Tag Archives: industry

Valuation Dashboard: Industrials – Update

Summary 4 key fundamental factors are reported across industries in the Industrial sector. They give valuation status of an industry relative to its historical average. They give a reference for picking stocks in each industry. This is part of a monthly series of articles giving a valuation dashboard in sectors and industries. The idea is to follow up a certain number of fundamental factors for every sector, to compare them to historical averages. This article covers Industrials. The choice of the fundamental ratios used in this study has been justified here and here . You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. You can refine your research reading articles by industry experts here . A link to a list of stocks to consider is provided in the conclusion. Methodology Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). They are compared with their own historical averages “Avg”. The difference is named with a prefix “D” before the factor’s name (for example D-P/E for the price/earnings ratio). It is measured in percentage for valuation ratios and in absolute for ROE. The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and size biases, which is necessary when going out of a large cap universe. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, much less for ETF investors. Industry valuation table on 11/25/2015 The next table reports the 4 industry factors. For each factor, the next “Avg” column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next “D-xxx” column is the difference between the historical average and the current value, in percentage. So there are 3 columns relative to P/E, and also 3 for each ratio. P/E Avg D- P/E P/S Avg D- P/S P/FCF Avg D- P/FCF ROE Avg D-ROE Aerospace&Defense 22.02 18.02 -22.20% 1.19 1.02 -16.67% 21.02 21.28 1.22% 7.89 9 -1.11 Building Products 28.48 20.14 -41.41% 1.28 0.64 -100.00% 33.72 22.38 -50.67% 9.91 6.07 3.84 Construction&Engineering 23.7 18.3 -29.51% 0.43 0.48 10.42% 18.32 19.81 7.52% 2.76 5.98 -3.22 Elec.Equipment 21.46 18.31 -17.20% 1.51 1.64 7.93% 27.36 21.88 -25.05% -8.4 -3.3 -5.1 Ind. Conglomerates 41.07 20.45 -100.83% 2.54 1.3 -95.38% 33.63 29.98 -12.17% 1.88 12.12 -10.24 Machinery 19.26 18.25 -5.53% 1.09 0.9 -21.11% 27.38 21.81 -25.54% 9.65 8.72 0.93 Trading Companies&Distri 15.36 17.14 10.39% 0.6 0.7 14.29% 12.99 25 48.04% 9.18 8.61 0.57 Commercial Services&Supplies 22.1 20.86 -5.94% 1.17 1.03 -13.59% 24.19 19.84 -21.93% 2.15 3.99 -1.84 Professional Services* 23.25 24.04 3.29% 1.46 1.22 -19.67% 21.24 17.43 -21.86% 7.36 3.09 4.27 AirFreight&Logistics 23.07 21.06 -9.54% 0.66 0.57 -15.79% 21.72 32.87 33.92% 11.93 11.12 0.81 Airlines 12.46 15.18 17.92% 0.97 0.41 -136.59% 19.15 12.37 -54.81% 34.11 3 31.11 Marine** 12.92 14.04 7.98% 0.81 1.41 42.55% 15.89 23.27 31.71% -15.58 6.05 -21.63 Road&Rail 16.88 19.17 11.95% 1.22 0.86 -41.86% 34.67 36.17 4.15% 16.97 9.43 7.54 Transport Infrastructure** 7.01 23.6 70.30% 1.06 1.19 10.92% 5.37 20.8 74.18% -1.33 -3.22 1.89 *Professional Services: Avg since 2008. **Factors may vary a lot for some industries with a low number of stocks or a lot of outliers. Valuation The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better. Price/Earnings: Price/Sales: Price/Free Cash Flow: Quality (ROE) Relative Momentum The next chart compares the price action of the SPDR Select Sector ETF ( XLI ) with SPY (chart from freestockcharts.com). (click to enlarge) Conclusion Industrials have slightly out-performed the broad market in the last 3 months, but underperformed it in the last 6 months. The 5 most prominent S&P 500 industrial companies in the recent rally have been General Electric (NYSE: GE ), Southwest Airlines (NYSE: LUV ), Norfolk Southern Corp (NYSE: NSC ), Raytheon (NYSE: RTN ), United Rentals (NYSE: URI ). LUV and RTN have hit new all-time highs, GE is close to its 2008 top. At industry level, Trading Companies and Transport Infrastucture are the only 2 industries with the 3 valuation ratios pointing to underpricing, and a quality level above the historical average. The industries with an improvement in valuation factors since last month are Trading Companies, Commercial Services and Supplies, Marine. There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. As an example, a list of stocks in Industrials beating their industry factors is provided on this page . If you want to stay informed of my updates on this topic and other articles, click the “Follow” tab at the top of this article.

Dividend Growth Stock Overview: NextEra Energy

About NextEra Energy NextEra Energy (NYSE: NEE ) generates, distributes and sells electricity to customers in 27 states and Canada. The bulk of the company’s customers are in Florida, served by its subsidiary Florida Power & Light Company. In addition to Florida Power & Light, NextEra Energy operates subsidiaries that generate renewable energy, provide electricity service to locations in Texas and New Hampshire, and sell fiber optic telecommunications services around the United States. The company employs nearly 14,000 people, and is headquartered in Juno Beach, Florida. Nearly 5 million customers are served by Florida Power & Light, which has 25,100 megawatts (MW) of electrical generation capacity. Over 90% of FPL’s capacity comes from natural gas and nuclear power. Based on 2014 figures (the latest year that’s available), over half of the operating revenues come from residential accounts, and another 36% come from commercial accounts. While wholesale revenues account for only 3% of the total, wholesale revenues were negligible as recently as 2012. NextEra Energy prides itself on using renewable power generation sources, and its promotional materials tout this effort; however, FPL’s two solar generation facilities provide only 35 MW of capacity. The company’s other major subsidiary is NextEra Energy Capital Holdings, Inc., which owns NextEra Energy Resources (NEE Resources) and NextEra Energy Transmission, LLC (NEET). NEE Resources is a wholesale generator of power and operates NextEra Energy’s competitive energy businesses (as opposed to its rate-regulated businesses). It also conducts energy-related commodity marketing and trading activities to mitigate risks from fluctuations in energy prices. NEET owns and operates two subsidiaries of its own, Lone Star and NHT, which provide rate regulated electricity service in parts of Texas and New Hampshire, respectively. NEET also owns FPL FiberNet, which leases internet network capacity to customers in Texas, New Hampshire and parts of the south-central United States. In 2014, NextEra Energy posted total income of nearly $2.5 billion on revenues of $17.0 billion. 60% of the total income was provided by Florida Power & Light, with the remaining 40% coming from NEE Resources. Earnings per share were $5.60 in 2014; NextEra Energy recently reaffirmed full-year 2015 earnings in the upper half of a range of $5.40-5.70, which translates into a year-over-year increase of between 1% and 2%. Based on the current dividend of $3.08, the company’s payout ratio is 56%. It expects to compound EPS at 6-8% a year through 2018, and is projecting EPS of $5.85-6.35 in 2016 and $6.60-7.10 in 2017. NextEra Energy has a share repurchase program that was authorized in February 2005 and reaffirmed in July 2011. Its repurchase activity is sporadic. The initial authorization in 2005 was for 20 million shares, and over a decade the company has repurchased less than 7 million shares. As of December 2014, 13.3 million shares, representing 2.9% of the outstanding shares, remained on the program. The company is a member of the S&P 500 index and trades under the ticker symbol NEE. As a member of the S&P 500, once NextEra Energy has increased dividends for 25 consecutive years, S&P will classify the company as an S&P Dividend Aristocrat. Given that NextEra has made a conscious effort to increase its dividend each year for 21 years straight, I expect the company to continue to do so. This would put it on track to become a Dividend Aristocrat at the beginning of 2020. NextEra Energy’s Dividend and Stock Split History (click to enlarge) NextEra Energy has compounded its dividend at 8% over the last decade. It has paid dividends since at least 1983, and has increased them since 1995. The company announces annual dividend increases in mid-February, with the stock going ex-dividend at the end of February. In February 2015, NextEra Energy announced a 6.2% dividend increase to an annualized rate of $3.08 per share. The company should announce its 22nd consecutive annual dividend increase in February 2016. Historically, NextEra Energy has increased dividends in the mid-single digits, but over the past few years, it has increased the growth rate. Over the last 5 years, it has compounded its dividend at 9.02%, while over the past 10 and 20 years, the company has compounded the dividend at 8.05% and 6.46%, respectively. The company has split its stock twice. The splits, both 2-for-1, occurred in January 1985 and March 2005. A single share purchased prior to January 1985 would have split into 4 shares. Over the 5 years ending on June 30, 2015, NextEra Energy stock appreciated at an annualized rate of 19.0%, from a split-adjusted $46.00 to $95.23. This outperformed the 15.0% compounded return of the S&P 500 index over the same period. NextEra Energy’s Direct Purchase and Dividend Reinvestment Plans The company has both direct purchase and dividend reinvestment plans. You must already be an investor in NextEra Energy to participate in the plans; if you own the stock in your brokerage account, you’ll have to have it transferred into your name in order to join the plans. The minimum investment for additional direct purchases is $100, and the dividend reinvestment plan allows for full or partial reinvestment of dividends. The plans’ fees structures are favorable for investors. Depending on the source of the shares purchased – and, unfortunately, you’ll have no control over that – you’ll pay a maximum of 3 cents per share purchased if they’re purchased off the open market; there’s no charge if the shares are purchased directly from NextEra Energy. When you sell your shares, you’ll pay a transaction fee of either $15 or $25 (depending on the type of sell order) plus a commission of 12 cents per share. You’ll also get charged an additional $15 if you go through a phone agent to sell your shares. All fees will be deducted from the sales proceeds. Helpful Links NextEra Energy’s Investor Relations Website Current quote and financial summary for NextEra Energy (finviz.com) Information on the direct purchase and dividend reinvestment plans for NextEra Energy Disclosure: I do not currently have, nor do I plan to take positions in NEE.

U.S. Geothermal – Still No Short-Term Catalysts On The Horizon

Summary US Geothermal continues providing decent financial results. This year the company demonstrates some progress in taking two geothermal projects, WGP Geysers and El Ceibillo, closer to their production phase. However, in my opinion, setting COD (“Commercial Operation Date”) at 2Q 2018 (El Ceibillo) and 3Q 2017 (WGP Geysers) is going to be a challenge for the company. I believe that currently US Geothermal’s shares are overvalued against its peers. On November 23, 2015 US Geothermal Inc (NYSEMKT: HTM ) published its 3Q 2015 results. Below I am commenting on these results. I am also covering the last developments at the two most advanced geothermal projects. Year to date financial results The table below summarizes year to date financial results: Source: Simple Digressions and the company’s reports As the table shows, the results reported by the company in the first nine months of 2015 were comparable to those reported last year. However, a 17.5% increase in book value is worth commenting. To remind my readers, I consider book value as one of the best performance measures of any company. Simply put, if a company is able to increase its book value in the long-term, it means that it has built its value. Let me show how HTM was building its value: Source: Simple Digressions and the company’s reports Note: to calculate HTM book value I have excluded two issues, which distort it in the long-term: Accumulated other comprehensive income (AOCI) – it is part of the equity section of the balance sheet, representing accumulated unrealized gains and unrealized losses, such as cash hedges or currency translation adjustments. Every year or quarter this item fluctuates, very often quite much. What is more, AOCI depends on exchange rates, interest rates and other issues, which the company does not control. Therefore I have eliminated AOCI from my calculations of book value. Non-controlling interest – because non-controlling interest represents the stakes other entities hold in the company’s consolidated assets I have excluded this issue from my calculations. Because non-controlling interest is excluded from my calculations, the final figure demonstrates book value attributable to the company’s shareholders. As the chart shows, HTM increased its book value attributable to its shareholders from $0.66 per share at the end of 2012 to $0.80 per share at the end of September 2015 (an increase of 21.2%). In my opinion, it is a big plus – US Geothermal, increasing its book value in the long-term, behaves like a classic utility company. Operating results The table below presents basic operating results: Source: Simple Digressions and the company’s reports As the table shows, year to date US Geothermal reported slightly lower electricity generation and slightly higher operating expenses than in the same period in 2014. After taking a closer look at each operating facility I came to the conclusion that the main factor, standing behind higher operating expenses, was the Raft River’s performance. Raft River, located in Idaho, is the smallest HTM’s power plant, in terms of generation capacity (9.4 MW). Since the beginning this facility has been lagging behind other two plants. However, this year this underperformance is particularly striking: (click to enlarge) Source: Simple Digressions and the company’s reports As the chart shows, this year each megawatt hour, generated by Raft River, delivered only $4.94 in operating income (I call it “Netback”). Other plants, San Emidio and Neal Hot Springs, delivered $61.19 and $75.66, respectively. In its 3Q 2015 report the company explained that there were two reasons standing behind this underperformance: 371 lost hours during two unplanned outages (according to my calculations, these outages were responsible for the lost revenue of $196 thousand) Higher operating costs due to turbine repairs and wage increases – year to date these additional costs were $361.5 thousand (turbine) and $142.3 thousand (wages). I think that technical problems, experienced at geothermal facilities, happen sometimes. However, granting wage increases to the crew when the facility is in trouble is not, in my opinion, the best practice. Projects under development US Geothermal has four projects classified as “Projects under development”: El Ceibillo Phase I, San Emidio Phase II, WGP Geysers and Crescent Valley Phase I. Of these four projects, in 2015 the company was developing mainly two of them: WGP Geysers and El Ceibillo. Below I am commenting on these developments. WGP Geysers In April 2014 the company acquired the so-called “Geysers project”. To remind my readers, this project is located in the Californian broader Geysers geothermal field, the largest producing geothermal field in the world. In June 2015 the company completed a flow test program of the three production wells. These tests confirmed that wells were operational but to achieve a planned long-term capacity of 28.8 MW, two or three additional production wells should be reopened (the company does not need to drill new wells). In other words – before any geothermal company takes a decision on eventual production, flow tests have to be performed to establish resource viability. US Geothermal completed such tests and announced that two or three additional production wells were needed. In my opinion, it is an important message. It seems that the company is approaching a production decision on WGP Geysers – if such is the case it could be a game changer. However I have some doubts. The company estimates that production at Geysers should start in the third quarter of 2017. In my opinion, it will be a challenge to meet this timeline because HTM must, for example, open two or three production wells, connect its property to the grid, sign a power purchase agreement, find financing for its project etc. All these issues need time so the two-year time frame, in my opinion, seems to be very optimistic. El Ceibillo, Guatemala US Geothermal used to postpone a commercial operation date (COD) of El Ceibillo many times. Fortunately, since the fourth quarter of 2014 the company has been confident that this facility should start its operations in the second quarter of 2018. On October 13, 2015 HTM was granted the concession agreement for the El Ceibillo development. To remind my readers, the previous concession expired this year so now the company is once again formally allowed to continue development. Currently the company is in the middle of it. In 2014 it completed a nine hole temperature gradient drilling program (an initial part of any development). This year HTM is performing flow tests – one well (EC-2A) confirmed that there is a commercial resource at El Ceibillo but at least two additional wells are needed to extend the resource area (drilling at the first well, EC-3, started on October 29 ). Summarizing, the company is at its intermediate stage of development at El Ceibillo. In my opinion, setting 2Q 2018 as a COD is going to be, similarly to WGP Geysers, a challenge. Equipment purchase On November 9 the company announced it acquired equipment for the construction of three binary geothermal power plants. This equipment was acquired at a significant discount to its cost. According to the company: “We paid $1.5 million, which is approximately 5% of the equipment’s original cost, a saving of roughly $28 million. This equipment gives us the ability to expand our megawatt output at our existing portfolio of advanced stage development projects at significantly lower cost, and in much shorter construction timeframes” The equipment is supposed to be applied to the Crescent Valley and San Emidio Phase II projects. The initial market reaction was very positive – on November 9, the company’s shares closed 8.9% higher than on the previous day. Well, in my opinion, the equipment acquisition is surely a positive thing in the long-term – the company should save a lot of money and time at the construction of Crescent Valley and San Emidio II. The management did a very good job, indeed. However, in the short-term this message means nothing – the company has just bought some equipment, which will be stored as inventory, waiting a few years to be applied. Additionally, this equipment will be accounted for as inventory and disclosed at cost ($1.5 million). However, the most paradoxical thing is the fact that when both projects start their operations, the company will be allowed to recognize depreciation charges attributable to only $1.5 million. Putting it differently, an excellent managerial success, due to accounting and fiscal rules, will be converted into lower depreciation charges and higher taxes in the future. Valuation To demonstrate US Geothermal’s market valuation I have calculated the Enterprise Value / EBITDA multiples for a few geothermal energy stocks. The chart below, depicting these ratios, was taken from my article on another geothermal company, Polaris Infrastructure. As the chart shows, currently the company’s shares are trading at a multiple of 12.3, which means that they relatively overvalued against its peers: Summary US Geothermal continues to provide descent financial results. However, due to large non-controlling interest component, HTM shares are relatively overvalued against its peers. In this article I have covered two projects, which are approaching production phase – WGP Geysers and El Ceibillo. Year to date some progress towards putting these projects closer to production has been evident. However, in my opinion, to meet time frames set by the company is going to be a challenge. Therefore I am sustaining my previous thesis on US Geothermal – there are still no short-term catalysts to lift the company’s shares. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.