Updated Position Monitor | New Thoughts Across 11 Stocks | CREE, GLW, INTC, MSCC, KEYS

Best Ideas LONG

1. SNE: The company is undergoing a generational change in profitability and cash generation, with multiple drivers including long profitless divisions reforming, and a growth segment in semiconductors adding high incremental margins to the mix – it is a business that is sustaining a 2+ year technology lead on peers.  A series of positive profit catalysts and revaluation remain embedded in our view of upside. In the near term we see ~-10-15% downside risk against 25% upside risk on our view of fair value range of FCF. On a 12-18 month basis we think upside could be 50-60% on FY2 forward FCF.
2. CREE: Growth of demand for new uses of SiC driving revenue and margin upside, slowly healing LED market driving directional change in estimates, if Lighting execution improves it is night and day impact, all under the guidance of a new CEO with no magic bullet but a great history of getting it right. Use weakness to accumulate with a view that P+L, margins, and FCF will trough in front of us but out-year will reflect ongoing growth + turnaround efforts. We see 25-30% downside risk and 50-75% upside risk on a 1-2 year basis at 25x FCF.
3. GLW: Strong optical cycle continues, better than expected Gorilla Glass and growth in other businesses all contribute to revenue momentum. The elephant in the room is display Glass. A dog for many years, technology based capacity growth has narrowed from above 10% to below. ASP change has followed that path. New technology growth in 2018 (10.5G fabs) is viewed as risk of creating a glut. Maybe. But in 2018 it will be a reward and drive upside in Corning display revenue. $2+ of FCF per share continues to be our 2019 bogey, driving risk to the upside of ~40%. Admittedly, Corning has been a good stock, and downside risk stands at around 20-25% on trailing FCF. 

Best Ideas SHORT

1. CALD: Pulling a fast one on markets is a core competence here. The company pretends they are a software 2.0 SaaS era company with a growth product penetrating a large and growing SPM market. The truth is this is a 1.0 era software company that should have minted cash in the transition from on-premise to SaaS and yet all the cash on the balance sheet basically comes from two equity raises in 2015 and 2016. The core incentive management business (commissions) grows at a glacial pace of ~5% or below and is losing share to Anaplan, second most important product is CPQ where CALD is already relegated to a backseat in favor of solutions from Apttus and CRM, and the only leg standing for growth is the Learning Management software solutions division, which is growing but is in a highly competitive market with contracts less than one year in length making customer churn a risk and high sales activity required. The company gave 2018 revenue guidance in November 2017 despite having only ~6mos of visibility, and is now back-filling that guidance with M&A. The stock trades in-line with SaaS peers in the vanilla 5-6x forward revenue zone, but CALD revenue growth is part inorganic, it’s products are not integrated, are not winning, and its markets are not growing that fast, which means the stock should not be trading at over 100x FCF. We see small % upside risk, and large % downside risk. We think best case FCF will be $30-40m in 2018, and we think the company will spend $50-60m on M&A to fill revenue the holes. It would not surprise us to see this as a $6-700m market cap company in 2-3 years time ($1.8b today) as the shine wears off. 
2. SABR: Stuck with a slowly innovating legacy product in a market where technology growth is accelerating, with the need to rewrite code and replace old infrastructure partially still ahead, in a market that may be changing from consolidated oligopoly to having segments filled by new technology entrants that have been invited to the revenue party by key airline customers. Translation: ignore NDC at your peril. Some recent better transaction results, completion of the Wyndham ramp, and seeing the flow-through benefit of a recent 11% RIF are all n-t positives…large cash payments in the near term to the former private equity owners, plus dividend + buyback promises, all make the stock fairly stuck, and still unrealistically expensive over 20x FCF. We see 5-10% upside risk against 25-30% downside risk.  

Bench Ideas LONG

1. II-VI: Materials science innovator benefiting from positive growth trends in Silicon Carbide for power conversion, Gallium Arsenide for 3D sensing, CO2 laser and diamond window in EUV systems, photonics for communications infrastructure, and other trends. Upside / downside looks to us like -10% / +50% on an LTM EPS (-10%) vs FY2 (+50%) basis.
2. MU: Is it over? Data suggests DRAM pricing is strong and that NAND fears – which we had held all year long – don’t seem to be weighing on the market much.  We see 80% upside risk / -40% downside risk at current levels.
3. MXIM: One of the best, last standing, standalone businesses in semis, with a solid market position, trading at 16x EV/FCF – cheaper than secularly challenged semis like Intel or MicroSemi...we added the stock to our Vetting ideas Oct 4 on the Long side but it quickly got away from us and we’d rather wait for better risk/reward entry point, with currently 20-25% upside potential against 15-20% downside risk.    

Bench Ideas SHORT

1. MSCC: What? MSCC is on our Bench Shorts? We have been one of the best sleuths on that stock, the only Bear, and pretty decent call in a year that semis ripped to find one that has been flat in spite of a massive multiple re-rating for the entire group. Why Short? True growth rate is 0% to -1%. Management guiding to 6-8% is a farce and we have proven thoroughly that there is no sustainable path to those #s. Case in point? The company bragged that June-Q through Dec-Q of the current calendar year would showcase their true organic growth rates…then they quietly bought a company at the end of the June-Q to help them make results and guidance, and promptly announced yet another transaction at the beginning of the current Q. Why bench? No one else doing this work, and post recent M&A, no way for them to miss near term. The problems pile up on a go-forward basis, including FCF likely down in the coming year as GAAP fundamentals for the acquired businesses are below current fundamentals, and the company achieved it’s promised $400m+ FCF in F17 thanks to a one-time swing in accounts payable that won’t repeat. We see 10-15% upside risk on 20x LTM FCF and -30% downside risk on 15x forward FCF.
2. KEYS: Growth is MIA as this serial decliner keeps buying properties but not looking before they leap, having recently acquired a company that was forced to restate earnings twice in the last decade, that had grown mainly by acquisition in that timeframe, whose best product was a complete loser in the market relative to its peers while the entire product segment looks challenged going forward, and who was back at it over-stating FCF in the last years before the takeout. Proofs? We got ‘em, including write-downs pre + post closing, and the fate of the newly hired x-CEO to run the division. There is a growing mythology around the company that it is a beneficiary of 5G and that it will de-lever and become a FCF machine. The latter is predicated on Ixia + KEYS. Oops, that will prove to be a big mistake. And management has already showed their hand as M&A driven to offset a dying business. The former is maybe $120-150m 5G forward revenue on a $3.5b revenue basis while multiple other (larger revenue) products decline! Our view: if you like 5G buy something that will really benefit from it. Risk/reward? At 15x forward FCF, or ~$25, I’d probably leave it alone although still expensive even there. Upside risk? The Oct-Q and Jan-Q will have unsustainably good FCF. If analysts straight line that and put 20x FCF on the # they can get $50, so ~20% upside / -45% downside risk from here.
3. INTC: We moved off the active Short at the right time but did not go long. Is it a long? Good PC data into 4Q, and strong server data in 4Q/1Q on higher cloud budgets are positives. Large analytics cycle ahead, Altera not trailing peer XLNX as terribly, and good momentum in memory/MBLY for edge computing/Nervana, and mobile with Apple are also positives. Why not a long? Valuation disparity with peers has been eroded, and there is a devil’s bargain getting long Intel when AMD’s cut of the market grows over the next few quarters. At some level, it may be worth it. Similar upside/downside considerations currently. We see -20% downside risk and 30% upside risk at current levels with upside being revaluation of FCF to peers’ levels and downside being revaluation to recent historical norms for Intel. Revaluation will be contingent on the axis of growth versus share loss.     

More unique ideas coming!