Ongoing Excellence And Premium Valuation Mean Loving IDEX From Afar

Playing a "I like it, but the shares are expensive" drinking game with my articles in the industrial sector would probably be lethal right now, but the fact remains that the market continues to reward many companies with robust valuations even though there are some pockets of weakness in short-cycle markets. IDEX (IEX) is one of my favorite companies, a disciplined deployer of capital with strong niche-based businesses and excellent margins, but it's hard to see how IDEX shares can keep generating attractive returns from this high level.

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Ongoing Excellence And Premium Valuation Mean Loving IDEX From Afar

ON Semiconductor Not Out Of The Woods Yet

I’ve been bullish on ON Semiconductor (ON) for a while, but I thought the shares were a little ahead of themselves back in February, particularly given what I thought were risks that semiconductor companies would see a longer correction process from record high lead times and less growth in 2019. While semiconductor stocks as a whole have continued their upward march (despite some iffier reports), ON shares have underperformed since mid-February, falling slightly against a 15% increase for chip stocks in general and more modest performances from fellow power peers like Infineon (OTCQX:IFNNY), STMicro (STM), and Texas Instruments (TXN).

I’m still concerned about full year expectations for 2019, particularly with record high inventory and what I think will be a weaker second half economy than commonly expected now. Longer term, I still like ON and I think fair value is in the low-to-mid $20’s. Although I hesitate to recommend these shares without reservation because I think there could be a market correction that takes the shares back to around $20, investors who less inclined to try to time the market and/or willing to hold longer term can certainly consider this name today.

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ON Semiconductor Not Out Of The Woods Yet

Growth Concerns Continue To Dog Check Point

Although not my favorite idea in security software (having expressed preferences for Palo Alto (PANW) and CyberArk (CYBR) in the recent past), I thought Check Point (CHKP) looked undervalued back in January even allowing for the suboptimal growth profile of this security company. Shares rose better than 15% since that last update, though the post-earnings sell-off has cut that in half and left the shares lagging Palo Alto, Fortinet (FTNT), and CyberArk (by a wide margin) since then.

Once again the key concern around Check Point is whether the company can generate enough growth, particularly now that the company is clearly sacrificing margin to pursue growth. At today’s valuation, I’m pretty ambivalent about Check Point. I believe this company would/will fare better in an economic downturn due to its large, well-established legacy customer base, but it’s tough to make money long-term in low-growth software companies and I’m not sold on the idea that Check Point has a plan in place to drive a meaningful acceleration in growth, particularly when 2018 was a strong year for the sector and Check Point didn’t really participate.

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Growth Concerns Continue To Dog Check Point

FEMSA's First Quarter Was Messy, But Basically Positive

With the combination of a late Easter and the impact of new accounting standards (IFRS16), it was likely that FEMSA’s (FMX) first quarter was going to be messy relative to expectations, and so it was. Reported revenue was weaker than expected, but I’d argue core underlying trends remain strong. Although FEMSA management still has much to prove regarding the strategic expansion into pharmacies and fuel stations, the OXXO business still offers significant growth potential and Coca-Cola FEMSA (KOF) seems to finally be on better footing.

The shares do not seem radically undervalued, but I do think they still offer some value and a way to add non-U.S. exposure through a very well-run Latin American consumer/retail company.

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FEMSA's First Quarter Was Messy, But Basically Positive

Alfa Laval Buoyed Again By Strong Marine Results

As has been the case for most multi-industrials, particularly in the capital goods sector, Alfa Laval (OTCPK:ALFVY) (ALFA.ST) has shaken off some of the malaise that had pushed the shares down until relatively recently – while Alfa has outperformed its industrial peers since my last update, the 6-month and 12-month comparisons have Alfa lagging the market as sell-siders and investors have grown worried about what will happen as scrubber orders start to fade.

Although I’m not wild about the valuation (nor the valuation on industrials more broadly), this is still a company that I like quite a bit. I think there’s more opportunity in marine than just scrubbers, and I think longer-term opportunities in food, beverages, life sciences, and HVAC are not always given their due. Give me a 10% to 15% pullback and these shares get much more interesting as a potential longer-term holding.

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Alfa Laval Buoyed Again By Strong Marine Results

Neurocrine Drifting, But The Total Package Is Still Appealing

Although Neurocrine Biosciences (NBIX) has a strong primary commercial asset in Ingrezza, a slower-building but still promising secondary asset partnered to AbbVie (ABBV) in Orlissa, and an improved pipeline, the reality is that the shares of biotechs in Neurocrine’s stage of life can flounder or drift for stretches of time. In the absence of new clinical data to get excited about, investors will instead fixate on short-term details or just get bored and move on, and I think that explains at least some of Neurocrine’s lackluster recent performance.

All in all, though, I still like this stock. I believe Ingrezza still has upside, and while Orlissa is taking longer to build than most investors would like, it’s still a good opportunity. Beyond that, opicapone may still be an underrated opportunity, and likewise with NBI-74788, and Neurocrine has some early-stage assets worth watching now, including its second VMAT-2 compound and its Voyager (VYGR) partnership.

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Neurocrine Drifting, But The Total Package Is Still Appealing

Old Dominion Operating At A High Level, But Some Concerning Signs Are Emerging

When I last wrote on Old Dominion (ODFL) in late December, I thought the share price was getting interesting, but wasn’t quite low enough to entice me to buy in ahead of what I believed would be a slower pace of growth in 2019 and 2020. While there are now some signs that slowdown is emerging, the shares are up about 25% since that article. So, let’s just say that earlier call of “not yet…” is not getting printed out and put on the fridge.

I continue to believe, as I’ve long believed, that Old Dominion is a best-of-breed that deserves a premium. I also believe that the ongoing expansion of online retailing is a positive for the less-than-truckload (or LTL) industry, even if Old Dominion itself isn’t all that weighted toward retail. Still, I’m concerned about a slowdown in short-cycle industrial markets in 2019 and 2020 and concerned that Old Dominion could face a one-two punch of more challenging tonnage and pricing. With that, I’m willing to miss out on further gains in Old Dominion shares rather than chase at today’s price.

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Old Dominion Operating At A High Level, But Some Concerning Signs Are Emerging

Roper's Growth Engine Keeps Humming

As a multi-industrial increasingly driven by its high-margin, asset-light software businesses, Roper (ROP) continues to diverge from the broader multi-industrial category in generally positive ways. Management has built a solid value-compounding engine here, and Wall Street is quite well aware of that, with the shares up another 30%-plus over the trailing twelve months. I do expect Roper to continue to deliver better-than-average organic growth with improving margins, and I believe Roper has a repeatable formula here for successful M&A, it’s increasingly difficult for me to see value in the shares. Yes, there are investors in companies like Roper and Danaher (DHR) that will argue for buying irrespective of valuation, but that’s not my approach and I think shareholders should at least be aware of the risks if Roper’s engine ever has a hiccup along the way.

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Roper's Growth Engine Keeps Humming

Stanley Black & Decker Comes Back With A Stronger Report

A weak, and poorly-received, fourth quarter put Stanley Black & Decker (SWK) in a hole, and while the shares have lagged industrial peers over the last year, the performance since my last update has been noticeably better. With a strong first quarter driven in very large part by the tool business, Stanley’s guidance for 2019 certainly looks more attainable than just three months ago. While I still see risks in the second half of the year from weaker than expected “general industrial” markets, Stanley should be poised to benefit from gradual improvement in auto demand later this year and some self-directed gross margin improvement efforts.

I’m not as interested in the valuation/share price opportunity as I was in January, as the stock has risen more than 20% since then (roughly doubling its peer group). I’m concerned that the market and industrials in particular are ahead of themselves now and I’d prefer to wait for a better entry price before starting a position here.

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Stanley Black & Decker Comes Back With A Stronger Report

Lincoln Electric Still Looking Wobbly, But That's What Buying Opportunities Often Look Like

Situations like the one Lincoln Electric (LECO) presents to investors today are why investing isn’t easy – the business has clearly slowed and there are valid reasons to think it may slow further. And yet, as seen in industry segments like Japanese automation, the market often prices in bottoms and recoveries well ahead of the fact. Lincoln Electric shares look undervalued today, and this is one of the better-run industrials I’ve ever followed, but the company is also starting to expand into some areas that could increase the overall operating risk. All told, I think this is a name to start considering, but investors need to keep their eyes open to the risks of a broader sell-off.

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Lincoln Electric Still Looking Wobbly, But That's What Buying Opportunities Often Look Like

Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

Atlas Copco (OTCPK:ATLKY) won’t have the best quarter among multi-industrials this quarter, Honeywell (HON) and Dover (DOV) already surpassed them in organic growth, but the level of outperformance was startingly high all the same and further supports the argument for Atlas Copco as a best-of-breed multi-industrial. Although there are signs of deterioration if you look for them, management seemed relatively unconcerned about the health of the business.

Atlas Copco ADRs have shot up about 20% since my last update (the local shares have done better), when I said that the shares looked about as promising as they get on valuation. It’s a lot harder to reiterate that argument now, and I’d rather wait for a pullback than chase these shares in what I still believe will prove to be a decelerating macro backdrop.

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Startlingly Good Results From Atlas Copco Support The Quality Premium Argument

ITW's Margins Seem To Be Holding Up Well As Growth Slows

With the blizzard of earnings reports from April 25, and those that came before, it seems clearer to me that shorter-cycle industrial companies are facing a much more challenging growth environment. In addition to the surprisingly weak revenue number from 3M (MMM) (down 1.1%), Sandvik’s (OTCPK:SDVKY) SMS business saw a 1% decline, and Stanley Black & Decker (SWK) saw a 3% decline in its Industrial segment, while all of the discrete automation companies have seen growth slow.

Considering all of the above, the 1.5% contraction at Illinois Tool Works (ITW) this quarter isn’t so shocking or alarming. Perhaps even more important, particularly relative to 3M and Sandvik’s SMS business, is that ITW’s margins held up better – lending some support to the idea that ITW is a company built more for margins and returns than growth, which isn’t such a bad thing when growth gets scarce.

Industrials have rallied since I last wrote about Illinois Tool Works on growing optimism that 2019 growth will be stronger than expected, and ITW has actually outperformed its peer group. Although I don’t have any particular objections to ITW as a hold, I don’t find the valuation exciting enough to start a position here and I still see more risks that growth in North America will slow as 2019 moves on.

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ITW's Margins Seem To Be Holding Up Well As Growth Slows

Rockwell Skids On A Weaker Auto End-Market

The last three months haven’t been particularly kind to Rockwell (ROK), as the share price of what is usually a darling among industrials has lagged the broader industrial sector, and automation peers like Yaskawa (OTCPK:YASKY), Fanuc (OTCPK:FANUY), Nidec (OTCPK:NJDCY), Emerson (EMR), Schneider (OTCPK:SBGSY), and even ABB (ABB). To be fair, it was the significant slide after second quarter earnings on Thursday that did the damage, though the shares had still been lagging most automation companies (except ABB) and were only slightly better than the average industrial before the report.

Like 3M (MMM), Sandvik (OTCPK:SDVKY), SKF (OTCPK:SKFRY), Illinois Tool Works (ITW), and the Japanese automation companies, weakness in autos is a major contributor to Rockwell’s present weakness, but I took management’s guidance and comments as reflective of some potential warnings about spreading weakness in other industrial end-markets – something that I’ve been expecting as this year rolls on. Rockwell shares are now in a tough situation valuation-wise; they’re not so clearly undervalued that I’m inclined to say “just buy and wait for the cycle to reverse), but the valuation is getting more reasonable and this is a stock to watch more carefully now.

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Rockwell Skids On A Weaker Auto End-Market

3M Decimated On Autos, Electronics, And Execution

Thursday’s first quarter earnings report was the worst day for 3M (MMM) shareholders in a long, long time, as a huge double-digit miss at the segment profit line drove a double-digit decline in the share price. While 3M is not going to burn down, fall over, and sink into the swamp, the shares are going to be in the penalty box for a while, and management needs to prove convincingly that they can not only improve margin execution, but restructure the business in the direction of both great margins/returns and at least decent growth.

3M’s valuation is much more reasonable than it has been in some time, but it’s fair to ask and wonder if turning around this supertanker is going to be a longer process. If the problems really are confined primarily to auto and electronics, this is a name to investigate further, but I don’t think investors need to make a snap decision for fear of missing out, as the concerns about 3M’s growth and execution capabilities have been building for a while and won’t go away in quarter.

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3M Decimated On Autos, Electronics, And Execution

Accuray Executing More Consistently, Now Waiting For China To Kick In

As I have said in the past, although the share price really doesn’t reflect it, Accuray’s (ARAY) CEO has done a good job of stabilizing and turning around this business. Product quality and service delivery issues are long since resolved, margins have improved noticeably, and debt has skillfully managed. On top of that, the company has been rolling out product and software upgrades that meaningfully address competitive weaknesses and improve the value of the system to hospitals, and the company has successfully closed a long-awaited JV for the large China market.

And now… we wait. Outside of the China opportunity Accuray remains an “is what it is” business, with the company picking up only modest market share (primarily from Elekta (OTCPK:EKTAY) and old Siemens installations). Not much has really changed about the U.S. market, where Accuray is still generally a distant afterthought, and the Japanese business can’t do it all alone. I do believe these shares remain undervalued, but a lot is riding on the China opportunity, and both Elekta and Varian (VAR) are keenly focused here too, while ViewRay (VRAY) chips away a bit at the U.S. market opportunity.

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Accuray Executing More Consistently, Now Waiting For China To Kick In

Nidec Is A Name To Watch When Industrials Cool

Nidec (OTCPK:NJDCY) (6594.T) has participated in the global industrials rally that has also benefited names like Yaskawa (OTCPK:YASKY) and Fanuc (OTCPK:FANUY), with the same basic result – although Nidec has a bright future as it looks to transition its business to new growth opportunities in EVs, appliances, and industrial motors and controls, the recent rally has already factored in a strong rebound in the underlying business. I’m still bullish on the company, but it’s harder to argue for the stock after the 20%-plus rally since my last update and this is a name I’d flag for a pullback.

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Nidec Is A Name To Watch When Industrials Cool

Fanuc Forecasting The Bottom, While Investors Price In The Recovery

It’s not exactly news that the stock market is a look-ahead mechanism for valuing companies, and that’s particularly important to keep in mind today when looking at factory automation companies. While business continues to deteriorate at Fanuc (OTCPK:FANUY) (6954) and may well not truly bottom out until the fall of 2019, the nearly 30% year-to-date move in the stock (well ahead of the average industrial stock) against a roughly 18% drop over the past year suggests that investors are already starting to look ahead to the recovery in orders, revenue, and profits.

Valuing Fanuc has always been problematic, as the company’s perceived quality has generally earned it a premium (not wholly undeserved in my opinion). Even though I’m modeling in a recovery starting in fiscal 2021 (the fiscal year ending March 2021), including multiple years of double-digit revenue growth and a sharp recovery in margins, the shares are well ahead of where those cash flow streams suggest it should be. With that, I’d prefer to wait for a cooldown among names like Fanuc and Yaskawa (OTCPK:YASKY) before stepping up.

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Fanuc Forecasting The Bottom, While Investors Price In The Recovery

All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

It’s been a wild ride for Silicon Labs (SLAB). Something of a growth darling (at least at times) over the last few years, Silicon Labs actually underperformed the SOX in 2018 and closed the fiscal year with an ugly miss-and-lower. While the shares had followed the year-to-date rally in semiconductor stocks, it was still lagging before a surprisingly strong first quarter seemingly shifted sentiment overnight.

I had previously said I’d be interested in SLAB in the low $70’s, and it never quite got there before this rocket ride back toward $110. Therein lies the problem with trying to be disciplined on price/value, particularly when it involves growth stocks. Although Silicon Labs looks too pricey now, I can understand why at least some investors are piling back in – SLAB is setting up attractive qoq growth rates at a time when many semiconductors still look likely to struggle to post attractive growth.

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All Is Seemingly Forgiven As Silicon Labs Rockets Back Into Growth Investors' Good Graces

STMicroelectronics Still Counting On A Big Finish To 2019

When I last wrote about STMicroelectronics (STM), I cautioned against trying to get too cute about timing a bottom for this leading chip company, particularly when the shares looked undervalued even on the assumption of a tougher 2019. The shares have since risen another 15% or so, lagging a broader chip market rally that has surprised me in its intensity.

I continue to like STM, though perhaps not quite as much as before given the rising valuation, and I like the company’s broad leadership across microcontrollers, PMICs, sensors, MEMS, silicon carbide, and so on, as well as the diverse market exposure to attractive markets like autos, industrial, IoT, and imaging. Although I am still concerned that the big second half rebound that so many chip companies are counting on may disappoint, I still think STM is a stock worth buying and owning today.

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STMicroelectronics Still Counting On A Big Finish To 2019

FirstCash Posts Better Results On Accelerating LatAm Growth

After a disappointing fourt quarter, FirstCash (FCFS) restored some of its growth luster with a better set of first quarter results that included an acceleration of growth in the Latin American store base and improved margins in the U.S. stores. FirstCash remains a solid play on the Mexican consumer and a somewhat countercyclical play on the U.S. economy, though the risk of regulatory changes and new fintech competition shouldn’t be excluded.

At over 14x forward EBITDA, FirstCash shares look more like a solid hold than a clear-cut buy today given where the valuation is. That said, the arrow is moving in the right direction with respect to the underlying momentum in the business, which is why I’m willing to hold on even if discounted cash flow modeling suggests suboptimal returns.

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FirstCash Posts Better Results On Accelerating LatAm Growth