OUTLINE:
*Each target price is (1) computed using CGFS' proprietary valuation and simulation approach and (2) adjusted within 3 standard errors of the estimate. Assumption and computation details are inserted at the end of each write-up.
This Week's Picks:
- Our Weekly Stock Picks*
- The Bond Report, What's next, & Key Earnings
*Each target price is (1) computed using CGFS' proprietary valuation and simulation approach and (2) adjusted within 3 standard errors of the estimate. Assumption and computation details are inserted at the end of each write-up.
This Week's Picks:
Fortune Brands Home and Security is the industry leader because of its well-known and high performing brands in the segments of cabinets, plumbing, doors, and security. The company's third quarter earnings resulted in operating margin gains in three of the four segments from the previous year while navigating the disruption in Florida and Texas due to hurricanes. FBHS will benefit from the promising housing improvement trends of greater consumer confidence, greater millennial homeowners, and an increase in the median age of homes in the U.S. to 40 years. FBHS has industry leading and increasing operating margins in the segments of cabinets and plumbing. The Global Plumbing Group strategy of increasing sales volume in the Plumbing segment with the largest operating margin. There is opportunity for margin growth in the segments of doors and security due to lagging behind competitors' margins in those segments. FBHS has an underleveraged balance sheet compared to its competitors that will allow them to continue growing with strategic acquisitions and international expansion. The Monte Carlo simulations shows that the company has a greater upside than downside due to the ability to continue decreasing operating costs as a percent of revenue. FBHS is well positioned for its stock price to continue increasing past its 52-week high.
Amedisys provides high quality home health, hospice, and personal care services to clients all around the country. With 88% of plans operating at 4.0+ CMS Star Rating, and continued improvements to operating cost controls, AMED is in a position to take advantage of the industry growth that is expected for health care services. Share price has been beaten down by concerns over CMS’ Home Health Groupings Model, but the plan has been dropped, and AMED should be able to see considerable growth going forward.
As the new year approaches, Flir Systems is doing a total revamp to their segments and condensing their six segments into three business units at the start of 2018. With new products coming out recently and strong operating income margins throughout all segments, Flir Systems looks like they are going to continue to grow through each segment. Lastly, with the new CFO looking to increase their margins at any possible chance and the constant growth of the industry, Flir Systems is under priced at $46.19 and will see major growth over the next year.
Central Garden & Pet’s stock has grown 25% since the beginning of the year, as the company recorded its second consecutive year in double-digit growth in revenues. The company will continue its strong momentum as investments in product innovation will enable them to diversify its portfolio of products even more and attain a greater market share. In addition, the company will continue to increase its earnings as growth in EBITDA outpaces the revenue growth, as a consequence of the fastest growth of the pet segment and the focus on optimizing the supply chain footprint and achieve cost synergies integrating acquired companies. Lastly, the company will continue its aggressive M&A campaign, acquiring companies that will add value to the company and increase its sales.
Nike has an equal mixture of both bear and bull signals which causes the stock to garner a hold rating. Black Friday sales are estimated at all time highs which give Nike a head start to begin one of the busiest times of the year. Nike still remains and extremely popular brand which will continue to drive growth for the athletic apparel behemoth. Nike has begun to implement the Consumer Direct Offense, its plan for future growth in the competitive retail industry. However all of these bull signals are offset by major industry headwinds which will impact the company for the next four to six quarters and possibly beyond.
Cohu, Inc. is poised for significant growth in the years ahead. This growth will be spurred by their recently released new products, expansion of the automotive IC market, and their improved financial model to achieve $500M in sales in the next 3-5 years. Currently, the market has not reacted to these catalysts, providing a unique mispricing opportunity that must be capitalized on as soon as possible.
Dana Inc. has strong growth factors due to further market expansion in growing regions like China. They are an industry leader, launching new products, which follow the current industry trends towards electric vehicles. With further acquisition synergies on the 2018 horizon, Dana Inc. should see increased efficacies with multiple growing end markets.
Hasbro, Inc. is the leading force in the world’s toy and entertainment industry and will continue to drive demand through seasonality effects and the release of new products as we move through the fourth quarter. Currently valued slightly below the middle of its 52-week price range, Hasbro is underpriced compared to the Consumer Discretionary sector and presents a great buying opportunity for stock appreciation. In addition to forecasted growth in the fourth quarter, Hasbro may strike a deal to acquire its competitor Mattel, largely expanding its product platform and driving its potential for greater long-term growth. With steady sales and margin growth, Hasbro can drive returns near 22% as it catches up to the market, making it an attractive investment with high growth potential for both short and long-term investment strategies.
Comfort Systems’ stock will experience strong gains in upcoming quarters as the company will experience strong revenue growth, improving operations, and expansion of their service and maintenance segment. The stock will gain from consumer investment within the industrial market and demand for Comfort Systems’ necessity based products. The industry must soon expand to meet the demand from millennial investors creating more opportunity for Comfort Systems. The company’s operations will continue to improve, providing stronger margins and a more efficient conversion of backlog through the recent acquisition of BCH Holdings. Currently Comfort Systems’ operations outperform its peers.
Brooks Automation is well positioned to expand and execute their long term strategy looking forward. With demand for semiconductors at an all time high, and the life science segment of the company growing fast and is well positioned to beat earnings for the current year.
Seagate is a leading provider of a stabilizing hard-disk drive market. In the shift towards solid state drive, the company will be able to stay competitive through the agreement with Toshiba Memory Corp. Operational excellence with further drive margins past competitors who have little room to grow. Value will also be created through a decrease in capital expenditures which will lead to 30-50% of cash flows being returned to shareholders. At a P/E of 11.6x, this undervalued stock must be bought.
CONE Midstream Partners is primed to become a leader in the midstream energy service industry. CONE has a long term fixed fee agreement with two best in class sponsor companies CONSOL Energy Inc. and Noble Energy Inc. CONE is positioned well as the price for oil steadily rebounds. The acquisition of CONE Gathering DevCo. has increased efficiencies in the Anchor System segment. With the improvements to operations, quality and efficiencies, CONE is a definitive buy recommendation.
OSI Systems, Inc. is looking to and has started to expand by leveraging it electronics and contract manufacturing capabilities into selective end product markets through organic growth and acquisitions. They have started to accomplish this through recent acquisitions and a purchase of a new facility in the middle of the 2017 fiscal year. For their security division they are looking to grow more in the international markets through government agencies. OSIS is also looking to see growth in their healthcare segment through helping developing countries and the increase in aging population. OSIS has many ways to see growth in different segments of their business towards the end of the year and from the last quarterly report, the CEO Deepak Chopra seems excited for 2018.
Masimo Corporation is a relatively new company that over the past couple of years has been growing at exponential levels. Masimo’s major competitive advantage comes from their superior products, which sets them apart from their competitors. Masimo is at their 10-year post IPO and has continuously seen double digit revenue growth organically which is supplemented through royalty revenues. Between this and cost cutting initiatives, Masimo is increasing operating margins and creating value year-over-year. In addition, Masimo continues to fuel innovation and enhancements to their products from the consistent investment in R&D.
Albemarle Corp, headquartered in Baton Rouge, Louisiana, is a premier specialty chemicals company with leading positions in attractive end markets around the world. The most valuable product that they sell is lithium and lithium compounds. With the emergence of Tesla and other auto manufacturers creating electric vehicles, the growth in demand for lithium is inevitable. Albemarle is the leading provider of lithium resources that are directly used in the batteries, which will keep these cars moving. Albemarle has also acquired a fellow lithium-based company “Rockwood Holdings, Inc.,” which is starting to increase margins in their lithium segment. The company operates through three segments, “Lithium and Advanced Materials”, “Bromine Specialties”, and “Refining Solutions”. The lithium segment recently became the main revenue driver along with increasing margins. Net profit margin nearing 30% for this particular segment. I highly recommend a buy for this company at its current price of $127.48.
Johnson Outdoors, a public corporation since 1987, produces, markets and distributes outdoor recreation equipment that is sold in 80 different countries. They offer a family of core brands across 16 product categories and employ 1,200 employees in 20 facilities worldwide. The experienced management team has delivered industry leading results over the past year and the financial sector has recently reacted negatively to an earnings call on December 8th that I believe will help to drive value as the stock price stabilizes in the coming weeks. Johnson Outdoors expects the transformation of its Consumer Center, as well as investment in digital marketing efforts and the production of digital and technological products to continue to drive growth in the coming year. Executives are actively seeking opportunities in the sphere of M&A activities and are prepared to take advantage of the proper situation should they discover it, utilizing their high levels of cash balances and ability to source funds at a reasonable level. Geographic expansion efforts in 2018 will help to give the company a stronger competitive advantage over its peers.
Tutor Perini Corporation is positioned well in the real estate construction industry. TPC has been an established leader in the civil, building and specialty construction market for over 120 years. They have built an impressive backlog that grew 20% in 2017, and is valued at $7.5B. TPC has current projects consisting of Hudson Yard NYC, Los Angeles MTA, NYC MTA and San Francisco MTA. They have established relationships with federal and state governments as well as specialty contractors over the years, so they have become very effective at winning projects over their competitors.
Energy Recovery, Inc. is a company that works in two different segments. Water and Oil & Gas is what ERII focuses on. For the water segment, they focus on desalination, which makes seawater potable. This is what they believe they can benefit from. ERII supports most of Spain’s and other countries desalination plants. Going forward ERII plans to enter into the material science and manufacturing of ceramics, which is a key component of its PX devices. This will aim to boost device production, cut costs, and improve product quality. This company is part of an industry that will eventually save us when fresh water becomes a luxury product and this is why I can see a good future for ERII.