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Stephen Simpson, CFA

 
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  • Manitex Misses, But May Be Building Momentum
       • Fri, Aug. 8 MNTX Comment!

    Summary

    • Like Terex and Manitowoc, Manitex missed expectations on weaker demand in the North American crane market, though Manitex seems to be outgrowing the market and taking share.
    • The acquisition of PM Group is a bold move and a logical extension into knuckle boom cranes, but it is a large deal and successful integration/execution is a must.
    • Although the near-term outlook has worsened a bit, Manitex is still a share-gaining growth story in industrials and should trade into the high teens.
  • Petrochemical Transportation Pain Is Kirby's Gain
       • Thu, Aug. 7 KEX 1 Comment

    Summary

    • Kirby continues to post strong results as limited barge capacity and increasing crude oil and petrochemical production support good results in the marine business.
    • Kirby is well-positioned to add capacity to match the expected growth in crude and refined product production, while the diesel business should improve on better fracking fundamentals.
    • Kirby shares usually look expensive and continue to go up anyway and today's valuation is no exception.
  • Weyerhaeuser's Asset Quality Held Back By A Sluggish Recovery
       • Thu, Aug. 7 WY 1 Comment

    Summary

    • Weyerhauser did better than the comp group in the second quarter, helped by solid volumes across the timberland and wood product operations.
    • Timberland performance is being held back by weak building activity and weaker export demand, while wood products is seeing the impact of higher OSB capacity.
    • Trading below fair value in the range of $35 to $36, Weyerhaeuser is a good risk-adjusted play on an eventual recovery in housing demand.
  • Wright Medical, Wrong Market
       • Thu, Aug. 7 WMGI Comment!

    Summary

    • Wright Medical is doing fine from a sales perspective, and likely gaining share in foot/ankle, but margins were disappointing, leaving a lot to do in the second half of 2014.
    • INFINITY represents a strong incremental revenue opportunity and FDA approval of Augment could come as a welcome surprise.
    • Excluding Augment, Wright Medical can trade into the mid-$30's and still go for less than normal takeout multiples, while the Augment CVRs currently price in sub-30% odds of Augment approval.
  • Sluggish Collections As PRA Group Begins A New Era
       • Thu, Aug. 7 PRAA 1 Comment

    Summary

    • PRA Group misses again on revenue and earnings, with the slowdown in call center collections continuing.
    • Purchase activity remains challenged with major sellers still on the sidelines, but management's collection expectations continue to head higher and collection productivity is improving at a double-digit rate.
    • Giving partial credit to Aktiv, I increase my estimate of fair value to $71.50, with an underlying assumption of high single-digit long-term FCF growth.
  • Ultra Petroleum Continuing To Yo-Yo Between Gloom And Glee
       • Wed, Aug. 6 UPL 5 Comments

    Summary

    • Ultra Petroleum missed second quarter expectations on lower production and higher cash costs.
    • Pinedale wells continue to generate strong returns, while the potential of the Uinta is constrained by takeaway capacity.
    • With current NYMEX prices, Ultra's NAV appears to lie around $33 while the EV/EBITDA approach suggests $28.
  • Have Expectations Exceeded Helmerich & Payne's Capacity To Outperform?
       • Wed, Aug. 6 HP 1 Comment

    Summary

    • The sell-off after FQ3 earnings likely had more to do with sector-wide profit-taking after a big run than fundamental issues with an otherwise okay quarter.
    • HP management believes there's still a need for about 50% more AC drive rigs in the U.S., and the company could be looking at a multiyear opportunity outside the U.S.
    • At 6.5x 12-month EBITDA Helmerich & Payne shares are just slightly undervalued; HP remains a great company in the space but not the best value.
  • Even With Weak Iron Prices, Rio Tinto Looks Like A Relative Bargain
       • Wed, Aug. 6 RIO 1 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 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 VDNRF 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 SCGLY 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 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 3 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 AVD 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 MIC 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 AB 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 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 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 NUVA 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 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 PCL 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 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 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 PACB 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 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 MXIM 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.