Tag Archives: income

New Jersey Resources: Next Year Is Key For Its Future

Summary The company is in a prime location, located near ample natural gas reserves. The company has not had a rate case filing in several years, leaving net income stagnant. Bottom line growth has instead come from the Energy Services business, which is non-regulated and prone to swings in profitability. New Jersey Resources (NYSE: NJR ) is a relatively under-followed energy holding company. The company’s primary business is regulated natural gas distribution to roughly 500,000 customers in New Jersey, but the company also has started to grow its pipeline and storage businesses and has built a small clean energy generation portfolio. Shares have rallied firmly the past year as the company has garnered some more exposure, but the company is still woefully under covered by analysts and retail investor ownership remains low. Is there an opportunity present to snap up shares before visibility inevitably improves? Location, Location, Location Low natural gas prices highly benefit New Jersey Resources. New Jersey is positioned right next door to the Marcellus/Utica shale, which has dramatically increased the natural gas reserve base available to all gas utilities in the Northeast, including New Jersey Resources. By extension, this means cheap natural gas prices for New Jersey Resources customers. Happy customers make for happy utilities as cheap prices for consumers reinforces support for the public utility commission to back any infrastructure investments the company wants to make. At the same time, the company’s other businesses (midstream/storage) are set to benefit as healthy demand growth increases demand for additional pipeline build out and storage availability. From a customer growth perspective, several locations in New Jersey are commutable to and from New York City or Philadelphia. As much as state residents seem to despise the state, proximity to some of the country’s top metropolitan areas will keep residents around, if begrudgingly. The state has maintained steady population growth over the past five years, in line with national averages. New Jersey Resources has done better than that, as the company operates in only three counties in New Jersey: Monmouth, Ocean, and Morris. (click to enlarge) * NJR Investor Presentation, Service Territory Breakdown New Jersey Resources appears to have its regulated downstream utility operations in ideal New Jersey locations. Ocean County has continued to be the population growth leader in New Jersey, posting healthy increases yearly. The company also has the opportunity to likely easily add roughly 50,000 existing New Jersey residents over the next few years, converting those that are still using propane/electricity for heating while being within or very near New Jersey Resources lines. Operating Results Revenue has largely been flat over the past five years due to falling natural gas prices. Like most natural gas utilities, the cost of natural gas is passed on to consumers through agreements with the public utility commission. High natural gas prices mean higher revenues but lower margins as the utility’s profit share per cubic foot sold is fixed. Compounding problems, New Jersey Resources has not had a base rate case filing in years. Base rate cases adjust the base rate charged to customers and are necessary when the utility has faced rising costs. Thankfully, this will change within the next few months, with the pre-hearing beginning in November. By early second half of next year, we should have a decision that should yield revenue increases for the company. Operational costs for New Jersey Resources have expanded since 2007 (the time of the last case) so the company should have an extremely straightforward filing. Operational cash flow has improved considerably in the past two years as New Jersey Resources recovered from some one-time charges that took place in 2012/2013. Operational cash flow expansion has primarily come from solid results from the Energy Services operating segment, which saw net income more than double. Energy Services takes advantage of pricing differences between regions or time periods, selling excess natural gas inventory when prices are high and building additional stock when prices are low, either through direct sales or through entering derivative contracts. In general, the more volatile natural gas prices are, the more profitable this division becomes. Poor performance in this division could cause future earnings volatility. I would prefer to see net income growth from regulated utility operations, which has only grown 1.3% since 2012. Unfortunately, we won’t see this until we see the results of the rate base case expansion. Debt has remained very low, with net debt of only $814M at the end of Q2 2015. Investors must keep in mind that New Jersey Resources does not generate much in the way of EBITDA currently ($200M in 2014) so leverage still exists even given the relatively low size of debt for a utility. Conclusion The upcoming rate case will be key to the company’s long-term success. Long term, the company will need the cash flow support from that base case. Shares trade expensively for a utility (12.79x EV/EBITDA, 18.5x 2016 EPS estimates) and a bulk of the earnings growth of the past few years has relied on a non-regulated Energy Services business that could prove volatile. Investors should be cautious and watch the rate case proceedings carefully.

Consolidated Edison – Slow And Steady Growth While Bringing Stability To Your Portfolio

Summary Consolidated Edison serves 3.4M customers in the New York City area. ConEd is a Dividend Champion having raised dividends for 41 consecutive years; a starting yield of 3.91% and a 5-yr dividend CAGR of 1.3% brings Chowder Rule to 5.21. In a slow and steady growth sector, ConEd is stable and is planning to grow by investing heavily in the electric and gas infrastructure investments in the next two years. Consolidated Edison Inc (NYSE: ED ) is a regulated electric, gas and steam utility delivery company serving New York City and Westchester County. The company serves 3.4M customers and is an iconic dividend growing company loved for its long track record of not only paying dividends — which it has paid since 1885 — but has raised those dividends for 41 consecutive years. The company operates in three segments: Consolidated Edison Company of New York (CECONY), Orange & Rockland Utility Company (O&R) and Competitive Energy Business. Corporate Profile (from Yahoo Finance) Consolidated Edison, Inc., through its subsidiaries, engages in regulated electric, gas, and steam delivery businesses in the United States. It offers electric services to approximately 3.4 million customers in New York City and Westchester County; gas to approximately 1.1 million customers in Manhattan, the Bronx, and parts of Queens and Westchester County; and steam to approximately 1,700 customers in parts of Manhattan. The company owns 62 area distribution substations and various distribution facilities; 39 transmission substations and 62 area stations; electric generation facilities with an aggregate capacity of 705 megawatts that run with gas and fuel oil; 4,330 miles of mains and 369,339 service lines for natural gas distribution; and 1 steam-electric generating station and 5 steam-only generating stations. It also supplies electricity to approximately 0.3 million customers in southeastern New York, and in adjacent areas of northern New Jersey and northeastern Pennsylvania; and gas to approximately 0.1 million customers in southeastern New York and adjacent areas of northeastern Pennsylvania. The company operates 572 circuit miles of transmission lines; 14 transmission substations; 62 distribution substations; 86,379 in-service line transformers; 3,991 pole miles of overhead distribution lines; and 1,869 miles of underground distribution lines, as well as 1,867 miles of mains and 105,077 service lines for natural gas distribution. In addition, it is involved in the sale and related hedging of electricity to retail customers; and provision of energy-related products and services to wholesale and retail customers. Further, the company develops, owns, and operates renewable and energy infrastructure projects, as well as invests in transmission companies. It primarily sells electricity to industrial, commercial, residential, and governmental customers. The company was founded in 1884 and is based in New York, New York. A Closer Look Consolidated Edison operates in one of the most vibrant and densely populated areas — New York City. Operating with a focus on the transmission and distribution business, the commodity exposure is less than other utility companies in the sector such as Southern Company (NYSE: SO ). The following chart provides an overview of the different segments of ConEd and the contributed earnings per segment. (click to enlarge) (Source: 2015 Wolfe Research Power & Gas Leaders Conference Presentaton ) The regulated nature of the industry has kept the stock performance stable and tempered through rough times in the economy. However, ConEd still has avenues to grow. The company’s forward-looking focus for growth includes: Delivering energy to a growing service area Energy conversion programs Oil-to-gas conversions Development of renewable energy Energy infrastructure investments for electric & gas transmissions and electric & gas storage. (Source: Created by author. Data from Capex Forecast 2014 10-K) One worrying trend that investors need to be aware of is that the utilities sector is seeing continued headwinds in revenue growth. There are various reasons, but the main ones are motivated by increased costs from utility companies to cover operating and overhead costs. In addition, revenue growth headwinds come from a combination of energy conservation, energy efficiency and shift towards independent power generation as renewable energy becomes more affordable and accessible for the end users. The following chart from ConEd shows the changes in electricity usage, which has seen steady declines from both residential and commercial users over the last few years. As electricity is the biggest segment in ConEd’s business, it should be something potential and current investors should stay vigilant about. (click to enlarge) (Image Source: ConEd Credit Suisse Energy Summit Presentation ) Dividend Stock Analysis Financials Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations. (click to enlarge) (Source: Created by author. Data from Morningstar) (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The utility industry is resilient and has seen a slow and steady rise over the years. Revenues and earnings are fairly constant with year-over-year growth ranging between -0.25% to +0.25%. The debt load is also stable and ED enjoys an “A+” credit rating from S&P. ED has a debt/equity of 1.07 and a current ratio of 0.90. Dividends and Payout Ratios Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: Utility companies are slow and steady growers and are perfectly suited for long-term dividend investors. Consolidated Edison is a Dividend Champion having raised dividends consecutively for 41 years. The 1-, 3-, 5-, and 10-year dividend CAGRs are 2.4%, 1.6%, 1.3%, and 1.1% respectively. Coupled with a current dividend yield of 3.91%, ED has a Chowder Rule number of 5.21. The current payout ratio is 67.7%. The payout ratio falls within the target range of 60%-70%. Outstanding Shares Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The number of shares have risen steadily over the years until 2011, but have stabilized since. Book Value and Book Value Growth Expected: Growing book value per share. (click to enlarge) (Source: Created by author. Data from Morningstar) Actual: The book value is a bright spot in the company’s financials. The book value has steadily increased over the years maintaining a nice upward trajectory. Valuation To determine the valuation, I use the Graham Number, average price-to-earnings, average yield, average price-to-sales, and discounted cash flow. For details on the methodology, click here . The Graham Number for ED with a book value per share of $43.66 and TTM EPS of $3.77 is $60.86. Based on the last closing price, the stock is currently 10.15% overvalued. ED’s 5-year average P/E is 15.34, and the 10-year average P/E is 15.23. Based on the analyst earnings estimate of $4.04, we get a fair value of $61.97 (based on the 5-year average) and $61.53 (based on the 10-year average). ED’s average yield over the past five years was 4.67% and over the past 10 years was 4.99%. Based on the current annual payout of $2.60, that gives us a fair value of $55.67 and $52.10 over the 5- and 10-year periods, respectively. The average 5-year P/S is 2.16 and average 10-year P/S is 2.0. Revenue estimates for next year stand at $21.18 per share, giving a fair value of $45.74 and $42.35 based on 5- and 10-year averages, respectively. The consensus from analysts is that earnings will rise at 2.72% per year over the next five years. If we take a more slightly conservative number at 2.5%, running the three-stage DCF analysis with an 8% discount rate (expected rate of return), we get a fair price of $67.27. The following charts from F.A.S.T. Graphs provide a perspective on the valuation of ED. (click to enlarge) (Source: F.A.S.T. Graphs ) The chart above shows that ED is slightly overvalued. The Estimates section of F.A.S.T. Graphs predicts that at a P/E valuation of 15, the 1-year return would be -6.5%. (click to enlarge) (Source: F.A.S.T. Graphs ) Conclusion Electric utilities in general have seen slower sales industrywide amid a combination of energy conservation, energy efficiency and shift towards independent power generation/natural gas usage. The utility sector is a stable slow-growth sector that is revered during recessions by investors. ConEd fits the bill, as it has slowly and steadily grown the business over many years, although the stock is currently overvalued. Based on the metrics discussed above, if we give equal weight to all metrics, we get a fair value of $58.94. Remember that utilities sector stocks play a very different role in a portfolio — it will not rise fast, bringing amazing capital gains and quick wealth. What utility stocks bring to an investor’s portfolio is inertia and stability while providing steady and reliable income. One added risk for investors is the potential rise of interest rates by the US Fed. Bond substitutes such as utility stocks suffer the most in rising rate environments. Full Disclosure: None. My full list of holdings is available here .

Muddling Through Works For Me

The global economy, including the United States, is muddling through with growth well below potential, but better than a year ago. The global consumer is the winner while the global producer is suffering from excess capacity, excess inventory and much lower prices. Lower prices for the producer means higher disposable income for the consumer as long as his income is at least constant and hopefully, rising. There are clear winners and losers out there due to this conundrum. It’s not so hard really to construct a long/short portfolio in this environment if you use common sense and in-depth research. It is most interesting to see how managements are reacting to this environment. If they bite the bullet and make the right strategic changes, they will come out stronger and their stock price will reflect it but if they keep their head down and maintain the status quo, their business and stock price will erode over time. The portfolio manager who uses historical analysis and doesn’t listen to or see what is happening out there won’t see the change. But the one with an analytical proclivity, an open mind and who puts in the hard work will see the change or lack thereof and construct a winning portfolio accordingly. This is an analyst’s delight. My strength! This is a worldwide phenomenon so you need a global perspective and knowledge. That’s what we at Paix et Prospérité are all about. The financial markets continued to move up last week on the “wall of worry” that we have been discussing in previous blogs. Our view was, and remains, that the Fed is out of the way until at least December, and most likely next March, and this has become the prevailing wisdom on Wall Street. You could hear the sigh of relief around the world. The global financial markets acted accordingly: stock markets for the most part rose, led by China and the emerging markets; bond yields remained ridiculously low as fears of deflation override fears of inflation; commodity prices, including oil, fell for the week; the dollar held constant after falling over the last two weeks; a huge deal was announced in the beer industry; Dell bid over $67 billion for EMC which was under attack from an activist; and corporate earnings season began. Quite a busy week! Our portfolio continues to outperform by a wide margin. I have spent a lot of time over the last year declaring that this is a market of stocks, not a stock market. Step back and think about this for a moment. Historically, investors rotated industry sectors based on where you were in the economic cycle. For instance, you would want to have the stable growers like food and drug stocks when the economy turns down and parenthetically you would want to own the economically sensitive stocks late in a cycle as capacity utilization increases to the point that prices increase accelerate and stick. Not now! What’s different today? Globalization. The lowest common denominator, for the most part, sets prices. For example, Chinese steel imports have forced tremendous pricing pressure here and in Europe. Some nations don’t have the same profit motive as we do and may be nationalized. It could all be about jobs over profits. Currencies play a major role here too. It used to be that our high-energy costs penalized our chemical industry in competing globally. Not anymore as our feedstock costs are as low as any country, including the Middle East. Products move globally and if you don’t have a competitive advantage either in price or technology, you’ll lose out over time. It’s our job to find them. We’re pretty good at that. Change can take many forms. Take a look at Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), and Uber as three examples whose business models turned their respective industries upside down. Just ask Wal-Mart (NYSE: WMT ) and the networks. We will discuss all of this in more depth later but you can guess where I am going with this. Do the work; don’t follow the chart, as that is history; and find the future winners as your longs and the losers as your shorts. I waited over a year for Nelson Peltz to wake up the analysts and investors in GE . Be patient and let the thesis play out. Don’t forget to maintain your liquidity and control risk too. Let’s quickly take a look at the events of the week by region, see if there any changes in core beliefs and then turn to asset allocation and specific recommendations. 1. As I mentioned last week, the U.S consumer is in great shape and continues to support the economic expansion more than offsetting industrial weakness most prevalent in weak export numbers. Specifically, consumer confidence rose to 92.1 in October from 87.2 in September; consumer expectations out six months rose to 82.7 from 78.2 in September; the consumer view of their personal finances rose to 106.8 from 101.2 last month; consumer comfort index rose to 45.2 and is up 5 points in a month and retail sales rose a mere 80.1% in September from August. The surprise for the week was that the Consumer Price Index fell a seasonally adjusted 0.2% in September and was unchanged year over year. Excluding food and energy, the core CPI actually rose 0.2% in September and 1.9% year over year. Social security recipients, over 56 million strong, will not get an increase in the cost of living index in 2016. Tell them there is no inflation in the country. Relative strength by the consumer is being partially offset by continued weakness in factory output, which declined 0.1% last month. Manufacturing comprises only 12% of the economy and will remain a drag for quite some time. By the way, capacity utilization declined to a three month low of 77.5. Finally the Beige Book came out and supported only a “modest expansion” at the end of the third quarter. Many of the districts blamed the strong dollar saying it was hurting exports and tourism. Clearly the Fed is on hold for now and maybe longer than we think despite several world central bankers asking for the Fed to end the drama and to finally lift rates. Waiting has been unsettling to the global economies, as we have mentioned many times too. Since estimates of future global growth are still falling, the Fed is on HOLD. 2. The big news out of Europe is that Switzerland is set to impose 5% leverage ratios on its largest banks which include Credit Suisse and UBS up from around 3.7% as mandated by Basel III. The Swiss authorities are following the lead of U.S. regulators who set the same levels for our biggest banks. It’s quite simple: higher capital ratios means less lending. Dodd Frank and Basel III have certainly reduced financial risk in the economy at the expense of growth. While growth in Europe has clearly bottomed, it won’t reach earlier estimates due to weakness in foreign economies impacting exports. But the European consumer is clearly doing better which bodes well for 2016. 3. China reported its third quarter GNP on Monday and had the weakest quarter in 6 years. China Premier Li has been vocal, recently committing to moving forward on market oriented reforms to open up the country more to foreigners, ongoing urbanization, more transparency and increased infrastructure spending. Services and consumer spending are supporting growth while manufacturing and exports are relatively weak. A familiar story. By the way, credit growth has accelerated recently as monetary easing has spurred loans. The CPI increased 1.6% in September from a year earlier while the PPI fell 5.9%. There is more room for further monetary and regulatory initiatives to stimulate growth as has occurred elsewhere. 4. Japan’s government recently lowered its targets for growth this year as output/industrial production is weaker than anticipated due to slower growth overseas. Here again, consumer spending is holding up as employment and wages are slowly increasing and lower energy costs are boosting disposable personal income. Catch a theme here? The global consumer is holding up well while the global producer is weaker than anticipated. So why does muddling through work for me? Let’s get back to our core beliefs: the global economy, including the U.S., will continue to grow, albeit slowly, and there will be lower highs and higher lows as imbalances are contained and a conservative bias permeates at every level from government to business to the individual; interest rates will remain surprisingly low as global competition will keep a lid on inflation along with lower energy prices; the dollar will remain the currency of choice as this country’s global competitive situation continues to improve and energy independence remains a possibility down the road; earnings, excluding commodity related industries, will surprise on the upside despite relatively sluggish global growth; speculation is limited to real estate, art and private equity; the stock markets are undervalued as 10 year bonds are around 2.1%, the risk factor should be around 3 as leverage ratios keep falling; and S&P earnings are slightly higher in the aggregate and much higher in energy and commodity companies. It’s hard to imagine M & A getting any stronger. Another of our core beliefs. Finally this is all about asset allocation, stock selection and risk controls. I listened to or read the transcripts of at least a dozen companies last week starting with Alcoa (NYSE: AA ) and ending Friday with GE and Honeywell (NYSE: HON ). I really suggest that you take the time to read some of these transcripts as managements are really doing some amazing things. Alcoa is splitting into two companies; GE is selling most of its financial assets and reinvesting in its higher margin, higher return industrial businesses; Honeywell is churning out 10%+ growth and generating 110% free cash flow; Citi (NYSE: C ), Bank America (NYSE: BAC ), JP Morgan (NYSE: JPM ), PNC etc., are all making great strides not relying on a rising yield curve to make money; Intel (NASDAQ: INTC ) is upgrading its mix. I could go on and on. My portfolio is comprised of being long companies going through positive changes, short those with their heads in the ground, a few Larry Tisch value plays and there is no industry concentration. It really is stock specific. I remain around 93% net long, no bonds and no dollar currency trading position. Take the time to understand the strategic goals of the management of each company in your portfolio, step back and reflect hard and long on it, pause once again and consider all that could go wrong and also right, control your risk by maintaining ample liquidity and be patient as change doesn’t occur over night. There are clear winners and losers out there. Perfect for a hedge fund like ours. Change is a global phenomenon.