Tag Archives: feeds

Earnings Review: Drought, Currency Impact On International Business Dents Duke’s Q4 Results

The largest electric utility company in North America, Duke Energy (NYSE: DUK ) reported its fourth quarter and full-year earnings for the fiscal-year 2015 on Thursday, February 18th. The company reported adjusted earnings per share of 87 cents, 7% below consensus estimates of 94 cents . Management attributed the earnings miss on the impact of mild weather conditions and the negative impact of currency translation, as revenue earned from international operations in South America was worth less when translated back into the U.S. dollar. For the full year, revenue stood at $23.46 billion , down 2% from 2014’s $23.93 billion. Operating income rose by 2.1% year over year as operating expenses fell by close to 3% on lower fuel expenses. The decline in operating costs was offset by higher operation and maintenance expenses, as well as higher depreciation and amortization expenses. Segment wise, increased pricing as well higher wholesale net margins led to a 9% increase to $601 million in the reported adjusted income of the Regulated Utilities division. Lower margins for National Methanol and the unfavorable impact of currency translations meant that the adjusted income of the International Business dropped by 5.6% to $68 million for the full year. The company’s commercial power business reported an adjusted income of $41 million for the full year, up 28% from last year’s $32 million, on the back of higher margins in wind and solar generated power. The commercial power business which now includes unregulated renewable assets and commercial electric and gas transmission investments but not the Midwest Commercial Generation business, which the company sold to Dynergy last year. We have a $68 price estimate for Duke Energy , which is about 9% below the current market price. Key Drivers For 2016 Due to a tougher regulatory environment, Duke has had to forego short-term profitability and focus on optimizing its asset base. The company has focused on increasing investments in natural gas and renewables, while getting lowering its exposure to unregulated markets. In 2016, the company expects most of its growth in the regulated utilities business to come from opportunities that will be unlocked by the $5 billion investments in growth that it has made. Management expects retail load to grow by around 0.5% year over year, and that should result in some bottom-line growth for the company. Most of its growth in 2016 is expected to result from the integration of the North Carolina Eastern Municipal Agency’s (NCEMPA) assets that it purchased for $1.25 billion and closed in July of last year. Additionally, the company has been focusing on reducing operational and maintenance costs. On the commercial power front, Duke expects to benefit from a $1.5 billion investment in Renewables and from its stake in the joint venture in the Atlantic Coast pipeline with Piedmont and Dominion. However, there has been a lag in getting regulatory approval for operations in certain jurisdictions. This, coupled with the loss of earnings from the Midwest power generation business, will offset some of the gains from new investments. On the international front, management said that reservoir levels in Brazil increased throughout 2015, which will enable the company to purchase power at a lower cost in 2016, resulting in higher margins. However, lower exchange rates between currencies in South America and the U.S. dollar, and low Brent crude oil prices, will mean lower revenue for the company’s National Methanol business. Additionally, Duke is considering exiting from its international business, but no timeline has been specified on this front, making the performance of the international business in 2016 less important. Most of Duke’s growth will come from its core business, which the company expects to grow between 4% and 6% in 2016. Disclosure: No positions.

PFF Dodges Bullets From The Banking Sector

Preferred stock ETFs were once considered a tiny corner of the alternative income marketplace that had dodged the bullet of credit contraction. High yield mainstays like junk bonds, master limited partnerships, and even REITs have felt the pain of income investors reeling in their risk targets and running for the safety of high quality bonds. That picture changed dramatically this month as the iShares U.S. Preferred Stock ETF (NYSEARCA: PFF ) fell 5% from high to low and is scrambling to claw its way out of the abyss. This uptick in volatility may come as a surprise to many who had become accustomed to small prices changes in the index over the last several years. Preferred stocks are somewhat of a hybrid instrument that carry qualities of both equity and debt instruments. Therefore, with interest rates falling, it must be an equity-driven event that is causing this turmoil. A quick check behind the scenes of PFF reveals that this fund owns a diversified mix of 260+ individual preferred securities. Yet the single largest underlying sector is banks (42%) and diversified financial companies (18.50%). Together these two groups make up over 60% of the total portfolio and will therefore contribute an outsized portion of the fundamental price action. An overlay of PFF versus the SPDR S&P Bank ETF (NYSEARCA: KBE ) shows that the preferred stock index began a pronounced downside move in tandem with the sharp dive in publicly traded bank stocks (blue line). Click to enlarge PFF had a much more muted percentage drop than KBE. However, it is clear that the stress in banking stocks is also translating to a measure of fear in the underlying preferred market as well. Another interesting phenomenon with this price action has been the relatively swift and sharper recovery in PFF versus KBE. While banks are barely off their lows, PFF has been able to recover more than half of its corrective move. Only time will tell if this V-bottom formation will hold or if there will be another round of selling that will again test the resolve of income investors. I have owned PFF for clients in my Strategic Income Portfolio for a number of years and have been pleased with its makeup and performance over that time frame. A fund of this nature provides us with exposure to an alternative asset class with a much lower beta than a traditional dividend equity fund. It has also demonstrated a much stronger comparable income stream than a diversified bond fund. We view preferred stocks as a tactical opportunity in the context of a diversified income portfolio . This means that they are typically sized smaller than a core holding and may be added or removed as necessary to accommodate the current interest rate or stock market environment. Moving forward, I will be closely monitoring the price action in this sector to determine if we should scale back our position or continue to hold as this recovery develops further. Either way, our process will entail incremental steps and a thorough evaluation of the income landscape to ensure proper alignment with our conservative mandate . Disclosure: I am/we are long PFF. 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. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Investors Continue To Shy Away From Below-Investment-Grade Debt Funds

Mutual fund investors have been voting with their wallets on lower-quality bond funds. Funds in Thomson Reuters Lipper’s High Yield Funds and Loan Participation Funds classifications have seen their coffers shrink on a fairly consistent basis since the second half of last year. The net outflows for each have intensified as of late; High Yield Funds has suffered negative flows in 14 of the last 15 weeks (-$17.5 billion), and Loan Participation Funds is currently in a downward spiral of 22 consecutive weeks of net outflows (-$14.4 billion). This recent activity is the continuation of a longer-term trend; High Yield Funds has not experienced a positive annual net inflow since 2012 (+$21.1 billion), while Loan Participation Funds last took in net new money on an annual basis in 2013 (+$57.4 billion). During this latest run the largest net outflows among the high-yield fund universe belonged to some of the more well-known names in the field. The Ivy High Income Fund (MUTF: IVHEX ) (-$1.3 billion), the American Funds American High-Income Trust (MUTF: AHIFX ) (-$1.1 billion), and the PIMCO High Yield Fund (MUTF: PHLPX ) (-$1.0 billion) all saw over a billion dollars leave the fold. Trailing slightly behind this lead group were the BlackRock High Yield Bond Portfolio (MUTF: BHYAX )(-$911 million) and the JPMorgan High Yield Fund (MUTF: JHYUX ) (-$709 million). Similar to the high-yield fund universe, the most significant net outflows for loan participation funds over the most recent tracking period have been concentrated in a handful of funds. Since the start of the fourth quarter of last year there have been four funds whose negative flows have been significantly greater than the rest of the universe: The Oppenheimer Senior Floating Rate Fund (OOSA) (-$2.0 billion), the Fidelity Advisor Floating Rate High Income Fund (MUTF: FFRHX ) (-$1.3 billion), the RidgeWorth Seix Floating Rate High Income Fund (MUTF: SAMBX ) (-$1.1 billion), and the Eaton Vance Floating-Rate Fund (MUTF: EVBLX ) (-$960 million). Click to enlarge