If you exclude stock-based compensation, which we like to do, the pro forma P/E multiple rises to 7.2. Return on equity will be 14% after taxes and return on capital, 11.1%. Book value is $28.67 a share, so it is selling for 0.96 times book.

This year capex will be high, at $150 million, but AdvanSix will generate $21 million of free cash flow. In 2023, they generated free cash flow of $185 million on $172 million in net income. Earnings are growing nicely, which we like. The past two quarters saw a turnaround in earnings and operating margins. The net debt to equity ratio is 0.26.

What does AdvanSix produce?

Black: Nylon 6, a synthetic material used in carpets, automotive and electrical components, sports apparel, and food packaging, accounts for 24% of sales. Caprolactam, the main feedstock in the production of nylon fiber, is about 19%. Ammonium sulfate is 27%; that's a fancy name for fertilizer. As production goes from liquid to pellet form, operating margins are moving up. The fourth business is chemical intermediates. These manufacturing byproducts are used in adhesives, paints, solvents, and such.

The U.S. accounts for 82% of revenue; Latin America and Canada about 11.9%; Europe and the Middle East, 4%; and Asia, 2%. Is this a great company, like the AI companies Henry discussed? No. But the business is improving, the balance sheet is strong, and it is selling for about a third of the multiple of the S&P 500.

We'll take another.

Black: Unity Bancorp is based in Clinton, N.J. It has 21 branches and about 220 full-time employees. Earnings have gone straight up since 2017. Unity finished 2024 with earning assets of about $2.59 billion. We estimate they will increase this year to $2.66 billion to $2.68 billion. The net interest margin, or the cost of assets minus the cost of liabilities, was about 4.16% in the third quarter, which is outstanding. Net interest should total between $110.4 million and $111.5 million this year.

Unity is liability-sensitive [liabilities reprice faster than assets in response to interest-rate changes]. For every one percentage point increase in rates, the bank loses about $2.5 million in net interest. Rates have backed up by about 56 basis points since the third quarter, so that would shave about $1.4 million from net interest, leaving the total in 2025 at between $109 million and $110.1 million. [A basis point is a hundredth of a percentage point.]

The provision for loan losses is only about $3.3 million. Non-interest expense is about $8 million The efficiency ratio [expenses divided by revenue] is about 44.2%, outstanding for a small bank.

We expect Unity to earn between $4.65 and $4.68 a share this year. The Street's estimate is $4.56. Return on equity in 2025 should be 15%. The return on assets is a sensational 1.77%, and the P/E ratio is 9.1, based on this year's expected earnings.

Priest: Does Unity pay a dividend?

Black: The stock is $42.46. There are 10 million shares outstanding, and the market cap is $425 million. The dividend is 52 cents a share, for a 1.2% yield.

Unity's reserve for loan losses is 1.7 times, so there is a margin of safety. The assets-to-equity ratio is 9.3 times, indicating that it isn't heavily leveraged.

Unity services northern and central New Jersey. Commercial real estate loans are 60.8% of the loan book. Residential mortgages are about 29%. Residential construction is 4.6%, and consumer is only 3.3%. The average interest rate on the portfolio is about 6.53%. Only 7% of the commercial real estate loans come due in the next five years, and the average outstanding loan is about $5 million.

Unity was founded in 1991. It has available liquidity of $569 million, so it won't go out of business if we have another crisis.

Are you expecting a wave of bank M&A, or smaller banks getting rolled up by larger banks?

Black: That's a good question, but we never buy on the basis of a takeover. We buy to own the existing business.

You may remember that the regional-bank stock index took off last year when the Fed indicated that interest rates would be coming down. Now that bond yields have backed up, putting pressure on net interest margins, the stocks have come down. But Unity is a good business. It was earning in excess of 15% on equity year in, year out, when most regional banks were earning 8% to 10%.

Next, Ultra Clean Holdings is based in Hayward, Calif. It is a developer and supplier of critical subsystems, components, parts, and high-purity cleaning services for the semiconductor and semiconductor capital-equipment industries. The company designs products for Lam Research and Applied Materials, including chemical delivery modules, frame assemblies, and process modules. In services, it performs high-purity cleansing of tools, process-tool recoating, and micro-contamination analysis.

The stock is $37.57, and the market cap is $1.69 billion. There is no dividend. Ultra Clean finished last year with roughly $2.09 billion of revenue. We expect revenue to increase around 13% this year, to about $2.362 billion. Above $2 billion, operating margins should approach 10%. That implies $236.2 million in operating income.

After interest expense of $48 million, interest income of about $5 million, and taxes paid at a 24% rate, we get between $129 million and $147 million in net income, or $2.86 to $3.26 per share. Our midpoint is $3.06, compared with the Street estimate of $2.77. The stock trades for 12.3 times our estimate. Back out stock-based compensation of 38 cents a share and the multiple is 14 times. Pro forma 2025 return on equity is 14.6%; return on total capital, 12.3%; and the price to book-value ratio, 1.97.

In terms of the business, memory was about 27% of revenue this past year. Foundry and logic was 56%, non-semiconductor revenue was 6%, and service revenue, 11%. In coming years, the company thinks memory will grow faster than foundry and logic. Ultra Clean has a small presence in China, but enough manufacturing capacity in the U.S. that it won't be hurt by tariffs. Operations are based primarily in the Western U.S., Maine, the U.K., the Czech Republic, Israel, Korea, Taiwan, and elsewhere in Asia. The addressable market is roughly $25 billion to $30 billion. The company expects to benefit from the increasing complexity of chips.

Ultra Clean likely won't ever command the P/E multiples of Lam or Applied Materials, which we happen to own. They trade for around 18 times earnings. But this is a good surrogate play with the wind at its back.

What else are you recommending?

Black: SS&C Technologies Holdings is based in Windsor, Conn. The founder, William Stone, still runs it. Delphi is a customer. SS&C is the largest hedge fund and private-equity administrator and mutual fund transfer agent. It provides end-to-end expertise across financial-service operations, with software and solutions. It operates via contracts and licensing agreements. Customers are asset managers, insurance companies, wealth managers, banks, and brokerage firms. The company also has a healthcare division that handles claims processing, analytics, member engagement, and the like.

The stock trades for $76.05. It has an $18.8 billion market cap and a 1.3% dividend yield. Top-line growth is only about 5% or 6%, but bottom line grows consistently by 10% or 11%. From 2018 to 2023, return on equity was consistently greater than 19%. The company has had only one down year in earnings growth since 2015. In 2022, it earned $4.65 a share, below 2021's $5.02.

The revenue base is about $5.84 billion. It could grow by 5.5% to 6% this year. We peg operating income at $2.33 billion on the low end and $2.36 billion on the high end, and net income at $1.42 billion to $1.44. After accounting for stock buybacks, divide that by 245.3 million shares and you get adjusted earnings per share of $5.77 to $5.86. My midpoint is $5.81, and the Street's estimate is $5.75.

We expect SS&C to generate about $1.63 billion in free cash flow this year. Return on equity will be about 18.2% for the year and return on total capital, 9.4%. The P/E is 13.1. After removing 84 cents a share in stock-based compensation, we get earnings of $4.97, and a P/E of about 15.3.

A few more details: SS&C has 27,000 employees, and 114 offices in 90 cities. The company spends about $500 million a year on internal software development. The revenue mix is 82% software and 18% licenses and maintenance. SS&C grows consistently and generates a lot of cash.

Thanks, Scott.

--Additional editing by Nicholas Jasinski

Write to Lauren R. Rublin at lauren.rublin@barrons.com

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January 10, 2025 18:06 ET (23:06 GMT)

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