenal Operationally Sound, But Cycle Pressures May Be More Challenging

 

There is little to find fault with at Fastenal (FAST) from an operational perspective, and valuation is pretty binary – either you’re comfortable paying a hefty premium to buy/own a top-quality industrial supplier, or you’re not. That doesn’t mean that Fastenal is completely immune to larger cyclical concerns, as the shares have historically had a tougher time in periods where IP growth is slowing off recent peaks.

Fastenal shares are up a bit from my last update, outperforming MSC Industrial (MSM) and the broader industrial sector, but underperforming Grainger (GWW) and Applied Industrial (AIT). Little has changed with my basic thesis – I have no meaningful long-term operational concerns with Fastenal, but I remain concerned that the demanding valuation will make sustained outperformance more challenging in the future.

 

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 Fastenal Operationally Sound, But Cycle Pressures May Be More Challenging

The Frustrating Wait For Positive Differentiation From First Horizon Goes On

 

The bull thesis on First Horizon (FHN) has centered around the ideas that management has learned important lessons from mistakes of the past and that, coupled with the leverage and synergy opportunities provided by the Iberiabank deal, the bank was about to set out on a new path of better growth and higher returns.

It’s premature to call this an impromptu rendition of Waiting for Godot, but it’s getting harder to make the “the turnaround is coming, and things are going to get better” argument stick after ongoing performance that’s really rather more “okay” than “good” (or better). With that, the shares have modestly trailed the regional bank group since my last update, while other bank stocks I like including Citizens (CFG), Key (KEY), Synovus (SNV), and Zions (ZION) have all done noticeably better.

First Horizon shares still look undervalued and priced for a double-digit return, not to mention well-leveraged to the upside, but valuation alone doesn’t move stocks and these shares really need to see a marked improvement in performance. As a shareholder myself, I have to admit that my patience is wearing thin, particularly with other banks offering similar upside and showing more operational upside.

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The Frustrating Wait For Positive Differentiation From First Horizon Goes On

Texas Capital Bancshares: Love The Plan, But It Will Take Time

 

Wall Street being a notoriously impatient place, it's not so surprising that turnaround stories are so often overlooked in their early stages - usually, turnaround plans involve a lot of near-term pain and execution risk with no certainty on that outcome. When they work, though, the rewards can be substantial.

Writing about Texas Capital Bancshares (TCBI) back in July (ahead of the company's September strategic update), I was cautious on the near-term valuation and outlook, but still bullish and I thought that there were solid arguments for long-term investors to stay put. The shares subsequently spent some time below $60 and are pretty much where they were when I last wrote, underperforming the banking sector by a noticeable amount.

My feelings haven't changed. I think CEO Holmes has put a good plan in place, and while there is execution risk, I think that's outweighed by the opportunities this restructuring will unlock. Higher spending may well keep a lid on the share price for a while longer, but I think the long-term return potential makes this a name to consider if you believe management is pursuing the right plan for the business.

 

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Texas Capital Bancshares: Love The Plan, But It Will Take Time

KeyCorp: A 'Show Me' Story That Has Been Showing More And More

 

I’ve been bullish on KeyCorp (KEY) since my first Seeking Alpha article on the stock back about three years, and the shares have finally started outperforming of late. While my prior thesis on KeyCorp was more that the bank wasn’t as bad as commonly perceived, following the bank for a while and seeing what management has been doing over the last year or two, I’m increasingly thinking there’s a standalone positive story to tell – not an “it’s better than people think”, but increasingly “it’s actually pretty good”.

It’s true that KeyCorp isn’t going to be an ROE or ROTCE superstar, but I think the Street has started waking up to not only stronger near-term loan growth potential, but also a fundamentally stronger long-term growth position. KeyCorp’s Western markets are some of the fastest-growing regions in the country, and management is building some strong lending verticals that have long growth runways.

The 30% or so move since my last article has definitely mopped up some of the undervaluation I saw before, but I think I can still argue for a share price 10% higher than today’s price. I’d ideally like a chance to buy in below $25, but I think there’s a buy-and-hold argument at today’s price.

 

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KeyCorp: A 'Show Me' Story That Has Been Showing More And More

United Community Banks Still Following A Tested Formula

 

It may seem like damning with faint praise, but there's nothing all that unusual about the business strategy that United Community Banks (UCBI) is following. A smaller bank still focused principally on commercial real estate lending, UCBI has used serial acquisitions of small banks to build its operations, and the company remains focused on attractive fast-growing markets in the Southeast.

It's been a while since I've written about United Community, but over the past five years, the company has more or less tracked the small bank sector. United Community operates in increasingly competitive markets, but the bank prioritizes high-touch customer service at a time when many larger banks are trying to shift more commercial lending to a digital-enabled "DIY" model. What's more, there's still room for the company to expand beyond CRE lending, with asset-backed lending, equipment finance, healthcare, and SBA lending all offering opportunities.

United Community doesn't jump off the page as being dramatically cheaper than other growth banks, but I do still believe that a lot of growth banks are trading with some worthwhile upside. Between attractive underlying markets, opportunities to expand the lending franchise, and more M&A in the future, I believe that UCBI could generate long-term earnings growth in the double digits, making the current 11.5x multiple on 2023 earnings (similar to banks with more modest growth expectations) worth a further look.

 

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United Community Banks Still Following A Tested Formula

Huntington Set For Significant Pre-Provision Profit Acceleration, But The Street Isn't All-In

 

Writing about Huntington Bancorp (HBAN) last March, I wasn’t all that excited about the stock. Although I did (and do) like the company’s decision to invest in long-term growth (including meaningful IT spending, product development, lending expansion, and the TCF deal), I had concerns about how the Street would treat a bank stock with less clear-cut operating leverage in the near term, particularly one operating in a region (the Midwest) that the Street isn’t all that excited about.

Since then the shares have chopped around between $13 and $18, but are now almost exactly where they were at the time of that last article – in the meantime, larger regional banks have done considerably better (a 15% gain in the KBW Nasdaq Bank Index), and individual names I preferred, including Keycorp (KEY) and Citizens (CFG), have done even better.

Although I do have concerns about specific points like deposit betas and loan growth acceleration/loan share gains, I’m getting more bullish on these shares, as I think the stock valuation is undervaluing the prospect of strong pre-provision profit growth over the next few years. This is now a borderline buy call with double-digit return potential, and a name I’d definitely watch more closely from here.

 

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Huntington Set For Significant Pre-Provision Profit Acceleration, But The Street Isn't All-In

Execution Remains The Key For Cisco, But Has Proven Elusive For Some Time

 

It’s no secret that Cisco’s (NASDAQ:CSCO) performance has left a lot to be desired for some time. While the stock has done a little better of late, the three-year, five-year, and 10-year comps are not so impressive relative to the company’s peer groups, nor the wider markets. There are a lot of moving parts to that performance, including a track record of M&A that leaves plenty to be desired, but execution seems to me to be the real key.

Opportunity has never been the issue for Cisco, and it isn’t today – Cisco is targeting attractive growth markets that can easily support revenue growth. That’s particularly true over the next 12-24 months, as spending from enterprise, webscale, and service provider customers on 5G, 400GE, Wi-Fi, security, and other areas of interest to Cisco should be quite strong. The question is whether Cisco can get its large array of ducks in a row and execute on that opportunity.

At this point I’m honestly surprised there isn’t more discussion around the idea of breaking up Cisco. Over the last few years the industrial sector has seen a marked shift toward the idea that companies must “earn the right” to remain conglomerates, and if they don’t, they should break up the business. That hasn’t been true for tech yet, but should Cisco’s execution not improve, I would expect that chatter to start. As is, Cisco looks a little undervalued to me, and were the company to really come through on execution over the next three-to-five years, the upside could be meaningful.

 

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Execution Remains The Key For Cisco, But Has Proven Elusive For Some Time

PacWest Still Undervalued As Opportunities To Deploy Excess Capital And Generate Profit Growth Continue To Improve

 

Banks have done well in general since the middle of 2021, but banks with strong leverage to loan growth in 2022 and the opportunity to drive double-digit pre-provision profit growth are doing even better. PacWest (PACW) was one of the banks I was bullish on back in the summer based on that undervalued profit growth leverage for ’22-’23, and the shares have since climbed another 20% or so, beating its peer group by around 500bp over that period.

PacWest doesn’t offer above-average asset sensitivity (and the bank’s internal deposit beta projections may be too optimistic), and I do think a capital raise (likely subordinated debt and/or preferred equity) is possible, but I still like the growth leverage story, and I believe high-single-digit long-term core earnings growth can support double-digit share price appreciation from here.

 

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PacWest Still Undervalued As Opportunities To Deploy Excess Capital And Generate Profit Growth Continue To Improve

Self-Help And Improving End-Markets Driving Hancock Whitney To Market-Beating Performance

 

I liked Hancock Whitney (HWC) back in July due to its combination of valuation, leverage to loan growth recovery in 2022, and self-help potential on expenses. While the COVID-19 pandemic has still had some negative impacts on the company’s core markets, the business has nevertheless been executing well and the shares are up almost 25% since that last article – handily beating not only the S&P 500, but also regional banks as a group.

I still like the story at Hancock, and I think the combination of loan growth, expense leverage, and rate leverage will serve the company well. While expectations are quite a bit higher now, and I do have some concerns about the year-over-year growth in pre-provision profits for 2022, I do still see double-digit upside for this name, and I consider it an under-followed name in the regional bank space.

 

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Self-Help And Improving End-Markets Driving Hancock Whitney To Market-Beating Performance

Valuation Still The Biggest Issue With Commerce Bancshares

 

If you had to overpay for a bank you could certainly do worse than Commerce Bancshares (CBSH), as this Midwestern lender has a good track record of both internal value creation and relative performance within the banking sector. Still, I’m not in the habit of overpaying for assets unless there’s a very good reason to do so, and these shares have fallen a bit since my last update on the shares, underperforming other regional and community banks by more than 10%.

Even with that period of underperformance, I can’t find a compelling argument to pay up for these shares, and trading at around 18.5x the Street’s FY’23 EPS estimate, investors definitely have to pay up. While there are several fine attributes to Commerce, including strong fee-generating businesses, a very good underwriting track record, and a plan to continuing targeting commercial loan growth markets outside the Midwest, the overall outlook for loan growth isn’t that special and the bank isn’t particularly leveraged to rate hikes.

 

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Valuation Still The Biggest Issue With Commerce Bancshares

Regions Has The Pieces In Place For Ongoing Growth

 

Banks have done well on a sector-wide basis since my last update on Regions Financial (RF), but my bullishness on this leading Southeastern franchise has nevertheless been rewarded, as the shares have outperformed its peer group by close to 10% (and the S&P 500 by around 15%) on growing recognition of the bank’s potential to generate double-digit pre-provision growth as loan demand improves and rates head higher.

Regions isn’t a perfect story – the Southeast is getting more and more competitive, higher expenses need to be monitored, and deposit betas are a big unknown – but I like the moves the company has taken to improve its loan growth outlook and its asset sensitivity. Region’s outperformance has brought it back to the pack as far as valuation goes, but I still lean favorably on this name.

 

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Regions Has The Pieces In Place For Ongoing Growth

Aptose Deep In The Doghouse Due To Lack Of Pipeline Progress

 

I’ve been bullish on Aptose Biosciences (APTO) for some time, but have also tried to make clear that I view this as an extremely risky play on potentially class-leading drugs for hematologic oncology. So far, that bullishness has not been rewarded at all, as disappointing clinical updates have led investors to abandon ship.

There’s no arguing that the lack of clinical responses in the studies of luxeptinib has been very disappointing, and even if a new formulation of the drug can unlock the potential seen in pre-clinical studies, this is absolutely a “show me” story. While there’s an argument that recently-acquired drug HM43239 (or “’239”) is getting unfairly overlooked as investors have bailed out, the reality is that biotech sentiment has turned sour and early-stage oncology plays are among the riskiest in the sector.

I wouldn’t fault anybody for taking their losses here and moving on, or at least stepping to the side until there are more data in hand. While it’s certainly true that getting in “at the ground floor” can lead to the best returns, there should still be plenty of upside for those investors who buy in further down the clinical investment timeline. Moreover, appealing as it might be to identify those ground floor opportunities, all too often in early-stage small-cap biotechs investors find that a sinkhole opens up below that ground floor.

 

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Aptose Deep In The Doghouse Due To Lack Of Pipeline Progress

Preferred Bank Offers An Attractive Mix Of Loan Growth, Efficiency, And Rate Leverage

 

It’s been a while since I’ve updated my thoughts on Preferred Bank (PFBC), but in the roughly three years since my last update on this small, well-run California-based bank, the shares have comfortably outperformed the peer group (by around 30%), as the bank’s high credit quality/underwriting ability and low expenses have seen it through the challenges and disruptions created by the pandemic.

I still expect the bank to generate long-term core earnings growth in the high single-digits, and I expect dividend growth in the double digits. I do also have some concerns regarding competition and a time-lag for realizing benefits from higher rates, but with upside toward $90, this is still a name to consider.

 

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Preferred Bank Offers An Attractive Mix Of Loan Growth, Efficiency, And Rate Leverage

Signature Bank Going Into 2022 Loaded For Growth

 

I saw more upside in Signature Bank (SBNY) when I last wrote about the stock a year ago, but I’m not going to pretend I expected another double. While the shares have pulled back on worries about the recent weakness in cryptocurrency, and perhaps the additional equity raise as well, there are multiple strong growth drivers at this bank as it heads into 2022 – not only is the digital/crypto banking business growing, but so too are businesses like capital call lending, mortgage warehousing, and mortgage servicing, and Signature is one of the most asset-sensitive banks I follow, meaning that it has significant earnings leverage to future rate hikes.

I don’t have an issue with the idea that Signature is a riskier growth story than the typical bank, or even other growth names like First Republic (FRC), East West (EWBC), Pinnacle (PNFP), SVB (SIVB), and it’s certainly true that Signature Bank shares have outperformed all of those names by a wide margin over the last year. Trading at under 13x my 2023 EPS estimate (against an average of around 11.6x for regional banks irrespective of growth) and below my long-term core earnings-based fair value, I still see upside. This is a riskier-than-average business model and I’m a little nervous at how popular the stock is on the sell-side now, but it’s hard to argue the shares are undervalued unless you believe the core lending operations are going to slow markedly.

 

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Signature Bank Going Into 2022 Loaded For Growth

Hexcel Needs To Offer More Than Just A Widebody Recovery Story

 

Ahead of what may well strike some readers as a negative review of Hexcel (HXL), I want to be clear about one thing from the outset – I think Hexcel management has done a good job here. I do think there are some significant issues that investors have to consider, and some real challenges ahead for management, but when it comes to operating the core business, I don’t really have a lot of complaints.

That said … Hexcel is very much tied to the recovery in the widebody aircraft market, and though I view that as a “when, not if” question, I think the value of that recovery is already reflected in the shares. I thought the same at the time of my last update, and the shares are about 13% lower now. In my view, for the stock to offer really appealing long-term potential, the management must find new markets/offerings for growth.

 

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Hexcel Needs To Offer More Than Just A Widebody Recovery Story

H.B. Fuller Has Done Well On Pricing And Margins, But Making It Last Is The Next Challenge

 

Going into 2022, I would argue that one of the biggest questions for H.B. Fuller (FUL) (“Fuller”) is whether the company can hang on to the robust pricing it achieved in the second half of the year and deliver good volume numbers against what will be some more challenging comps for the first three quarters of 2022.

I thought H.B. Fuller was both undervalued and well-leveraged to improving end-markets a year ago, but I didn’t expect quite the strength that the company showed in 2021, and the shares are around 25% higher now. That performance was well above what rival Henkel (OTCPK:HENKY) managed, though not quite as strong as Arkema (OTCPK:ARKAY), and more or less in line with the very well-regarded Sika (OTCPK:SXYAY).

At this point I still have my doubts about Fuller – the company’s long-term margin performance hasn’t been that strong, and I’ve had my doubts that the company can really differentiate its products in the market. If they can hold the line on pricing, that’s a strong argument in their favor. I still see Fuller as potentially undervalued if it can deliver improved margins (on top of long-term revenue growth of around 5%), but that’s not a small “if” for the company.

 

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H.B. Fuller Has Done Well On Pricing And Margins, But Making It Last Is The Next Challenge

Ciena Is In A Prime Position To Leverage Robust Data Infrastructure Spending

 

The turn came a little faster than I expected (by a quarter or two), but Ciena’s (CIEN) strong guidance with its fiscal four quarter earnings (reported in early December) confirmed what has been my thesis for some time – that Ciena is the leading optical player and well-placed to leverage strong customer investments in data infrastructure, to say nothing of opportunities to gain share in its core business and leverage new business opportunities.

Ciena shares have given back around half of their post-earnings pop, but are still up more than 20% from the time of my last update. I continue to like these shares, and even with the recent move, I still see a double-digit long-term annualized total return potential from here, and nearer-term potential into the mid-$70’s (if not more).

 

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Ciena Is In A Prime Position To Leverage Robust Data Infrastructure Spending

The Fanuc Story Is Getting More Interesting

 

Japan’s Fanuc (OTCPK:FANUY) has long been a major player in automation, with leading share in CNC equipment for machine tools, as well as strong share in robots and machine tools like tapping centers. Despite that leadership, I’ve been less than positive on the company at many points due to what I’ve seen as excessive investor enthusiasm and questionable choices in the past regarding R&D investments and capital allocation.

Since my last update, the shares have slid another 10% or so, underperforming the S&P 500, but more or less matching the broader industrial space and good enough for a “middle of the road” performance versus other automation plays like ABB (ABB), Schneider (OTCPK:SBGSY), Siemens (OTCPK:SIEGY), and Yaskawa (OTCPK:YASKY). I still have many concerns about Fanuc, including a possible near-term order peak, increasing competition from Chinese rivals, and underinvestment in growth areas like cobots, but the valuation is more reasonable now than it has been in a while, and that’s with what I don’t believe are “heroic” growth assumptions.

 

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The Fanuc Story Is Getting More Interesting

AngioDynamics - Progress Despite Margin And Pandemic Challenges

 

Between resurgent hospitalizations tied to the COVID-19 pandemic and higher costs/lower efficiency in the manufacturing and shipping operations, the last six months have been challenging for AngioDynamics (ANGO). This is reflected in the share price, which has declined about 16% since my last update, underperforming the S&P 500, but not doing all that badly compared to other smaller med-techs in similar markets (including names like Cardiovascular Systems (CSII), Inari (NARI), and Penumbra (PEN)).

At this point AngioDynamics remains a “show me story”; management has to show that it can generate meaningful revenue growth from its “Med Tech” portfolio, while also generating reasonable cash flows (or sale proceeds) from slow-growing legacy businesses making up about 75% of the revenue base.

The weaker near-term margin outlook doesn’t help, and AngioDynamics risks being stuck in an investor “no man’s land” between inadequate revenue growth to get the interest of “emerging/established growth” investors and inadequate margins for more value/FCF-oriented investors. That said, I do think the valuation is interesting for more risk-oriented investors.

 

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AngioDynamics - Progress Despite Margin And Pandemic Challenges

Hurco Still Unfollowed And Unloved, But Delivering On Improving End-Market Conditions

 

Owning stocks like Hurco (HURC) – small industrials with no institutional research coverage and too little daily volume to attract a lot of fund managers – can be a frustrating exercise in the best of times. These aren’t the “best of times”, though, as the Street continues to pull back from industrial names, and particularly those leveraged to capex equipment, on fears of peaking orders and margin pressures from supply chain challenges.

To be sure, I do have some concerns about how Hurco will navigate ongoing cost pressures – they’re not doing badly, but costs aren’t letting up. Likewise, orders are annualizing close to prior peaks, so further improvement may be a larger ask.

All of that said, I do still believe there is room for Hurco to log more growth in this cycle, not to mention leverage better volumes into better margins. If Hurco can couple low single-digit long-term revenue growth (in line with developed market capital investment) with modest long-term operating margin improvement, I believe these shares deserve to trade in the $40s, making them a name worth considering today for investors who can accept the risks that go with illiquid cyclical small-caps.

 

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Hurco Still Unfollowed And Unloved, But Delivering On Improving End-Market Conditions

More Progress Evident At Accuray, But Sustainability And Follow-Through Remain Key

 <This article was published a couple of months ago, but somehow fell through the cracks for me and I never posted it here.>

On multiple occasions, I’ve lamented Accuray’s (ARAY) inability to sustain, let alone build upon, past success, and the tape tells the tale – the stock’s five-year and 10-year returns are pretty dismal, as investors have grown weary of the “wait until next year” story that has long dominated the name.

That said, I saw reasons for more bullishness in my last update on the company, and fiscal first quarter results (reported earlier in November) were better than expected. Along with improved visibility on the R&D pipeline and progress in China, the shares are about 40% higher now, but still not overvalued relative to what mid-single-digit revenue growth and low-to-mid-teens EBITDA margins should support.

To be clear, this is a name with above-average risk, and one where investors have to believe that past results are not predictive. Between improved product offerings (both hardware and software), changing reimbursement, and growth in the Chinese market, I believe there is a bull case still to be made, but there is no point in pretending that success here is assured.

 

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More Progress Evident At Accuray, But Sustainability And Follow-Through Remain Key

Truist Leveraged To Higher Rates, Improving Loan Demand, And Positive Operating Leverage

 

I’ve written more than once that Truist (NYSE:TFC) tends to be a bank stock that zigs when others zag, and that has been at least partially true again since my last update on the bank. Since then the shares have outperformed the S&P 500 by over 10%, while also outperforming the banking sector by over 5%.

Although I don’t think Truist is remarkably cheap right now, I do think it checks some thematic boxes – at a time when several large banks have spooked the Street with expense guidance, Truist delivered better-than-expected positive leverage in the quarter and the outlook for expense leverage is improving as the SunTrust merger integration proceeds. What’s more, I believe Truist management gets that they need to change with the times – embracing not only digital offerings, but customer-friendly policies that will help them better compete with fintech alternatives.

 

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Truist Leveraged To Higher Rates, Improving Loan Demand, And Positive Operating Leverage

Another year goes by...

A little hard for me to believe that this would have been Chris's 47th birthday.
It's definitely "just a number" at this point, but for whatever reason the nostalgia and what-ifs are a little more present this time around.

Hope you're all well. Hug your loved ones.

And if I don't post again before the end of the year, Merry Christmas, Happy Holidays, and Happy New Year to all of you.

Hey Everybody

 Hey all, 

Just realized I haven't posted (or written) in almost two months.
Things are fine.
I guess I'm enjoying the "luxury" of not really having to work/write when I'm not fired up to do so.

I'll probably get back to it before too much longer, but wanted you all to know I'm fine and haven't completely vanished.

best,

The Management

Celanese Stock Is Seeing Cyclical Sentiment Headwinds, But Long-Term Fundamentals Look Good

 

The shares of Celanese (CE) have performed fairly well on a year-to-date basis, up around 18% and outperforming the broader chemical space on soaring prices for acetic acid and vinyl acetate monomer (or VAM), and almost keeping pace with the S&P 500. Like with many cyclical names, though, the shares have started to underperform as investors anticipate normalizing prices and weaker 2022 profits.

As I’ve said in pieces on steel companies and other chemical companies, in the short term it’s tough to make money fighting the tape, and it’s tough to make money in cyclical commodity names when commodity prices and margins are heading lower off a peak. Longer term, though, I like Celanese’s market-leading and very efficient acetyl chain and engineered material businesses, and I think today’s price doesn’t really reflect the full value. Tactically, I’m cautious about recommending the shares today, but the valuation makes this a name to watch.

 

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Celanese Stock Is Seeing Cyclical Sentiment Headwinds, But Long-Term Fundamentals Look Good