Tag Archives: transactionname

Long Duke, But Don’t Load Up Just Yet

Summary An abnormal growth trend in the past two years has caused a relatively stable industry to see much decline due to energy conservation and a lack of overall demand. Bad PR surrounding the new EPA rulings on carbon pollution and coal ash have created nightmares for Duke, resulting in a 10% decline on the year. Capitalization on the higher demand for energy during the summer could help bolster the stock short-term, along with a potential share buyback. Achieving the EPS, setting a greater growth trend for the dividend, keeping the credit ratings high, and EPS growth at least a 5% for the long-term are all pivotal to. After viewing the dividend hike to 82.5 cents a share and sifting through some high short interest stocks, I came across a well-known name: Duke Energy (NYSE: DUK ). Deep in the integrated utilities, the Charlotte -based energy company is a long-time energy producer suffering from a poor growth trend due to a lagging commodities sector and lethargic demand. The company deserves a hold rating, as very few growth catalysts are leadings its outlook. Having only had a positive FCF since 2012, now in the amount of $1.09 billion on a LTM basis, I’m concerned that the recent dividend raise might eat too significantly into FCF. Furthermore, with Lynn Good increasing her salary by 50%, but more notably her short and long-term incentive opportunities to higher multiples of her salary, I believe the money could be better well-spent given their lagging growth recently. Sure, they did implement a new retirement program , but again, there are bigger problems that Duke is facing besides employee turnover. As I figured, the stock saw a lot of downward momentum at the end of the winter, and has really just been on a slow down trend since the spring started. We’re seeing really interesting support around the $70 level. The stock is at April 2013 levels, where they were fairing much the same as they are now. The second half of 2014 proved to be an exceptional growth trend, just about scraping the $90 level, but I can’t reasonably expect the stock to trend in that direction for quite some time. (click to enlarge) Source: Bloomberg We’ve seen a good, but not great three year revenue growth trend from Duke, with most of the gains coming in 2012. With revenues now well above $25 billion, I’m concerned that they won’t be able to sustain this level. Their International Energy segment has seen a small decline of 1.15% over the past three years, which accounts for about $1.4 billion in revenue each year. While much of their efforts are concentrated in Latin America, Brazil has been of particular interest to the company. Much of the operations are similar to their domestic segment, Brazil is suffering from a poor wet season and high water demand, causing reservoirs to be low and inefficient for their hydropower plants. Furthermore, I can’t see them having huge international growth when things like their quarter interest in National Methanol Company (NMC) in Saudi continues to suffer from extremely low margins. Luckily, International Energy does not account for a substantial portion of total revenue, but it’s worth noting that hydropower in Brazil will be lower in future quarters based upon thermal power being prioritized over hydropower and this trend will continue through the end of the year, already down 52.9% in terms of pricing. Sure, there are a few construction and renovation projects that Duke has going for them, but they’re not going to see the light of day until three or four years out, let alone reach their highest potential capacity. For example, a 750 MW natural gas-fired generating plant in South Carolina, which cost about $600 million, won’t be available for use until late 2017 ( 10-Q ). Even little things like the switching from lead acid to lithium-ion batteries in the Notrees Windpower Project in Texas are important steps in helping long-term efficiency and stability for the company. They just recently gained a 40% stake in the $5 billion venture to build the Atlantic Coast Pipeline, which will bring natural gas from Marcellus and Utica in Pennsylvania to West Virginia and coast Virginia and then to North Carolina. Additionally, a 1640 MW combined cycle natural gas plant in Citrus Country Florida, expected to be finished in 2018, will cost $1.5 billion. Based upon hedging activities from many oil companies, like Oasis Petroleum (NYSE: OAS ), running out next year, the input fuel could be very cheap to Duke. On a different note, the stock repurchase program that began earlier this year still has about 15% left approved, which represents a good buyback of about $225 million. This will certainly help push the shares up for a few sessions. The Commodities Caveat Apart from construction and financial growth catalysts, which will have seemingly minimal effects, the commodities market could really end up hurting this company if prices rise. While natural gas prices, via the Henry Hub below, have been on a great YOY downtrend, which reduces input costs, there’s a caveat present. (click to enlarge) Source: Bloomberg With an oversupply of natural gas and plants at Duke reaching 94% capacity, they’re going to suffer from limited profitability. Revenues will eventually decline due to a lower margin received for their output. While demand for natural gas isn’t increasing, but is rather just being adopted as coal-based energy retreats, Duke could have a real profitability problem on its hands, considering their profit margin is expected to drop over 9% this year. The exact same case applies to oil and company management has estimated that the negative effects will be anywhere from 2.5-5% of EPS. I firmly believe their operating margin will remain strong around 24%, but I would need to see significant improvement for this utility company to fend off tough macro conditions. Speaking of said conditions, with a proposed interest rate hike from the Fed later this year, company management has stated that EPS could be affected as much as -$0.07 in the following quarter. Need For Improvement I firmly believe that their regulated utilities segment needs to start showing growth before a reasonable entry point can be made into the stock. Accounting for $22.2 billion in total revenue, the entire segment is up about 27.92% in the past three years, but this has already been priced into the stock, considering many of the gains took place in FY 2014 and FY 2012. Their primary servicing region of the Carolinas, Florida, Ohio, Kentucky, and Indiana has about 7.3 million retail customers. Yet, take a look at the factors hampering their growth: Energy efficiency and conservation efforts, particularly in residential areas The Midwest and Carolina servicing regions were lagging; residential growth, overall, was down 1.4% A higher amount of unserviceable calls than normal this past winter and an increasing number of outages this summer Their commercial power segment, which really only represents a fraction of a percent of total revenue, has suffered a 53.22% three-year decline. Their focus, here, is on alternative energy sources, primarily wind and solar. Regulation Woes Rising Regulation via the EPA’s “Clean Power Plan” set to cut carbon pollution for power plants by 30% by 2030 will pass this summer ( Bloomberg ). This effectively eliminates a coal from being the major energy generator in the long-term, as now the cost structure is unfavorable. Coal Ash Disposal has become a recent nightmare for Duke as they are now required to dispose of the coal ash at four major sites sustainably by 2019 and have all sites cleared by 2029. CBS’ 60 Minutes even dedicated an entire segment towards criticizing the current disposal process of Duke. The estimated cost is about $3.4 billion, or about 3x FCF, currently. Again, the company will still be fine in the long-term as they have a current available liquidity of $6.4 billion, and while they could use a bump up in their credit ratings, the company is standing on solid ground. (click to enlarge) Source: Company Presentation Conclusion On the back end, Duke may benefit from higher D&A costs when it comes time for quarterly reports based upon the pipeline and construction activity, Duke Energy will report quarterly earnings on August 6th, just after the end of July surge of earnings reports from major oil and gas companies. It’s worth noting that their Q3 EPS levels have been historically higher than all other calls, and with projections showing a potential 50% increase in EPS from Q2 to Q3 of this year, the stock is definitely worth considering. Looking to the future, I believe this company will most likely be fine – but there’s too much short-term negativity clouding any decent chance at profitability. Note: All Financial Data Taken From Bloomberg Database 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.

5 Ways To Beat The Market: Part II Revisited

In a series of articles in December 2014, I highlighted five buy-and-hold strategies that have historically outperformed the S&P 500 (SPY). Stock ownership by U.S. households is low and falling even as the barriers to entering the market have been greatly reduced. Investors should understand simple and easy to implement strategies that have been shown to outperform the market over long time intervals. The second of five strategies I will revisit in this series of articles is the “value factor” that has seen stocks with these characteristics outperform the broader market. In a series of articles in December 2014, I demonstrated five buy-and-hold strategies – size, value, low volatility, dividend growth, and equal weighting, that have historically outperformed the S&P 500 (NYSEARCA: SPY ). I covered an update to the size factor published on Wednesday. In that series, I demonstrated that while technological barriers and costs to market access have been falling, the number of households that own stocks in non-retirement accounts has been falling as well. Less that 14% of U.S. households directly own stocks, which is less than half of the amount of households that own dogs or cats , and less than half of the proportion of households that own guns . The percentage of households that directly own stocks is even less than the percentage of households that have Netflix or Hulu . The strategies I discussed in this series are low cost ways of getting broadly diversified domestic equity exposure with factor tilts that have generated long-run structural alpha. I want to keep these investor topics in front of the Seeking Alpha readership, so I will re-visit these principles with a discussion of the first half returns of these strategies in a series of five articles over the next five days. Reprisals of these articles will allow me to continually update the long-run returns of these strategies for the readership. Value In the first article in this series, I described the “size factor”, or why small-cap stocks tend to outperform large-cap stocks over long time intervals. The size factor is captured in the Fama-French Three Factor Model that helped earn Eugene Fama the Nobel Prize in Economics in 2013. Another of these factors is the “value factor.” The researchers noted that low market-to-book stocks tended to outperform high market-book stocks. Adding the “size factor” and value factor” to the Capital Asset Pricing Model better describes the stock market performance than beta alone. Since we are trying to beat the general market, it makes intuitive sense that alpha would be found in a value factor that was used as a supplement to better describe overall returns. Our second way to beat the market, as proxied by the S&P 500, is then to simply buy value stocks. Below I have tabled the average returns of the S&P 500 Pure Value Index, and show the returns of this index graphed against the S&P 500. For more information on this style-concentrated index, please see the linked microsite . This index is replicated through the Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) with an expense ratio of 0.35%. The S&P 500 Pure Value Index identifies constituents by measures of high levels of book value, earnings, and sales to the share price. In the five strategies I am detailing to “beat the market”, I will be using trailing 20 years of data, which is the longest time interval that encapsulated all of the relevant indices used in the analysis. (click to enlarge) Source: Bloomberg; Standard and Poor’s Source: Bloomberg; Standard and Poor’s Why has value investing worked historically? Why has the S&P 500 Pure Value Index outperformed over this long sample period? Value investing has been extolled since the days of Benjamin Graham, and put into most visible practice by his pupil, Warren Buffett. Value investing necessitates understanding the difference between a stock that is valued too low by the market, and a stock that is a “value trap” because changes in the business or its industry have created a structural headwind. Value investors then need to have the fortitude to hold their investment when investor sentiment runs counter to their investment themes. On average, individual investors do not have these attributes. In data from “How America Saves”, the fund giant Vanguard has published a wealth of data on defined contribution plans under its management. The table below shows participant contributions in Vanguard’s defined contribution plans over the trailing ten years. Investors should on average be taking a long-term view towards their retirement assets; however, investors owned their lowest percentage of equities in 2009 as markets rebounded from the 2008 downturn, missing a 26.5% total return for the S&P 500 and a tremendous 55.2% return for the S&P 500 Pure Value Index. Source: Vanguard – an updated version of their analysis is linked . In the four years that the S&P 500 produced a negative return in our twenty-year dataset, the value index produced a higher return in the following year. In the Vanguard data, retirement plan participants, who should be taking a long-term view towards their investments, were less likely to own equities after 2008. Value investing is a discipline, and the average investor is not suited to follow this approach, which may be why a low-cost, rules-based exchange-traded fund with a value bent like may be a good solution for some investors. While a value-based strategy has historically outperformed, you can see from the data table below that the value-based index lagged in the first half of 2015. Source: Bloomberg, Standard and Poor’s This 249bp first half underperformance relative to the S&P 500 was the last first half underperformance since 2012. In that year, value stocks rebounded by generating a nearly 18% return in the second half versus a 6% return for the broader market. Value stocks have only produced negative returns over the first six months of four calendar years in the dataset, 1994, 2000, 2008, and 2015. Two of those periods (2000 and 2008) preceded economic recessions and one year 1994 – featured sharply higher interest rates. As I wrote in my 10 Themes Shaping Markets in the Back Half of 2015 , with stock prices near all-time highs and bond prices still elevated from low interest rates despite the first half sell-off, forward returns in asset markets will continue to be subnormal. For long-term investors with a buy-and-hold approach, the value factor has generated alpha over long-time intervals. I will be publishing updated results for three additional proven buy-and-hold strategies that can be replicated through low cost indices over the next three days. Disclaimer My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPY. (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.

Inside The Crash In China ETFs

China was hot and soaring among all stock markets across the globe for the most of this year thanks to rounds of ultra-easing policies. In fact, China was leading the global markets, attaining the best performing country spot for the first half. But the incredible run was washed away over the past few weeks as concerns brew over the longevity of the stimulus-driven rally and the real health of the economy. Further, worries over lofty valuations raised a panic alarm among investors after a one-year stupendous rally. What Let the Dragon Out Several factors led to horrendous trading in China. First, more than 40% of the mainland China companies halted trading in their shares, locking in up $2.6 trillion worth of shares. This is touted to be the largest wave of trading halts in the history of the Chinese equity market. Additionally, the world’s second largest economy is faltering with slower growth in six years, credit crunch, a property market slump, weak domestic demand, lower industrial production, and lower factory output. Corporate profits are also lower than a year ago. Further, a slew of recent measures including fresh interest-rate cuts, stock purchases by state-directed funds, looser margin-financing rules, central bank pledge of liquidity support, and suspension of new listings are not helping in any way to boost investors’ confidence. Lastly, deepening Greece crisis and Grexit fears shook investors across the globe, a creating risk-off trading environment. The combination of factors led to a dragonish sell-off in the Chinese market. The Shanghai Composite Index plunged over 8% in today’s session, extending its steepest three-week decline since 1992. With this, the index tumbled 32% since its peak in June 12 and wiped out more than $3.5 trillion in market capitalization. On the other hand, Hong Kong’s Hang Seng Index plunged as much as 8.6% on the day, making the biggest drop since November 2008. ETF Impact Quite expectedly, the terrible trading has been felt in the Chinese ETF world too. Funds in this space also saw big losses over the past one month, putting an end to their winning streaks, and landing them in the bear territory. China ETFs Performance Market Vectors China SME-ChiNext ETF (NYSEARCA: CNXT ) -43.54% db X-trackers Harvest CSI 500 China-A Shares Small Cap Fund (NYSEARCA: ASHS ) -43.49% iShares MSCI China Small-Cap ETF (NYSEARCA: ECNS ) -29.14% Guggenheim China Small Cap ETF (NYSEARCA: HAO ) -25.24% First Trust China AlphaDEX Fund (NYSEARCA: FCA ) -17.27% SPDR S&P China ETF (NYSEARCA: GXC ) -16.38% iShares FTSE China ETF (NASDAQ: FCHI ) -16.14% iShares MSCI China Index Fund (NYSEARCA: MCHI ) -15.57% iShares China Large-Cap ETF (NYSEARCA: FXI ) -15.08% PowerShares Golden Dragon China Portfolio (NYSEARCA: PGJ ) -13.92% From the above table, it should be noted that steep declines were widespread among the Chinese ETFs. Interestingly, A-shares ETFs have been the worst performers of the Chinese rout, followed by small caps. Large-cap focused funds and the broad market funds too saw double-digit declines over the past four weeks. Further, ETFs targeting specific sectors like Global X China Industrials ETF (NYSEARCA: CHII ), Global X China Materials ETF (NYSEARCA: CHIM ), Guggenheim China Technology ETF (NYSEARCA: CQQQ ), Global X China Financials ETF (NYSEARCA: CHIX ) and Global X China Consumer ETF (NYSEARCA: CHIQ ) also bore the brunt, declining 27.46%, 25.26%, 21.25%, 16.32% and 13.71% respectively. What Lies Ahead? Given the steep decline in all the corners of Chinese space and huge numbers of trading halts, fears are largely building up in the space. Morgan Stanley ‘s head analyst of emerging markets and global macro economy views this as the biggest bubble in the last 20-30 years, while others are anticipating that China’s market turmoil might be a bigger issue than the Greece crisis. It is not only destabilizing the economy but could also have ripple effects in the global markets if it continues for long. However, the stepped-up measures taken by the government lately will soon start to pay off providing a boost to the stocks. In addition, easy cheap money flows in contrast to tightening policy in the U.S. will allow Chinese ETFs to resume their impressive ascent. Further, continued selling has made the Chinese stocks inexpensive at current levels. This is especially true given the Shanghai Composite Index and Hang Seng Index have a P/E ratio of 18.91 and 9.7, respectively, compared to 21.3 for the S&P 500 index. So investors should wait until the Chinese market bottoms out and then cash in on the opportunity of the beaten down prices with any of the above-mentioned ETFs having a favorable Zacks Rank of 2 (Buy) or 3 (Hold). Original Post