Tag Archives: stocks

Baidu and Microsoft Team Up to Give Windows 10 a Chance in China

Source Baidu. Microsoft knows that making Windows 10 the operating system of choice in China will be an uphill battle, so it’s teaming up with Baidu for a promotional push.

XLE: Energy Stocks Still Overvalued Relative To The Oil Price

Oil may find a bottom this fall at $35-$40 — but that doesn’t mean oil stocks will find a bottom. The XLE energy stock ETF remains highly inflated, as compared with the oil price. Oil and the broader stock market have been trading together since volatility spiked in August. If the S&P 500 goes down another leg to the 1680 range this fall, XLE will fall even farther than the S&P and the oil price will. Don’t buy oil stocks yet — in fact, consider shorting XLE. Ever since the oil price crashed in the fall of 2014, investors have been trying to call a bottom and find an opportunity to invest in the energy sector at bargain values. But so far, the market has frustrated would-be value investors in energy, as the oil price and energy stocks of all types have continued to fall farther and farther. The low to date was reached in the market selloff of August 24-25, when WTIC oil settled at $38.22 and the Energy Select Sector SPDR ETF (NYSEARCA: XLE ) fell to $59.22. Some investors are now hopeful that these prices were the bottom that they have been waiting for, and they think now is finally the time to buy energy stocks and make big profits on the oil price rebound in the coming years. I believe they are half right, but unfortunately it is not the most profitable half. The oil price itself was probably very close to the bottom when it fell into the $37-$40 range for a few days, below $40 for the first time since February 2009. But the large-cap and mid-cap energy stocks in XLE probably have a lot farther to fall. XLE was in the low $40s in February 2009, and it could fall another 33% from its current price before it reaches that level again. The point is that large-cap and mid-cap energy stock prices are influenced both by the oil price and by the performance of the broader stock market in general. Their prices were very low in February 2009 because the oil price and all stock prices were very low. Their prices held up relatively quite well from fall 2014 through spring 2015 because the whole stock market was holding up well then. Investors had confidence that the big oil companies would ride out the oil price drop and continue to prosper along with the entire economy when oil prices recovered. But since the return of volatility in all markets since August, oil stocks no longer have the assurance of the broader market to fall back on. Stocks have dropped decisively from their highs earlier in 2015, and the technical charts point to further declines coming this fall, which of course is a historically weak seasonal period for stocks. Numerous technical indicators signal that if the S&P 500 cannot hold support in the 1820-1867 range, a drop all the way to 1680 is the next likely step down. Moreover, in the current period of volatility, stocks and oil are trading together. When one goes down, so does the other. A bearish market trend and linkage of stocks and oil is very, very bad news for the energy stocks in XLE. One chart shows clearly how much more room XLE has to fall: (click to enlarge) This chart shows the ratio of the share price of XLE to the actual price of WTIC oil, over the entire history of XLE as an ETF, from 1999 to the present. Notice how elevated the XLE price remains today, as compared with the oil price. The ratio has retreated from its all-time highs earlier this year, but it still remains very high compared to most of the past decade and a half. If the broader stock market takes another turn for the worse, this charts shows that XLE has plenty of room to fall along with it, even after the oil price itself nears a bottom and stops falling so steeply. Notice in the chart that until last year, the XLE:$WTIC ratio normally stayed in a range from 0.6 to 0.8. With all stocks in a downward trend, there is no particular reason to expect that XLE will stay elevated above that range, and every reason to expect the likelihood of XLE returning to that range. For example, if the oil price settles at $40 and the XLE:WTIC ratio even returns to the top of the old range at 0.8, that would mean an XLE share price of $32, almost a 50% drop from its current price. If the oil price settles at $35 and the ratio falls to the bottom of the old range at 0.6, that would mean an XLE share price of $21, a 66% drop from its current price. I am not predicting that XLE will crash to $21 or even $32 this fall. I am just pointing out that it is well within the realm of reasonable possibility and would not represent an extreme change in the historical performance of XLE relative to the oil price. More likely is a decline to the low $40s or high $30s this fall, the range that XLE fell to in the crash of 2008-2009. The overall stock market would not have to crash 2008-style for XLE energy stocks to fall to those levels. The process will look very different because in 2008, stocks crashed first and then the oil price dropped, whereas this time the oil price dropped first and stocks are falling later. Actions to take: First of all, don’t buy oil stocks yet! The knife is still falling. More aggressive investors can consider shorting XLE. As a hedge, investors can short XLE and buy The United States Oil ETF, LP ( USO) to play a decline in the XLE:$WTIC ratio.

AmeriGas Partners: Proceed Cautiously

Summary 8.5% yield is enticing for income investors, but has risks. Heritage Propane acquisition just isn’t working well; leverage up, earnings per share are down. Propane faces stiff competition from continued natural gas expansion and increasing market supply. AmeriGas Partners (NYSE: APU ) is a nation-wide propane distributor operating as a MLP. The company’s primary business model is to supply propane to rural areas where natural gas is not run due to the costs involved. To operate as a business that serves these small communities, AmeriGas has had to develop significant transportation and distribution infrastructure, helping give the company the current market advantage it holds. Propane is a multi-faceted commodity. The fuel source is plentiful, easily separated from crude oil during refining and also extracted as a byproduct from oil/natural gas wells. The resurgence of fracking in the United States has unlocked a major supply source for the fuel that is unlikely to go away anytime soon – the Marcellus and Bakken shale plays are expected to produce billions of gallons of propane annually by 2020. However, propane is less energy efficient than other sources of power generation like gasoline and natural gas. This relative energy inefficiency will continue to have propane play second fiddle to more efficient fuels. Over the past decade as energy markets have evolved, propane prices have collapsed in comparison to alternatives like gasoline and home heating oil. Toughening the market for AmeriGas, residential consumer propane use has shrunk as well, outside of years with exceptionally cold weather. The future of the fuel primarily relies on commercial uses such as use in internal combustion engines. However, commercial users have more options than residential buyers who have little to no access to alternative sources of heat production. Any sustained growth in propane prices compared to alternatives will be met by falling demand by end-users. Overall, given my views on natural gas pricing remaining low despite strong demand from utilities and chemical companies, my views on propane fall in the same category. I’m in the camp that propane prices will remain lower for longer. To offset losses, the company has to rely on continued expansion in propane cooking and water heating. This will likely at best offset the downtrend in residential heating markets. This doesn’t mean that AmeriGas is doomed, but the company does face headwinds given the environment it is currently competing in. Whatever your opinion on propane’s future, there isn’t any denying that the North American energy market, propane included, is in the middle of significant and profound change. Mixed Bag Of Operating Results *numbers in millions CAGR 2015 (est) 2014 2013 2012 2011 Total Revenue 3.76% 2942 3713 3167 2922 2538 Cost of Revenue -3.44% 1395 2121 1660 1720 1605 Operations & Maintenance 11.21% 950 964 944 889 621 Depreciation & Amortization 19.39% 193 197 203 169 95 Total Operating Expenses 2.67% 2592 3250 2774 2764 2333 OpEx as % of Total Revenue -1.06% 88.10% 87.53% 87.59% 94.59% 91.92% Investors should note that the above are fiscal year results – AmeriGas’ fiscal year ends 9/30 which means only one quarter needed my estimation. As investors can see, 2015 total revenue is set to fall over 20% primarily due to a more mild winter season compared to prior years. On the plus side, gross and operating margins have improved and operating income expanded. It might surprise investors to find out that 2011 was the more profitable year. Why? The acquisition of Heritage Propane in 2012 was incredibly expensive, paid for by nearly $1.5B in cash that had to be raised in the debt markets, along with a $1.1B dilutive stock issuance that diluted shareholders nearly 40%. Total debt now stands at $2.2B, compared to $929M in 2011 and AmeriGas now pays $100M more in interest expense annually than it used to, even in a falling interest rate environment that has improved. Debt used to finance the purchase wasn’t cheap – the majority ($1B due 2022) carries a burdensome 7% rate that cannot be refinanced due to covenants until 2017. I have yet to see much value in this purchase. While operating income has nearly doubled, shareholders haven’t seen any reward as earnings per share has moved nowhere. The estimated $2.38/share AmeriGas will earn in 2015 is less than the $2.93/share the company earned in 2011. *numbers in millions CAGR 2015 (est) 2014 2013 2012 2011 Cash From Operations 30.07% 521 480 356 344 189 Capital Expenditures 7.54% 111 114 111 103 77 Dividends Paid 20.45% 362 347 327 272 172 Resulting Free Cash – 48 19 -82 -31 -60 Additionally, when evaluating utilities I like to see how the cash is used. When looking at a utility, there are two main uses for cash from operations: capital expenditures and dividend payments. If investors in their research see continued years of negative free cash after these two items are paid, eyebrows should be raised. Utilities with healthy leftovers have cash balances they can use for acquisitions, debt retirement, share repurchases, or just setting aside cash for a rainy day. This is an area that has seen improvement for AmeriGas, although I would like to see more improvement than what I’ve seen. As another critique, historically, approximately 60% of capital expenditures have been “maintenance” capital expenditures, or capital expenditures that are done simply to maintain the current asset base. So from a growth perspective, only 40% of 2015’s capital expenditures, or $45M, is used to build new plants, storage devices, or purchase new equipment. Future growth may be curtailed if this investment remain slow. Conclusion Investors were skeptical back in late 2011/2012 over whether the Heritage Propane acquisition was a good deal. Several ratings agencies downgraded the company’s debt on questions whether the cost (11x EBITDA) and risk of failed execution high. This is part of the reason why AmeriGas’ debt issued to fund the acquisition carried such unfavorable rates. Looking back from today, it appears those fears were largely founded. Investors who are likely salivating at the current 8.5% yield should question whether that yield may remain stagnant in the years to come. Management wants to target 5% annual targets but free cash flow currently cannot support much further growth. I can see expansion if we have a string of cold years in 2016 and 2017 while interest rates remain low. Strong operating results before a debt refinance option opens up could free up some cash flow to support some future dividend raises. Beyond 2018, the source of tens of millions in additional free cashflow to fuel 5% dividend increases each year becomes murky.