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Stephen Simpson, CFA

 
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  • 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.
  • Can Mosaic Get The Sustainable Price Leverage It Needs?
     • Wed, Aug. 6 POT, YARIY, MOS Comment!

    Summary

    • Amidst growing worries about the implications of lower grain and oilseed prices, Mosaic is tuning up its production cost profile.
    • The need for crop nutrients isn't going to go away over the long-term, but the threat of undisciplined supply additions is arguably the biggest downside risk.
    • Between my bear-case and base-case scenarios, the risk/reward seems to favor a bullish stance on Mosaic.
  • The Easy Part May Be Over For Vedanta Resources
     • Tue, Aug. 5 HBM, FCX, GLNCY Comment!

    Summary

    • Vedanta shares have rallied more than 20% on optimism over base metal prices, self-improvement efforts, and a new pro-business government in India.
    • Management still has much to do to improve costs and production in copper and aluminum, and it's still unclear if consolidating Hindustan Zinc will move forward.
    • Vedanta looks about 5% to 10% below its NAV fair value, but weak Q1 production and EBITDA numbers are a reminder of the execution risks still present.
  • Paladin Energy Increasingly Leveraged To A Uranium Price Recovery
     • Tue, Aug. 5 PALAY 2 Comments

    Summary

    • Paladin Energy raised $190M by selling a minority stake in its Langer Heinrich mine and shuttering the high-cost Kayelekera mine will preserve cash during a tough stretch.
    • Paladin Energy is highly leveraged to uranium prices above $50/lb (while most sell-side targets are in the high $60's/lb), but a large convertible debt maturity looms in late 2015.
    • Current price curves support a fair value of $5/ADR for Paladin, but the shares are basically a leveraged play on uranium prices (good or bad).
  • Forest City Enterprises Still Not Getting Full Credit For Its Transition
     • Tue, Aug. 5 FCE.A, FCE.B Comment!

    Summary

    • Concerns about stabilizing key assets like the Barclays Arena and Ridge Hill retail development continue to weigh on the shares of this transitional real estate company.
    • Reducing debt and disposing of non-core assets is leading to a leaner, simpler, less-risky model and a real estate company with substantial exposure to the hot Brooklyn property market.
    • Fair value appears to lie around $25, but management has a lot of items to cross off the to-do list before the shares will reflect the full underlying value.
  • Fear Once Again Driving Societe Generale Shares
     • Tue, Aug. 5 BNPZY, C, HSBC 2 Comments

    Summary

    • Societe Generale's strong second quarter results take a back seat to growing fears about Russian sanctions and possible U.S. fines.
    • Societe Generale's balance sheet could withstand low-probability events like Russian expropriation and/or a $5 billion U.S. fine, but it would definitely sap the company's capital and growth in the short-term.
    • A 10% 2018 ROE still supports a fair value near $14 and management compensation is aligned with cost and return improvement goals.
  • BRF SA Doing A Lot More With Less
     • Tue, Aug. 5 JBSAY, NSRGY, BRFS 1 Comment

    Summary

    • BRF SA's efforts to upgrade its portfolio and streamline operations are having a stronger and faster positive impact on the company's margins.
    • JBS is looking to get more competitive in processed food, but BRF has leading market share and a near-term tailwind from lower grain prices.
    • Low teens FCF growth can support a fair value above $27.
  • A Quietly Busy Senomyx
     • Tue, Aug. 5 SNMX 2 Comments

    Summary

    • Second quarter earnings are barely an opening act, as investors continue to look ahead to PepsiCo's second half commercialization of S617.
    • A new agreement with PepsiCo for a salt program and a two-year extension of the sweet collaboration underline the solid relationship between Senomyx and a food/beverage industry giant.
    • Facilitating less usage of sugar, HFCS, salt, and other ingredients is a multibillion-dollar opportunity between lower costs and enhanced product claims, but commercialization success is not guaranteed.
  • American Vanguard Starting A Long Road Back
     • Mon, Aug. 4 FMC, MON, SYT 2 Comments

    Summary

    • American Vanguard is paying a punishing price for poor weather and lower crop protection utilization earlier this year, as inventories weigh on results.
    • A significant operating turnaround is unlikely before the 2015 planting season, as manufacturing will be running at inefficient levels due to excess inventory levels.
    • Mid-single digit revenue growth and double-digit FCF margins can support a fair value of $17.50.
  • FLY Leasing Still Trying To Close Its ROE Gap
     • Sat, Aug. 2 FLY 4 Comments

    Summary

    • FLY Leasing is facing significant lease expirations in 2015, but has already made progress remarketing those assets.
    • AerCap and Air Lease have massive order books of new planes, but FLY Leasing continues to sell old aircraft at net gains and has meaningful potential operating leverage from here.
    • A long-term ROE of 11.5% would be below the top operators, but still enough to support a fair value of $17.50.
  • A High Multiple And Weak Performance Slam Manitowoc
     • Fri, Aug. 1 MTW 1 Comment

    Summary

    • Manitowoc disappoints across the board, but results in the crane business were particularly weak.
    • North America has yet to see the long awaited non-residential construction-driven recovery, but smaller companies may be gaining share on Manitowoc and Terex in the meantime.
    • Even with a sharp pullback, Manitowoc is not a strikingly cheap play in the industrial sector.
  • Macquarie Infrastructure Gets Bigger And Better
     • Fri, Aug. 1 KMP, BPL, OILT 1 Comment

    Summary

    • Macquarie Infrastructure has bought out the contentious owners of the other half of IMTT and the deal improves the company's growth prospects, tax efficiency, and proportional cash flow.
    • Higher levels of business jet activity continue to help Atlantic Aviation, but Macquarie Infrastructure is now heavily skewed to the well-placed petrochemical storage assets and growth potential of IMTT.
    • I believe that the IMTT deal has helped to boost the fair value to close to $75, leaving these shares appealingly undervalued.
  • AllianceBernstein Looking Stronger, With More To Come
     • Fri, Aug. 1 AZSEY, BEN, BLK Comment!

    Summary

    • AllianceBernstein has logged several consecutive months of improving inflows, with new high-margin institutional fixed income products leading the way.
    • After an extended effort to reduce non-comp expenses, AllianceBernstein appears to have significant underlying margin expansion potential - possibly on the order of 10 full points.
    • Better operating leverage leads directly to better returns on equity, pushing my estimate of fair value above $30 with a strong yield in the meantime.
  • Cavium Networks - Beat, Raise, Repeat
     • Fri, Aug. 1 BRCM, FSL, CAVM 1 Comment

    Summary

    • Cavium adds yet another earnings beat to its impressive run of success.
    • New product launches, including Octeon III, LiquidIO, and ThunderX should support ongoing growth in 2H'14 and into 2015.
    • Cavium can support a $50 fair value, but growth expectations are high and any near-term shortfalls or stumbles will be severely penalized.
  • Ongoing Challenges Pressuring Glatfelter
     • Thu, Jul. 31 NP, UFS, GLT Comment!

    Summary

    • Glatfelter missed the sell-side earnings estimate for the fourth straight quarter, hurt in part by the conflict between Russia and Ukraine.
    • Staying ahead of obsolescence is a constant fight, but Glatfelter continues to have multiple value-added opportunities with growth rates ahead of industry norms.
    • With a fair value in the high $20's, Glatfelter shares are getting to a more interesting place with respect to value, but stopping the earnings misses would help a lot.
  • Headwaters Continues To Build Out A Niche Materials Business
     • Thu, Jul. 31 HW 1 Comment

    Summary

    • Headwaters meets revenue and EBITDA expectations, but earnings quality and guidance may have left some investors a little disappointed.
    • The housing recovery continues at a slow pace, while Headwaters' management continues to acquire niche materials businesses where it can hold meaningful share and grow overall utilization.
    • At less than 10x forward EBITDA, Headwaters looks more than 20% undervalued today.
  • NuVasive Running On Renewed MIS Vigor
     • Thu, Jul. 31 SYK, JNJ, ZMH Comment!

    Summary

    • NuVasive left its larger rivals in the dust, as mid teens growth was well above the low single-digit growth rates of other large players in the spine market.
    • A strong suite of minimally invasive products, ongoing share gains for MIS procedures, and ample operating leverage potential make NuVasive an attractive potential target.
    • NuVasive doesn't jump out as cheap on a DCF basis, but ongoing share gains, margin improvements, and takeover speculation could fuel a run into the $40s.
  • Cloud Peak Energy Still Generating Cash In A Tough Market
     • Thu, Jul. 31 ACI, ANR, CLD 1 Comment

    Summary

    • Cloud Peak stayed more or less on target in the second quarter, even though serious rail congestion issues are making life difficult.
    • Cloud Peak has the advantage of the lowest-cost asset base in the most economically viable coal basin in the U.S., leaving good upside if prices can get back to $14/ton.
    • A $20 NAV is reason to consider the shares, but it may take some time for that $20 price to come into play.
  • The Wait At Plum Creek Timber Stretches On
     • Thu, Jul. 31 PCH, RYN, WY 2 Comments

    Summary

    • Plum Creek guides down expectations on a reduced harvest and higher basis for land sales.
    • Private timberland transactions continue to indicate that Plum Creek shares are undervalued, but the Southern sawlog market appears oversupplied in the near term as demand has yet to really recover.
    • A long-term NAV estimate suggests fair value in the high $40s, but the "hurry up and wait" nature of the story makes it harder to remain patient.
  • FEMSA Seeing A Slower Rebound
     • Tue, Jul. 29 KOF, FMX Comment!

    Summary

    • FEMSA's OXXO same-store sales have yet to show the hoped-for recovery in 2014, but results continue to reflect a leading franchise.
    • Management has numerous choices at hand for growth, including expanding its pharmacy and QSR operations and entering new Coca-Cola bottling markets.
    • Double-digit FCF growth and the Heineken stake support a fair value over $100, but FEMSA is not the cheapest play on Mexico's recovery.
  • Statoil Results Show The Price Of Value
     • Tue, Jul. 29 TLM, STO 4 Comments

    Summary

    • Statoil missed analyst profit expectations as management chose to curtail production in the face of lower prices.
    • A goodwill impairment charge for the U.S. unconventional assets doesn't help the asset quality argument, but high-impact exploration results later this year could change the tone.
    • Statoil continues to trade at a low relative multiple, but even a 3.0x multiple to 12-month EBITDA supports a $32 stock and execution should lead to a multiple re-rating.
  • Volatile Pacific Biosciences Continues To Make Progress
     • Tue, Jul. 29 TMO, RHHBY, ILMN 5 Comments

    Summary

    • PacBio shares sold off sharply on a disappointing order total for the second quarter.
    • Oxford Nanotechnologies is getting more attention, but PacBio continues to do well with improving read lengths and accuracy and has plans for further improvements underway.
    • Fair value is very sensitive to even modest changes in future assumptions, but the shares look undervalued if the company can achieve long-term market share of 10% in next-gen sequencing.
  • Lonza Targeting Significant Internal Improvements
     • Mon, Jul. 28 NVZMY, RDSMY, LZAGY Comment!

    Summary

    • Lonza is delivering better than expected results and focusing on significant improvements in asset utilization and operating efficiency.
    • Immuno-oncology could lead to growing demand for advanced outsourced pharmaceutical manufacturing services, while a shift towards more biotechnicals could boost Specialty Ingredient margins and returns.
    • Lonza doesn't look cheap, but a recent run of outperformance could lead to further upward revisions in estimates and price targets.
  • Is This A 'Buy The Dip' Opportunity At Maxim Integrated Products?
     • Sun, Jul. 27 LLTC, CRUS, AAPL 7 Comments

    Summary

    • A weak outlook for high-end Samsung phones, as well as declines in Industrial sales, leads to a double-digit downward revision to the next quarter's revenue target.
    • Maxim may be too ambitious in its addressable market growth estimates for mobile, industrial, and autos, but the company isn't starting from zero.
    • Both discounted cash flow and margin-based EV/revenue support a fair value target of $32.50 today.
  • Decent Earnings Not The Real Story At Turkcell
     • Sat, Jul. 26 TKC 2 Comments

    Summary

    • Turkcell's earnings were a little complicated, with forced rate cuts pressuring revenue and fines hitting income, but better than expected underlying profitability.
    • An announcement from the U.K. Privy Council suggests that Cukurova has raised the money it needed and it has reached an accord with Altimo to repay its debt.
    • If the Cukurova-Altimo affair is finally over, significant dividends could be on the way, but the shares have already reacted pretty favorably and it may be time to take profits.
  • Operating In Obscurity, Microsemi Continues To Execute
     • Sat, Jul. 26 MSCC Comment!

    Summary

    • Microsemi delivers a solid fiscal third quarter and guides to a slightly better fourth quarter as markets like aerospace, defense, and medical seem to be picking up.
    • Microsemi's underrated FPGA business outgrew the market this quarter.
    • I estimate a fair value of $32 for Microsemi, making it one of the cheapest non-distressed chip stocks out there.
  • Carpenter Technology Ready For Demand And Free Cash Flow Growth
     • Sat, Jul. 26 CRS Comment!

    Summary

    • Carpenter's new Athens facility is close to meaningful contributions and should expand the company's revenue, margin, and FCF potential.
    • A destocking cycle in aircraft engines and fasteners appears to be ending and accelerating build rates and rising nickel prices should be good for sales and margins.
    • At 10x EBITDA, Carpenter has worthwhile upside, but I would expect the multiple to decline to historical norms as cyclical market demand picks up.
  • iStar Financial Still Worth The Hassle
     • Fri, Jul. 25 STAR 1 Comment

    Summary

    • iStar has made steady progress in reducing its cost of capital and cleaning up problem assets.
    • Management is looking to deploy capital into an expanding real estate lending and net lease portfolio, while opportunistically looking to upgrade the value of the operated properties and land portfolio.
    • Estimating the net economic value of iStar's various portfolios to common shareholders, I come up with a fair value of $18.50 today.
  • Cameron Showing Some Much-Anticipated Margin Progress
     • Fri, Jul. 25 CAM 1 Comment

    Summary

    • Cameron still has a lot to do to improve margins in the core DPS business segment, but capacity additions are largely complete and Q2 results showed progress.
    • Orders were underwhelming, but Cameron has some attractive mid-term opportunities particularly as the venture with Schlumberger picks up momentum.
    • Between 9x and 10x EBITDA Cameron is either roughly fairly valued or modestly undervalued, though there is still rerating potential from better margins and improving demand fundamentals.
  • Can Linear Technology Match Quality With Growth?
     • Fri, Jul. 25 BRCM, LLTC 3 Comments

    Summary

    • Linear comes through again with a solid quarter, but the market wanted more bullish guidance.
    • Linear has exciting opportunities in electric/hybrid vehicle battery management and machine-to-machine communication, but margin leverage may be tapped out.
    • Between overvalued on DCF and undervalued on margins and ROE, Linear is probably fairly valued absent more cash going back to shareholders.
  • Iron's Free Fall Has Rusted Fortescue Metals
     • Thu, Jul. 24 BHP, RIO, FSUGY 3 Comments

    Summary

    • A significant drop in benchmark iron ore prices and wider spreads for lower-quality ore has walloped Fortescue's realized prices and pinched its profits and free cash flow generation.
    • Fortescue should stay free cash flow positive with realized prices at or above $70/mt, but there's a substantial value-per-share difference between surviving and thriving.
    • A 5.5x multiple to lowered FY2015 expectations suggests a fair value above $10.50, but Fortescue is really only appropriate for aggressive risk-tolerant investors looking to play a rally in iron.
  • Orders A Bright Spot, But ABB Has A Lot Of Work To Do
     • Thu, Jul. 24 SEIGY, GE, ABB 3 Comments

    Summary

    • ABB reports another big earnings miss, as ongoing problems in the Power Systems segment overshadow more widespread general weakness.
    • Double-digit order growth was nice to see, but management needs to fix the Power operations and shore up margins in automation to really excite investors again.
    • ABB management has a chance to change the tone on the shares at the September analyst day, and the shares look undervalued below $26 but significant execution risks remain.