Cognex Languishing Through A Painful Reset Of A Major Growth Market

It would have been difficult to be more wrong about Cognex (NASDAQ:CGNX) than my call back in April that, despite challenges in the logistics market (warehouse automation), this machine vision company would still manage double-digit growth in 2022. In fact, Cognex is likely looking at not only a revenue decline in 2022, but quite possibly a decline in 2023 as well given weaker macro trends. With weaker end-market demand (and a fire at a manufacturing partner), Cognex is on pace for far less in terms of profitability and cash flow than I’d expected, and it may not be “business as usual” until 2024/2025.

Down about a third since my last ill-fated update, Cognex has been a notable laggard in an otherwise flattish market for other automation names like Datalogic (OTC:DLGCF), Fanuc (OTCPK:FANUY), Keyence (OTCPK:KYCCF), Rockwell (ROK), and Yaskawa (OTCPK:YASKY), though KION (OTCPK:KIGRY), another logistics-driven name, has been even weaker. While I do see long-term value in the name here, it’ll be difficult for sentiment to turn with logistics revenue likely down 20%-plus again in 2023, particularly if other end-markets weaken more than seems to be baked into sell-side expectations.

 

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Cognex Languishing Through A Painful Reset Of A Major Growth Market

High Costs And Macro Worries Drag Cemex Down

My bullish call on Cemex (NYSE:CX) in February was predicated on strong volumes and pricing in the U.S. driving better profits and cash flow, with a healthy outlook for increasing infrastructure spending supporting the longer-term view. While U.S. demand and pricing have both been healthy, the market has become considerably more nervous about 2023 and Cemex has fallen short on profitability, leading to a 20% drop in the stock price and underperformance in an admittedly lackluster cement sector (though Eagle (EXP), GCC, and Martin Marietta (MLM) have held up better).

I’m increasingly concerned about what look like structural cost issues at Cemex that seem likely to lead to longer-term underperformance in profitability. That said, I do think infrastructure demand is likely to remain quite supportive and today’s price seems to reflect an overly bearish outlook for the company. Management has most definitely not earned the benefit of the doubt here, but if the company can manage something on the order of 4% long-term EBITDA growth, I do think there is some value here.

 

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High Costs And Macro Worries Drag Cemex Down

Hancock Whitney Outperforming On Solid Execution And A Great Balance Sheet

I expected good things from Hancock Whitney (NASDAQ:HWC) in my last update on this Gulf Coast bank, and I haven’t been disappointed. While deposit outflows have been a little worse than I expected, deposit and loan betas have been quite strong and the company continues to execute well on costs. With that, the shares have outperformed since that last article, outperforming regional banks by more than 7% and bringing the year-to-date outperformance up to around 12%.

The only real negative I can’t point to here, apart from a deteriorating macro environment, is the valuation. Hancock Whitney has been doing well, but not well enough to drive substantial upside revisions to my numbers, and so the outperformance is chewing into some of the undervaluation I saw before. I’d rather own a more expensive high-quality bank than a cheaper low-quality bank, but investors probably shouldn’t expect much beyond a high single-digit to low double-digit return over the next year.

 

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Hancock Whitney Outperforming On Solid Execution And A Great Balance Sheet

Franklin Electric Offers Solutions To Long-Term Water Issues, But The Near Term Is More Challenging

This isn’t a particularly good time to be leveraged to residential construction, and while Franklin Electric (NASDAQ:FELE) offers better near-term leverage to ongoing demand for irrigation and dewatering, the prospect of weaker residential and below-ground fueling systems, not to mention ongoing supply/margin challenges, is weighing on the shares. Down about 5% since my last update, Franklin has more or less kept pace with the broader industrial sector, and staked out a middle ground between better-performing water stories like Xylem (XYL) and Lindsay (LNN) and weaker names like Mueller (MWA) and Zurn Elkay (ZWS).

The challenge in approaching Franklin Electric today is balancing out the near-term end-market weakness with above-average long-term potential, as well as a valuation that’s not so exceptional compared to industrials in general, but looks rather good compared to how the market has traditionally valued water plays.

 

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Franklin Electric Offers Solutions To Long-Term Water Issues, But The Near Term Is More Challenging

IDEX Rightly Appreciated For Its Excellent Credentials And Advantageous Market Exposures

I've talked about IDEX (NYSE:IEX) as a "best of breed" industrial in the past, and I continue to believe this is one of the best-run and best-positioned industrials out there. Management has shown that they can not only optimize operations but also execute successfully on tuck-in/bolt-on deals that build on existing strengths.

Since my last update, this has been one of the strongest stocks among the industrials I follow, with the shares up almost 25% and beating flat performance for the larger multi-industrial group, as well as other high-value "compounder" industrials like Ametek (AME), Danaher (DHR), Fortive (FTV), Nordson (NDSN), Rockwell (ROK), and Roper (ROP). This outperformance has been well-founded, with strong double-digit revenue growth and healthy margins, as well as broad-based strength in the business.

Valuation is my biggest issue. I realize some investors believe in buying quality and holding on irrespective of valuation, but I think entry prices matter, and it's tough to see how IDEX is substantially undervalued even given above-average growth potential in the coming years.

 

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IDEX Rightly Appreciated For Its Excellent Credentials And Advantageous Market Exposures

Silicon Labs: A Growth Story That Is Dented, And Maybe Delayed, But Not Derailed

“Buy the dip” is a piece of advice that can make investors a lot of money over time, but it’s also difficult advice to follow. Every once in a while there’s a market, sector, or stock-specific “freak out”, but more often than not, meaningful dips come with scarier changes in the near-term outlook. The Street being what it is, it’s not uncommon for those near-term changes to lead to big swings in long-term outlooks, estimates, and target prices, as many analysts seem to forget that cyclical stocks/industries cycle in both directions.

Since my last update, Silicon Labs (NASDAQ:SLAB) has outperformed the broader semiconductor space by about 15%, as the company has continued to post strong growth from its IoT-focused business. While there is growing evidence of an impending slowdown (echoed by other players in IoT), this hasn’t been outside of my expectations. I do see elevated risk to sentiment and near-term estimates, but I also think Silicon Labs is trading at a pretty attractive valuation relative to how growth semiconductor stocks typically trade.

 

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Silicon Labs: A Growth Story That Is Dented, And Maybe Delayed, But Not Derailed

Valley National Bank Trying To Turn Over A New Leaf

Valley National Bank (NASDAQ:VLY) is still trying to put a lackluster performance and total return history behind it. Since a CEO change at the end of 2017, the company has made meaningful progress on operating efficiency and has seen some acceleration in tangible book value growth, but challenges remain. Despite a fairly strong return on tangible common equity, the bank’s acquisitive behavior continues to sit poorly with many analysts and investors, and the company’s efforts to drive a more balanced mix of organic and acquired growth are still relatively new and unproven.

I like the strategy Valley National is following now, and I think the Bank Leumi deal may be a better long-term opportunity for the company than is reflected in the share price, as I think a larger private banking operation (somewhat similar to First Republic (FRC)) and a larger national specialty commercial lending franchise (somewhat similar to First Citizens (FCNCA)) can both create value. Still, I’m worried about the short-term profit outlook given the bank’s need to raise higher-cost deposits and the Street’s penchant for short-term thinking. Valuation is interesting at today’s level but there are a lot of banks trading at “interesting” valuations, and sentiment remains a concern for me.

 

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Valley National Bank Trying To Turn Over A New Leaf

Texas Capital Bancshares: A Sound Long-Term Transformation Plan, But Vulnerable In The Near Term

Writing about Texas Capital Bancshares (NASDAQ:TCBI) in February, I said that while I was bullish on the long-term strategic transformation plan put in place by the new CEO, I saw a “better than average” chance that the bank would underperform in the near term given the bank’s high deposit beta and willingness to invest opex into the transformation of the business. That’s largely played out this year as I expected, though I’m honestly a little surprised that the shares are only down a bit more than regional banking peers given the steeper pace of deposit cost growth.

I still see Texas Capital as a short-term/long-term puzzle I do like the CEO’s vision for what the bank should be – focused on commercial lending, with stronger investment banking, trading, and treasury options to drive fee income and stickier relationships – but it will take time to get there. In the meantime, I see elevated operating risk on higher deposit costs and weaker operating leverage. Investors unsure of their ability to time a turn in sentiment for banks may want to consider buying or holding the shares now, but there could be better entry points over the next year.

 

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Texas Capital Bancshares: A Sound Long-Term Transformation Plan, But Vulnerable In The Near Term

Turkcell Continues To Execute Well, But Macro Remains An Uncontrollable Risk

I believe I’ve been fair, if not effusive, in my praise of Turkcell (NYSE:TKC) management, and nothing has changed since my last article on this leading Turkish telecom provider to change my view. Management continues to do a good job of navigating a difficult inflationary environment (running at around 85%/year), as well as keeping the company ahead of rivals and continuing to reinvest in the long-term growth potential of the business.

While I thought the challenging macro environment in Turkey would mitigate potential gains in the share price, I’m happy to say I was wrong – Turkcell shares have risen more than a quarter since my last update, a strong performance against a backdrop of largely negative emerging market telco performances over that time. While the shares still look undervalued, the challenges of modeling in a high-inflation environment are considerable and ongoing erosion in the value of the Turkish lira remains a real risk.

 

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Turkcell Continues To Execute Well, But Macro Remains An Uncontrollable Risk

BorgWarner Making More Progress Than The Share Price Shows

This has been a tougher-than-expected year for auto suppliers, as component availability (particularly semiconductors) has continued to impact production schedules, leading to lower-than-expected volumes and margin headwinds from inefficient production schedules, compounded by ongoing inflationary pressures on inputs. Despite those challenges, BorgWarner (NYSE:BWA) has done better than many peers relative to expectations, and management has kept the company on track with respect to building out its capabilities in electrification.

BorgWarner shares have lost about 5% of their value since my last update, a disappointing result, though still better than the S&P 500 and better than many peers/rivals like Faurecia (OTCPK:FURCF), Valeo (OTCPK:VLEEY), Aptiv (APTV), Lear (LEA), and Dana (DAN), though trailing American Axle (AXL) and Vitesco (OTCPK:VTSCY). While I do still believe that BorgWarner is meaningfully undervalued, a weaker consumer spending backdrop for 2023 isn't helping near-term sentiment, and significant ongoing questions remain about the long-term market share and profitability of BorgWarner's EV-based businesses.

 

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BorgWarner Making More Progress Than The Share Price Shows

For Broadcom, Outperformance Is Just Another Day At The Office

In the not-always-rational world of Wall Street, I'm actually a little surprised that the Street hasn't adopted more of an expectation of ongoing beat-and-raise quarters from Broadcom (NASDAQ:AVGO). Then again, given that outlooks are withering at many peer semiconductor companies, I suppose that there's little inclination to look a gift horse in the mouth.

Broadcom shares have rebounded about 20% since my last update on the company (only about a month and a half ago), and while that is better than the performance of the SOX index (up about 16%) and certain select peers (like Marvell (MRVL)), a few like Microchip (MCHP) and NVIDIA (NVDA) have done even better. Pull the comparisons out a year, though, and Broadcom is handily outperforming all of those except Microchip (which it has outperformed, but not by a wide margin).

I still view Broadcom as a core holding. I love the company's leverage to high-end networking/data center demand for connectivity and AI acceleration, as well as leverage to home broadband, and I believe businesses like wireless, storage, and software are still more than worthwhile over the longer term. Roughly 20% below my fair value estimate and priced for a high single-digit long-term annualized return, this remains an attractive idea in my view.

 

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For Broadcom, Outperformance Is Just Another Day At The Office

Ciena Spikes On Improving Supply, And The Backlog Remains Robust

Supply chain issues hamstrung Ciena (NYSE:CIEN) throughout its fiscal 2022 year, as the company couldn't get the chips and other components it needed to fulfill robust orders from telco, enterprise, and cable companies. The fiscal fourth quarter was a different story, though, as the company was finally able to fulfill more of its component needs, allowing for a double-digit sequential growth rate in its core networking equipment business.

Ciena shares spiked about 20% on the strong fourth quarter beat and management's guidance for FY'23, but the company isn't completely out of the woods yet where margin recovery is concerned. Even so, I believe the shares remain undervalued with more visibility on mid-to-high single-digit revenue growth (stronger over the next few years) and a sustained margin recovery, not to mention share growth in its core markets and expansion into meaningful new adjacent markets.

 

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Ciena Spikes On Improving Supply, And The Backlog Remains Robust

Why JPMorgan Is Still A Good SWAN Option

The Street has gotten much more concerned about funding costs and credit quality with banks in recent months, and that seems to be benefitting JPMorgan (NYSE:JPM). While JPMorgan isn’t immune to deposit/funding cost pressures, nor worsening credit quality, this top-tier bank is relatively well-positioned compared to its peers and concerns about operating leverage and capital requirements are starting to fade.

JPMorgan shares are up almost 20% since my last update, leading the way among the large banks that could reasonably be considered peers. With that outperformance, and the risk that net interest income could reach a peak in the next quarter or two, it’s harder to argue for JPMorgan’s near-term outperformance potential, but I do still see a worthwhile longer-term total return opportunity here. What’s more, if the economy weakens even more than I expect and sees a hard/harder landing scenario play out, I believe JPMorgan will fare better than most.

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Why JPMorgan Is Still A Good SWAN Option

First Republic Paying A Steep Cost For Growth

Using pullbacks to pick up shares of well-run companies is usually a good strategy over the long term, but it has absolutely not been working with First Republic Bank (NYSE:FRC) here of late. This bank is choosing to prioritize long-term growth over short-term profits, steering into rapidly-rising funding costs to continue acquiring customers and grow the loan book. While I believe this will prove to be a sound decision over the long term, it has hammered the near-term earnings prospects and valuation.

The shares have fallen another 25% since my last update (and over 40% since I flipped from neutral to positive in mid-2021), dramatically underperforming its peer group. I've underestimated just how willing this bank would be to pay the short-term costs for long-term growth, but I do still believe in the longer-term story here. I think the shares remain undervalued, but I could see sentiment and near-term earnings pressure weighing on the stock at least through mid-2023, given where we are in the rate cycle.

 

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First Republic Paying A Steep Cost For Growth

Lexicon Continues To Drift Ahead Of An Expected FDA Approval And A High-Risk Commercialization Effort

The biotech sector has stabilized since a summer rally, but it is still a difficult market for smaller biotechs, and particularly those that the market is likely to need substantial further funding (which, honestly, is most of them…). That's a challenging enough backdrop for Lexicon Pharmaceuticals (NASDAQ:LXRX) before considering challenges/issues like building a sales infrastructure to support the launch of sotagliflozin in congestive heart failure and the uncertain clinical and financial pathway for its pain drug LX9211.

My feelings on Lexicon remain mixed since I wrote in July. I do see significant commercial potential for sotagliflozin based upon the size of the market and the clinical efficacy of the drug, but the challenges of building a go-it-alone marketing infrastructure capable of maximizing the opportunity are not at all trivial. Likewise, I'm encouraged by the potential of LX9211, but there's still a long road ahead to realizing that potential. I think a fair value estimate of $5.50/share is valid, but this remains a high-risk/high-reward sort of opportunity.

 

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Lexicon Continues To Drift Ahead Of An Expected FDA Approval And A High-Risk Commercialization Effort

Brown-Forman: Not A Compelling Idea - Softening Volumes, Weaker Margins, And High Valuation

Unexpectedly stronger headwinds from foreign exchange and input costs aren't exactly unusual today, but they are combining to make life more challenging for Brown-Forman (NYSE:BF.A)(NYSE:BF.B). On top of that, the underlying volumes in spirits aren't really that exceptional and the stock remains richly-valued by most approaches.

These shares are down around 10% since my last update, underperforming consumer staples (the Consumer Staples Select Sector SPDR Fund (XLP)) overall and names I preferred back in the day like Diageo (DEO) (that article is here) and Pernod Ricard (OTCPK:PRNDY) (that article is here). Still, while the long-term returns haven't been bad at all (a double-digit annualized total return over the last 10 and 15 years), the valuation today is no clear bargain to me, and I don't really find this a compelling idea even after the sharp post-earnings reaction.

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Brown-Forman: Not A Compelling Idea - Softening Volumes, Weaker Margins, And High Valuation

NRG Energy And Vivint: Paying For Transformation, The Street Prefers Buybacks

It would seem that the Street is far from convinced about the ongoing restructuring and business transformation efforts at NRG Energy, Inc. (NYSE:NRG), and the latest move – the $2.8B deal for Vivint Smart Home, Inc. (NYSE:VVNT) – is doing nothing to ease that anxiety. The shares fell about 15% on the deal announcement, continuing a trend of sharp moves between the mid-$20s and mid-$40s over the last five years as the Street tries to dial in the long-term cash flow consequences of management’s ongoing business transformation efforts.

I can understand why at least some investors would prefer the certain accretion of buybacks over another M&A transaction that brings integration and execution risk. I believe further transformation is necessary, though, and I favor using cash flow to build up (or perhaps shore up) the company’s future prospects and cash flow generation capabilities, so I see this as a short-term versus long-term debate. I do think the selloff makes the shares more interesting, but I do also see ongoing execution risk here.

 

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NRG Energy And Vivint: Paying For Transformation, The Street Prefers Buybacks

Unifi Hit By A Sharp Downturn In Orders, But It Doesn't Unravel The Long-Term Story

Weaker retail sales and record-high retailer inventories has led to a sharp reversal in fortunes for Unifi (NYSE:UFI), as this leading producer of recycled polyester yarns has seen a sudden and sharp downturn in volumes this year. That downturn has not only thrown management’s guidance for FY’23 out of the window, but also likely put the company’s former FY’25 goals ($1.1B in revenue, 10%-plus EBITDA margin) out of reach.

This has had a massive negative impact on the share price, with the stock down more than 50% since my last update on the company. This is a huge setback, but I do note that the company is still leveraged to an ongoing trend among major retailers to shift to recycled polyesters and this inventory issue with retail and apparel customers will resolve over the next few quarters. Even with a sharp revision to near-term financials, I still believe there is a bullish case to be made for the shares, though it will take some time to recoup the losses seen in 2022.

 

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Unifi Hit By A Sharp Downturn In Orders, But It Doesn't Unravel The Long-Term Story

Enovis Drifting In A Med-Tech No Man's Land

There’s no definitive rule about what works in med-tech, but companies that combine good-but-not-great revenue growth (below the double-digits) and good-but-not-great EBITDA margins (below the mid-20%’s) can often drift in a sort of valuation no man’s land where the shares can struggle to rerate meaningfully higher. That may be at least part of what’s hurting the share price performance of Enovis (NYSE:ENOV), as the company is an odd mix of business segments with varying growth prospects.

I wasn’t overly fond of Enovis at the time of the Enovis-ESAB (ESAB) separation, and the 20% or so drop in the share price since then hasn’t made me regret that position. I have been impressed with the performance of the Reconstructive business, but I continue to believe that management’s expectations and targets for the Prevention & Recovery business, and the business as a whole, could still be too high. What’s more, I think the lack of “pure-play” leverage to more attractive growth markets could make the stock a harder sell with institutional investors.

 

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Enovis Drifting In A Med-Tech No Man's Land

Sonova Seeing Strong Execution Collide With Macro Uncertainties

Sonova Holding (OTCPK:SONVF) (OTCPK:SONVY) (SOON.SW) has built an enviable track record in the hearing care space. Not only has the company built upon its leading position in the hearing aid market over the past decade (now holding around one-third share), but the company generates strong margins, cash flows, and return metrics like ROIC. Now that legacy of operational excellence is colliding with some meaningful end-market uncertainties, as the 2023 macro-outlook deteriorates and the company will be coping with a new regulatory environment in the key U.S. hearing aid market.

I’m expecting high single-digit revenue growth from Sonova over the next three to five years, slowing toward a 5% to 6% growth rate over the longer term, and I’m expecting EBITDA margins to expand into the low-to-mid-30%s over the next few years. Between discounted cash flow and growth/margin-driven EV/revenue, I do think these shares offer enough upside to merit a closer look from investors.

 

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Sonova Seeing Strong Execution Collide With Macro Uncertainties