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General Electric’s Asset Sales Are Creating A Natural Gas Buy With A Dividend

Summary Black Hills Corporation has announced the acquisition of SourceGas Holdings LLC from GE/Alinda Capital. The Acquisition is a continuation of GE’s selloff of assets in a broader strategy to streamline the firm. Black Hills expects the purchase to increase their customer base by 55%. That kind of increase in business is going to have real effects on their earnings per share. What’s Going On? I have written previously about General Electric’s (NYSE: GE ) continued exit from the Finance industry. Most recently, Black Hills Corporation (NYSE: BKH ) has announced its acquisition of SourceGas Holdings LLC. SourceGas is managed by GE energy Financial Services and Alinda Capital Partners. SourceGas has 4 utilities in the United States that serve over 400,000 customers in the western United States. It also has a 512-mile intrastate natural gas pipeline that operates in Colorado. SourceGas was created in 2007 when GE and Alinda Capital made a purchase from Kinder Morgan Inc. (NYSE: KMI ). What’s So Good About It? The $1.8 billion deal is a continuation of General Electric streamlining its business. I am a continued advocate that a streamlined General Electric focusing on its core strengths is going to be a great business to own. The firm will be much better situated to react to economic changes in a timely manner. This acquisition also brings a whole new investment into play. It is a sweet deal for Black Hills Corporation. The firm is no slouch to begin with. The past three years have seen growing net income, improving balance sheets, and improved cash flows. The SourceGas Holdings purchase will increase Black Hills’ customer base by 55% . The company has noted that the effective purchase price will actually be lower due to tax benefits incurred by the acquisition. This is a continuation of the progressive integration of 19 utility systems in the last 10 years. President and CEO David R. Emery spoke strongly about the acquisition strengthening the growth of Black Hills. “SourceGas is a great strategic fit, adding to our strong utility base and providing operational and financial benefits to all the customers and communities we serve. We are excited to significantly expand our presence in Colorado, Nebraska, and Wyoming, and look forward to serving customers and developing new relationships in Arkansas. The transaction continues our proven record of growth in the utility business through targeted acquisitions — over the last decade, we have successfully integrated 19 electric and natural gas systems in support of this growth strategy.” For a utility firm like Black Hills, the importance of natural gas purchases cannot be stressed enough. Natural Gas officially surpassed coal this week as the largest US electric source. The move to buy SourceGas is part of a bigger strategy for the firm to diversify its power sales due to declining wholesale volumes . Stacy Numeroff (an analyst at Bloomberg) noted that “gas utilities do not face the same threats to load growth from distributed generation as their electric counterparts.” It is very encouraging that the utility firm is working to get in on the better growth offered in gas utilities. It is also worth noting that while Black Hills has experienced declines in power sales over the past few years, their net income has increased every year since 2011 demonstrating management’s ability to react to market moves. The one concerning thing about Black Hills’ acquisition is the $720 million that will be added to their current $1.2 billion in debt. The 55% increase in their customer base seems positive enough to let this debt be acceptable, but it is still a concern. As of now, the deal is expected to be completed in early 2016. Mark Maloney (a manager at Manulife Asset Management LLC) pointed out that “Black Hills has a strong track record of accumulating small utilities over the years and they’ve been very successful.” Do You Invest? In the last seven quarters , Black Hills has had 5 earnings beats, with one miss. The question is whether or not the acquisition of SourceGas is going to have a positive effect on earnings per share. The company has stated that it will add “meaningfully” to earnings. With the SourceGas deal increasing its customer base by more than half, I don’t see how it can’t have awesome outcomes for earnings per share. It’s worth noting that 1-year earnings per share growth is already ahead of its 5-year growth rate. The P/E is right along with the Multiline Utilities average, so Black Hills is not costing you any premiums. The 1-year price target of $55.50 seems obtainable if this deal plays out. If you can stomach the debt situation, good net income, improving balance sheets and cash flows on top of the growth potential from this acquisition make for a nice future play with a 3.5% yield cherry on top. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Best And Worst: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

Summary Mid Cap Blend style ranks ninth in 2Q15. Based on an aggregation of ratings of 19 ETFs and 328 mutual funds. CZA is our top rated Mid Cap Blend ETF and TMPIX is our top rated Mid Cap Blend mutual fund. The Mid Cap Blend style ranks ninth out of the 12 fund styles as detailed in our 2Q15 Style Ratings report . It gets our Dangerous rating, which is based on an aggregation of ratings of 19 ETFs and 328 mutual funds in the Mid Cap Blend style. Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 3264). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 (click to enlarge) * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Validea Market Legends (NASDAQ: VALX ) and ProShares S&P MidCap 400 Dividend (NYSEARCA: REGL ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (click to enlarge) * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Johnson Mutual Funds Opportunity Fund (MUTF: JOPPX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Guggenheim Mid-Cap Core (NYSEARCA: CZA ) is our top-rated Mid Cap Blend ETF and Touchstone Mid Cap Fund (MUTF: TMPIX ) is our top-rated Mid Cap Blend mutual fund. CZA earns our Attractive rating and TMPIX earns our Very Attractive rating. The Progressive Corp. (NYSE: PGR ) is one of our favorite holdings of Mid Cap Blend ETFs and mutual funds, despite being a large cap stock. Progressive earns our Attractive rating. Since 1998, Progressive has grown after-tax profit ( NOPAT ) by a steady 7% compounded annually. Progressive also boasts a top-quintile return on invested capital ( ROIC ) of 22%. The company counts rising economic earnings and strong free cash flow among its many other strong points. At ~$28/share, PGR trades at a price to economic book ( PEBV ) ratio of only 0.9. This valuation implies that Progressive’s NOPAT will permanently decline by 1c0% from current levels. However, if Progressive can grow NOPAT by just 5% compounded annually for the next five years , the stock is worth $41/share today — a 46% upside. Russell Small Cap Completeness ETF (NYSEARCA: RSCO ) is our worst rated Mid Cap Blend ETF and Saratoga Advantage Mid Cap Portfolio (MUTF: SPMAX ) is our worst rated Mid Cap Blend mutual fund. RSCO earns our Dangerous rating and SPMAX earns our Very Dangerous rating. One of the worst stocks held by Mid Cap Blend ETFs and mutual funds despite being a small cap stock, is Black Diamond Inc. (NASDAQ: BDE ). Black Diamond earns our Very Dangerous rating. In 2014 the company earned a negative NOPAT of $4 million, the company’s worst single year in our model. This negative NOPAT is particularly alarming since it represents the third consecutive year of declining NOPAT. Compounding this issue is Black Diamond’s value destroying -2% ROIC. Black Diamond’s economic earnings have also been negative for five consecutive years. Despite the poor financial state of the company, the stock has risen to unwarranted values and is now awfully overvalued. To justify its current price of ~$10/share, Black Diamond would need to achieve positive NOPAT margins (-2% in 2014) and grow revenue by 29% compounded annually for the next 16 years . With revenue growth below these expectations and actually declining in 2014, there remains significant downside risk in BDE shares. Figures 3 and 4 show the rating landscape of all Mid Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources Figures 1-4: New Constructs, LLC and company filings Disclosure: David Trainer owns PGR. David Trainer and Allen L. Jackson receive no compensation to write about any specific stock, style, style or theme. Disclosure: I am/we are long PGR. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.