Tag Archives: texas

Atmos Energy – Great Company, But Overvalued

Summary Atmos Energy operates in highly favorable operating and regulatory environment. The company is a Dividend Aristocrat, having raised its dividend for over 31 years now. However, the company is overvalued. The yield is too low compared to historical averages and the company’s overspending of its cash is worrisome. Atmos Energy Corporation (NYSE: ATO ) operates primarily as a regulated natural gas distributor, in fact it is one of the largest pure play natural gas operations in the United States. Based out of Texas, he company has operations stretching across eight states serving over three million customers. Given its location, Atmos Energy has access to cheap natural gas sourced from the Val Verde and Barnett shale plays. Further bolstering the company is a favorable regulatory environment. Both Texas and neighboring Louisiana have company-friendly utility policies in the form of annual rate filing mechanisms. These allow Atmos Energy to put in requests to modify its rates on an annual basis without filing a formal rate request. What this means is that the company can recover a majority of capital expenditures and commodity prices from customers quickly. These two factors have created a prime situation for Atmos Energy’s utility operations. Overall, Atmos has been a consistently profitable business that has rewarded shareholders greatly over the years. The company is a member of the oft-observed Dividend Aristocrats index (companies with 25 or more years of consecutive dividend increases), which has led to Atmos Energy finding itself in many retail investor portfolios due to its strong yield and proven track record. But is the future for Atmos Energy as bright as the past? Company Track Record (click to enlarge) Total revenue has grown at a 3.74% pace since 2011. In reality, this understates growth as the company sold some of its natural gas distribution operations in four states as part of a streamlining initiative (Missouri, Illinois, Iowa, Georgia). Investors can see that this divestiture was wise as it likely contributed to improved operating margins from fiscal 2013 forward. Like I do with most utilities, I like to see how cash flow is used by the company. Dividend-paying companies have two main uses of cash outside of operational activities; capital expenditures and dividend payments. At worst, I like to see cash flow from operations = capital expenditures + dividend payments. As you can see, Atmos Energy has traditionally run a deficit on this metric. What this means is that the company has to raise cash to meet all of its obligations, either through debt or a dilutive stock offering. As should have been expected, Atmos Energy raised $386M net cash in 2014 from a stock issuance (9.2 million shares), the announcement of which sent shares plunging (shares have since recovered). Atlas has no plans to slow down capital expenditures, which the company has said is needed primarily to maintain pipeline integrity and general system improvements. In fact, capital expenditures may reach $1.1B annually by 2018 according to company estimates. I would expect Atmos to raise some funds in the debt markets in 2016 or 2017, possibly in the range of $500M, given its solid credit ratings. Application of the Dividend Discount Model As I highlighted in a prior article , the dividend discount model is a great way for conservatively valuing dividend companies, especially those with stable and proven track records. We can generate a valuation of Atmos Energy with the following assumptions: $1.65 expected dividend next year, an 8% discount rate, and 2.5% average annual dividend increases going forward (below the current three year average of 2.9% but below the ten year average of 2.0% increases). P = 1.65 / (.08 – .025) P = 1.65 / 0.055 P = $30/share This gives us a fair value of $30.00/share, indicating that shares might be overvalued based on the expected future cash flows to be generated from our investment. Further support of this relative overvaluation can be found in the five year dividend yield average for Atmos, which has historically averaged 3.80%, which would put fair value of shares at the $44-45/share range. Given the yield currently stands at 2.81%, I believe that shares may have appreciated in value too much compared to recent company earnings. Conclusion Atmos has a strong set of operations in a highly desirable area. Management history of rewarding shareholders is healthy. However, this status has made the company’s stock a bit crowded, especially given the risks related to the expected continued leveraging given the operational cash flow deficit. In my opinion, for investors that want safety, there are better picks in the utility or dividend aristocrat space that would present less material downside risk. At current prices, I simply could not become a shareholder.

Principal Solar – A Silk Purse Or A Sow’s Ear?

Principal Solar is on schedule to build the largest solar farm east of the Rockies. Principal Solar has tremendous potential in terms of expanding its solar utility distribution because of backing by wealthy investors. Principal Solar’s stock has significantly underperformed its competition. On June 1, I wrote an article on Principal Solar’s ( OTCPK:PSWW ) business strategy as the “world’s first distributed solar utility.” The company had issued a series of press releases announcing its plans. Starting on Feb. 4, 2015, it announced that it was building the largest solar project east of the Rockies, which was followed on March 9, 2015, by news that a second, equally large plant would be built in North Carolina. (See company press releases at principalsolar.com for more details.) PSWW then attempted to attract investors when a proposed IPO was announced on May 20, 2015, and an S-1 was filed with the SEC seeking to raise $27.5 million. On June 5, 2015, management announced a reverse 1:4 stock split. When these tactics didn’t work, management lowered the IPO to $12 million. When that proved unsuccessful in generating finds, management withdrew the IPO. One of the interesting notations in this article was that “The Dallas energy company [Principal Solar], backed by oil billionaire Ray Hunt.” Interestingly, a separate article on Bizjournals.com notes the following: A Nov. 3 date has been set for a hearing on whether to confirm a plan that could eject Energy Future Holdings from bankruptcy by allowing the Dallas-based energy giant to sell its transmission utility Oncor to a consortium led by Hunt Consolidated Energy. Ray Hunt’s son, Hunter, is CEO of Hunt Consolidated Energy. In a deal valued at about $19 billion, Energy Future’s revised plan calls for selling Oncor to a consortium that includes its junior creditors, Hunt Consolidated, the Teacher Retirement System of Texas and investment firms Anchorage Capital Group, Arrowgrass Capital Partners, Avenue Capital Group, BlackRock and Centerbridge Partners. As I mentioned in my June article: Texas has plenty of rich investors. With 93 billionaires with a combined net worth of $493.5 billion, California has the highest number of Forbes 400 members. New York claims the second spot with 65 members, followed by Texas (39), Florida (31), and Illinois (17). So a silk purse is PSWW’s relationship with Hunt, which in turn seems to have the connections to attract additional high-worth investors. On Aug. 26, Principal Solar issued its latest press release, which states: PSWW has agreed to terms to co-develop its first major solar asset with affiliates of Entropy Investment Management, LLC (‘Entropy’). The 100MW facility, located in Cumberland County, North Carolina, will produce enough electricity to power approximately 20,000 average American homes. Construction began the week of Aug. 17, 2015, and the project is expected to begin generating power before the end of 2015. In the transaction, PSI will continue to play an important role in completing the project’s development phase and sold its interest in the project to affiliates of Entropy. PSWW seems to be changing its contractors. A company press release from May 11, 2015, stated that Alpha Energy would be its contractor to build the Cumberland solar farm. Initially, PSWW announced that Spanish firm Isolux Corsan as its engineering, procurement and construction contractor. Additional confusion comes from a Feb. 5, 2015, article in CleanTechnica.com : Principal Solar acquired the right to develop the project from Innovative Solar Systems, LLC of Asheville, North Carolina. The acquisition of the project is expected to close no later than June 3, 2015, with construction to be completed in early 2016. In July, I phoned John Green, managing partner of Innovation Solar Solutions, and he told me that all contracts have been signed and the project was on schedule. So here are my big questions: Why did the company announce that it expected to close the deal on June 3 and never make the announcement, even though a month later John Green said the project was proceeding and on schedule? Why did management wait until Aug. 26, nine days after construction began and two months after the failed IPO and plummeting stock? Why is PSWW down from a high of $35.60 in April to close at $1 on Tuesday? I don’t want to speculate, but I thought executives of companies did everything they could to prop up the price of stock for investors. I would like to understand these questions, but emails to PSWW’s CEO, CFO, and VP went unanswered. Principal Solar is competing against some heavyweights in the solar power utility market — Solar City (NASDAQ: SCTY ), TerraForm Power (NASDAQ: TERP ), Canadian Solar, and First Solar ( OTCQB:FLSR ). However, TERP is down from about $40 per share in July to close at $21.63 on Tuesday. SCTY is down from $60 per share in August to $50.10 on Tuesday, and FLSR is down from $53 in June to $49 on Tuesday. Yet PSWW is down from $35.60 to $1. Principal Solar is a silk purse when it comes to investor potential, primarily through Hunt. If Hunt acquires Oncor, there are significant opportunities for PSWW. Hunt Consolidated would own Oncor and Ray Hunt, who is the father of Hunter Hunt, CEO of Hunt Consolidated, is a backer of PSWW. According to the Oncor website: Oncor is a regulated electric distribution and transmission business that uses superior asset management skills to provide reliable electricity delivery to consumers. Oncor operates the largest distribution and transmission system in Texas, providing power to 3 million electric delivery points over more than 103,000 miles of distribution and 15,000 miles of transmission lines. From an investor standpoint, PSWW certainly looks like a sow’s ear at this time. But the deep pockets and strategy of the company executives could turn the stock into a silk purse. The man question is whether stock investors will buy the incongruous events and look to the future. 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. 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.

CARZ ETF Zooms Ahead On 10-Year High Auto Sales

In August, the automakers witnessed the highest rate of increase in light vehicle sales in the U.S. in 10 years. Sales on a seasonally adjusted annualized rate (“SAAR”) surged to 17.81 million units in August 2015 from 17.3 million units in August 2014. This was the highest pace since July 2005. Moreover, the SAAR finished above the 17 million mark for the fourth straight month in August. However, U.S. light vehicle sales nudged down 0.7% year over year to 1.51 million units in August 2015. Low oil price, a recovering economy, improving labor market condition, and easy availability of credit with lower interest rates and longer repayment periods were the main reasons behind the surge in sales on a SAAR basis. However, the inclusion of the Labor Day weekend in September this year, compared to August last year, resulted in a year-over-year decline in August sales figures. While Ford Motor Co. (NYSE: F ) registered the highest year-on-year improvement in August among the major automakers, General Motors Company (NYSE: GM ) recorded the best sales figure for the month in absolute terms. Auto Sales in Detail Ford reported a 5% increase in U.S. sales from the year-ago period to 234,237 vehicles, witnessing its best August sales in nine years. Meanwhile, FCA US LLC – controlled by Fiat Chrysler Automobiles N.V. (NYSE: FCAU ) – recorded a 2% year-on-year gain in sales to 201,672 vehicles, registering its highest August sales since 2002. This was also the 65th consecutive month in which the company reported a year-over-year gain in sales. However, General Motors recorded 270,480 vehicle sales in August, marking a 0.7% year-over-year decline. Though retail sales improved 5.9% to 224,978 units, the company witnessed a 24% plunge in fleet sales in August. Separately, sales performances from the major Japanese automakers were disappointing last month. Toyota Motor Corporation’s (NYSE: TM ) sales went down 8.8% year over year to 224,381 units. Sales also declined 5.3% on a daily selling rate (“DSR”) basis from the year-ago period. Moreover, Honda Motor Co., Ltd. (NYSE: HMC ) recorded a 6.9% year-over-year decline in sales on a volume basis to 155,491 vehicles in the month. Also, Nissan Motor Co. Ltd. ( OTCPK:NSANY ) reported a 0.8% year-over-year decrease in sales to 133,351 vehicles in August. Catalysts Behind the Surge The overall improvement in the U.S. economy has helped the auto sector to register solid gains in the past few months. The “second estimate” released by the U.S. Department of Commerce last month showed that the GDP in the second quarter advanced at a pace of 3.7%, significantly higher than the first quarter’s rise of only 0.6%. Though the economy created only 173,000 jobs in August, down from July’s tally of 245,000, the unemployment rate declined to 5.1% from July’s rate of 5.3%. Meanwhile, the market is witnessing a freefall in crude prices since the middle of last year. In fact, the price of West Texas Intermediate (WTI) fell nearly 60% as compared to mid-2014, when oil was trading above $100 each barrel. This oil plunge is also playing a major role in boosting auto sales. Moreover, automakers are aiming to increase market share by offering large incentives and discounts to customers. Additionally, banks are providing more car loans with lower interest rates and longer repayment periods. Further, the high average age of cars on U.S. roads has led to increased replacement demand both for cars and for parts. CARZ in Focus The auto ETF – First Trust NASDAQ Global Auto ETF (NASDAQ: CARZ ) – gained nearly 2% following the release of the auto sales report on Sept. 1 through Sept. 3, before losing 2.2% last Friday. It has a decent exposure to the above-mentioned stocks, excluding FCA US LLC, and is thus poised to gain from improving auto trends in the coming days. The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket with Ford, Honda, Toyota, Daimler and General Motors comprising the top five holdings with a combined allocation of more than 40% of fund assets. In terms of country exposure, Japan takes the top spot at 36.6% while the U.S. takes the second spot having around 24.8% allocation, followed by Germany with 19.1% exposure. The ETF is unpopular with $32.4 million in its asset base and sees light trading volume. The product seems to be slightly expensive with 70 bps in annual fees and has a dividend yield of more than 1.7%. The fund has a Zacks ETF Rank #2 (Buy) with a High risk outlook. Bottom Line The improving auto industry has been one of the drivers of the recent economic growth in the U.S. Auto sales will continue to be a tailwind for the economy in the coming days. It is also speculated that the auto sector is poised for further gains given the favorable macroeconomic fundamentals. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.