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Stephen Simpson, CFA

 
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  • Sluggish European Demand May Be Opening A Window Into Innospec
       • Oct. 15, 2014 IOSP Comment!

    Summary

    • Weaker European demand and Russia's self-inflicted troubles are hurting volumes for the company's core Fuel Additives business.
    • Innospec continues to build up its oilfield chemicals business and is likely also looking for bolt-on deals to expand the Personal Care Performance Chemicals operation.
    • Headwinds in the energy sector, weaker European demand for fuel additives, and double-digit declines in fragrances are pressuring near-term results, but the long-term valuation is starting to look attractive.
  • The Frustrating Wait For Value Realization At PCTEL
       • Oct. 14, 2014 PCTI Comment!

    Summary

    • An ongoing restructuring of the antenna business has crimped growth and lower near-term wireless spending is a risk through the balance of the year.
    • PCTEL is exposed to antenna growth markets like precision agriculture and process automation that could support significant revenue growth, but the risk of competition is real.
    • If PCTEL can generate FCF margins in the high single digits, a fair value above $10 is reasonable, but low liquidity and a lack of coverage are near-term challenges.
  • WESCO Still Waiting
       • Oct. 14, 2014 WCC Comment!

    Summary

    • Warnings from Hubbell and Nexans aren't particularly encouraging for WESCO's near-term prospects.
    • WESCO is structured to generate strong operating leverage in upturns, but non-residential construction is on a stubbornly slow recovery trajectory.
    • WESCO shares should generate market-beating returns once North American industrial and construction spending turns around, but the prospects absent such a turnaround aren't so impressive.
  • Maxwell Down On Power, But Still Promising
       • Oct. 3, 2014 MXWL 14 Comments

    Summary

    • Maxwell shares have sold off, as Chinese hybrid bus orders have become more volatile and automotive OEM orders haven't come through as hoped.
    • Ultracapacitors still make sense in numerous applications for cars, trucks, and rail, all of which can support multiple hundreds of millions of dollars in revenue.
    • I still believe Maxwell shares are worth around $11 per share, making them worth another look after this pullback.
  • Cemig's Wild Ride Continues
       • Oct. 3, 2014 CIG 8 Comments

    Summary

    • Cemig continues to pursue legal remedies for key hydropower concessions amidst larger worries about rainfall, reservoir levels, Brazil's economy, and the Brazilian electoral cycle.
    • Cemig management is still targeting bold expense cuts in the distribution business, but the rates of return on new power projects don't look so strong.
    • Cemig looks fairly valued at $6.50/ADR, but there could be more than $4/share of upside if those hydropower concessions are retained.
  • LipoScience Rescues Some Value For Shareholders In A Sale To LabCorp
       • Sep. 26, 2014 LPDX, LH Comment!

    Summary

    • LipoScience sells itself to LabCorp for $5.25 per share in cash, or less than 2x forward revenue estimates.
    • LipoScience didn't have the resources to build a commercially viable business with its LipoProfile test, but the science and benefits are sound and LabCorp can take the test much further.
    • LabCorp's offer is fair relative to LipoScience's standalone prospects, even though the deal could well be a meaningful value-builder for LabCorp down the line.
  • Everest Re Managing Through A Tough Environment
       • Sep. 26, 2014 RE 1 Comment

    Summary

    • Reinsurance rates appear to be heading down another 10% for the Jan 1 renewals.
    • Everest Re is using new products, different attachment points, and retrocessional insurance to manage risk while growing share in U.S. prop-cat reinsurance.
    • Everest Re still looks a little undervalued and is both well-managed and well-capitalized.
  • Arch Coal Still Looking For Light At The End Of The Tunnel
       • Sep. 19, 2014 ACI 13 Comments

    Summary

    • Met coal prices continue to bump along at unprofitable levels, while thermal coal demand is impaired by serious rail issues in the Powder River Basin.
    • Arch Coal has been reducing costs and has $1.25 billion in liquidity remaining, likely enough to carry it through to a 2018 debt maturity.
    • Arch Coal doesn't look like a value turnaround story on the basis of fundamentals, but a rebound in coal prices could still propel the shares higher for very aggressive investors.
  • Amidst Some Market Concerns, Brookfield Infrastructure Keeps On Keeping On
       • Sep. 19, 2014 BIP 7 Comments

    Summary

    • Growth slowed in the second quarter, but Brookfield Infrastructure is sticking with its long-term plans for FFO growth in the neighborhood of 8% to 11%.
    • Certain asset types are getting more expensive, but BIP's broad investment mandate gives management the flexibility to shift capital around and select from a deep poor of infrastructure assets.
    • An AFFO/FFO-based fair value of $42 doesn't suggest massive near-term appreciation potential, but BIP is an appealing stock for patient investors looking to leverage multiyear growth from infrastructure investments.
  • SL Green Realty Keeps Producing Value In A Hot Market
       • Sep. 19, 2014 SLG 1 Comment

    Summary

    • Strong demand for NYC office space continues to support attractive rental spreads and good occupancy rates for SL Green.
    • SL Green is increasingly looking to capital recycling as a source of potential value and is branching out a bit from its core focus on Manhattan office properties.
    • SL Green seems pretty fairly valued today, with my estimates of fair value running from about $104 to $108 per share.
  • CapitaLand Remains Undervalued Amidst Challenging Property Markets
       • Sep. 18, 2014 CLLDY Comment!

    Summary

    • Reacquiring CMA gives CapitaLand more control over a valuable collection of assets that can anchor future integrated/mixed developments.
    • The housing markets of Singapore and China are in rough shape, but CapitaLand's asset exposure is under control and the retail properties are doing pretty well.
    • CapitaLand still trades at what seems to be an excessive discount to underlying net asset value, with a long-term ROE of 9% supporting a price more than 20% higher.
  • Endo's Bid For Auxilium Makes Sense
       • Sep. 18, 2014 ENDP Comment!

    Summary

    • Endo publicly announces its desire to acquire Auxilium for $28.10 per share.
    • Auxilium is currently playing it cool, but Endo's deal offers credible sales synergy, a chance to maximize the value of Xiaflex, and good cost and tax leverage for Endo.
    • Endo has room to up its bid, but the company's deal pipeline is reportedly pretty healthy and management likely won't overpay for Auxilium.
  • Gordmans Stores Has Better Management, Will Results Reflect It?
       • Sep. 18, 2014 GMAN 2 Comments

    Summary

    • Gordmans Stores' comps have continued to erode and have taken margins with them as the company must resort to steep markdowns to move merchandise.
    • Hiring the former CEO of Stage Stores looks like a good move, but Gordmans' problems are likely going to take at least a year to fix.
    • If Gordmans can generate 2% to 4% comp growth (and 5% annual sales growth overall), these shares could move back to $6 or higher but comps are critical to margins.
  • A Few Flickers From Torchmark
       • Sep. 18, 2014 TMK 1 Comment

    Summary

    • Torchmark defended its capital position after the S&P revised its outlook lower, but there is a risk that a future downgrade could harm the company's marketing efforts.
    • Torchmark's agent restructuring efforts are supporting solid new business trends, but investment performance is harder to come by in this rate environment and underwriting margin has wobbled a bit.
    • A 14%-15% long-term ROE can support a fair value from $57 to $61 and Torchmark offers uncommonly consistent performance with much less underwriting and balance sheet risk.
  • Is It Time To Bottom-Fish For Vale SA?
       • Sep. 17, 2014 VALE 41 Comments

    Summary

    • Iron ore prices have tested the $80 level and led to predictions that iron is dead as an attractive commodity.
    • Vale has very low production costs, high-quality ores in its Northern resource base, and ample expansion potential.
    • Just 5.5 times 12-month EBITDA can support a fair value above $14, but further iron ore price declines and a potential new political regime in Brazil loom as risks.
  • Braskem Hamstrung By Brazil's Industrial Malaise
       • Sep. 17, 2014 BAK Comment!

    Summary

    • Braskem has seen domestic demand for polyolefins and vinyls drop on a widespread slowdown in industrial production.
    • Global polyolefin/naptha spreads are healthy, but there is supply uncertainty during negotiations with Petrobras and an ethane-fueled plant in Mexico is still years away from making a real contribution.
    • Braskem's shares deserve to trade at a discount to European and U.S. basic chemical peers, but even a 6x multiple to 12-month EBITDA suggests solid upside.
  • CSN's Highly Leveraged To Recoveries In Brazil's Economy And Global Iron Prices
       • Sep. 17, 2014 SID 1 Comment

    Summary

    • CSN is one of Brazil's largest steel producers, and particularly in higher-value steels, and one of the world's largest iron ore miners.
    • Brazil's steel industry is suffering in the face of weakening domestic demand and competition from cheaper imports.
    • CSN is heavily leveraged to stronger auto/truck, construction, and energy activity in Brazil, as well as better global iron ore prices.
  • Brazil's Malaise Drags Gerdau Down
       • Sep. 17, 2014 GGB 1 Comment

    Summary

    • Brazil's economic performance has continued to falter, with auto production and construction starts down by double-digits from the prior year.
    • Gerdau is looking to higher-value products and greater vertical integration to improve long-term results, but weak prices have sapped 2014.
    • Gerdau still makes sense as an early play on a Brazilian recovery, but it may be another six to nine months before the indicators turn positive in Brazil.
  • Skepticism Weighs Heavily On Ternium
       • Sep. 17, 2014 TX 1 Comment

    Summary

    • Ternium shares have struggled amidst soft steel prices and weak demand in Argentina, with Brazilian producers continuing to see overcapacity and shrinking demand in their home market.
    • Ternium is leveraging itself to increasing industrial activity in Mexico, particularly in autos, energy, and construction.
    • A 5x EBITDA multiple leads to a fair value of nearly $31, but Ternium shares likely need to see strong growth in Mexico and an Argentine recovery to get ahead.
  • Eastman Chemical's Taminco Deal Looks Solid
       • Sep. 16, 2014 EMN 2 Comments

    Summary

    • Eastman Chemical isn't getting Taminco cheap, but the deal will add a high-quality market leader in a large specialty chemical market.
    • Eastman's diverse set of specialty chemical businesses should support ongoing double-digit ROIC and growth rates above the industry norms.
    • Adding Taminco adds about 5% to my fair value for Eastman Chemical, with fair value around $85 to $95 per share.
  • Siemens Has Changed The Tone, But Can It Deliver?
       • Sep. 16, 2014 SIEGY Comment!

    Summary

    • Siemens has rallied analysts to its cause, with a growth-oriented focus on key markets like automation, electrification, and digitalization.
    • Healthcare would probably do better on its own, but management seems reluctant to launch a full-scale spin-off of this business.
    • I believe Siemens needs double-digit FCF margins on a sustained basis (something it hasn't done before) to offer meaningful upside to today's price, but stronger sales growth is certainly possible.
  • Allison Transmission Still Looking At A Multiyear Sales Effort Outside The U.S.
       • Sep. 16, 2014 ALSN Comment!

    Summary

    • Weaker medium-duty truck orders and Ford taking its transmissions in-house for larger trucks is a threat, but the new TC-10 transmission should create new opportunities in Class 8 trucks.
    • Shortages of qualified drivers are driving more operators to adopt automatics in North America, but utilization outside North America is still low and a major potential driver for Allison.
    • Allison still trades at a pretty hefty forward EBITDA multiple, but the company should be in position to generate significant free cash flow and looks more attractive on that basis.
  • IPG Photonics Continues To Grow, While Growing Its Addressable Markets
       • Sep. 16, 2014 IPGP 2 Comments

    Summary

    • Despite weaker first quarter guidance, IPG Photonics has kept up double-digit growth, with particular strength in material processing applications.
    • The company is looking to displace traditional lasers in large markets like micromachining and microlectronics, while also looking to 3D printing and sapphire glass cutting as growth opportunities.
    • The growth expectations for IPG Photonics are not conservative, but the company retains a significant lead over its rivals and can support a fair value in the mid-$70s.
  • BB&T Buys Again And Restates Its Case
    Sep. 16, 2014 BBT 2 Comments

    Summary

    • Close on the heels of announcing the purchase of branches in Texas from Citigroup, BB&T announces the acquisition of Bank of Kentucky - lifting the bank to #2 in KY.
    • BB&T's Investor Day didn't present a whole lot that was truly new, but management remains focused on deploying capital toward growth, running a balanced business, and returning capital to shareholders.
    • BB&T is still trading below its long-term fair value and the bank is well-positioned to grow through both M&A and organic branch-based operations.
  • Applied Optoelectronics Looking To Two Primary Growth Drivers
       • Sep. 16, 2014 AAOI Comment!

    Summary

    • Applied Optoelectronics is looking to leverage expertise in lasers into growth opportunities within the 10G/40G data center upgrade cycle and broadband fiber-to-the-home.
    • Applied Optoelectronics offers strong capabilities and performance in lasers, as well as vertical integration that should allow the company to compete effectively on price/performance metrics.
    • Not surprisingly for an up-and-coming tech company, AAOI isn't all that cheap on cash flow, but the valuation looks more promising in terms of PE and EV/sales.
  • Is Intercept Pharmaceuticals Building The Next Great Specialty Franchise?
       • Sep. 15, 2014 ICPT 4 Comments

    Summary

    • Intercept should file its first NDA in 2015 and start a Phase III trial for an indication that could offer HCV-like revenue potential.
    • Intercept's OCA appears not only very effective in orphan indications like PBC and PSC, but also the potentially multimillion-patient NASH market.
    • Because of a low share count and a long timeline to peak revenues, Intercept valuation is very sensitive to relative small input changes, but fair value seems around $425/share.
  • Allana Potash Continues To Drift Amidst Ag Malaise
       • Sep. 13, 2014 ALLRF 11 Comments

    Summary

    • Allana shares continue to drift lower, despite a strong and engaged strategic partner in Israel Chemicals.
    • If efforts to increase royalties and taxes on resources produced in Israel stick, Allana's Ethiopian Danakhil project may become even more valuable to ICL.
    • Allana still needs to secure project financing, but these very risky shares look undervalued below $0.80/ADR.
  • Vectura Group Following A Familiar Path
       • Sep. 13, 2014 VEGPF 2 Comments

    Summary

    • Vectura Group isn't well-known, but it has a broad and deep portfolio of patents and technology for the formulation, manufacture, and administration of respiratory drugs.
    • Novartis's Ultibro and Seebri are selling well in the EU and Ultibro could become a blockbuster in the U.S., generating meaningful royalty revenue for Vectura.
    • Vectura may choose to use its impending free cash flow generation to transition toward a specialty pharma model where it keeps drugs in-house for proprietary development and commercialization.
  • F5 Networks Executing Well And Building Out The TAM
       • Sep. 12, 2014 FFIV 1 Comment

    Summary

    • The ADC market has been looking better, but F5 is really getting a boost from customer adoption of its add-on security products.
    • Expanded security offerings could add billions to F5's addressable market, but I wouldn't ignore the company's growing suite of products aimed at service providers looking to upgrade/support their data services.
    • The valuation isn't a compelling bargain today, but the growth potential makes it worth following in case the shares slide.
  • Colfax Still Enjoying The Fruits Of Superior Growth Potential
       • Sep. 12, 2014 CFX 3 Comments

    Summary

    • Despite another miss in the second quarter, the Street is still on board with Colfax's significant margin improvement/leverage opportunities.
    • Welding end-markets seem to be in recovery and the gas handling business is doing well, but weakness in power gen and oil/gas could still be a short-term challenge for fluid handling.
    • Colfax offers excellent near-term and long-term growth potential, which the Street will richly reward, but a lot of those rewards seem to already be factored into the stock price.
  • Microsemi Puts Cash To Work In M&A And Buybacks
       • Sep. 12, 2014 MSCC 1 Comment

    Summary

    • Microsemi acquires Centellax, a small semiconductor company with MMIC technology that can help Microsemi's development of higher-margin high-performance chips.
    • Microsemi confirms above-average sequential growth in a weaker quarter for chip companies and announces a $100M share buyback.
    • Trading more than 20% below my fair value estimate, Microsemi continues to look like a relative bargain in the chip space.
  • Will Gamesa Move From Survive To Thrive?
       • Sep. 12, 2014 GCTAY 1 Comment

    Summary

    • Gamesa has been rebuilding credibility with solid performance on orders, revenue, and margins - everything the analysts say they want to see.
    • I have my concerns that Gamesa's extended austerity program has put the company behind in terms of R&D, but a recent JV with Areva will help the offshore business.
    • Gamesa looks fairly valued today unless you believe the company can generate double-digit long-term revenue growth and/or double-digit FCF margins.