Tag Archives: sectors

Attractive Valuations And Potential To Outperform Peers Are Highlights Of American Electric Power

Summary Stock should trade at a 5%-10% premium to its peers’ average forward P/E. Company’s business fundamentals remain strong and efforts to strengthen regulated operations will bode well for stock price. As AEP increases regulated operations, its cash flows will become more certain, which will support dividend growth. American Electric Power (NYSE: AEP ) has strong business fundamentals and its future financial performance is expected to be solid. The stock stays an attractive investment prospect for income-seeking investors, as it offers a solid yield of 3.9% . Moreover, the company’s future growth is expected to stay strong, which will be mainly driven by its capital spending, directed at strengthening and expanding its regulated business operations. The company’s focus on regulated business operations is gaining significant traction, and it expects to achieve long-term growth of 4%-6%. Moreover, an important decision American Electric has to make in the next 3-6 months is regarding the faith of its merchant assets; either the company will sell the assets or continue to operate them. Furthermore, the stock’s current valuations are attractive. Strong Performance and Growth Catalysts American Electric has been delivering a strong financial performance, which is expected to continue in future, mainly driven by its increased focus on regulated operations. The company reported EPS of $0.88 for 2Q2015, beating consensus of $0.81. Also, rate increases and cost control initiatives positively affected American Electric’s performance for the quarter. In 2Q2015, the company secured a $123.5 million annual revenue increase and ROE of 9.75% in West Virginia, along with a $45.4 million annual revenue increase and ROE of 10.25% in Kentucky. Given the strong performance in the first half of 2015, the company increased its mid-point of 2015 EPS guidance by 2%; increased 2015 EPS guidance from $3.4-$3.6 to $3.5-$3.65 . In recent times, the company increased its focus on regulated operations, as the performance of unregulated/merchant operations has stayed weak and volatile because of low forward power prices. The company has a robust capital spending outlook, which will fuel its revenues and earnings growth in future years; American Electric plans to incur capital spending of $12.3 billion from 2015-2017. As the company has increased its focus on strengthening its regulated operations, 96% of the planned capital spending will be allocated to regulated business. Also, the company increased its 2015 capital spending guidance from $4.4 billion to $4.6 billion ; as the company continues to make progress with its cost control measures under its continuous improvement program, it freed up an additional $200 million for capital investment for 2015. The following chart shows the breakdown of the company’s planned capital spending. (click to enlarge) Source: Investors Presentation As forward power prices remain weak and volatile, utility companies in the U.S. are taking initiatives to reduce their merchant power operations. American Electric is also considering different strategic options for its 7,900MW of competitive fleet. I think that in the next 3-6 months, the company will make a decision regarding the future of its merchant assets, as currently it waits for the PJM auction results and for the pending Ohio PPA proposal. I think the best option for the company is to sell its merchant assets, as it will allow it to completely focus on regulated operations, which will improve its revenues and cash flow stability, and will augur well for the stock valuation. Moreover, I believe the company’s merchant assets sale value could range from $2 billion to $3.2 billion, depending on the outcome of the PJM auction prices, which are expected to settle by mid-August. Also, if the company chose to sell its merchant assets, it can direct the sale proceeds to increase its planned capital spending for future years, which will have a positive impact on the stock price. Other than the robust capital spending profile, the company has been making consistent efforts to improve its credit outlook. The company has successfully managed to reduce its total debt to total capitalization ratio from 57% in 2010 to 54.3% in 2Q2015. Also, the company’s qualified pension funding stands at 101% in 2Q2015, up from 96% in 1Q2015 and 97% in 2014, as displayed below in the figures. (click to enlarge) Source: Investors Presentation Valuation and Summation The stock’s current valuation stays attractive, as it is trading at a forward P/E of 15.08x , in contrast to its peers’ average forward P/E of 15.5x. Given, the company’s solid financial performance and robust capital spending profile, which will fuel its future growth, I think the stock should trade at a 5%-10% premium to its peers’ average forward P/E. Also, the company’s business fundamentals remain strong and the company’s efforts to strengthen its regulated operation will bode well for the stock price. And if the company chose to sell its merchant assets, its business risk profile will improve, as revenues and earnings will become more stable. Moreover, as the company is increasing its regulated operations, its cash flows will become more certain, which will support its dividend growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Why You Should Be Looking At The Uranium Sector To Grow Your Portfolio

Summary Global demand for uranium is set to grow for the long term, which will cause an inevitable rise in prices. Japan is set to restart its nuclear industry with its first reactor ready to restart in August. Asian demand for energy, driven by China, S. Korea and India will demand significantly more uranium than is presently available. This is the first article of two wherein I will lay out the case that uranium prices are set to soar in the near future, perhaps as soon as the end of this year and/or into 2016. I will also provide a suggestion on an easy way to invest in the uranium sector with the potential to reap significant return on your invested capital. In my next article, I will provide investors interested in this sector with information on a number individual companies involved in the mining/production of uranium. These suggestions can be a source basis for your own further research/due diligence with the goal of providing your portfolios with a significant boost in value. The Market for Uranium According to the World Nuclear Association, the world’s nuclear power reactors currently require about 68,000 tonnes of uranium each year. The supply is provided from both mines and other sources, such as nuclear weapons stockpiles and civil stockpiles held by utilities and governments. ( source ) In 2014, the world’s total production of uranium from mining activity was 56,217 tonnes, a shortfall of 12,000 tonnes of the current requirement for world reactors. Through 2013, highly-enriched uranium from weapons stockpiles had displaced approximately 8850 tonnes of U3O8 production from mines each year, meeting about 13 to 19 percent of world reactor requirements. ( source ) Individuals who follow the uranium market are aware of the Megatons to Megawatts deal that was signed in 1993 between the USA and Russia. It was an agreement whereby the USA, “over a 20-year period, would purchase 500 tonnes of Russian ‘surplus’ high-enriched uranium (HEU) from nuclear disarmament and military stockpiles. These were to be bought by the USA for use as fuel in civil nuclear reactors. In return, the USA transferred to Russia a similar quantity of natural uranium to replace that used to downblend the HEU.” (source) This deal concluded at the end of 2013. At present, there are 437 operating nuclear power plants worldwide, and there are 60+ new plants under construction in 13 countries plus Taiwan. China has 26 operating reactors and 24 under construction . India has 21 operating reactors and 6 under construction . The USA has 5 reactors under construction and has plans to build 5 more new reactors . South Korea is planning to bring 4 reactors online by 2018 and another 8 by 2030. (for more information, see here ). Nuclear power capacity is steadily increasing on a global basis. Plant upgrading is resulting in significant capacity increases . e.g., Switzerland’s 5 plants have had their capacity increased by 13.4%, Spain’s 9 reactors have had capacity increased by 13% and numerous other countries have had capacity increased through upgrading or are in the process of doing so. Plant life extension programs are maintaining current capacity, especially in the U.S. Currently, Japan has all of its nuclear reactors shut down. As many of you reading this know, this was the result of the 2011 Fukushima accident caused by the tsunami that hit Japan March 11, 2011. However, on July 10, 2015, Kyushu Electric Power Co. announced that its Sendai Nuclear Power Unit No. 1 had completed fuel loading in preparation for its restart in August. It’s 2nd unit may be restarted as soon as September. Japan is slowly moving towards getting its nuclear industry going again. As of the end of the financial year to March 31, 2015, Japan had imported a record 7.78 trillion ($65 billion) of natural gas in order to make up for the shortfall in energy that was previously generated by the nuclear industry. Importing that much LNG has had a negative impact on Japan’s economy, making it significantly more expensive for industry to operate and squeezing profits. It has also caused an increase in household utility bills. The importing of so much LNG has also caused Japan to begin posting trade deficits, something unheard of prior to the shutting down of all of the nuclear reactors. Presently there are 25 reactors in Japan that are seeking a restart and the government, led by Prime Minister Shinzo Abe, wants to start as many as possible “to meet the nation’s energy needs and grow the economy.” ( source ) The restarting of Japan’s nuclear reactors should have a positive impact on the price of uranium. The psychological barrier to investing in the sector that shutting down its reactors caused will be removed and this should be bullish for the price. The restarts will also boost the confidence of investors in the industry as a whole and the long-term prospects for the nuclear power industry. Although Germany is planning to decommission all of its nuclear power plants by 2020, there is a real fear by taxpayers in the country that they will have to foot the bill for the increase in prices that are going to be an inevitable cost of shuttering the nuclear power industry. So, will Germany reverse course and eventually go back to using nuclear energy or power generation? Time will tell, but even the country does get completely out of nuclear power generation, it really won’t have any negative impact on the inevitable rise in prices ahead. This is because of the Asian move towards nuclear energy to meet the massive need for power in that area of the world, home to 4.47 billion people. In East through to South Asia, there are currently 123 operating nuclear power reactors, 41 under construction and firm plans to build 92 more, while many more are proposed. The greatest growth in nuclear power generation is expected in China, South Korea and India. ( source ) How To Invest In The Sector Aside from investing in individual uranium mining and processing companies, some of which I will highlight in my next article on this subject, one way to invest in this sector is through the Global X Uranium ETF (NYSEARCA: URA ). See the chart below. (click to enlarge) URA tracks the Solactive Global Uranium Index and both the index and the ETF include companies involved in the exploration, mining, and harnessing of uranium. Some of the top holdings include Cameco Corp. (NYSE: CCJ ), Uranium One (TSE-UUU), and Hathor Exploration (TSX-HAT). You can see from the chart above that the ETF has seen its price decimated by the melt down (pun intended) in the sector since 2011 and the fall in the price of uranium, which currently sits at a spot price of Nevertheless, for contrarions, this presents a great time to consider investing some funds in this space, especially as the uranium price, currently sitting at approximately $36/pound, is bound to begin rising in response to the inevitable demand/supply imbalance created by the need for more and more affordable and clean energy sources, especially in Asia. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in URA over the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Asia Pacific Fund: A Conservative And Extremely Undervalued Option

Summary The Asia Pacific Fund currently has extremely low valuation and is trading at a discount of 12.28%. The fund’s investment approach is extremely diversified, making it a conservative means to profit from economic growth in the Asia Pacific Region. The fund’s valuation is more attractive than other exchange traded funds that invest into high growth Asian countries. The Asia Pacific Fund (NYS APB ) is current a very attractive buy, and perhaps one of the best opportunities for investors seeking to take advantage of opportunities offered from discounted closed end funds. The fund invest in listed equity in the Asia Pacific region and is managed by Value Partners Hong Kong Limited. Historical performance of the fund has been positive, and the liquidity risk is negligent; the fund has an average trading volume of 18,562. One current unique opportunity that this fund presents is that it is currently trading at a discount of 12.28% , providing opportunity for those willing to take a long term investment approach. For a fund that invests into Asia, the valuation is extremely low at the moment; the fund currently has a P/E of 7.5. This is exceptionally lower than other exchange traded funds that invest in high growth countries in Asia, such as the Philippines , Vietnam , and Indonesia . The fund takes a very diversified approach to Asia, as the top 10 holdings for the fund only make up 34.1% of the fund. Moreover, geographical diversification within the Asia Pacific region is very strong; the fund invests in China, Hong Kong, South Korea, Taiwan, Singapore, Thailand, Indonesia, The Philippines, and Malaysia. High geographical diversification in a region that is on track to prosper in the future, further attributes to the logic of investing in this fund. These facts, coupled with the fund having low valuation and trading at a discount, provides a conservative and ideal investment opportunity. Fund Performance The fund seeks to track the performance of the MSCI All Countries Asia Ex. Japan Index, and was able to outperform the MSCI Europe and the S&P 500 Composite this year. Performance this year has been substantial, and is on track to continue based on growth projections for the Asia Pacific region. Investors who are willing to take a long term bullish view of Asia can benefit from investment in this fund. 1 Year % 3 Year % 5 Year % 10 Year % Asia Pacific Fund 12.4% 9.9% 16.37% 131.1% MSCI AC Asia Ex Japan 11% 22.9% 37.2% 161.2% S&P 500 Composite 10.4% 46.8% 76.8% 75.2% MSCI Europe -4.4% 33.2% 40.4% 70.1% Source: The Asia Pacific Fund March 31, 2015 Industry Approach The fund invests its assets into a variety of industries, and the majority of its assets are invested in the following industries: Real Estate: 17.6% Banking: 16.8% Consumer Discretionary: 16.1% Industrials 10.1% Consumer Staples: 7.4% Telecommunication Services: 6.2% The industry approach is very diversified, provide a conservative means to access growth in the Asia Pacific region. Holistically, growth in the Asia Pacific region is set to outperform the rest of the world, with 5.5% Per Annum GDP Growth projected for 2015-2016. Specific opportunities can be found in the consumer products industry, as consumption will inevitably increased with the increased economic growth in this region. Moreover, increased economic activity will also be a major catalyst for the real estate industry, particularly in the increased demand for office rentals. Conclusion This fund provides a unique and simplistic opportunity for investors to leverage off of growth in the Asia Pacific Region. The following factors make this fund relatively favorable to other investment approaches in Asia. The fund is trading at a 12.28% discount and has a P/E of 7.54, which is much more attractive than other alternatives in Asia. The only area of concern is the timeframe required to reconcile the fund’s trading price. The fund’s investment approach is extremely diversified, based on the variety of holdings and industries it invests into, as well as its high geographical diversification. Based on my observation of closed end funds and exchange traded funds that invest in Asia, closed end funds often provide more opportunity for investors. A similar case can be found in a previous article mentioning the benefits of the Aberdeen Indonesia Fund (NYSEMKT: IF ), which is trading at a discount of 10.05% . While both funds present ample opportunity, a diversified investment approach may be more suitable, as Indonesia’s growth is also met with inflation and exchange rate movement risks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.