Tag Archives: income

Spark Energy’s Income Statement Is In For Some Pain

I’m taking my losses and selling SPKE before Q4 earnings. SPKE has abandoned its plan to increase spending to acquire customers and has now doomed its income statement. SPKE’s model isn’t built for constant shifting between high and low spending and this will create many problems. In hindsight I always knew what Spark Energy (NASDAQ: SPKE ) was, and I detailed that in my initiation article, so maybe I shouldn’t be as disappointed in how this trade turned out as I am, because I’m actually really disappointed. I’m selling SPKE on Monday at the open down 14.5% or so (depending on where this stock opens) for a couple reasons but primarily because the company has no idea what it’s doing. It’s literally operating in an industry where all you have to do is spend endlessly to acquire customers (welcome to the S&M black hole!), pray that you can do a decent job at hedging exposure to natural gas (creating the spread that creates the margin), do a good enough job to hang on to the majority of customers (but trust that there will in fact be churn), hope the share price goes higher, raise debt or finance via equity offering, and repeat the process. The most important must-do by far of those listed is spend, by the way. That’s all you have to do. Heck, I’ll make it even simpler for you SPKE – use your new revolver, yeah the one with the $37.9 million in current borrowing availability and go acquire customers. It’s that easy. Just spend, spend, spend! What do you not get about that? (click to enlarge) But of course, SPKE management couldn’t do that. No, SPKE management just announced on the Q3 CC that it’s executing its third strategic shift in as many years. What is this shift I speak of? Well, I’m speaking of the shift to (again) lower customer acquisition spending (this is after ramping customer acquisition spending in mid-2013 after lowering it in early-2012) to focus on “the longer-term sustainable growth consistent with our focus on distributable cash flow (SOURCE: SPKE Q3 CC )”, whatever that means. I say whatever-that-means because there’s nothing “longer-term” about SPKE’s business. It’s a commodity of the worst variety, meaning it has zero differentiation from competitors and zero value-prop to customers other than at any given point it can offer electricity services at a cheaper price than its competitors, which is by definition the definition of a commoditized business. This is pretty well evidenced in the attrition SPKE experiences regularly. I mean consider this, SPKE spent to acquire 91,000 customers between Q2 and Q3 while at the same time 44,000 customers walked through the door on the way to the next commoditized provider: (click to enlarge) Talk about an inefficient model. Now getting back to the stated reduction in spending and focus shift, this becomes a big problem because every time SPKE drops customer acquisition spending, as they did in FY2012, SPKE sees its revenues fall off a cliff. I’ve detailed this in SPKE’s financials in previous articles and even promoted this as a reason that “value” existed in buying the shares when I did. Of course this was under the assumption that management would actually do what it said it was going to do at the time I bought shares, which was spend, spend, spend. I only bought these shares because I wanted to piggy back on the ramped spending and the fact that the spending costs (customer acquisition costs) get recorded as an asset on the balance sheet and accounted for through D&A over 8 quarters. I wanted to front-run the what should have been explosive top-line growth with what would have been for a while minimal D&A additions to the income statement. This would have artificially enhanced the income statement and I was hoping propped the stock to a point that I could have sold at a healthy gain all while collecting a fat dividend for waiting. Yeah, it didn’t exactly turn out as planned. So, here we are with today’s “new model” that SPKE is promoting as the way of the future. Forget that the company has a horrible looking S-1 filing with three years of volatile financials and that the company has zero history of being able to execute on any single strategic initiative for more than a quarter or two. Don’t mind that. Let’s just get long some shares because, well, this is the way of the future. This is the “longer-term” more “sustainable” way to run this commoditized business. I think SPKE thinks it’s something it’s not and that can be a very dangerous thing. It has been for bagholders in the past and has been for this bagholder through 5 five months of ownership. The Ramp UP and The Ramp DOWN SPKE’s creating huge financial volatility for itself by constantly ramping up and ramping down spending. It’s also creating volatility for itself in not having a focused approach to its S&M efforts. SPKE also noted on its Q3 CC that it’s shifting its focus again back to commercial accounts, something it had completely abandoned after focusing on several years ago. You see a pattern here? SPKE seems to always be chasing the “hot dot” of the moment and seems to be the real case of the tail wagging the dog. Take a look at what it’s done for the income statement: (click to enlarge) So, first things first SPKE’s 9M results are absolutely blown up because 1H/14 was blown up by spending not being ramped until Q3/13. Let me explain how that works. SPKE can easily track revenues growth with S&M spending growth. What it can show is that once it increases spending, roughly three months into elevated spend levels revenue growth begins to turn upward. After about six months revenue growth reaches a terminal velocity where more spend is needed to created more velocity. That’s a pretty easy equation to follow. Now, I don’t know if that is uniform in this space or not but that’s what SPKE’s history has shown us. When SPKE decided to increase S&M spend in Q3/13 that means Q1/14 was only seeing terminal velocity of the initial increases in spend levels (which were increased from there further) and in fact the spend was being spread across larger geographic areas. This means that velocity was lower across a wider casted net which means sales were lower than they could have been had SPKE simply been concentrated (further saturating an area with spend). Yet another misstep. Regardless, that explains the 9M results showing such a variance from the Q3 results. Oh, by the way, we’re heading back to the days of reduced spending but don’t worry things are going to be different this time around because management has a plan. The 9M/14 results show flat top-line results, better NAO revenues (which are basically hedging gains or losses and largely SPKE has shown it has zero control and/or predictability in this line item), much higher operating expenses, and growing operating and net losses. This is inclusive of the benefit of a lower D&A expense, which will slowly be getting bigger quarter after quarter for the next six quarters before shrinking assuming SPKE actually maintains its plan to lower spending. There’s a huge amount of customer acquisition costs that have to be D&A’d to the income statement from the previous quarters spending ramps, regardless of if SPKE abandons the strategy half way through. What drove the 9M and quarterly results? S&M spending and hedging. That’s the entire business here folks. There’s a guy knocking on your door or a flyer in your mail offering you electric service. Is it at a lower cost or not? That’s what drives SPKE’s income statement. It’s really not that complicated but somehow SPKE has found a way to complicate it. What’s really sad is that had SPKE just stayed the course it might have been able to finally hit a vein regionally that it had some traction with or find a market that actually responded to its spending. I mean the cash is already gone, why not actually use what’s left on the balance sheet and dip into the revolver? Everything outlined in red is bad. The entire income statement is bad. I mean just look at that net income destruction Y/Y from ~$12 million to ~$7 million. Now, I’ll give SPKE that it hadn’t had a full 9M to show its increased spending and larger customer base within the 9M/14 figure, and subsequently SPKE went out and acquired some customers from outside sources so at least it’s trying the M&A route, but the comps it was up against in 2014 weren’t tough considering it didn’t ramp 2013 spending until Q3 as well. I just don’t have any sympathy for SPKE’s financials at this point because it’s doing this to itself. SPKE’s Adjusted EBITDA really shows the customer acquisition cost spend differential and why I say that once you start spending in this model you have to continue to spend forever, that the model basically becomes a constant black hole of S&M dollars: (click to enlarge) You can see how I’ve outlined the massive difference in customer acquisition costs in the comparable periods. In Q3/14 it was roughly 400% Q3/13, you don’t think that should have been driving revenues? You don’t think the ramp from previous quarters should have been driving revenues? The fact that the Q3 income statement showed flat revenues Y/Y in Q3/14 is a clear sign that the ship is already starting to take on water. That ramped spending is about to start to really add up on the income statement over the next few quarters in the form of a D&A uptick and SPKE isn’t going to have the revenues to offset it. It’s going to be taking huge losses on that when it happens. The spending difference becomes pretty egregious on the 9M side of the Adjusted EBITDA. 9M/14 customer acquisition costs were roughly 700% 9M/13 spending. Even with that, even with the compounding spending that should have reached maximum velocity from quarter prior SPKE still posted flat revenues. What an absolute disaster. This is going to bury SPKE’s stock over the next few quarters and was something I outlined in my prior articles. If SPKE didn’t have consecutive and sequential blowout top-line growth quarters you want nothing to do with this company. It won’t have the top-line to make up for the D&A uptick. That in a nutshell explains the bear thesis around this name going forward. This stock is dead, it just doesn’t know it yet. Do I need to even note those Adjusted EBITDA figures? Didn’t think so. Now, you can imagine what these types of operations have done for cash flows, which actually account for the cash outflows of the customer acquisition costs as they are incurred: (click to enlarge) Yeah, the cash from operations has been blown up and maybe that’s the reason for the strategy shift towards lower spending. Maybe SPKE management saw that what they were doing (again) wasn’t working and decided that conserving the last of the cash and the last of the liquidity via the revolver was the primary concern. I mean to hell with the income statement, that’s just for accounting nerds, the cash flow statement is dealing in real dollars, actual cash and when you run out of that and still don’t have a plan on the board for how you turn the corner and make it to spring you don’t get to play anymore. Even at minimal levels of revenues if SPKE can get spending down low enough it can generate good levels of FCF. Just look at both of these periods listed here. Solid FCF could allow the company to rebuild its cash balances and make one more run at another strategy shift or whatever else the company might have in mind. The point is, just don’t run out of cash. I think that’s probably the best explanation I have for what’s been announced and what’s about to be allowed to happen to the incomes statement. Where’s the trade? The trade is to sell SPKE and don’t ever consider it on the long side again. This business model and this niche isn’t one that you want to invest in for all the reasons mentioned in the beginning of this article. It’s a commodity with no way to differentiate itself and no way to protect itself from the wide swings that come with trying to hedge energy exposure on a constantly fluctuating demand. SPKE always was a bad business but I thought I could catch a few cheap points riding an accounting loophole that would have allowed revenue to grow while expenses remained artificially low on the income statement. I was wrong and lesson learned. I recommend a sell of SPKE. I look forward to providing continuing coverage in the future. Good luck to all.

GAMCO Natural Resources, Gold & Income Trust: Similar But Different Discounted CEF Opportunity

Summary GNT invests in hard assets and trades at a discount to NAV, like its sibling GGN. GNT, however, has a more diversified portfolio and doesn’t use leverage. Although GNT has a lower yield than GGN, it may be a better option for some investors. GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ) is a sister fund to GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ), another closed-end fund, or CEF, that I recently wrote about . GNT shares many similarities with its older sibling, but the differences could make it more appropriate for some investors looking for a combination of hard asset exposure, income, and “outsourcing.” The same but different Like GGN, GNT is heavily invested in the precious metals, mining, energy, and energy services sectors (this quartet makes up around 80% of its portfolio). That fits tightly with its name and is roughly similar to GGN’s allocation. GNT, however, has more leeway in its security selection, putting another 15% of assets in the specialty chemicals, agriculture, and machinery sectors. This is likely the reason for the very slight difference in the naming of these two closed-end funds. (Note the switched places of natural resources and gold in the two names.) What it means for investors is that GNT is a bit more diversified. That can be a good thing on one hand, but also tells you that this CEF isn’t a pure play precious metals and energy fund. If that’s what you are looking for, you’re better off with GGN or some other option. Another big difference between the two is the use of leverage. GGN uses leverage, GNT does not. That could limit performance at GNT in an up market, but won’t exacerbate losses in a down market. And since weak gold prices and recently plummeting oil prices have been a big issue for the fund, that’s not such a bad thing right now. GNT, however, does make use of options, like its sibling, to meet its primary goal of income generation. That’s why income investors should like this CEF and its monthly dividend. Currently it’s paying $0.07 a share, a reduction from $0.09 a share paid in December. The yield based on the lowered dividend is a touch over 10%. Although that’s nothing to sneer at, GGN’s yield is closer to 12%. But that higher yield comes with the added risk of leverage and with a less diversified portfolio mandate. A trade off worth spending some time considering. But don’t forget the dividend cut, because such dividend changes are a risk inherent to both CEFs. On sale Last year wasn’t any kinder to GNT than it was to GGN (down nearly 24%), with GNT shares falling around 22% (total return, which includes dividends was a loss of around 13%). That’s largely because commodities of all sorts were out of favor. Gold, for example, has been a laggard for some time and oil’s quick fall is filling the headlines right now. However, such hard assets, including other commodities like food, can be a haven in a storm. Gold, for example, is an inflation hedge and a safety vest when the market gets stormy. It’s why asset allocation models include such securities, they provide diversification. That doesn’t mean load up on either GGN or GNT, but it does mean that adding a little of either to an otherwise diversified portfolio could be a good long-term decision. And now is a good time to consider it if you haven’t already. First off, the fund had a bad year last year because the sectors on which it focuses underperformed. There are various reasons for that, and fear of further downside risk could keep you away, but it also means that these sectors are on sale. If you wanted to own them, but haven’t pulled the trigger, they’re cheap right now. But that’s not the only sale going on. GNT is a closed-end fund, which means its market price often deviates from its net asset value, or NAV. NAV is the actual value of what GNT owns on a per share basis. Over the last couple of years, GNT has traded at a discount to its NAV in late December and early January, with the gap narrowing as the new year progresses. Investors selling shares that have gone down in value to lock in losses for tax purposes is a part of this. The discount is currently nearly 9%, larger than sibling GGN’s 5% or so. And while GNT doesn’t have as long a history, the trends for the two are roughly similar. So you could view GNT as being on double mark down. That allows you to pick up a high yield, the chance for the discount to narrow, and exposure to out of favor hard assets. Very similar to what GGN offers, but without the leverage and with a bit more portfolio level diversification. Author’s Note: The comments on the GGN article referenced above brought up some valid points that will be similar for GNT for long-term investors. They are worth a read if you haven’t seen them. This article, like the one about GGN, speaks more to new investors. I plan to address some of the thoughts presented by long-term investors in a future article. It’s number four or five in the cue of ideas brought out by recent comments on articles I’ve written. And I want to thank those who have respectfully disagreed with me. Respectful discussion makes this community better and more fun.

GGN: Now Could Be A Good Time To Pick This High Yielder Up

Summary GGN invests in gold and natural resources, with an option overlay and the ability to use leverage. GGN’s is trading at an over 5% discount to its NAV, despite a history of trading at or above NAV. That could make now a good time to consider this relatively risky high yielder. GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT: GGN ) isn’t for the feint of heart. But if you can handle a little risk and have been looking for a way to add hard assets to your portfolio, now could be a good time to consider this closed-end fund, or CEF. And with an over 12% yield, paid monthly, you’ll be getting a nice income stream, too. Not your average bear GGN isn’t your run of the mill gold fund. This CEF’s portfolio is roughly 50% metals and mining stocks and 33% energy and energy services stocks. So roughly 80% of the fund is in sectors that have been, you could say, out of favor. Oil and related stocks have been the most recent market pariahs taking a toll on this CEF’s market price. However that doesn’t mean that you should avoid these assets. Hard assets and related industries can provide a valuable hiding place when markets are in turmoil or when inflation is rising quickly. They are often seen as a safe haven. It’s this diversification opportunity that leads investors to include some hard assets in their portfolios. So, the current malaise in mining and energy stocks can be looked at as a reason to avoid the sectors, or as a Blue Light Special opportunity for adding hard assets to your otherwise diversified portfolio-Just in case. But there’s more to GGN than just a focus on hard assets. It can also make use of leverage ( around 7% or so recently ) and an option overlay strategy. The primary goal of the fund is to provide investors with a high level of income, capital appreciation is a secondary goal. Thus, the fund writes options on the stocks it owns. And since volatility is the norm in the precious metals arena, there’s plenty of opportunity to take advantage of the options strategy to create income. Right now GGN pays $0.07 a share every month. That was recently cut from $0.09, a fact that should prepare you for income volatility here. However, even with that dividend cut, the CEF still pays a handsome yield of around 12%. Thus giving you high yield exposure to a broad asset class that could provide a safe haven if the markets tank. The leverage piece of the puzzle is more difficult to reconcile with the fund’s income objective. However, with rates historically low, GGN is taking advantage of an opportunity to access cheap debt. That’s a double edge sword, since leverage can enhance performance on the upside and exacerbate losses on the down side. There’s been more down than up lately, so it’s a good thing that leverage is pretty light at around 7%. This is a piece worth watching if you decide to step in here. That said, sister closed-end fund GAMCO Natural Resources, Gold & Income Trust (NYSE: GNT ) is another option if you want to avoid leverage, but it’s yield is a couple of percentage points lower. I’ll write about this CEF shortly. The real opportunity While owning an income producing security in out of favor industries is a good reason to be looking at GGN, it doesn’t get at the real opportunity right now. And that’s the discrepancy between GGN’s share price and its net asset value, or NAV. Historically, GGN has traded at or slightly above its NAV, with the Closed-end Fund Association pegging the average premium over the past five years at a little over 2%. But right now GGN is trading at discount of around 5% or so. The reason for this is likely two fold. First, investors have been selling off anything related to oil over the last six months or so as oil prices have fallen precipitously. That includes GGN. Second, year-end selling to lock in losses to offset gains elsewhere for tax purposes. GGN is a prime target for tax less selling since last year was a less than stellar one for the fund; the fund’s share price was down nearly 25% in 2014. (Total return, which includes distributions, was a loss of roughly 15%.) That’s not a guarantee that you’ll see a 7% price jump as 2015 progresses in addition to a 12% yield. But it does mean that GGN’s shares look like they are being put on an even deeper sale than the two sectors on which it is focused. So, if you want to own some hard assets “just in case,” now is a good time to take a look at GAMCO Global Gold, Natural Resources & Income Trust. That’s especially true if you have an income bent and prefer to outsource at least some of your investment activities.