Here’s a quick rundown of Tuesday’s after-hours action: Nike (NKE) hit new all-time highs in extended trading after the athletic shoe and apparel giant reported a 22% rise in earnings that beat expectations, boosted by gross margin expansion, a lower effective tax rate and lower share count. Nike also reported strong future orders. Revenue rose 4% but slightly missed views. Apple (AAPL) has updated its bylaws to let investors who hold at least 3%
Summary CLNE’s margin has improved in the past year despite lower revenue as its margin/gallon is steady due to a diversified base of fleet operators and protection from the retail price. The price of natural gas/diesel gallon equivalent was $0.27 last month, which is way cheaper than diesel and gasoline, which is why CLNE’s volumes will continue increasing. CLNE’s natural gas volumes will increase as the addressable market grows from 74 million gallons last year to 1 billion gallons of diesel equivalent in 2018. CLNE could also benefit from an improvement in natural gas pricing as LNG exports from the U.S. begin next year, leading to lower oversupply and a move toward international pricing. The decline in natural prices has put the brakes on Clean Energy Fuels’ (NASDAQ: CLNE ) performance this year. After recording consistent top line growth until 2014, the company’s top line performance has slid this year. This is evident from the chart given below: Don’t miss the positives However, the above chart also shows that despite the drop in its top line, Clean Energy has managed to improve its margin profile since the downturn in natural gas pricing began. This is an impressive fact if we consider that low natural gas prices should have ideally pulled down Clean Energy Fuels’ margin profile, but the company has managed to keep its margin per gallon intact. For instance, last quarter, Clean Energy’s gross margin was $0.26 per gasoline gallon equivalent, down just $0.02 per gasoline gallon equivalent from last year. This is impressive if we consider that prices have dropped massively in the past year. The reason why Clean Energy’s margins have held steady in these difficult times is because the company has a diversified base of fleet operators that use its natural gas fuel volumes, and these are protected to some extent from the retail price due to the contracts in place. More importantly, it should also be noted that despite lower diesel prices, the use of natural gas fuel has not dropped as fleet operators have continued adding more NGVs to their fleets. This is clearly reflected by the fact that Clean Energy’s volumes delivered in the previous quarter grew 17% year-over-year. Now, on taking a closer look, it becomes clear that natural gas is still a cheaper fuel option than diesel despite the decline in diesel prices this year. Take a look at the following table for more clarity: Source: Westport Innovations Hence, the price of natural gas per diesel gallon equivalent stood at $0.27 last month, which is lower than the regular gasoline price of $2.059 per gallon and diesel price of $2.421 per gallon last month. So, it is not surprising to see that Clean Energy has seen an increase in its volumes delivered this year even though diesel prices have weakened, which lowers the incentive of switching to natural gas fuel for fleet operators. Why Clean Energy’s drop is an opportunity As discussed above, Clean Energy is seeing both volume and margin growth, while natural gas has an advantage over diesel in terms of both costs and emissions. As a result, the adoption of natural gas-powered trucks and buses should continue increasing going forward. For instance, in the past few years, the adoption of CNG trucks in the refuse transit market has increased, as shown below. More importantly, the adoption of heavy-duty LNG trucks as a percentage of overall sales will increase in the coming years, leading to an increase in gallons delivered from 74 million last year to 1 billion in 2018: (click to enlarge) Source: Clean Energy Fuels Hence, due to the advantages of natural gas, its adoption will increase going forward and help Clean Energy amplify its volumes delivered. However, as we saw earlier in the article, the steep drop in the price of natural gas has made it difficult for Clean Energy to grow revenue, but this might change next year onward as LNG shipments from the U.S. start gaining traction next year. By 2020, Australia and the U.S. are expected to make up for almost the entire 50% increase in global LNG trade, with the latter expecting to become an LNG exporter on the level of Qatar. Now, if we consider that the supply situation in the global LNG market is weak and the U.S. is aggressively building its LNG export infrastructure as shown in the chart below, the oversupply situation in the U.S. natural gas market will ease going forward as exports begin. Source: Cheniere Energy Also, due to these exports, the price of natural gas in the U.S. will move closer to international levels, which are higher, and eventually lead to better natural gas pricing in the U.S. as well. As a result, Clean Energy will see an increase in both revenue and margins going forward. Conclusion The performance of Clean Energy Fuels on the stock market has been no less than disappointing this year, but there are positives that we should not miss. The company’s volumes and margins are increasing, while a potential improvement in natural gas prices will be another tailwind. So, it seems like a prudent idea to buy shares of Clean Energy Fuels on the drop as it can deliver gains in the long run.
Summary My rough bottoms-up valuation of the GREK index reveals just fair overall valuation. Greek banks now represent less than 5% of the GREK, and I consider them a long-term call option costing me roughly 5% of the index. While the overall GREK index looks just fairly valued, the low median values reveal that there are many very cheap individual stocks. These stocks are cheap for a reason, such as high debt, falling sales and often energy sector dependence. The general theme of Greece has come out of the headlines recently. However, its banks were very much in the spotlight in the past weeks as their stocks crashed following the expected stock dilution and lukewarm interest from institutional investors to take part in the recapitalization. With the Greek banks’ bad news getting gradually priced in, I wanted to reexamine the Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) index now and attempt to make a very rough bottoms-up valuation to see if there is an attractive investing opportunity. My analysis revealed several surprises and facts, which I would like to share with my readers now. Fact #1: There is very little downside risk in GREK from the Greek banks now With year-to-date returns of Alpha Bank ( OTCPK:ALBKY ), National Bank of Greece ( OTCPK:NBGGY ), Eurobank ( OTCPK:EGFEY ) and Piraeus Bank ( OTCPK:BPIRF ) up to negative 99%, the total weight of the Greek banks in GREK has been diminished to below 5%. This significantly reduces the risk of a large decline in GREK. The GREK options implied that volatility has fallen recently to reflect this lower downside risk. So I now consider the Greek banks as a call option that costs less than 5% of the GREK index and never expires. Not only is the banks’ weight on the index insignificant, but the banks are also usually valued using industry-specific valuation metrics. Valuing them using traditional broad market valuation metrics would just distort the entire picture. Due to these two facts, I decided to simply ignore the banks in the valuation and treat them as the 5% call option that never expires. So what exactly is GREK made of? Here is the list of the current top 25 holdings, representing the overwhelming majority of the total index value, sorted by their weights on the index. The holdings and their weights are updated as of December 17, 2015 and provided my Morningstar. (click to enlarge) Source: Morningstar, author’s recalculations Financial ratio metrics I recalculated the index weight values by summing up holdings of the same company in the form of its primary stock listing (usually listed in the Athens stock exchange) and its ADR form. Here is the updated list, which simplifies things and shows a clearer picture of the holdings, including the financial ratio metrics. (click to enlarge) Source: author’s calculations based on data from Bloomberg, Morningstar, Gurufocus, Yahoo finance and Finviz A quick warning on methodology Please bear in mind that some of the data was hard to get and calculate, and had to be obtained from several sources that may not be using a consistent methodology. While most data incorporates the third quarter 2015 numbers, which include the tough period of bank transaction limits, etc., some minor data was available for the June quarter only. Therefore, an error margin should be much wider than usual, at least plus and minus 20% in the valuation metrics. Otherwise, the valuation is very representative because it takes into account ~92% of the GREK index’s holdings, omitting just the ~5% attributed to the banks for the reasons described above, and also ignoring about 3% of GREK that comes from some below 1% positions. The total GREK metrics calculations are made using a weighted average, with the values being weighted by the stock’s index weight. Negative or N/A values are ignored, and the weights of the remaining valid values are increased proportionally to make up 100%. Surprising fact #2: the GREK index as a whole looks fully valued using most financial metrics The overall dividend yield for the trailing twelve months is just 1.25%, nothing to attract income investors (even if the other risks were ignored). Other metrics are not faring much better. Consider the following. Trailing-twelve-month P/E not very attractive The average trailing-twelve-month P/E of the GREK index is ~16.14x. This is roughly on par with the U.S. and many European or other indexes of economies that are in much better shape, with much more predictable future political and economic environment. So this is a big disappointment, but in times of economic distress, P/E’s may be abnormally high or low as they near bottoms. Some commodity and energy-related GREK stocks are arguably at a deep through of the current cycle. The negative P/Es were ignored, so the calculation takes into account ~86.50% of the total index; the 10% of the index has negative earnings, and the remaining 5% are the banks. The high P/E for the two largest constituents, which are not very cyclical and represent ~40% of GREK, are not very enticing. On the other hand, if we look at the more important cash earnings, the P/FCF figures for these two largest stocks are much lower and arguably quite attractive. Trailing-twelve-month Price/free cash flow is more attractive than the TTM P/E The weighted average TTM P/FCF came in at ~13.31x. This is not bad at all given what Greece and their companies have had to go through in the past twelve months, though the largest constituent, Coca Cola HBC ( OTC:CCHBF ), is predominantly export-oriented. Nevertheless, investors can buy many companies outside of Greece with even lower P/FCF ratios and arguably similar or better prospects or at least less political and economic risk, such as even Apple (NASDAQ: AAPL ), or International Business Machines (NYSE: IBM ), or Xerox (NYSE: XRX ). The P/FCF calculation includes ~85% of the index weight. About 10% of the index has negative FCF, and the remaining 5% are the banks, which were excluded. The forward P/E is even a bit worse than the TTM P/E The weighted average forward P/E currently stands at ~16.94x, as represented by just ~54% of the index. The rest of the constituents either don’t provide forward guidance or I was not able to obtain one. So the forward P/E is less representative but not very attractive nonetheless and carries a higher risk of ending significantly off the mark as many factors are either unpredictable or not factored in the guidance. The Price-to-sales and price-to-book is similar to other markets and not very attractive The weighted average P/S came in at ~1.40x and the P/B is ~1.60x. This is nothing out of the normal range typical for other markets and doesn’t really entice much buying when so many markets with similar valuations are available to international investors. However, some companies within the average show very attractively low P/S and P/B values, indicating distress but also potential attractive deep value plays for patient investors. These include the energy sector stocks, such as Motor Oil (Hellas) Corinth Refineries SA ( OTCPK:MOHCY ), Hellenic petroleum SA (ATH:ELPE), and Public Power Corporation of Greece ( OTCPK:PUPOF ), as well as others such as Ellaktor SA ( OTCPK:ELLKY ). However, many of them carry relatively high debt and other risks. The important fact #3: Using EV/EBIT and EV/EBITDA, GREK trades at about half the S&P 500 valuation The average EV/EBIT stands at ~11.6x and is calculated using 85% of the index. The remaining 10% has negative enterprise value or negative EV/EBIT and was ignored, as were the banks. The average EV/EBITDA is ~5.7x and was derived from ~88% of the stocks weight, with ~7% being EV/EBITDA negative or having negative enterprise value, with the banks being excluded again. For a comparison, the aggregate S&P 500 EV/EBITDA currently stands at around 10x while the median value is around 11x and is arguably overvalued as a group. The GREK index trades at about a half of the EV valuation of the S&P 500. In other words, GREK would have to DOUBLE in order to trade at the same valuation as the S&P 500. And EV metrics for some individual GREK stocks are even more attractive. For example, Coca Cola HBG trades at just ~3.5x EV/EBIT and 2.29 EV/EBITDA thanks to its high debt leverage. The most important fact #4: while overall GREK valuation looks full, the mean averages are much lower, signaling plenty of individual stock opportunities in GREK While mean valuations for the U.S. indexes are mostly higher than the weighted average, in GREK, the opposite is true. There are many stocks cheaper than the overall index. In other words, while the U.S. S&P index valuation masks how expensive many of its individual stocks are, the GREK index’s seemingly unattractive overall valuation hides many undervalued stocks beneath the surface. For example, the median P/B is just 0.91, below 1x, signaling clear distress in parts of the index, especially the energy. I believe it is worth it for investors to go through the individual Greek stocks and pick the best spots rather than buy the overall index, which in itself is only fairly priced and future returns will be just average in my opinion (5% to 10% per year with high political and economic risk). Several GREK individual stock ideas for further research 1. Coca Cola HBC While the company trades at a seemingly high P/E and forward P/E, the cash metric, trailing P/FCF is sitting at just ~11x. 3.5x EV/EBIT and 2.29 EV/EBITDA are very low as well. The problem, of course, is the relatively high debt/capital ratio as well as other potential risks that need to be analyzed in more detail before buying. 2. Several other companies There are many companies trading at very attractive valuation metrics, and their individual risk profiles and future outlooks have to be carefully examined before jumping in. These include Athens Water Supply & Sewerage ( OTCPK:AHWSF ), Folli Follie ( OTCPK:FLLIY ), and Greek Organisation of Football Prognostics ( OTCPK:GOFPY ). 3. Many energy-related bargains, mostly carrying higher risk Metka SA trades at just ~6x P/E. However, it is FCF negative. As an engineering contractor, it has been negatively impacted by the energy sector weakness. However, the 2.28x EV/EBIT and 1.45x EV/EBITDA look very cheap if the company manages to survive through the downcycle. There are also several companies trading at depressed valuations due to being closely tied to falling energy prices, such as Public Power Corporation of Greece , Motor Oil (Hellas) Corinth Refineries , and Hellenic petroleum (ATH:ELPE) and Ellaktor , which trade at rock-bottom P/S ratios but carry mostly very high risk due to low commodity prices and high debt. Risks Besides the specific risks in the individual stocks, such as debt and falling sales and margins, the GREK and its constituents are prone to very high political and economic risks that may include higher taxes, price controls, and even an outright nationalization or semi-permanent strikes, revolutions, and boycotts of local sales by the local population. Conclusion While the overall GREK index does not look cheap given all the extra risks involved with Greece, the low median valuations reveal that there are many individual companies in the index that are attractively priced. However, they also carry individual risks such as high debt and more. Some individual stocks worth further investigation include Coca Cola HBG, Metka, Athens Water Supply & Sewerage, Folli Follie, and Greek Organisation of Football Prognostics. There are also several energy-related companies trading at distressed P/S ratios carrying high debt and cyclical risk. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.