Today's top ideas (Thur, Nov 9)

Ducommun is a critical Tier 1 and Tier 2 supplier of advanced material aerostructures and electrical components to the defense and commercial markets. Via targeted acquisitions, the company is increasing its higher-margin engineered and aftermarket business. Simultaneously, management is working to improve organic margins by reorganizing its operational and physical footprint. We are particularly attracted to Ducommun’s electronic systems business, which engineers, manufactures, fabricates and integrates a wide range of high-performance components and systems for commercial and military aircraft, missile systems, ships and radars. While we believe the market sees Ducommun as a commercial aerospace stock, we believe management’s focus on the defense side of the company’s business is bearing fruit, and we believe it will capitalize on a productive M&A strategy moving forward.

Read the full article here. Read time: 8 min

Otis's New Equipment segment is under pressure with Q3 NE orders decreasing by -10% y/y. However, the NE backlog increased by 2%, and Otis’s total backlog remains strong, providing clear visibility into the next 18-24 months. Despite being a service-driven business, segment strength was noticeable, especially in Q3 service where adj. net sales were $2.088 billion, a 10.3% increase y/y. With annual savings target of $150 million, Otis is pushing to recognize the savings starting mid-2025. Despite some market downturns, with its 170-year history, Otis may regain its favorable position if the New Equipment segment improves. The company's shares are trading at 21.7x FY’23 free cash flow and more than 2.4% of outstanding shares may be retired per year moving forward.

Read the full article here. Read time: 7 min

Burford Capital, a pioneer in the litigation finance industry, stands out in our portfolio as a robust investment opportunity, distinguished by its ability to fund and fight legal claims for parties hesitant to endure the financial and temporal demands of litigation. With impressive track records in claim realizations and a shift towards a capital-light asset management model through raising funds externally, Burford's market performance is anticipated to be largely uncorrelated with broader economic trends. The firm's exceptional claim against Argentina in the YPF case, where it was awarded $6.2 billion—over double its market cap of $2.9 billion—offers a significant "kicker"; even a partial collection post-legal fees could essentially equate to acquiring Burford's entire operation at no extra cost. The outcome, potentially influenced by Argentina's imminent presidential election, could see a favorable settlement or alternative routes to leverage the award, cementing Burford as a particularly attractive investment with both unique business resilience and a significant pending legal windfall.

Read the full article here. Read time: 12 min

The author holds Petrobras preferred shares as their largest position. Petrobras has not experienced dilution since 2019, maintains a steady market cap, and has even sold assets without significantly affecting cash flow, instead boosting oil production and focusing on lucrative deepwater fields. With the new Lula administration, concerns of excessive taxation or a pivot to green investments have not materialized; the company plans modest “low-carbon investments” and has demonstrated a pro-oil stance. Since Lula's return, there's been a shift towards more offshore drilling, indicated by oil-friendly government policies and increased production targets. Petrobras's valuation remains discounted compared to its international peers, despite its superior production profile and shareholder-friendly dividends—the second highest globally in 2022 after Saudi Aramco. Preferred shares ($pbr.a) are more attractive than common due to dividend preference, a buyback program, and an 8% discount without significant loss due to lack of voting rights, given the government's controlling stake. Exit strategy centers around reaching fair value in the Brazilian context, eyeing a 10% forward dividend yield, and monitoring market opportunities. Petrobras's dividends are robust, expected between $10-13B at lower oil prices and potentially higher with increased production and favorable oil markets. The investment hinges on expanding market access, a bullish stance on oil prices, anticipating Brent to average above $90, underpinning expectations of a re-rating for Petrobras amidst high dividends and rising production.

Read the full article here. Read time: 7 min

The Environmental Group (EGL) stands out as an undervalued small cap growth prospect with a broad portfolio of environmental solutions encompassing waste management, air pollution control, gas turbines, and manufacturing and servicing of boilers. Under the leadership of CEO Jason Dixon, who has a successful track record in the industry, EGL has reinvigorated its operations and streamlined contract terms for improved cash flow. The company is positioned to benefit from multiple long-term growth themes, including the transition to renewables, the circular economy, the critical minerals boom, and PFAS treatment. With EGL's strong balance sheet and expectations of over 30% EBITDA growth in FY24, it offers an attractive entry price, trading at 9-10x EV/EBIT, making it an enticing investment opportunity for those seeking exposure to a range of promising sectors.

Read the full article here. Read time: 9 min

Adore Beauty (ABY.AX) maintains a favorable risk/reward profile as a long investment, trading at an attractive valuation with a share price of A$1.01, up from A$0.96 since the October 15 analysis. The company's recent trading update confirms sustained growth with revenue up by 4.7% YoY to A$47.5m, a growth in active customers by 1.5%, and a returning customer increase of 4.7%. ABY is on track to re-accelerate to mid-teens growth and is working towards greater than 8% EBITDA margins within 2-3 years, currently reiterating a 2-4% EBITDA margin for FY24. The stock remains undervalued at approximately 6x FY25 EBITDA and 0.3x FY25 sales, with potential to achieve normalized margins. There's speculation around a possible strategic or private equity acquisition due to the company’s involvement with UBS, an angle that may provide a swift value increase. The one-year price target is set around A$2.00 per share, based on a 15x FY25 EBITDA multiple, suggesting substantial upside, which reinforces the long position.

Read the full article here. Read time: 4 min