Value Portfolio

AGCO Corp., the agriculture equipment manufacturer, dropped 10.5% on October 7th after issuing an earnings warning for its upcoming third-quarter report on October 28th. CEO Martin Richenhagen stated:

During the third quarter, we experienced weaker than anticipated levels of demand and are responding by making more aggressive cuts in production schedules and expenses.

This temporary end-user demand weakness has not stopped director Mallika Srinivasan, AGCO director and CEO of India’s Tractor And Farm Equipment Ltd. (TAFE) from continuing to purchase tens of millions of dollars worth of AGCO stock. TAFE now owns 9.8 million shares, or 10.5 percent of AGCO’s outstanding shares. AGCO itself holds a 23.75 percent interest in TAFE. Srinivasan will likely take advantage of AGCO current bargain price to buy even more stock since an August agreement allows TAFE to acquire up to a 12.5 percent ownership stake in AGCO.

Brocade Communications Systems hosted a recent investor day. CEO Lloyd Carney announced that the company is expanding beyond its traditional IP networking hardware, running trials for network function virtualization (NFV) and software defined networking (SDN) with 50 tier-1 service providers. The company expects to go live with this new service in late 2015 and generate revenue for the company in 2016.

During his presentation, Mr. Carney also reported that firm has divested some of its lower-margin businesses like its adapter, wireless and low-end routing switches. Focusing on higher-growth businesses makes sense.

CFO Dan Fairfax expects storage area network (SAN) revenue for the fourth quarter is expected in a range of a 1% drop or a 2% growth while IP Networking growth is expected to be up 6% to 15%. Revenue for the fourth quarter is expected to be in the range of $550 million to $570 million, the mid-point of which is 1% better than a year ago.

The company also issued an extended guidance for 2015-16. Management expects SAN growth for the upcoming fiscal year of about 2% while IP networking is growth is in the range of 8% to 12%. Brocade is also targeting non-GAAP gross margin  of 66% to 67% for fiscal 2015.

Management said it is still committed to returning 60% of free cash flow to shareholders through its buyback program as well as its recently established dividend. Management said it target a 3% to 4% reduction in its share count through share repurchases annually. The company still has $690 million of its $1 billion buyback program remaining as of Aug 20, 2014.

The analyst at Wunderluih Securities was so impressed with Brocade’s focus on complementing its traditional networking hardware with software enhancements that he reiterated his buy recommendation on Brocade and upped his price target to $12, which constitutes 20% upside from the the stock’s current $10 price point.

FutureFuel, the biofuels and specialty chemicals producer, has suffered from an interminable 11-month delay in the EPA’s issuance of renewable fuel standards (RFS) for 2014, as well as the failure (so far) to renew the $1.00 blenders’ fuel credit per gallon of gasoline. There is speculation that the EPA in its final rules will reverse its preliminary decision to lower the biodiesel mandate for 2014, and that a lame-duck Congress will renew the blenders’ fuel credit after mid-term elections and make the credit retroactive.

If this speculation proves accurate, FutureFuel’s stock will gain significantly in price. With the stock price so low, investor expectations are overly pessimistic and vulnerable to an upside surprise. Two recent analyses of the stock conclude that it has “serious upside potential” and  that the current sub-$12 price point represents “a relatively short lived buying opportunity.“

Now may be the best time in a long time to invest in FutureFuel and therefore I am making it a “Best Buy”, replacing W.R. Berkley which is still a good buy but much closer to its intrinsic value.

Stepan Co. is a great company that has raised its dividend for 46 consecutive years. I recommend reading Stepan’s recent investor presentation, which explains that the company’s recent slowdown is temporary and caused by a decline in the use of surfectants in U.S. laundry detergent (slide no. 9).

The good news is that: (1) sales of surfectants in the U.S. will stabilize after 2014 thanks to expanded uses in oil recovery and agriculture; (2) the company’s other business segments — polymers and polyols — are doing very well in CASE (coatings, adhesives, sealants, elastomers), roofing and insulation; and (3) international expansion in Brazil (surfectants) and China (polymers) is taking off.

Two things that keep me bullish on Stepan: (1) strong “balance sheet to get it through any slump“; and (2) “macro growth tailwinds” that will pay off in the future.

Momentum Portfolio

Apogee Enterprises reported strong a fiscal 2015 second-quarter as revenues jumped 30% to $231.9 million. Operating income for the quarter surged 66% to $15.5 million.

Its Architectural Glass revenues rose 20% to $84.2 million. Architectural Services rose 41% to $59.4 million on broad-based growth. Architectural Framing Systems jumped 55% to $76.7 million due to a combination of 28% organic growth and its acquisition of Alumicor in Nov 2013. Large-scale Optical Technologies revenues fell 2% to $19.4 million due to the timing purchases of its major retailers.

All four of its segments contributed to the company’s 58% backlog growth to $480 million. The firm expects to deliver about $285 million of this backlog in 2015 and $195 million in fiscal 2016 and beyond.

CEO Joseph F. Puishys raised the company’s earnings guidance for the year from a prior range of $1.35 to $1.50 per share, stating:

Fiscal 2015 is shaping up to be an exceptional year for Apogee. We have raised our outlook for revenue growth to approximately 20%, from 15 to 20 percent, and our earnings per share range has been increased to $1.62 to $1.72 to reflect the $0.22 tax credit we earned in the second quarter.

We are experiencing robust bidding and quoting activity, and significant backlog growth as we gain share. The strength we are seeing is mirrored in the metrics of our commercial construction market sectors. Regarding our large-scale optical segment, we are expecting that the third quarter will be seasonally strong with higher year-over-year comps, which should allow the segment to generate fiscal 2015 full-year results comparable to those in fiscal 2014.

Apogee also confirmed capital spending for fiscal 2015 of approximately $40 million, including recently announced expansions in its Architectural Glass and Architectural Finishing segments.

Following the strong performance, analysts at Northland Securities upgraded its price target from $33 to $47 per share. Analysts at DA Davidson raised their price target from $40 to $46 per share and Goldman Sachs raised its price target from $37 to $48 per share.

Shares gained 8.4% immediately following its earnings report, hitting a record-high of $42 on Sep 19.