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Stephen Simpson, CFA

 
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  • 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 19 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.
  • Can DigitalGlobe Relaunch After A Reset To Expectations?
       • Thu, Aug. 28 DGI 1 Comment

    Summary

    • Commercial revenue opportunities have developed more slowly than expected for DigitalGlobe.
    • Securing government permission to sell higher resolution images should help, and the company has accelerated its launch plans for its next satellite.
    • DigitalGlobe has a meaningful edge with high resolution satellite-based imagery and could be worth $36 today on high single-digit revenue growth, but must deliver strong commercial revenue growth.
  • Thompson Creek Not Yet Past The Point Of Hard Decisions
       • Wed, Aug. 27 TC 7 Comments

    Summary

    • Mt. Milligan is coming along, with higher gold production supporting lower net cash mining costs.
    • Management is evaluating its options at the Thompson Creek mine, including bringing in a partner or going forward with a lower-cost stripping program.
    • Adding a secondary crusher to Mt. Milligan could help resolve ongoing issues with ore hardness, and the company should be able to finance it out of cash flow.
  • Alaska Air Continues To Hold Its Own
       • Wed, Aug. 27 ALK 4 Comments

    Summary

    • Delta's efforts to add routes in Seattle continues to generate considerable attention, but Alaska Air's load factor is holding up and Delta seems more interested in supporting its international flights.
    • Alaska Air is adding more routes outside of its historical core base of operations, and is largely avoiding more crowded routes.
    • A fair value estimate of around $50 still suggests some upside, particularly if the company's new routes perform well and the company continues to hold its own against Delta.
  • GenMark Diagnostics Hoping To Make Its Mark In Clinical MDx
       • Wed, Aug. 27 GNMK Comment!

    Summary

    • GenMark's existing system and assays have outdone Street expectations for the last three quarters.
    • The launch targets for the new ePlex system have slipped about four months, but this is still shaping up as a very competitive multiplex MDx system.
    • Multiplex MDx testing can deliver meaningful improvements in lab efficiency and patient care and the potential for $400 million in revenue within 10 years of launch supports a $17.50 target.
  • Quebecor Has A Big Decision To Make In Wireless
       • Wed, Aug. 27 QBCRF Comment!

    Summary

    • Quebecor is seeing better margins at Videotron and the introduction of the iPhone is leading to higher ARPU.
    • Management has a big decision to make with respect to its wireless plans; the Canadian government is facilitating the creation of a fourth national carrier, but management wants partners.
    • Quebecor still looks undervalued on the basis of low revenue growth and modest margin improvements, but the scale of the company's wireless ambitions is a major unknown right now.
  • With An Iffy Non-Oncology Pipeline, Roche Pays Up For InterMune
       • Tue, Aug. 26 RHHBY, ITMN 5 Comments

    Summary

    • Roche comes out on top in what was rumored to be a multi-party bidding process for InterMune, agreeing to pay over $8 billion for the developer of Esbriet (for IPF).
    • Even with incremental free cash flow margins above 50%, Roche has to generate more than $2 billion/year in U.S. sales to justify the price paid for InterMune.
    • Roche's past failures in developing drugs outside of oncology likely pushed management toward this deal, but the shares still look modestly undervalued on mid-single digit growth expectations.
  • Synergy Resources Offers Strong Production Growth And Drilling Upside
       • Tue, Aug. 26 SYRG 2 Comments

    Summary

    • Synergy continues to generate solid IPs from wells in its core Wattenberg acreage targeting the Niobrara and Codell formations.
    • The company is about to start testing its acreage in the Wattenberg extension and may start drilling test wells in its Nebraska acreage as well.
    • PDC Energy and Bonanza Creek are likely less risky than Synergy, but Synergy still has considerable risked value that can be unlocked through its drilling program.
  • Bukit Asam's Production And Delivery Growth Offset Weak Pricing
       • Tue, Aug. 26 TBNGY Comment!

    Summary

    • Indonesia has coupled strong production growth, logistics de-bottlenecking, and competitive cash costs to generate strong revenue and EBITDA growth so far in 2014.
    • Contracts with the state power company lock in attractive prices for about half of the company's production, but higher royalties threaten to take a big bite out of future EBITDA.
    • Weak coal prices have pressured near-term EBITDA, but the shares still offer long-term potential above $6 for the ADRs and a decent dividend.
  • Mount Gibson Iron Still Needs To Buy Its Future
       • Tue, Aug. 26 MTGRF Comment!

    Summary

    • Mount Gibson is looking at lower production, lower realized prices, and higher capex spending in the short term as it moves ahead at Koolan Island and withstands weak iron prices.
    • A key item on management's to-do list is to deploy cash to acquire more quality iron mining asset or return that capital to shareholders and wind down.
    • I believe Mount Gibson shares are about 15% undervalued on the assumption of realized prices bottoming between $70 and $75 between 2016 and 2017.
  • Wilshire Bancorp Lagging Despite Strong Loan Originations
       • Mon, Aug. 25 WIBC 1 Comment

    Summary

    • Wilshire Bancorp is posting strong loan origination and good yields, but operating expenses have been tracking higher than expected.
    • Wilshire's loan yields are likely to come under more pressure in the coming quarters, but there's still meaningful synergy to be had from last year's acquisitions.
    • A fair value of $11 suggests worthwhile upside, but the bank likely needs to start beating estimates before the Street will care.
  • Conatus Pharmaceuticals Down On Low Enthusiasm For High Risk
       • Mon, Aug. 25 CNAT 7 Comments

    Summary

    • While biotechs targeting liver diseases were hot earlier in 2014, they have been weakened considerably as investors have turned away from biotechs with risky and early-stage programs.
    • The basic mechanism of action for emricasan makes sense, targeting the broad array of caspases that lead to inflammation and cell death in the liver.
    • Even with longer timelines to peak revenue, I still believe Conatus shares can trade to more than $20 if the company's Phase II reports are positive.
  • PAX Global Technology - Exceptional Growth And Exceptional Performance
       • Mon, Aug. 25 PXGYF Comment!

    Summary

    • PAX Global is pairing competitive technology with very competitive pricing to grow share in underpenetrated markets like China, Brazil, and India.
    • The transition to the EMV standard should give the company an opportunity to establish itself in the U.S. POS terminal market alongside VeriFone and Ingenico.
    • The U.S. ADRs are exceptionally illiquid but most major brokers will handle transactions on the Hong Kong exchange, and PAX Global looks 15% undervalued with exceptional growth potential ahead.
  • KMG Chemicals Really Needs That New Leg Of Growth Now
       • Mon, Aug. 25 KMG Comment!

    Summary

    • Growth in the electronics chemicals business has slowed and wood treatment is likely in permanent decline as the last major North American railroad switches to the creosote-boron mix.
    • Synergies from the UPC acquisition offer some margin-boosting potential in the short-term, but acquiring a new business is likely what sustains top-line growth.
    • Assigning a fair value in the high teens may be conservative given the potential for value-creating M&A, but growth prospects outside of M&A are otherwise unremarkable.
  • Mocon Has An Interesting Energy Angle, But Watch The Margins
       • Sat, Aug. 23 MOCO 2 Comments

    Summary

    • A sensor warranty issue in the fourth quarter of 2013 has impacted sales and margins for three quarters, but the company seems to be getting back in stride.
    • Aggressive development of U.S. onshore oil and gas reserves ought to support good demand for mud logging and Mocon's chromatograph/analyzer tools.
    • If Mocon can generate mid-to-high single digit revenue growth and lift FCF margins back into the low teens, a fair value above $20 seems reasonable for this very under-followed company.
  • With Cyclacel, The Waiting Is The Hardest Part
       • Sat, Aug. 23 CYCC 6 Comments

    Summary

    • Cyclacel shares have weakened as investors have avoided riskier biotechs, and perhaps due to some worries about potential competitive drugs sponsored by larger companies in pharma/biotech.
    • A decision to launch a Phase IIb study in r-MDS was contrary to expectations of a pivotal study, but this more conservative move may be the right one.
    • Even at a lower estimated fair value of $5, Cyclacel appears to incorporate very low expectations for clinical trial success.
  • Can 'Blocking And Tackling' Lead Accuray Higher?
       • Sat, Aug. 23 ARAY 1 Comment

    Summary

    • Accuray delivered strong product revenue growth and a good rebound in orders to end its fiscal year.
    • Gross margins were weaker than expected, but management guidance was consistent with expectations and a growing library of clinical data and the launch of the MLC should support order growth.
    • Accuray still looks significantly undervalued on a DCF and EV/revenue basis, but establishing consistent double-digit revenue growth may be the key to generating investor interest.
  • Concerns About The Utica Weighing On PDC Energy's Share Price
       • Sat, Aug. 23 PDCE 5 Comments

    Summary

    • Downspacing results from PDC Energy's Wattenberg acreage, where the company is the third-largest landholder, continue to support solid value and IRRs.
    • Results from the Utica remain mixed and this large (54K acres) acreage position is still a "show me story" for PDC Energy.
    • Even though the Utica accounts for around 20% of value, skepticism seems to be weighing down the shares, which I believe are worth between $63 and $76 today.
  • Competition And Momentum Weighing On Clovis Oncology
       • Sat, Aug. 23 CLVS Comment!

    Summary

    • Analysts and investors have started fretting that AstraZeneca's drug will be a stronger potential rival to Clovis's lead drug rociletinib.
    • Rociletinib still looks like an efficacious drug, but hyperglycemia may be a limiting factor and there's still not much data on rucaparib or lucitanib.
    • I estimate a fair value of $75 for Clovis, with more than $37/share in value for rociletinib.
  • It's Getting Harder To Give Axiall The Benefit Of The Doubt
       • Fri, Aug. 22 AXLL Comment!

    Summary

    • PVC prices haven't increased as much as analysts hoped, while ethylene prices have been quite strong throughout 2014.
    • Building an ethylene cracker is a reasonable long-term move, but Axiall's execution has left something to be desired and more companies are moving into chloralkali.
    • Axiall shares appear to be trading for less than half of asset replacement value, while a 6.5x multiple to 2015 EBITDA suggests a $47.50 fair value.
  • Abraxas Petroleum Running All-Out
       • Fri, Aug. 22 AXAS 5 Comments

    Summary

    • Abraxas has been significantly accelerating its drilling program and the drilling results have largely continued to come in ahead of expectations.
    • Management has a lot on its plate, with its Canadian and PRB acreage up for sale and a desire to acquire more acreage in the Eagle Ford (and Bakken).
    • NAV and EV/EBITDA suggest a fair value between $6 and $7, and Abraxas offers not only strong near-term production growth, but a clean balance sheet that creates acquisition flexibility.
  • A New Rayonier, But The Same Old Problem
       • Fri, Aug. 22 RYN 10 Comments

    Summary

    • Like Plum Creek and Weyerhaeuser, weak timberland operating conditions are leading to disappointing results and lower guidance.
    • Rayonier is now a timber pure-play, with timberlands in the South/Southeast U.S., Pacific Northwest and New Zealand, as well as acreage set aside for higher-value real estate sales.
    • Fair value calculations using an EV/EBITDA and NAV approach fall between $31.50 and $32.50, suggesting pretty modest potential for a company in an unfavored sector.
  • Even In Sight Of The 52-Week High, Bonanza Creek Can Go Further
       • Thu, Aug. 21 BCEI 2 Comments

    Summary

    • Bonanza Creek Energy has significantly increased its net acreage position, while ongoing drilling results increase the potential value of that acreage.
    • The company's eastern acreage may be more prospective for the Codell formation than previously thought and newer 28-stage wells are showing very low decline rates.
    • Bonanza Creek has been a strong performer this year, more than tripling the EPX index, and still appears to have double-digit upside from here.
  • ArcelorMittal Down, But Not Out
       • Thu, Aug. 21 MT 5 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.