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Stephen Simpson, CFA

 
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  • ArcelorMittal Down, But Not Out
     • Today, 4:08 PM NUE, STLD, BHP 2 Comments

    Summary

    • ArcelorMittal management bit the bullet and lowered guidance for the year in the face of ongoing weakness in iron ore prices.
    • The global construction recovery remains frustratingly slow and opportunities to raise steel prices may be more limited in the second half, putting more stress on a volume recovery.
    • ArcelorMittal continues to look too cheap at about 5.5x forward EBITDA.
  • Nektar Therapeutics Has More To Give
     • Today, 1:45 PM AZN, BAX, SLXP 3 Comments

    Summary

    • Investors should know within a month whether the FDA will approve Movantik, Nektar's opioid-induced constipation drug partnered with AstraZeneca that has $1B+ potential.
    • Phase III results from the BEACON study of NKTR-102 should come in the first half of 2015, while Nektar continues to develop two other promising oncology and pain compounds.
    • The risk of clinical failure is always present with biotechs, but Nektar shares can support a $16 fair value today and possibly more as regulatory and clinical developments unlock value.
  • Should Investors Press Their Luck With Fortuna Silver?
     • Today, 12:13 PM AG, FNLPF, PAAS Comment!

    Summary

    • Fortuna Silver has done a good job of expanding production and reducing operating costs, making it one of the more attractive silver mining companies on an AISC basis.
    • Drilling results from Trinidad North continue to support the notion that this is a high-quality expansion opportunity that can extend the useful life of San Jose.
    • Fortuna Silver doesn't look cheap on an NAV basis, but reserve additions from Trinidad North and further capacity expansions could drive more value in the coming year.
  • Some, But Not Enough, Progress At Kinross Gold
     • Today, 8:50 AM KGC 4 Comments

    Summary

    • Cost and capital discipline are helping, but Kinross still sits at the high end of the cost curve for large gold miners.
    • A go/no-go decision on Tasiast awaits in 2015, and investors are worried about what may happen to the company's valuable Russian assets in the meantime.
    • Excluding an expansion at Tasiast, Kinross looks more or less fairly valued today, but does offer much less development risk (and a better EV/EBITDA value) than most miners.
  • Risk And Reward Seem Pretty Balanced At Seattle Genetics
     • Tue, Aug. 19 IMGN, RHHBY, BMY 2 Comments

    Summary

    • Amidst some safety and competition concerns, Seattle Genetics is gearing up for an important clinical update - the Phase III results of the AETHERA study in post-transplant patients.
    • Label extensions could nearly triple the value of Adcetris, with follow-on studies offering important risk reduction events.
    • About three-quarters of my estimate of Seattle Genetics' value is tied to Adcetris, but early-stage pipeline compounds do have some exciting potential.
  • 2 More Positive Steps For Cameron International
     • Tue, Aug. 19 HLX, IR, SLB Comment!

    Summary

    • The OneSubsea joint venture expands to include an alliance with Helix Energy Solutions, creating more exposure to the fast-growing offshore well intervention market opportunity.
    • Selling the centrifugal compression business to Ingersoll Rand generates a good cash haul for further buybacks and largely completes management's non-operating to-do list.
    • Cameron is not especially cheap right now, but continuing to execute can lead to upside to 2015 numbers.
  • CareFusion's Strong Share Isn't Quite Enough
     • Tue, Aug. 19 BAX, HSP, ICUI Comment!

    Summary

    • CareFusion saw significant margin pressures in 2014 from an acquisition, delayed Pyxis ES installations, and higher-infusion capital equipment sales.
    • The margin trends that hurt the company in 2014 should improve in 2015, and management is on the prowl for growth-oriented acquisitions.
    • CareFusion could have some upside on an EV/revenue basis, but the discounted cash flow picture isn't as rosy unless the company can generate better sales momentum and margins.
  • Baytex Energy Is Following A Good Plan
     • Tue, Aug. 19 MRO, EOG, SM 3 Comments

    Summary

    • Baytex's acquisition of Eagle Ford acreage diversifies the production profile and adds exposure to a high-quality growth play.
    • Further non-core asset sales seem likely, and management may yet look to acquire more acreage in the high-return Peace River and Lloydminster areas.
    • Baytex looks only slightly undervalued on an EV/EBITDA basis and not tremendously cheap on an NAV basis, but the development risk seems lower than normal for companies of this size.
  • Geely Automobile Back On The Right Road?
     • Mon, Aug. 18 KNDI, BYDDY, DNFGY 4 Comments

    Summary

    • Geely's shares have languished as a weak lineup and poor dealership network has made an already tough Chinese domestic auto market even worse.
    • Geely is unifying its brand, reducing the number of platforms and product series, and restructuring its dealership network - all of which should contribute to a stronger sales outlook.
    • If Geely can generate low teens FCF growth, the shares are significantly undervalued today but Geely must first show some improvements in unit volumes.
  • Lenovo Doing Fine On Its Own
     • Sat, Aug. 16 GOOGL, IBM, HPQ 16 Comments

    Summary

    • Lenovo posted solid beats at the revenue and operating profit lines, as the global leader continues to gain share in PCs and is becoming a bigger factor in smartphones.
    • Regulators have given the IBM server deal a little more scrutiny, but both the IBM server and Google Motorola businesses appear to be stabilizing ahead of Lenovo's takeover.
    • Lenovo isn't a compelling bargain at a fair value of $30, but a history of both outperforming expectations and share price pullbacks merit a spot on watch lists.
  • Alacer Gold Still Looks Underrated Amidst Operating Risks
     • Sat, Aug. 16 GDXJ, GDX, ALIAF 4 Comments

    Summary

    • Alacer Gold's sulfide operations will be critical to driving the next leg of value, with higher initial capital costs offset by higher production and lower all-in costs.
    • Exploration could still add value to the heap leaching operations and there are operational/execution risks tied to the sulfide expansion project.
    • At a fair value of $2.50, Alacer does still offer upside for investors who can take the company-specific idiosyncratic risks.
  • Weak Coal Only Part Of The Natural Resource Partners Story
     • Fri, Aug. 15 NRP 2 Comments

    Summary

    • NRP still generates more than 60% of its revenue from its coal assets and operations, but the Street may not be giving fair value to its diversification efforts.
    • NRP owns a stake in a high-quality soda ash operation, aggregates, and productive oil and gas acreage that is starting to contribute real revenue.
    • If NRP can produce long-term distributable cash flow growth of 2% to 3%, a fair value above $17 seems appropriate for the units.
  • Chronic Execution Issues Still The Story At Riverbed Technology
     • Fri, Aug. 15 RVBD 1 Comment

    Summary

    • Riverbed can't seem to find the answer to chronic sales execution issues.
    • Riverbed's Steelhead, Steel Fusion, SteelApp, and SteelStore offerings have worthwhile sales upside, but the APM/NPM market looks considerably more competitive and challenging.
    • I calculate a fair value of $21 for Riverbed shares, equal to Elliott's buyout bid, and taking that bid offers much less execution risk to Riverbed shareholders.
  • Multi-Color - Better Margins, But Growth Still A Challenge
     • Tue, Aug. 12 CCDBF, LABL Comment!

    Summary

    • Multi-Color comes through with better revenue and better margins, but organic growth is still depressingly soft.
    • Acquisitions can add value, but Multi-Color may need to break away from its focus on the beverage industry and toward better sources of long-term growth.
    • Multi-Color has the potential to parlay mid-single digit revenue growth into double-digit free cash flow growth, but a consistent focus on execution and efficiency is required.
  • Cresud Finally Trading On Some Of Its Potential
     • Tue, Aug. 12 AGRO, IRS, SLCJY 6 Comments

    Summary

    • Cresud's urban real estate operations (IRSA) continue to perform well as rents, occupancy, and sales remain strong at these high-end properties.
    • Agriculture has also been doing well, but crop prices have started to retreat and Cresud's planting growth expectations are modest.
    • There is significant potential for Cresud to develop its land assets into much higher-value properties, but that's going to take time, money, and a more responsible Argentine government.
  • Weak Crop Prices Weigh On SLC Agricola
     • Tue, Aug. 12 MON, CRESY, AGRO Comment!

    Summary

    • Weaker soy, cotton, and corn prices have soured sentiment on Brazilian agriculture companies.
    • Land values continue to rise, but investors are increasingly skeptical that the pace of appreciation can be maintained.
    • Weak sentiment has pushed down SLC Agricola shares again, but the long-term value for one of Brazil's best agricultural companies looks quite attractive.
  • Lundbeck Remains A High-Risk/High-Reward Specialty Pharmaceutical Play
     • Tue, Aug. 12 ACT, HLUYY 1 Comment

    Summary

    • Lundbeck's second quarter results didn't offer much, good or bad, to sway the arguments around these shares.
    • The announced NDA filings of brexipiprazole were an unexpected positive, but the company has a lot of work to do in establishing Brintellix and Abilify Maintena in the U.S. market.
    • Lundbeck's fair value is more than 30% higher than today's level (assuming mid-single digit revenue and FCF growth), but Lundbeck must succeed in differentiating its drugs in crowded competitive markets.
  • Commercial Vehicle Starting To Show Operating Leverage
     • Tue, Aug. 12 GMEGF, CMI, CAT Comment!

    Summary

    • Revenue and operating margins come in better at Commercial Vehicle as improving orders and operating efficiency kick in.
    • The company's upcoming analyst day in the fall is an opportunity for management to explain its strategy for growth outside of its traditional reliance on cyclical North Am trucks.
    • Mid-single digit revenue growth and industry-average FCF margins can support a fair value around $10.
  • For Lexicon Pharmaceuticals, No News Remains Bad News
     • Mon, Aug. 11 AZN, JNJ, LLY 4 Comments

    Summary

    • Lexicon updates investors on its second quarter results, but still has no partner to develop LX4211 in Type 2 diabetes.
    • Going solo in Type 1 diabetes is a risky move, but the company has little choice given that the value of the drug is otherwise stranded.
    • Fair value of $3.50 continues to make these shares worth consideration, but the Street will need to be convinced that the company's go-it-alone strategy can work.
  • Alnylam Pharmaceuticals Has Plenty On Its Plate
     • Sat, Aug. 9 ISIS, SNY, ALXN 3 Comments

    Summary

    • Alnylam plans to provide clinical updates on four significant programs before year-end.
    • Alnylam will exceed its 5x15 target and should have at least a half-dozen human clinical trial programs underway in 2015.
    • Sentiment on biotech stocks has definitely soured, but Alnylam looks meaningfully undervalued on the basis of its lead amyloidosis programs.
  • Key Energy Services Needs To Get Its Act Together
     • Sat, Aug. 9 KEG Comment!

    Summary

    • Key Energy Services had warned of a bad quarter, and the company did indeed report weak results on an absolute and relative basis.
    • Company and client-specific issues may explain some of the underperformance, but it looks as though Key may have lost some share in markets like coiled tubing and frac stacks.
    • Leveraged to increasing workover and recompletion work, it may take time for Key's relative performance to improve but today's valuation does flag it as a potential bargain.
  • Neurocrine Biosciences Moving Ahead With '854
     • Sat, Aug. 9 ABBV, NBIX Comment!

    Summary

    • Neurocrine is clear to begin its Phase III study of '854 in tardive dyskinesia later this year, with the FDA agreeing to a single 240-pt study.
    • Elagolix development remains in the capable hands of AbbVie, while management works to get a Phase II study of '854 in Tourette's underway.
    • A third promising new drug would be welcome, the two lead drugs support a fair value of $17 between them, or an overall value of about $18.50.
  • S&W Seed Company Still Building Toward Big Things
     • Fri, Aug. 8 SANW 7 Comments

    Summary

    • S&W has been boosting margins by blending proprietary and generic varieties and leveraging the cost differences between its California and Australian operations.
    • The long-term growth story remains driven by the company's forays into dormant varieties, Roundup Ready alfalfa, and varieties suited for particular markets (like the tropics).
    • If S&W can grow at a sustained mid-teens rate, a fair value of $9 is reasonable today.
  • Taseko Mines Far From Knocked Out
     • Fri, Aug. 8 FQVLF, PCCRF, HBM 4 Comments

    Summary

    • Taseko continues to face an uphill climb for approval of its New Prosperity mining project, but Gibraltar is showing better copper and molybdenum recoveries and lower costs.
    • Cash flow positive, Taseko needs to decide whether to expand Gibraltar, build the Aley mine, and/or acquire another base metal producer.
    • With a fair value of $3 based largely on a $2.50/share value for Gibraltar, Taseko still looks undervalued.
  • Manitex Misses, But May Be Building Momentum
     • Fri, Aug. 8 MTW, TEX, MNTX Comment!

    Summary

    • Like Terex and Manitowoc, Manitex missed expectations on weaker demand in the North American crane market, though Manitex seems to be outgrowing the market and taking share.
    • The acquisition of PM Group is a bold move and a logical extension into knuckle boom cranes, but it is a large deal and successful integration/execution is a must.
    • Although the near-term outlook has worsened a bit, Manitex is still a share-gaining growth story in industrials and should trade into the high teens.
  • Petrochemical Transportation Pain Is Kirby's Gain
     • Thu, Aug. 7 KEX Comment!

    Summary

    • Kirby continues to post strong results as limited barge capacity and increasing crude oil and petrochemical production support good results in the marine business.
    • Kirby is well-positioned to add capacity to match the expected growth in crude and refined product production, while the diesel business should improve on better fracking fundamentals.
    • Kirby shares usually look expensive and continue to go up anyway and today's valuation is no exception.
  • Weyerhaeuser's Asset Quality Held Back By A Sluggish Recovery
     • Thu, Aug. 7 PCL, BCC, WY 1 Comment

    Summary

    • Weyerhauser did better than the comp group in the second quarter, helped by solid volumes across the timberland and wood product operations.
    • Timberland performance is being held back by weak building activity and weaker export demand, while wood products is seeing the impact of higher OSB capacity.
    • Trading below fair value in the range of $35 to $36, Weyerhaeuser is a good risk-adjusted play on an eventual recovery in housing demand.
  • Wright Medical, Wrong Market
     • Thu, Aug. 7 WMGIZ, SYK, TRNX Comment!

    Summary

    • Wright Medical is doing fine from a sales perspective, and likely gaining share in foot/ankle, but margins were disappointing, leaving a lot to do in the second half of 2014.
    • INFINITY represents a strong incremental revenue opportunity and FDA approval of Augment could come as a welcome surprise.
    • Excluding Augment, Wright Medical can trade into the mid-$30's and still go for less than normal takeout multiples, while the Augment CVRs currently price in sub-30% odds of Augment approval.
  • Sluggish Collections As PRA Group Begins A New Era
     • Thu, Aug. 7 PRAA Comment!

    Summary

    • PRA Group misses again on revenue and earnings, with the slowdown in call center collections continuing.
    • Purchase activity remains challenged with major sellers still on the sidelines, but management's collection expectations continue to head higher and collection productivity is improving at a double-digit rate.
    • Giving partial credit to Aktiv, I increase my estimate of fair value to $71.50, with an underlying assumption of high single-digit long-term FCF growth.
  • Ultra Petroleum Continuing To Yo-Yo Between Gloom And Glee
     • Wed, Aug. 6 QEP, RDS.A, APC 5 Comments

    Summary

    • Ultra Petroleum missed second quarter expectations on lower production and higher cash costs.
    • Pinedale wells continue to generate strong returns, while the potential of the Uinta is constrained by takeaway capacity.
    • With current NYMEX prices, Ultra's NAV appears to lie around $33 while the EV/EBITDA approach suggests $28.
  • Have Expectations Exceeded Helmerich & Payne's Capacity To Outperform?
     • Wed, Aug. 6 PTEN, NBR, HP 1 Comment

    Summary

    • The sell-off after FQ3 earnings likely had more to do with sector-wide profit-taking after a big run than fundamental issues with an otherwise okay quarter.
    • HP management believes there's still a need for about 50% more AC drive rigs in the U.S., and the company could be looking at a multiyear opportunity outside the U.S.
    • At 6.5x 12-month EBITDA Helmerich & Payne shares are just slightly undervalued; HP remains a great company in the space but not the best value.
  • Even With Weak Iron Prices, Rio Tinto Looks Like A Relative Bargain
     • Wed, Aug. 6 BHP, RIO Comment!

    Summary

    • Iron ore prices have been very weak this year, but Rio Tinto's position at the bottom of the cost curve allows its to stay FCF positive much longer than most.
    • Improvements in the aluminum and copper operations are long-await and still uncertain, but could drive upside in the coming years.
    • Rio Tinto seems like a relative bargain in the mining sector, with a 6x multiple supporting a fair value in the mid-$60s.