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Stephen Simpson, CFA

 
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  • Wabtec Is High-Priced And High-Quality In Equal Measure
     • Wed, Sep. 10 WAB 3 Comments

    Summary

    • Wabtec's recent acquisitions reflect a long-term commitment to growing its business outside the U.S. and expanding its offerings of electrical components and aftermarket products.
    • Overseas growth seems to be requiring more working capital, but I expect this to level off and the company's operating margin leverage potential is still meaningful.
    • Upgrades and expansions to both freight rail and transit rail systems can support double-digit growth for at least a decade, but a great deal is already expected from Wabtec.
  • Arcos Dorados Hits Bottom, Finds A Shovel
     • Tue, Sep. 9 ARCO 5 Comments

    Summary

    • Continued erosion in Brazilian same-store sales, stubborn costs, and increasing competition are sapping Arcos Dorados' key market.
    • Weakness in Venezuela, Argentina, and Mexico are only making a bad situation worse, and Arcos Dorados looks increasingly squeezed between a weak balance sheet and capex commitments to McDonald's.
    • Valuing Arcos Dorados at $7/share (8x 12-month EBITDA) may be harsh and DCF suggests more than 35% upside, but management needs to earn back the benefit of the doubt.
  • Copa Holdings Seeing Turbulence, But Still A Top-Notch Airline
     • Tue, Sep. 9 CPA 3 Comments

    Summary

    • A significant capacity reduction in Venezuela will minimize Copa's currency risk, but eliminate some of Copa's highest-margin business.
    • The capacity shuffle seems to be hitting revenue, but Copa should be able to still generate industry-leading margins even with a much smaller Venezuela business.
    • Assuming that half of Copa's Venezuela cash is lost, the shares still look undervalued below $140.
  • Belle International Fairly Popular Despite Some Core Weakness
     • Tue, Sep. 9 BELLY Comment!

    Summary

    • Belle has followed up its first-ever negative same-store sales comp in footwear with what looks to be a third straight quarter of sales contraction.
    • Sportswear is growing nicely, but offers much lower margins to Belle.
    • Belle management still has a lot of work to do with its online offerings; top-line growth has been good, but management has not pushed online-to-offline integration to its full potential.
  • China Resources Enterprise Languishing Over Short-Term Concerns
     • Tue, Sep. 9 CRHKY Comment!

    Summary

    • The market did not CRE management's updates concerning the Tesco JV, nor the beer business, as near-term growth expectations have come down substantially.
    • CRE still has a lot to gain from improving the Tesco stores and benefiting from Tesco's expertise in e-commerce and private label, while the beer business continues to gain share.
    • CRE shares are likely stuck absent an improvement in same-store sales, which may be difficult in the current macro environment. Even so, the shares hold good long-term potential.
  • BB&T Makes A Solid Acquisition, Needs To Impress At Its Investor Day
     • Tue, Sep. 9 BBT 3 Comments

    Summary

    • BB&T has acquired 41 more Texas branches and $2.3 billion in deposits from Citi at a reasonable price, with significant branch productivity upside.
    • BB&T's upcoming Investor Day (Sept 11) is a chance for management to reassure the Street regarding its cost-cutting goals and plans to improve loan growth, and clarify priorities for capital.
    • BB&T still looks undervalued on a long-term ROE assumption of 12.5% and further branch acquisitions can augment the company's growth potential.
  • Is Roche At Risk Of Losing Its Way?
     • Tue, Sep. 9 RHHBY 1 Comment

    Summary

    • Roche has seen Art Levinson, former CEO of Genentech, leave the board as his company Calico signs a major partnership with AbbVie.
    • Roche has been making some odd M&A decisions of late (including a seeming lack of conviction about abandoning or doubling down in sequencing) and has seen top-notch talent go elsewhere.
    • In a generally expensive sector, Roche screens as a decent investment option but the company needs to add more pharma experience to its board and strengthen its non-oncology business.
  • Is Now The Time For Essex Rental?
     • Mon, Sep. 8 ESSX Comment!

    Summary

    • Essex Rental has languished as weak non-residential construction activity has undermined demand for the company's cranes.
    • Management is trying to be more customer-friendly, while upgrading its fleet and expanding its distribution opportunities.
    • The ABI and Dodge Momentum Index are pointing to increasing non-residential construction activity, and I believe Essex can leverage that into near-term 10% revenue growth and 20% EBITDA growth.
  • Synergy Pharmaceuticals Could Be A Diamond In The Rough
     • Mon, Sep. 8 SGYP 2 Comments

    Summary

    • Synergy's lead drug plecanatide appears just as effective as Ironwood's Linzess, but with a notably better side effect profile.
    • The market for prescription drugs to treat constipation appears underdeveloped today, but could be worth $3 billion by the end of the decade.
    • Synergy needs cash (and later on, most likely a marketing partner or an acquirer), but the market seems to be undervaluing the company to a meaningful extent.
  • Occidental Has A Good Plan, And Some Value Left
    Mon, Sep. 8 OXY 1 Comment

    Summary

    • Occidental Petroleum is in the midst of extensive restructuring efforts that will place its high-potential Permian acreage in a front-and-center position going forward.
    • After the restructuring, Occidental should be able to generation mid-single digit annual production growth (better than many large producers), with returns on capital employed climbing above the mid-teens.
    • Occidental looks at least 10% undervalued on the basis of EV/DACF, EV/EBITDAX, discounted cash flow, and NAV, and also offers a decent dividend.
  • Hurco Delivers Once Again
     • Sat, Sep. 6 HURC 4 Comments

    Summary

    • Strong demand in Europe leads to double-digit revenue growth for this small machine tool company.
    • The possibility of adding 3D printing capabilities to machine tools is legitimately exciting, but will likely take time to materialize into real revenue.
    • Valuing Hurco on the assumption that it can maintain double-digit operating margins for the long term risks being too bullish, but the underlying fundamentals still suggest more upside here.
  • Finisar Taking Its Lumps
     • Sat, Sep. 6 FNSR Comment!

    Summary

    • Finisar shares have been weak on growing concerns about telecom capex plans and margins, and management's guidance for the next quarter will feed those fears.
    • 40G data center upgrades and 100G telecom upgrades are still valid drivers, but companies like Avago are ramping up their own competitive efforts and silicon photonics remains a long-term threat.
    • Finisar shares don't look all that cheap on a long-term DCF basis, but stabilization in the optical market could support a price in the low $20s if investors are willing
  • Mueller Water Products Showing Signs Of Real Recovery
     • Sat, Sep. 6 MWA 3 Comments

    Summary

    • Homebuilders are acquiring and developing land again, while municipalities seem to be on track to catch up with delayed/deferred water infrastructure projects.
    • With capacity utilization still below 70%, there should be meaningful untapped overhead leverage to drive margins as revenue accelerates.
    • It takes pretty aggressive assumptions to drive a fair value above 10%, but Mueller is a quality company that looks to be back on a solid recovery path.
  • Ciena Goes Back Into The Penalty Box
     • Fri, Sep. 5 CIEN 3 Comments

    Summary

    • Delayed North American carrier capex spending once again hits the telecom equipment sector and takes Ciena with it.
    • Ciena's share in DWDM continues to improve and the relationship with Ericsson appears to be helping the overseas business, while Web 2.0 and other non-telco customers offer upside.
    • Expecting more than 6% annual revenue growth and double-digit FCF margins from Ciena is hardly conservative, but the shares do seem undervalued on a DCF and EV/revenue basis.
  • Novadaq Technologies Knocked Back, But A Large Opportunity Remains
     • Fri, Sep. 5 NVDQ Comment!

    Summary

    • Underlying utilization of Novadaq's surgical imaging technology remains strong, with double-digit sequential growth.
    • Confusion over kit pricing, the mix of sold-vs-placed systems, and an increasingly contentious relationship with marketing partner LifeCell add uncertainty and risk to a stock with rich multiples.
    • Novadaq still looks meaningfully undervalued on its long-term potential, but the fate of the LifeCell relationship, timing of FDA approvals, and progress with direct sales all could create turbulence.
  • Miller Still Underfollowed And Undervalued
     • Fri, Sep. 5 MLR Comment!

    Summary

    • Miller continues to generate double-digit year-over-year revenue growth as the towing industry recovers and looks to refresh and expand fleets.
    • Miller is ramping up production in response to accelerating orders and operating expense leverage looks good, but gross margin leverage has proven to be tougher to achieve.
    • Miller is ignored by the sell-side and is too small/illiquid for much of the buy-side, but the company looks about 20% undervalued even with modest free cash flow assumptions.
  • Air Transport Group Finally Delivering
     • Thu, Sep. 4 ATSG 1 Comment

    Summary

    • Airfreight demand is picking up, improving the prospects for better utilization and yields on Air Transport's fleet.
    • Other than two leased aircraft that the company decided to purchase, capex needs should shrink to maintenance levels, creating good free cash flow in the coming years.
    • Air Transport remains a risky pick, but improving profitability and FCF support a fair value at least 15% higher and potentially significantly higher if the airfreight recovery has long legs.
  • Dana Holding Still Good, But Not So Cheap
     • Thu, Sep. 4 DAN Comment!

    Summary

    • Eroding South American markets and global off-highway demand have worried the Street, despite progress on margins and strong North American commercial vehicle demand.
    • Dana is looking for innovation to drive differentiation, better pricing, and stronger share over the long haul, while pricing, supply chain efficiencies, and other cost improvements boost margins.
    • Dana isn't a flat-out bargain today, but the shares do still appear undervalued and could catch interest if/when the markets start speculating about a recovery in off-highway and LatAm markets.
  • Ur-Energy Finally Seeing That Turn?
     • Thu, Sep. 4 URG 4 Comments

    Summary

    • The uranium market has responded to supply disruptions with a double-digit rally from the lows.
    • Ur-Energy management is being smart with its production, conserving its reserves in the hope of better long-term prices.
    • With first-quartile costs and meaningful expansion potential, Ur-Energy looks like a solid (but risky) way to play a long-awaited and oft-predicted recovery in uranium prices.
  • Silver Wheaton Still Looks Like A Quality Option
    Editors' Pick • Thu, Sep. 4 SLW 25 Comments

    Summary

    • Silver production wasn't fantastic in the second quarter, but Silver Wheaton's diverse portfolio and ample liquidity offer multiple avenues to long-term growth.
    • Silver Wheaton's low operating costs offer some protection in a weak silver market, and management will likely distribute future cash flows if it cannot find adequate new investment opportunities.
    • A fair value range of $26 to $28 seems reasonable for a company with Silver Wheaton's quality, but softer silver prices would definitely be a headwind to performance.
  • Monsanto Looking To Balance The Near-Term And Long-Term Opportunities
     • Thu, Sep. 4 MON 5 Comments

    Summary

    • Monsanto's near-term earnings momentum has been fading as corn market fundamentals continue to weaken.
    • Monsanto is building a strong growth-oriented soybeans business, with longer-term opportunities in next-gen crop protection and agriculture management.
    • A buyback makes more sense than acquiring Syngenta, as Monsanto is trading below its long-term fair value. The shares aren't dirt-cheap today, but weakness is an opportunity for long-term investors.
  • FEI Company's Retreat Not Quite Enough
     • Thu, Sep. 4 FEIC Comment!

    Summary

    • Weaker guidance, due in part to delayed semiconductor orders, has led to a double-digit decline in FEIC shares since my last update.
    • FEI continues to see significant growth opportunities in introducing its electron microscopy technology to new markets within electronics, material sciences, natural resources, and life sciences.
    • Long-term growth in the neighborhood of 7% to 8% a year still isn't enough to make FEIC an inarguable buy, but the shares are nevertheless tempting on their long-term potential.
  • Can Newfield Exploration Make Another Major Move?
     • Wed, Sep. 3 NFX Comment!

    Summary

    • Previously overlooked, Newfield is now getting its due for quality acreage in Oklahoma and Utah.
    • With Pearl close to starting up production, Newfield should be able to sell this asset and reap hundreds of millions of dollars in after-tax proceeds.
    • De-risking the SCOOP and STACK assets can add meaningful value and production, while the Uinta remains a quality opportunity, but Newfield's shares don't look so cheap at this point.
  • Can Penn Virginia Really Be This Cheap?
     • Wed, Sep. 3 PVA 4 Comments

    Summary

    • In six months, Penn Virginia has made significant acreage additions and seen very encouraging glimpses of the potential of the Upper Eagle Ford.
    • Production has come in weaker than expected, with various operational challenges leading to lower guidance for the second half of the year while the oil/gas mix gets gassier.
    • Production misses, higher expenses, a sizable funding gap, and weak oil prices don't help the cause, but Penn Virginia looks too cheap even with those problems taken into consideration.
  • Lightstream Resources Up, Down, And All Around
     • Wed, Sep. 3 LSTMF 15 Comments

    Summary

    • Surprisingly weak recent results from Swan Hills has sapped production growth and added uncertainty to an asset that is supposed to be a multiyear growth driver.
    • Cardium well economics have been getting better, but mechanical issues appeared in multiple wells in the second quarter, while Bakken production curves continue to lead to lower EURs.
    • It is hard to like an E&P with weak production growth prospects and high debt, but Lightstream generates very strong netbacks and seems undervalued even after factoring in the risks.
  • Oasis Petroleum Getting Less Than Its Full Due
     • Wed, Sep. 3 OAS 6 Comments

    Summary

    • New completion techniques are improving well economics and may upgrade the sentiment on Oasis's so-called "fringe" acreage.
    • Downspacing and lower Three Forks tests due in late 2014/early 2015 could offer additional upside, as could management's willingness to add acreage outside the Bakken.
    • Oasis looks like a name worth considering as a relative value call in the Bakken.
  • Order Growth Starting To Support The MTS Systems Story
     • Fri, Aug. 29 MTSC Comment!

    Summary

    • Fiscal 2014 hasn't been the strongest year for MTS Systems, but order acceleration is encouraging for the coming year.
    • MTS Systems is leveraged to increased R&D spending from Chinese automakers as these companies start to develop designs for the international export market.
    • MTS Systems shares look undervalued below $76, with upside if the company can achieve management's ambitious revenue growth goals.
  • XPO Logistics Sticking To Its Guns
     • Fri, Aug. 29 XPO 8 Comments

    Summary

    • XPO Logistics continues to modify its long-term vision of what it will be, embracing a wider view of third-party logistics and its role as a consolidator.
    • Growth continues at a torrid pace, but XPO is still looking at potentially billions in future M&A spending.
    • There is a much wider range of potential outcomes for XPO than most transportation stocks, with a $36 "base case" fair value offset by substantial downside risk and potential upside.
  • Rofin-Sinar Still Not Up To Speed
     • Fri, Aug. 29 RSTI 1 Comment

    Summary

    • Revenue performance remains erratic as major markets like machine tools, auto OEMs, and semiconductors continue to drift without clear trends.
    • Rofin-Sinar is still lagging IPG Photonics in fiber lasers and needs to build scale to achieve better margins.
    • Mid-single digit growth can support a price target above $27, but Rofin-Sinar needs a healthier capex environment and better execution in fiber lasers.
  • HollySys Offsetting Weak IA With Strong Rail
     • Thu, Aug. 28 HOLI 1 Comment

    Summary

    • HollySys is working through a slowdown in the industrial automation market by targeting new markets and new product segments.
    • Recent tenders in the Chinese rail segment have gone very well for HollySys and the company recently announced its first subway tender in Singapore.
    • HollySys seems undervalued below $25 and the underlying assumptions could prove too conservative if the company can really establish itself outside of its traditional Chinese markets.
  • Taminco Should Be Switching Over To Cash Generation
     • Thu, Aug. 28 TAM 2 Comments

    Summary

    • After acquiring Kemira's formic acid business, forming a JV with Balchem, and completing a capacity expansion project in the U.S., Taminco should have the pieces in place to generate cash.
    • Taminco will remain focused on higher-margin, higher-growth, non-cyclical markets and look to products like Dow's Enlist Duo to generate potential upside.
    • Fair value remains at $26, making Taminco a solid hold and a stock to consider on pullbacks.
  • Chart Industries Has Deflated On A Slower LNG Buildout
     • Thu, Aug. 28 GTLS 1 Comment

    Summary

    • Weak Biomedical sales have hurt Chart's reported results, but it is the slower development of the U.S. LNG market and the erratic pace of the Chinese market that hurts more.
    • Chart Industries management remains bullish on the potential for the LNG market and is building out the capacity to serve the market it expects in three to five years.
    • Even after a big pullback, Chart's valuation still assumes quite a bit of growth in the coming years.