Bank Of America Fueled Up And Ready To Go When Rates Cooperate

 

On balance this was a good reporting cycle for the banks and the sector has modestly outperformed the S&P 500 since earnings began. For Bank of America (BAC) it wasn't an especially strong quarter, but then there really weren't any issues that cause me any lingering concerns about the business plan or managements ability to execute. More than anything, I think of this quarter and Bank of America like someone sitting in their car glancing at their watch and wondering when they'll be able to finally get going.

I didn't really see Bank of America as notably undervalued when I last wrote about the stock, and instead thought it was valued in line with the larger banks. Since then the shares have moved almost in lockstep with the larger bank index (the KBW Nasdaq Bank Index (BKX)). I still don't see enough fundamental undervaluation here to make it a must-own, but I do think it's a perfectly valid option for longer-term holders - the one caveat is that Bank of America's high asset-sensitivity would be a drag if rates stay for longer, but also a way to play a more aggressive investor view on rates.

 

Read the full article at Seeking Alpha: 

Bank Of America Fueled Up And Ready To Go When Rates Cooperate

Société Générale: Renewed Enthusiasm, But Familiar Problems

 

In the year or so since I last wrote on Société Générale (OTCPK:SCGLY) ("SocGen") sentiment has most definitely shifted. The stock is almost double where it was before, as are sell-side price targets, and analysts seem a lot more bullish about management's ability to finally hit its cost reduction and return improvement targets.

As I said in that last piece, SocGen was trading on very very low expectations, and it hasn't taken a particularly large swing in terms of long-term ROE outlook to drive these higher fair values. And to be fair to management, there has been progress on business improvement initiatives in at least some businesses. Still, this is a company with a lot of work still in front of it and it seems unlikely that rates will be a big near-term help.

I do believe that SocGen is undervalued, and I believe any "going concern" risk is gone. What remains, though, are some very real questions about whether management can improve the business enough to ever get ROEs back above the cost of equity capital, and whether they are prepared to make some hard choices to get out of chronically-underperforming businesses. I'm more bullish than I've been in a while, and it only takes around 4% long-term growth off the not-so-impressive base of 2019 earnings to drive double-digit return potential here.

 

Click the link to continue reading: 

Société Générale: Renewed Enthusiasm, But Familiar Problems

Hartford Financial: Making Its Go-It-Alone Case, But The Market Hasn't Really Rewarded It

 

When I last wrote about Hartford Financial Services (HIG) ("Hartford"), Chubb (CB) was making its play to acquire the company, and I said that Chubb would likely have to go to $70/share or higher to get a deal done. As later revealed by Hartford, Chubb did go to $70, but Hartford wasn't interested and management has made it clear that they don't regard the company as for sale.

For the most part I think that any company should be for sale at the right price, but I think Hartford has some legitimate internal value drivers that aren't being fully appreciated by the market. Granted, the shares still trade quite a bit higher than they did before the Chubb bid, but I still see 10% or better annual appreciation potential here if Hartford can generate mid-single-digit core earnings growth … and I think they can.

 

Read the full article here: 

Hartford Financial: Making Its Go-It-Alone Case, But The Market Hasn't Really Rewarded It

Chart Industries - A Solid Core Business With Potentially Transformative Growth Opportunities

 

Chart Industries (NYSE:GTLS) offers a good case in point of how difficult it can be to stick with transformative growth stories. If you’re lucky, you get a chance to buy in when the growth opportunities aren’t visible (or are widely dismissed), but then when the story starts to work, you have to reconcile increasingly demanding valuations with the underlying growth opportunity.

To be fair, Chart shares aren’t that much more expensive than when I last wrote on the company, with the shares up about 15% against a 9% upward move in the wider industrial sector and a roughly 12% positive move in the S&P 500. Still, from my September 2020 article or October 2019 pieces, the shares have enjoyed quite a run as the market has started pricing in the company’s attractive growth opportunities in cleaner energy and various industrial end-markets.

As I said, valuation is challenging. On my base assumptions the shares look priced to deliver long-term returns around the mid-to-high single-digits, but that’s modeling in less than 10% of the total addressable market that management is projecting for 2030 just for the Specialty Products business (excluding energy and most industrial gasses). If hydrogen and carbon capture really take off, and Chart plays a central role, there’s absolutely meaningful upside to the revenue and cash flows currently in my model.

 

Read the full article at Seeking Alpha: 

Chart Industries - A Solid Core Business With Potentially Transformative Growth Opportunities

Supply Challenges May Not Explain All Of Advanced Energy Industries' Weakness

 

Despite strong demand for semiconductor equipment, recovering demand for a range of industrial and medical products, and ongoing investments in data centers, Advanced Energy Industries (AEIS) has been performing rather poorly. I’ll get to the financials in a moment, but the stock has lost another 20% or so in value since my last update, significantly underperforming comparables like Comet Holdings (COTN.S) and VAT Group (OTCPK:VACNY), as well as Delta Electronics.

While component shortages and supply chain issues may explain some of the challenges at AEIS, rivals don’t seem as bothered, raising the question of whether AEIS is losing share and losing momentum in its core businesses. It may be premature to question the company’s ability to participate in the strong semi equipment growth cycle, but the market is clearly out of patience and while the shares do look undervalued today, management needs to get the business back on track.

 

Read more here: 

Supply Challenges May Not Explain All Of Advanced Energy Industries' Weakness

Encore Wire Setting New Records On The Back Of Exceptional Copper Spreads

 

Wire isn’t the most exciting product out there, but it is pretty essential – you can’t build a modern buildings or machinery without it, and Encore Wire (NASDAQ:WIRE) operates an efficient business that prioritizes high levels of customer service. The long-term growth rates haven’t been uniformly impressive, and Encore Wire’s fortunes are inextricably linked to the price of copper, but the shares have outperformed the broader industrial sector since my last update (helped by a big run after the last quarter) and have likewise held their own against other industrials over the past decade.

Given the huge influence of copper prices on Encore’s financials, modeling is even more challenging than usual. While Encore should be leveraged to improving wiring demand as factories and warehouses automate, commercial and institutional buildings migrate toward more modern HVAC and building control systems, and investments continue in data centers and renewable energy, copper prices are likely going to dominate the story.

I think you can make an argument for Encore shares still having some upside at today’s price, but the long-term history is what it is. Encore has a strong track record of growing book value per share, but this is a commodity-driven name and those are often tough places to make long-term returns, particularly when you buy into what looks like a new long-term peak.

 

Follow this link to the full article: 

Encore Wire Setting New Records On The Back Of Exceptional Copper Spreads

Fanuc - Shares Sliding As Orders Rebounding

 

Long-time readers probably know that I haven’t been the biggest fan of Japan’s Fanuc (OTCPK:FANUY) over the years, as I believe the company has been slow to respond to changes in their end-markets and reposition the business accordingly. Even so, I find it curious that the shares have been as weak as they’ve been in 2021 in the face of improving orders and opportunities to leverage longer-term growth in factory automation.

Fanuc is far from my favorite name in automation, but I generally agree with the idea that there’s a “fair” price for any company with the wherewithal to remain competitive for the longer term. I do have some longer-term concerns about Fanuc that I’ll discuss in a moment, but with the shares appear to be at least 10% below fair value in a sector where companies don’t often get all that cheap, I do think this is worth a closer look.

 

Read the full article here: 

Fanuc - Shares Sliding As Orders Rebounding

Carlisle Isn't Flashy, But Has Some Dependable Multiyear Growth Drivers

 

It’s been quite a while since I wrote about Carlisle Companies (CSL); at the time I said I saw high single-digit annualized return potential from the company in line with the broader market. That was half-right, as the shares have more or less matched the S&P 500 since then, but have returned closer to 14% a year (or 15% if you reinvested dividends along the way), and have modestly outperformed the broader industrial space as well.

I continue to see Carlisle as a “sector/market-plus” sort of stock. I’d like to see more internal improvement from the Fluid Technologies business (aka CFT), but I like the long-term leverage to greener construction in Construction Materials (or CCM) and aerospace (Carlisle Interconnect Technologies (or CIT)). I don’t think Carlisle is remarkably cheap on its own, but that reflects my broader feelings about the market and industrials in general, and the valuation is at least reasonable or better on a relative basis.

 

Click here to continue: 

Carlisle Isn't Flashy, But Has Some Dependable Multiyear Growth Drivers

Teradyne Hindered By Near-Term Guidance, While The Long-Term Outlook Is Attractive

 

The last year and a half has been a strong one for Teradyne (TER) from an operational standpoint, as strong testing demand at leading-edge nodes has driven a stronger-for-longer cycle that has exceeded even the bullish expectations of a few years ago.

That hasn’t necessarily translated into runaway success for the shares, though, as the 85% or so total return since my last article has underperformed the returns of major semi equipment companies like ASML (ASML), Applied Materials (AMAT), and Lam Research (LRCX), and slightly lagged the SOX itself. Fellow test equipment maker Advantest (OTCPK:ATEYY) has largely kept pace, while probe test card manufacturer FormFactor (FORM) has noticeably lagged, particularly since the spring of this year.

Expectations are hardly low here, and the testing business has shown significant year-to-year cyclicality in the past. I still believe that cyclicality can be a risk to future short-term performance, but I don’t see a compelling reason why test equipment growth can’t continue at a “high mid-single-digit” rate, supplemented with strong growth in the Industrial Automation business as cobots continue to see adoption in multiple end-markets. As that can fuel a high single-digit long-term annualized total return, relatively good by the standards of the semi equipment space (broadly defined), this could still be a name worth considering.

 

Click the link to keep reading: 

Teradyne Hindered By Near-Term Guidance, While The Long-Term Outlook Is Attractive

Regal Beloit Still Underappreciated On Its Recovery, Expansion, And M&A Leverage

 

Shorter-cycle industrial stocks haven’t been doing as well lately, with the market worried that growth is already peaking and preferring instead to move on to longer-cycle ideas or theme stocks (automation, electrification, HVAC, et al). That hasn’t helped Regal Beloit (RBC), as the shares had been lagging the broader industrial space since my last update until a recent post-earnings run.

I continue to believe that Regal Beloit is underappreciated for its leverage to automation and HVAC, as well as a longer recovery/expansion cycle across the industrial markets it serves. Add in synergy benefits from the coming acquisition of Rexnord’s (RXN) Process & Motional Control (or PMC) business, and I think there’s more to this story than is being reflected in the share price.

 

Read the full article at Seeking Alpha: 

Regal Beloit Still Underappreciated On Its Recovery, Expansion, And M&A Leverage

Employers Holdings Leveraged To Improving Employment And Rates

 

As an underwriter of workers comp insurance for small employers, the pandemic has been particularly tough on Employers Holdings (NYSE:EIG). Lower employment levels sent demand plunging in 2020 and the situation hasn’t been helped by increased competition driving a multiyear decline in rates. Even with improved claims frequency, Employers is earning a lot less now than they used to before the pandemic.

I do believe Employers has seen the worst, but I don’t necessarily expect a V-shaped recovery given competition in the market and challenges to hiring in Employers’ core addressed markets. Longer term, though, I do think the company can get back to double-digit ROE and mid-single-digit long-term core growth, supporting a fair value in the mid-$40’s that is relatively attractive compared to today’s price.

 

Click here to continue: 

Employers Holdings Leveraged To Improving Employment And Rates

Trane Seeing All The Demand It Can Handle, If Not More

 

Writing about Trane (NYSE:TT) back in early April, I said that this leading HVAC-R company needed to post a couple of beat-and-raise quarters to rebuild investor sentiment and get the shares outperforming again versus the broader industrial sector. The company did just that, and the shares have responded – beating the sector by about 10 points since my last update (and the S&P 500 by about six points), and stretching the year-to-date outperformance to around 15% versus the broader industrial sector.

It’s not easy to find obvious bargains in the HVAC-R sector given investor enthusiasm for the near-term growth in residential demand and transportation, recovering demand in commercial, and longer-term opportunities in greener buildings and indoor air quality. I did highlight one such opportunity, Daikin (OTCPK:DKILY), back in mid-June, but those shares have since shot up.

Specific to Trane, I can’t say the shares are cheap on either a DCF or relative valuation basis. At best, I can say that the company’s premium on 2022 EBITDA (trading at around 2.5x higher than the group (17.5x)) can maybe be justified with a roughly in-line operating margin and superior revenue growth outlook in a market that richly rewards growth.

 

Continue reading here: 

Trane Seeing All The Demand It Can Handle, If Not More

Citigroup Still Offers Significant Execution-Driven Upside

 

Citigroup (NYSE:C) remains a frustrating stock, with the shares still continuing to lag the group of larger U.S. banks on a year-to-date basis by about 17 points. The new CEO has laid out what I believe to be an attractive medium-term set of corporate priorities, and while achieving these targets will require consistently good execution, I don’t think they’re excessively ambitious.

I expect Citi to achieve a 10% or better return on tangible common equity (or ROTCE) in 2023, and I likewise believe the shares are still meaningfully undervalued on that basis and on longer-term discount core earnings as well. Long-term core earnings growth of just 2% to 3% can support a fair value above $90, and I believe the CEO understands the steps that the bank needs to take to become more profitable and more competitive for the long term.

 

Read the full article here: 

Citigroup Still Offers Significant Execution-Driven Upside

Integra LifeSciences Seeing Good Core Growth, But Inner Turbulence Is A Concern

 

It’s always worth remembering that you can like a company without liking the stock (the reverse is less often true, at least for me), and that’s certainly the case for me with Integra LifeSciences (IART) (“Integra”). I believe Integra management has done a lot of heavy lifting over the last decade or so to craft a more focused, faster-growing, and much more profitable company with a focus on niche-like markets where incoming competition is not as much of a risk as it is for other med-techs.

That said, I don’t like how the integration of ACell is going so far, and the CEO transition creates some execution risk. I also still don’t like the valuation. Integra has lagged the S&P 500 (by around 6%) and the broader medical device space (by close to 10%) since my last write-up, and I still believe that Integra is priced for double-digit top-line growth that it’s not going to get.

Read the full article here: 

Integra LifeSciences Seeing Good Core Growth, But Inner Turbulence Is A Concern

Argo Group: Strategic Repositioning Coming Along, Shares Still Undervalued

 

Restructurings take time, but Argo Group (ARGO) is off to a good start, as this specialty insurance underwriter rebuilds itself around a strong core of U.S. markets like professional and product liability and surety. It certainly doesn’t hurt that Argo gets to restructure itself during an exceptionally hard market, where rates are quite healthy for a range of insurance types and comfortably cover likely losses.

Since my last update on Argo, the shares have done alright – appreciating around 8% and outperforming the likes of Everest Re (RE), James River (JRVR), Kinsale (KNSL), and W.R. Berkley (WRB), and even managing to almost keep pace with Arch Capital (ACGL). Rome wasn’t rebuilt in a day, though, and it’s going to take more time for Argo to get back to 10% and better ROEs, the point where I think a lot more investors will be willing to seriously consider the name. I see fair value above $60/share today, and double-digit annualized longer-term return potential beyond that, but whether that is sufficient reward is for each investor to decide.

 

Read more here: 

Argo Group: Strategic Repositioning Coming Along, Shares Still Undervalued

American Axle - Ample Risks, But Maybe Ample Rewards Too

 

Credit where due – in a tough operating environment, American Axle (AXL) is doing pretty well, and management deserves credit for that, as well as the ongoing balance sheet clean up. While the company’s leverage to SUVs and light trucks doesn’t seem to be making a huge difference in terms of near-term revenue performance versus other auto companies I follow, I do expect the company to benefit from OEM efforts to rebuild inventories in these high-value categories as semiconductor shortages ease in 2022.

The key bear argument remains the risk of electrification and how American Axle will fare in an EV world. With a lackluster eDrive offering today, little exposure to higher-value components, and high exposure to General Motors (GM), one of the auto OEMs pledging to in-source EV powertrain content, the long-term revenue cash flow could certainly be at risk. Then again, American Axle has multiple ways to play in the EV future, and the bear case may be overlooking too much of that.

Particularly now that the shares are down about 20% since my last update, I’m warming up to this stock. I already own BorgWarner (BWA) and Valeo (OTCPK:VLEEY) (OTCPK:VLEEF), and I think they’re better positioned for the EV future, so I’m not really in the market for another passenger vehicle-oriented supplier, but the undervaluation/return potential is really starting to stand out to me.

 

Read the full article: 

American Axle - Ample Risks, But Maybe Ample Rewards Too

Kirby Looking More Interesting After Some Recent Underperformance

 

Barge-operator Kirby (KEX) has its own sector- and company-specific drivers, but the shares have long tracked overall trends in transportation (like the Dow Jones Transportation Average), and like that index, the shares have been weak since May on various and sundry concerns about whether the recovery has already peaked and whether the resurgence in COVID-19 cases will once again slow the economy.

Down about 12% since my last article, when I thought the valuation was looking pretty full, I’m more interested in these shares today. I do have some longer-term concerns about demand in the barge market and what it implies for pricing and margin, but in the shorter term, increased refinery utilization and increased demand for gasoline and jet fuel (among other products) should drive improving utilization, rates, and margins in the inland marine business, and the slimmed-down Distribution and Services could outperform against no-to-low expectations.

I can see an argument for Kirby shares trading to $70 in the short term, which it makes worth considering today.

 

Read more here: 

Kirby Looking More Interesting After Some Recent Underperformance

Kemper Hammered With Higher Losses, But The Longer-Term Value Is Still Meaningful

 

The first half of 2021 has been brutal for Kemper (KMPR), with increased claims frequency and severity decimating the profitability of the company’s core auto insurance businesses. Although Kemper can withstand these losses and is already taking steps to mitigate the impact of claims inflation, it’s going to take a few quarters (at least) to get it sorted out, and I would expect a lot of investors to stay on the sideline until they do.

Bulls can argue that this is just an adverse part of the cycle, that Kemper’s reserves will hold up, and that this could actually force more opportunistic players out of the market, improving Kemper’s long-term growth opportunities. Bears can argue that Kemper is taking bigger hits than other underwriters, undermining the claim to superior underwriting, and that the business is likely to remain very competitive.

I’m still largely with the bulls. I think Kemper got caught in a tough squeeze, where it saw rising losses but couldn’t raise rates fast enough to compensate (due to regulatory issues). Investors shouldn’t ignore the risk of worse losses over the next few quarters, but 1x book is too low for a profitable insurer and I believe more risk-tolerant investors may want to take another look here.

 

Follow this link to the full article: 

Kemper Hammered With Higher Losses, But The Longer-Term Value Is Still Meaningful

Arch Capital: Still The Best And Still Undervalued

 

In a still-hot insurance market, a "hard market" in industry-speak, I continue to believe that Arch Capital (ACGL) is not only the best-run company out there, but still undervalued. While I don't typically cite share buybacks as proof of anything, given Arch's excellent historical track record with allocating capital, the fact that the company has been buying back shares at around 1.2x book when they're also underwriting seemingly all the business they can is a strong argument to me.

This hard market won't last, but Arch has always found ways to make money and do right by its shareholders, though it's not a year-in, year-out winner in the stock market. With the shares trading below my mid-$40's near-term fair value, I do think this is a name still worth considering at this level.

 

Read more here: 

Arch Capital: Still The Best And Still Undervalued

Universal Stainless & Alloy Products Still Offers Significant Leverage To Improving Alloy Demand

 

Conditions are still “choppy” in a lot of key alloy end-markets, especially aerospace, but looking at the results of companies like Acerinox (OTCPK:ANIOY), Allegheny (ATI), and Carpenter (CRS), not to mention commentary from a host of multi-industrials this quarter, it looks like the bottom is in for alloy demand and the recovery is already underway. That’s great news for Universal Stainless & Alloy Products (USAP) (“Universal”), and the 71% sequential increase in the backlog (about 2.6x this quarter’s sales) should likewise build some confidence in improving order trends.

I highlighted Universal as a way to trade a broad recovery in alloys across a range of end-markets back in late March, and the shares are up about 20% since then – not a bad return, but also not all that I think these shares can do as aircraft suppliers start ordering again and as participants in other end-markets try to deliver on their swelling order books.

With the bottom in, I think there’s a credible case for Universal trading up into the mid-teens, if not higher, before the end of 2021. I want to reiterate, though, that this is not a long-term commitment. Universal has a dreadful long-term history of value-creation for shareholders, so it’s really only suitable as a vehicle for trading the demand cycles for stainless steel and specialty alloys.

 

Read the full article here: 

Universal Stainless & Alloy Products Still Offers Significant Leverage To Improving Alloy Demand