Tag Archives: industry

Consider Midwest Utility ITC Holdings For Your DGI Portfolio

Summary Following my analysis of Wisconsin Energy, Southern Company and Avista, I decided to look at another possible growth prospect in the utilities sector. ITC offer superb growth opportunities together with great fundamentals and fair valuation. However, there are still several risk factors that must be taken into consideration, especially when we know it is a utility company. If you follow my last two articles, you will see that lately I am writing and debating with the readers about utility companies. I also wrote two articles about utilities back in March. The debate is whether one should look for a classic utility with high yield and low growth such as Southern Company (NYSE: SO ) or medium yield and medium growth like Wisconsin Energy (NYSE: WEC ). I must also note that I invest in Avista (NYSE: AVA ) as well, which also has medium yield and growth. I mentioned two out of the three types of dividend growth stocks. The third one is low yield and high growth. ITC Holdings (NYSE: ITC ) is a great example of such a company. I am going to analyze this company in this article, as I try to look for new investment opportunities. I found this stock while doing one of my routine screening, and I found out that it isn’t well known among dividend growth investors. ITC Holdings is a holding company. Through its regulated operating subsidiaries, International Transmission Company, Michigan Electric Transmission Company, ITC Midwest LLC and ITC Great Plains. It is engaged in the transmission of electricity in the U.S. It operates high-voltage systems in Michigan Lower Peninsula and portions of Iowa, Minnesota, Illinois, Missouri and Kansas that transmit electricity from generating stations to local distribution facilities connected to its systems. Fundamentals The fundamentals shown by ITC are really remarkable. They are remarkable for any company, and especially for a utility company. The revenue rose steadily over the past decade. Ten years passed since the initial IPO of the company, and in these ten years the revenue grew from $200 million in 2005 to $1020 million in 2014. This is CAGR of 17.69%. This rate will not be sustained, but the revenue will keep growing in the next years to come at high single digits according to the management. ITC Revenue (Annual) data by YCharts EPS also grew in a very impressive manner, and it is going to grow quickly in the next years to come. Issuance of new shares slowed the EPS growth, but as you will see, it had very little effect. The EPS grew from $0.353 in 2005 to $1.54 in 2014. This is CAGR of 15.87%. This is again an amazing number especially for a utility. The company is forecasted to show EPS of over $2 in 2015. The company reiterates its five year plan, and is going to show double digits EPS growth until 2018. ITC EPS Diluted (Annual) data by YCharts The dividend also grew quickly over that decade. It grew at a slower pace than the EPS, so the payout ratio actually declined to around 36%. In addition, the company told investors in November that it might expand the payout up to 40% in the future. The dividend grew from $0.175 in 2005 to $0.61 in 2014. This is CAGR of 13.3% which is great. In 2015 the dividend was raised by additional 15%, and the management is willing to raise the annual payment by 10%-15% annually. The drawback is that the current yield is very low for a utility company at just 2.2%. ITC Dividend data by YCharts Over the past decade the amount of shares outstanding increased by around 50%. This is typical for companies that are growing, issuing equity is a common way to raise capital. However, in the last two years, 2014 and 2015, the board authorized a buyback plan of $250 million. The board is positive about the strength of the balance sheet and the cash from operations, and I believe it will issue another similar plan in 2016. $250 million is around 5% of the shares outstanding, pretty impressive. Valuation ITC is really fairly valued. The forward P/E is around 16. When taking into consideration the double digits growth rate, some might say that the valuation is low. The high growth rate is lowering the P/E for 2016 and 2017 significantly. If I have to determine, I find it valued fairly to slightly undervalued. ITC PE Ratio (NYSE: TTM ) data by YCharts The reasons for the lower valuation are the fact that ITC is a less known company with no buzz at all, and the fact that the dividend yield is extremely low for a utility company. If the company can achieve its dividend growth goals, it will be a great opportunity for long term investors. Opportunities ITC enjoys a high rate of revenue, EPS and dividend growth. This growth is achieved while the company is practically a monopoly in several states, as it possesses a very wide moat due to its massive infrastructure. If the company can grow that quickly while being a supervised monopoly, it has a pretty bright future. ITC will also enjoy the transformation on the American energy market. As power plants using coal are closed, and plants using naturals gas and renewable energy are opened, they will all need to transmit the electricity from the plants to their customers. The massive infrastructure owned by ITC will be ready to join forces with the power plants. In my previous article about Southern Company and Wisconsin Energy, I was told by several readers, that SO has an advantage over WEC, and it is the fact that it operates in the growing south and not in the Rust Belt. I am not sure that this is an advantage for the long term, as the economy is cyclical, but ITC for sure has nothing to worry about it. The company is well diversified, and it operates and in the Rust Belt as well as in the south. Geographical diversification is always a plus for a utility company which is usually locked in a certain area. Another advantage is the regulation. While the typical utility company is regulated by the states and the federal government, and therefore in a position where it can suffer from multiple state jurisdiction, ITC is solely regulated by the federal government, because it is an electric transmission company. In addition, the allowed return on equity is higher, which allows the company to charge more money for its service. According to S&P, the allowed ROE by the federal government is between 12.16%- 13.88%. Risks The first risk is competition. The competition can come from two places, other transmission companies especially from the west, and electric companies that can build their own infrastructure. The advantage of ITC is the fact that infrastructure requires a lot of capital. This is the wide moat that the company has, and the reason for this risk to be less relevant at current prices. The federal regulator received in 2013, a complaint asking for the reduction of the allowed ROE. A similar case in New England back in 2011 resulted in reduction of the allowed ROE two years later. This might harm the profitability. However, the request wasn’t fully granted, and I believe that the same will happen here as well. The low dividend is another downside. Yes, it can and should grow in the near future. The company believes that it can sustain substantial growth for the long run here. However, the profits depend on the regulators, and a change in the regulation might slow down the dividend growth, and we will have a utility stock that yields less than 2.5%, not something to brag about. The debt load is high, and is getting even higher. With the interest rates raising, it will be even more expensive. The company is using at the moment debt to finance its operation. The expects annual cash from operations to be around $650 million, while the annual capital investment is $800 million. Now, add the dividend and the buyback, and this small company must have access to credit at all time. The management is aware of that, and they know that their goal is to maintain the current credit rating- A. Conclusion Well, I can’t see myself buy ITC now, I prefer WEC and AVA over it. The growth is important and unique for a utility, but it will take years for it to reach a “utility yield”. It will need 5 years of superb growth to reach the yield of WEC, and 8 years of superb growth to reach the yield of SO. My preferred utility companies are the medium growth and medium yield like WEC and AVA. Therefore, I prefer these two over both SO and ITC. If you have several utilities and a very long investment horizon, you should consider adding ITC to your dividend growth portfolio. If you are a value investor, you might be buying it as well, as the growth prospects are here and valuation is fair. You can initiate a small position and enjoy the growth, it is an odd utility by yield and payout ratios as well as by growth, but it is also a great company, that isn’t necessarily right for my portfolio.

Just Energy Group Q2 Earnings Review – No Slowdown In Sight

Summary Shares have appreciated substantially since July. Total revenue grew 18%, with the more profitable consumer segment growing 20%. The U.K. operation and the solar program will pave the way for future growth. After a poor performance in 2014 and trading flat in H1 2015, Just Energy (NYSE: JE ) is finally back on track. Since my last analysis on the company in July, shares have appreciated by 30% from $5.23 to $6.82 today. Let’s see how the company performed in Q2 (year end is in March). The company continued to deliver top-line growth. Increasing sales by a whopping 18% quarter on quarter from C$918 million to C$1.1 billion. This doesn’t surprise me one bit. With the exception of FY 2012, the company has always delivered consistent growth from year to year. (see below). Many consumers are aware of Just Energy’s incessant marketing, and the financials reflect that. Sales can be broken down into consumer sales and commercial sales. Quarter on quarter, consumer sales have grown by 20% and commercial sales by 16%. The growth from consumer sales are much more valuable because traditionally commercial customers simply paid less. In Q2, gross margin for the consumer division was 22%. In contrast, the commercial division only yielded 9%. After deducting various operating expenses, the consumer division is more than twice as profitable as the commercial division (C$27 million of operating profit vs. C$10 million of operating profit). We can also examine growth from by looking at how much money the company charges its customers, which would reflect more of an “organic growth” as opposed to revenue generated by acquiring new customers. For the consumer segment, margin per customer rose 24% from C$176/RCE in Q2 2015 to C$219/RCE in Q2 2016. Evidently, the company should be able to achieve sales growth even if customer acquisition slows. Despite these great results, the company still reported a loss. The main culprit is derivative losses. During the quarter, the company made a fair value adjustment of C$117 million due to declining commodity prices (i.e. the company would have to purchase commodities at higher prices than the market if contracts are settled now). These losses will eventually go away as the contracts expire (i.e. not recurring). Outlook I believe that the future is bright for Just Energy. The company is still rather small in the U.K. and has plenty of run way to expand. Just two quarters ago, U.K. contributed 202,000 RCEs. In Q3, this number has grown 36% to 275,000 RCEs. In addition, the company is also exploring non-traditional initiatives such as the partnership with Clean Power Finance to enter the residential solar market, which is all the rage right now. While the exact impact on the bottom line is not clear yet as results are still preliminary, I believe that this program will be a smash hit. Because the company is marketing to existing customers, I believe that the adoption rate should be fairly high. This means that the solar program should be able to generate incremental profit without the company spending too much money (as opposed to a new customer acquisition).

Restaurant Investing: What Early Investors Should Look For In An IPO Opportunity

Summary What are the telltale signs that a company’s stock is worth its post-IPO price? Do investors need to look beyond mere hype to make such a crucial decision as putting their money into a business? What are the metrics that an investor needs to closely review before making that investment decision? Photo Courtesy: Value in Wall Street Investing in a company that’s going to IPO is a difficult decision to make. With all the hype surrounding restaurant IPOs these past five years, the abundance of “noise” made by early investors and even the companies themselves drowns out the “right noises” that should be heard by anyone interested in getting in. Introduction The first point to remember is that it is never too late to invest in a stock as long as the company has a solid foundation of financial and operational management. In that respect, the CEO and CFO are the most important people to get to know because they carry the bulk of the responsibility for managing operations and finances. The second point – a deeper one – is how they’ve been performing in the years preceding the IPO. Very often, investors will merely look at the current revenues or average sales volume or unit growth published in the IPO prospectus, read a few articles from expert financial analysts and then jump headlong into the investment. More often than not – and this is because the vast majority of investors can’t actually get in at the IPO price – they are forced to buy at prices much higher than the actual performance of the company warrants. To help investors make better decisions, we’ve studied one of the best performing companies of this decade and showcased their metrics to elucidate what we mean when we say that management and margins should be the factors driving investor sentiment – and not the “campaigning” surrounding an initial public offering. Background For the purpose of this showcase, we’ll be looking at Chipotle (NYSE: CMG ), which is one of the top performers in the fast casual segment. In an earlier article, we discussed how this burrito maker crushed 3 prevalent myths about restaurant investing. In this article, we’ll see something entirely different: what were those early signs that told us that this was going to be a good company to invest in? The end objective here is to allow investors a deeper and broader insight into the decision-making process that should necessarily precede an IPO investment. With close to 1,800 restaurants efficiently serving burritos and other Mexican fare since the 90s, CMG is a fast casual restaurant that boasts one of the highest AUVs in the segment – $2.47 million over the last full fiscal (2014). Consider that its AUV growth for the three years preceding the IPO stood at above 6%, and you’ll know that comp sales growth contributed to a large part of that – growing an average of 16% in the three years before going public – as did aggressive but well-planned unit growth, which saw units go from 229 at the beginning of 2003 to 481 at the end of 2005 – a growth of 210%. When all these factors work together, they produce a solid foundation on which to base an investment decision. Of course, not all companies can boast stellar numbers before their IPO year, but the fact remains that these indications must necessarily be there in part. Anything less would likely miss the whole point of investing – to acquire, hold on to and benefit from a share of a consistently profitable public company. Analysis If you had delved into Chipotle’s margins reports for the five years preceding the IPO, this is what you would have seen: Strong cost control action on several fronts like occupancy, labor, food and pre-opening costs. An operating cost that went from 118% of revenue to 95% of revenue in 5 years. A net income percentage that grew from -18% to over 6% during that time. Five Years Pre-IPO Fiscal year 2005 2004 2003 2002 2001 Total revenue 100.00% 100.00% 100.00% 100.00% 100.00% Food, beverage and packaging costs 32.23% 32.75% 33.25% 33.07% 34.37% Labor costs 28.47% 29.63% 29.80% 32.50% 34.99% Occupancy costs 7.59% 7.69% 8.10% 9.15% 8.92% Other operating costs 13.22% 13.65% 13.80% 14.56% 16.38% General and administrative expenses 8.28% 9.53% 10.84% 12.61% 15.72% Depreciation and amortization 4.46% 4.63% 4.78% 5.50% 6.63% Pre-opening costs 0.31% 0.47% 0.52% 0.50% 1.71% Loss on disposal of assets 0.50% 0.36% 1.43% 0.73% 0.06% Total costs and expenses 95.06% 98.70% 102.51% 108.62% 118.79% Income (loss) from operations 4.94% 1.30% -2.51% -8.62% -18.79% Income (loss) before income taxes 4.82% 1.30% -2.44% -8.45% -18.24% Net income (loss) 6.01% 1.30% -2.44% -8.45% -18.24% If that data weren’t sufficient, you could have taken a look at its comparable store sales and average unit volumes, which were equally impressive: 6% growth in average unit volume for the three years preceding the IPO. 16% comp sales growth average for the period. Fiscal Year 2005 2004 2003 Average Restaurant Sales $1,440 $1,361 $1,274 Comparable Store Sales 10.20% 13.30% 24.40% If you still weren’t convinced, you could have looked into how fast it was growing its stores: A jump of 270% in the number of stores – all company-owned – between the beginning of 2001 and the end of 2005. Fiscal Year 2005 2004 2003 2002 2001 Units 481 401 298 229 177 Conclusion From what you would have seen of its Margins, Comp Sales, AUVs and Unit Growth in the 3-5 year period before it went IPO, you would have realized that this is a company with strong management and bright prospects for the future. So what about companies that are going IPO now or in the near future? Well, take a look at their metrics – just like we did for Chipotle for the years leading up to the IPO. Do they show strong or improving margins? Or both? Are they steadily growing their stores while keeping their pre-opening costs, occupancy and other current liabilities in check? Is their AUV improving or at least holding while they add more units? Are they going overboard on G&A using unit growth as the reason? Are their prime costs (food and labor) within reasonable bounds for the segment? These are questions that every investor in an IPO must necessarily ask. While this is no guarantee that a company that shows these positive indicators will make you money in the future, it gives you as educated a perspective to make your decision from as possible. Over the next week, we’ll be covering several recently-gone IPOs in the restaurant industry to try and arrive at some common denominators that underline strong performance and stability in a company. If you enjoyed this article, we’d be pleased as punch if you would do us the honor of reviewing our extensive coverage of major and minor players in the restaurant industry, and commenting candidly on what you think about them. Click here to see all other articles in our profile page. Some of the companies where investors were affected by “IPO-itis”: Potbelly (NASDAQ: PBPB ) PBPB data by YCharts Wingstop (NASDAQ: WING ) WING data by YCharts The Habit Restaurants (NASDAQ: HABT ) HABT data by YCharts El Pollo Loco (NASDAQ: LOCO ) LOCO data by YCharts Bojangles’ (NASDAQ: BOJA ) BOJA data by YCharts