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Stephen Simpson, CFA

 
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  • 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 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 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 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.
  • Peabody Energy Still Waiting For Better Days
       • Wed, Jul. 23 BTU 9 Comments

    Summary

    • Even without some one-time events, Peabody beat expectations on higher pricing and respectable cost-containment.
    • A thermal recovery in the U.S. could be limited by rail issues and weather, if El Nino leads to a milder summer.
    • Peabody has no meaningful liquidity issues and will likely be cash flow-positive in 2015. The shares still look like a good play on a coal recovery below $20.
  • With Aerospace Squared Away, Will United Technologies Go Back To Big Deals?
       • Wed, Jul. 23 UTX 1 Comment

    Summary

    • Sluggish orders undermine a pretty solid quarter at United Technologies in terms of revenue and margin progression.
    • Building BIS through acquisitions would make a lot of sense, and I expect UTX to target large European companies (or companies headquartered in Europe).
    • Mid-single digit revenue growth and high single digit FCF growth don't project a lot of upside, but that is the norm in industrials today.
  • Amidst Ongoing Doubts, Exact Sciences Still Offers Opportunity
       • Wed, Jul. 23 EXAS 29 Comments

    Summary

    • Exact Sciences continues to wait for two critical gating events - FDA approval of the Cologuard test and CMS reimbursement for the test.
    • Exact Sciences is implementing a business strategy that will cost more in the short term but generate significant profits and cash flows if/when the expected volume emerges.
    • Discounting back my projected cash flows leads to a fair value of $20.
  • Improving Results, Markets, And Operations For Steel Dynamics
       • Wed, Jul. 23 STLD Comment!

    Summary

    • Steel Dynamics' second quarter earnings support the idea that the North American steel market is seeing meaningful improvement.
    • Acquiring Severstal's Columbus mill is a major coup for the company, significantly expanding overall capacity, diversifying the geographical asset base, and adding higher-margin product capabilities.
    • Steel Dynamics looks fairly priced on 12-month EBITDA, but looking out just a bit further suggests more meaningful upside potential.
  • The Green Dot Roller Coaster Rolls On
       • Wed, Jul. 23 GDOT 2 Comments

    Summary

    • AmEx, Western Union, and Total Systems Services are stepping up their competitive efforts in the prepaid debit card space, threatening GDOT's margins and market share.
    • The Walmart deal expires next year and Walmart has a history of playing rough with its partners, putting more than half of the company's revenue at risk.
    • Low double-digit FCF margins and mid-to-high single-digit revenue growth can support a fair value around $22, but the fate of the Walmart deal will be a major value-changer.
  • Weak Core Results At BB&T Driven By Expenses
       • Tue, Jul. 22 BBT 3 Comments

    Summary

    • Lackluster fee performance and higher expenses drive a rare meaningful miss from BB&T.
    • Net interest margin was fine and credit quality remains good, but loan growth seemed a little soft compared to other peers, particularly in the Southeast.
    • BB&T looks undervalued below $41/share, but management must deliver on the projected expense improvements and perhaps should consider ways to maximize the value of the insurance operations.
  • Itochu May Pause, But Has A Good Long-Term Model
       • Tue, Jul. 22 ITOCY Comment!

    Summary

    • As other companies get more proactive with share buybacks and return improvements, Itochu has lost some of its comparative luster.
    • This fiscal year is looking less impressive, but Itochu is still likely to hold the top spot for returns on equity and capital and is the best-positioned in China.
    • Fair value for the shares appears to be between $29 and $32, though a lack of yoy earnings momentum could weigh on the shares.
  • Is Renaissance Re Still A Safe Haven Among Reinsurance Companies?
       • Tue, Jul. 22 RNR Comment!

    Summary

    • Property catastrophe reinsurance, RenRe's core market, is seeing serious price erosion as there is way too much capital chasing business and pricing discipline is flagging.
    • RenRe is expecting strong growth in Lloyds and specialty lines, but that doesn't appear to be enough to maintain attractive underwriting profit growth.
    • I believe RenRe shares are worth about $110 on the basis of long-term ROE potential, but that doesn't leave much upside at today's price.
  • Alpha Natural Resources Can Most Likely Survive, But Can It Thrive?
       • Tue, Jul. 22 ANR 10 Comments

    Summary

    • Alpha Natural has good liquidity, with most of its debt maturing in 2018 or later and substantial room to do more secured borrowing if needed.
    • Met coal prices remain in the dumps and Alpha Natural likely needs prices around $170 to $180 to reach positive free cash flow.
    • Assigning a 10x multiple to 2016 EBITDA and discounting it back doesn't lead to a compelling fair value, but Alpha is a leveraged play to a met coal recovery.
  • After A Transformative Deal, Can AerCap Holdings Climb Higher?
       • Sat, Jul. 19 AER 1 Comment

    Summary

    • AerCap management has meaningful SG&A synergy and receivables collection opportunities with the ILFC deal.
    • Acquiring ILFC from AerCap has more than quadrupled AerCap's fleet, further diversified the business mix, and brought in more than $2 billion of embedded value in the order book.
    • AerCap has taken on significant debt in the deal, but the potential of mid-teens ROE in 2015 can support a 1.25x multiple to book value, or a FV of $50.
  • Ultratech Sliding To The Right... Again
       • Fri, Jul. 18 UTEK 3 Comments

    Summary

    • Ultratech once again misses estimates and lowers guidance, as FinFET-related LSA tool orders are slow to develop.
    • Advanced packaging and high-brightness LEDs remain attractive opportunities for Ultratech, but LSA tool demand will decide the stock's fate over the next two-to-three years.
    • Ultratech can trade over $30 on good order flow, but the certainty of those orders coming in is still low.
  • Heartland Payment Offers Increasingly Diversified Growth
       • Fri, Jul. 18 HPY Comment!

    Summary

    • Non-card revenue continues to be a growth driver for this top-10 merchant acquirer and payment processor.
    • Integrated payment services are becoming increasingly important to maintaining competitive standing in the acquiring/processing world, but Heartland has already established good share in newer growth opportunities like school-based card services.
    • Neither discounted cash flow nor EV/EBITDA suggest that the Street is undervaluing the low-teens FCF growth potential at Heartland.
  • U.S. Bancorp Seeing Stable Credit And Early Signs Of Loan Growth
       • Fri, Jul. 18 USB 2 Comments

    Summary

    • U.S. Bancorp was on target with second quarter results, but did deliver surprisingly strong double-digit commercial lending and mortgage growth.
    • Net interest margin pressure could intensify in the short term due to higher wholesale lending levels and the end of checking advance products.
    • Both excess return modeling and RoTE-based P/TBV support a fair value of $43 today and U.S. Bancorp's modest interest rate sensitivity reduces near-term upside from higher rates.
  • First Cash Financial Does Enough To Get By
       • Fri, Jul. 18 FCFS Comment!

    Summary

    • First Cash did okay relative to expected results, but investors may be discouraged by the slow pace of the turnaround in Mexico.
    • The retail environment in Mexico is getting better, and decreased consumer lending options in the U.S. could be supportive to loan demand.
    • First Cash appears to be about 10% undervalued on the basis of mid-teens long-term FCF growth.
  • Aspen Insurance Making Its Case To Stand Alone
       • Fri, Jul. 18 AHL 2 Comments

    Summary

    • Aspen continues to resist Endurance's bid, even though Endurance is valuing Aspen more highly than all but the two best-run companies in the immediate peer group.
    • Strong premium growth and good combined ratio performance supports management's case that better results, and double-digit ROE, are not only possible but close at hand.
    • I calculate a fair value of $46 on a long-term ROE of 11%, but ongoing outperformance could lead to a more substantial re-rating.
  • Hartford Financial Services Offers Self-Improvement And Takeover Potential
       • Thu, Jul. 17 HIG 4 Comments

    Summary

    • Running off the variable annuity business is compressing returns, but The Hartford has a high-quality P&C business.
    • The Hartford still has room for further restructuring efforts, including operating expense reductions and possibly a sale of additional components of the runoff operations and/or the Group Benefits business.
    • Between a fair value of $38 (excess returns) and $42 (ROE-based P/BV), I believe The Hartford is still underappreciated by the Street and a strategic buyout could be possible.
  • Gladstone Capital Is Seeing Better Credit, But Growth Is A Concern
       • Thu, Jul. 17 GLAD 2 Comments

    Summary

    • Credit quality appears to be improving as non-accruals and unrealized losses shrink as a percentage of the portfolio value.
    • Gladstone deployed more capital earlier in 2014, but announcements of new investments have petered out and may well reflect a challenging competitive lending environment.
    • Gladstone's shares could trade back up toward 1.1x NAV as lending demand and credit quality improve, but dividend coverage is an issue in the meantime.
  • First Quantum Minerals Shooting For The Top
       • Thu, Jul. 17 FQVLF 1 Comment

    Summary

    • First Quantum continues to increase its long-term copper production potential, while also adding valuable nickel assets.
    • With the acquisition of Lumina, First Quantum likely won't be self-funding until 2018.
    • First Quantum remains on target and on plan, but is trading more or less around fair value today.
  • Albemarle Pays A Stiff Price For A Premium Asset
       • Wed, Jul. 16 ALB, ROC 9 Comments

    Summary

    • Albemarle is paying a 5% premium to Rockwood's all-time high (and 18x estimated 2014 EBITDA) for this leading lithium and metal surface treatments company.
    • Albemarle wanted a third value-driver and Rockwood's lithium operations offer uncommon growth potential and high margins relative to the specialty chemical sector.
    • The synergy targets seem reasonable, but the high price paid puts the onus on Albemarle to deliver the projected growth and margins in the coming years.
  • Whiting's Buy Shows How The Bakken Is Changing
       • Wed, Jul. 16 KOG, WLL 21 Comments

    Summary

    • Whiting's acquisition of Kodiak isn't about adding value through exploration, it's about adding value through operating scale and more efficient operation.
    • Kodiak's downspacing tests have been positive on balance (albeit not perfect), but Whiting should be able to drive better well completion and operating costs.
    • If everything works out, Whiting may be acquiring Kodiak for $6/share less than its underlying NAV, but the Kodiak-specific downside seems rather low.
  • Materion Is Getting Better And Taking The Valuation With It
       • Wed, Jul. 16 MTRN 1 Comment

    Summary

    • Orders are growing at a double-digit clip, and global supplies of beryllium master alloy appear to be getting tighter.
    • Management is looking to make margin and asset efficiency improvement an ongoing process, complemented with value-added M&A.
    • Higher prices and improving demand offer upside, but it's tough to call the shares cheap at around 8x forward EBITDA.
  • EZCORP Has Been Treading Water While Improving
       • Tue, Jul. 15 EZPW 62 Comments

    Summary

    • EZCORP terminated an expensive and unnecessary advisory agreement with a firm controlled by its controlling shareholder, saving $0.09 to $0.10/share a year in expenses, and named a new chairman.
    • I don't like the company's decision to reallocate gold jewelry to retail (from scrapping), but the company's Mexican lending operation is leveraged to improving employment and consumer confidence.
    • By almost any metric EZCORP seems too cheap unless you believe it can no longer generate double-digit margins and/or asset turnover in excess of 1.0.
  • More Addition By Subtraction At Weatherford
       • Tue, Jul. 15 WFT 2 Comments

    Summary

    • Weatherford sells its underperforming Russian and Venezuelan drilling and workover rigs to Rosneft in a $500 million deal.
    • Weatherford got a reasonable price for old assets operating in a tough market and likely upgraded the value of the remaining drilling assets due to be spun off via IPO.
    • Progress with the turnaround/streamlining efforts and an improving oil services operating environment give Weatherford upside to $25 or higher.
  • Compass Won't Be Changing Direction Soon
       • Tue, Jul. 15 CODI 3 Comments

    Summary

    • Growth and cash generation have slowed, but Compass has the liquidity to make meaningful additions to the portfolio.
    • Management is incentivized to focus on long-term value creation through the operation of a diverse portfolio of high-quality operating assets.
    • Compass still isn't strikingly cheap but does seem priced to generate respectable returns over the long term.