Tag Archives: utilities

Will GLD Resume Its Decline?

The market remains on fence on the timing of the Fed’s rate hike. SPDR Gold Trust benefits from economic uncertainty but not from low inflation. The Fed still expects inflation will reach its target in the coming years. A strong non-farm payroll report could further push down the price of GLD. Even though shares of SPDR Gold Trust (NYSEARCA: GLD ) are up for August , they are still down for the year. The debate over the Federal Reserve’s rate hike continues. The devaluation of the Chinese yuan along with low inflation and the strong U.S. dollar reduce the odds of a rate hike in September. But the Fed keeps us guessing. Nonetheless, a stronger than expected non-farm payroll report could bring back up the probability of a September hike and drag back down the price of GLD. Let’s see the recent developments in the market and their relation to GLD. The market still doesn’t know when the Fed will be ready to hit liftoff. And although the implied probabilities for a September rate hike are still very low – the odds are only 28% in September and 56% in December, the market could still raise these odds again if the upcoming non-farm payroll report exceeds the market’s expectations. Currently, the market expects a gain of around 220,000 jobs; if the actual number comes at over 250,000 this may be enough to rekindle the possibility of a rate hike later this month. Back in July, the NFP report showed a gain of 215,000, slightly below expectations, which still led to a rise in the price of GLD. When it comes to the September rate hike, even Federal Reserve Vice Chair Stanley Fischer , in a recent interview, still refrained from voicing his opinion about the September meeting and kept the possibility of a hike on the table. He was also optimistic in Jackson Hole and thinks inflation will pick up: “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further.” If this is the case, it will be harder for the Fed to reach its goal of 2% as rates start to rise again. Also, inflation aren’t, for now, rising. Moreover, the ongoing descent in the core CPI may have also contributed to the weakness of gold in the past couple of years. The chart below presents the price of gold and annual percent changes in core PCE between 2011 and 2015. (click to enlarge) Source: FRED The combination of a stronger dollar, which is likely to further strengthen as the Fed begins normalization, along with the low price environment, driven, in part, by falling commodities prices, isn’t expected to help gold or the price of GLD to bounce back from its recent fall. It’s also worth noting, a point made on CNBC , that the current long-term yields are still low – the 10-year Treasury bond yields are around 2.2%. Back when the Fed started to raise rates, yields were much higher – the spread between the federal funds rate and the 10-year note was closer to 4%. Thus, the market conditions, at least from the bond market, aren’t best for a rate hike. I think it’s not likely that the Fed will raise rates – for the same reasons everyone states including China, low inflation and yields, global economic uncertainty, strong U.S. dollar and more – any time soon. But we should also remember the Fed is purposefully avoiding from giving clearer guidance and keeping us guessing: It’s trying to test the waters and see the market’s reactions. So far, the growth in the U.S., which was very strong in Q2, could still change course. The labor market is improving but still has room for improvement especially when it comes to wages. And most importantly, inflation is low and higher rates won’t bring it any faster to the Fed’s target. For GLD, low inflation and the strong U.S. dollar will drag its shares down. Conversely, economic uncertainty could play in favor for its price – as was the case back in mid-August. Thus, over the short term, we could still see modest gains in the price of GLD, but as long as the Fed heads towards normalization – if not in September then in December or the beginning of 2016 – the U.S. dollar is, for the most part, heading up, GLD is likely to resume its slow descent. For more please see: 3 Questions About Investing in Gold . 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.

Active Power: An Analyst Catalyst Candidate?

ACPW reported an impressive Q2 which put the finishing touches on a further impressive 1H. The analyst community has taken notice. With changing estimate trend lines is ACPW an Analyst Catalyst candidate? Seeking Alpha readers who follow my writings understand just how lucrative identifying this can be. It looks like analysts are beginning to see a good story and a story in which they are collectively getting more and more confident in when it comes to Active Power (NASDAQ: ACPW ). After the company’s Q2/15 reporting confirmed what is shaping up to be an inflection point for operations analysts have come to modeling Active Power more bullish than prior and, importantly, more bullish in trend than prior. This matters in a big, big way for getting some volume into the name and for getting some valuation multiple expansion. I detailed the Active Power quarter reported in an initiation note in which I concluded the same as apparently what is now becoming a very consensus analyst opinion -Active Power is finally on its way to healthier income statement performances. Still, to see analysts turn estimate trends positive is encouraging and could, with a quarter or two of further execution, turn into the phenomenon I’ve called the Analyst Catalyst. I’ve detailed this before for Seeking Alpha readers in other names near inflection points of several varieties (growth rates, cash flow positive, EBITDA positive, etc.). It’s been a long, long time since Active Power was the recipient of such faith from the markets and that is reflected in its share price. A change would be welcomed by shareholders and is something that shareholders should pay close attention to. Active Power is currently modeled for steady increases to revenue, EBITDA, and fully diluted EPS to end full year 2015. Through 1H/15 the company remains well on pace to hit these marks. These would be higher highs put in for the noted metrics after the company bottomed in each category in full year 2014. Full year 2014 marked Active Power’s third consecutive year of posting lower lows for the line items – something that drove its stock price lower, investor sentiment to all-time lows, and analyst faith to a point of non-existence. Obviously the modeling change to growth in these categories for full year 2015 and for full year 2016 speaks to the turnaround at the company in progress: You can see in the table above that Active Power is expected to achieve the all-important EBITDA breakeven at full year 2015 reporting with the company going on to report its first EBITDA positive year in four years at full year 2016 reporting. That will be a huge milestone for the company and one that I think will open the name up to significant investment from institutions and other asset managers that can’t or choose not to invest in non-EBITDA positive names. This is more common than most understand. Also, it’s excellent to see that Active Power is modeled to reach near breakeven for EPS in full year 2016 reporting. Again though, maybe the best part of all this is that Active Power has now established positive estimate trends across these categories. In beating estimates, Active Power has essentially validated the reporting analysts’ models – which makes them look smart, which they like. As a natural consequence of both, analysts have had to positively revise estimates at each quarter reported based on the previous beat. I believe these positive revisions, which take place early to mid-quarter, help propel volume and upward share price movement between quarterly reporting. This cumulative effect of analysts powering shares higher at early or mid-quarter AND company quarterly reporting powering shares higher works to create a constant cycle of volume and higher pricing. In general I refer to this as the Analyst Catalyst. You can see in the charts below Active Power might be on the brink of such a bullish cycle: (click to enlarge) (click to enlarge) (click to enlarge) (click to enlarge) I believe that we should see a continued Analyst Catalyst take shape at Active Power as the company continues to impress at quarterly reporting. Active Power is showing excellent trend lines for income statement line items and for key metrics reported as a result of its maturing sales team (which the cumulative effect of this is hard to model) and its growing more well-known value prop. Both should make sure that Active Power continues in its turnaround success and in reshaping its total income statement. I’ll provide updates as I see estimates positively or negatively revise. Good luck everybody. 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.

Investments In Renewable Energy One Reason Among Many For A Bullish View On Duke

Summary Company has accelerated efforts to get a large regulated asset base in order to secure long-term growth. DUK is investing heavily in its solar and gas-run operations. Company’s future cash flows will improve, which will back its dividend growth. Duke Energy (NYSE: DUK ) is a leading electric power company in the U.S. The company’s financial performance remains satisfactory, and it has been making aggressive efforts to further improve its performance. DUK’s constant efforts to better its financial numbers by making growth investments in renewable energy generation projects have placed it on a growth track. Given the correct growth efforts backed by its healthy capital investments, I expect DUK’s revenues, cash flows and earnings base will get better over time. Moreover, as the company’s future performance will improve, it will continue to share its success with shareholders in the form of cash returns, which will positively affect its stock price; the stock offers a dividend yield of 4.6%. DUK’s Efforts to strengthen its Power Generation Fleet In the recent past, the U.S. government has increased its efforts to lower carbon dioxide emission rate from energy generation fleets of utility companies by imposing heavy taxes and fines. In order to save themselves from taxes and the fine burden, utility companies have increased their focus on the expansion of renewable energy generation resources, such as solar, wind, geothermal, liquid biofuels and hydropower. Owing to the increase in scale of capital investments made by utility companies in renewable energy generation projects, the EIA projects that the U.S. renewable energy supply will steadily grow in the coming years, as shown in the chart below. (click to enlarge) Source: eia.gov As far as DUK is concerned, in the light of strict environmental regulations, the company like all other utility companies has started investing in the expansion of its renewable energy generation portfolio; year-to-date, DUK’s renewable business has attained a capacity of around 2000MW and it is making continuous strides to increase it further. In fact, the company is seeking all possible growth opportunities to increase its renewable energy generation capacity. DUK has recently filed two RFPs with Carolina state regulators; one of the RFP is to seek permission for running 53MW of utility solar capacity in the region, in order to ensure proper supply of energy to customers of the region, least by the end of 2016. And in a separate RFP, the company has mentioned that it is looking for a solar capacity of 5MW for the Shared Solar Program. DUK believes that the Shared Solar Program will be beneficial for those customers who can’t install solar panels in their homes, but still want to enjoy benefits of renewable energy resources. The deadline for approval of both RFPs is mid-October 2015; I believe that with the approval of these RFPs, the company’s process of adapting solar energy will speed up, and will help it meet the growing demand for energy in Florida. Moreover, the Indiana Utility Regulatory Commission has approved DUK’s 20-year purchase agreement to buy up to 20MW of energy from two solar developers in Indiana. Given the fact that solar projects are part of the company’s regulated asset base, I believe that by investing in its solar asset base, DUK will be able to file regular rate increase cases with regulators, which will ultimately better its future revenues, cash flows and earnings base. And as far as its gas-based energy generation operations are concerned, being an important part of its regulated asset base, the company has been making capital investments in its gas-based operations. DUK had previously filed an application to acquire 599MW of combined cycle-gas plant from Calpine, in Florida, which was recently approved by the FERC. Also, the company has announced the acquisition of a 7.5% stake in Sabal Trail gas pipeline for $225 million; with the commencement of its operation by the end of 2017, the Sabal Trail pipeline will serve DUK’s 1640MW Citrus County combined-cycle gas plant, which will begin its operations in 2018. Moreover, the company had announced $1.1 billion Western Carolina Modernization project in 2Q’15, under which coal plants in Asheville will be soon retire and will be replaced with a new 650MW combined gas plant. Moreover, the project will positively affect the company’s performance, as the electricity generated from the combined gas plant will be 35% less expensive than traditional coal plants. I believe that all of the abovementioned investments by DUK for the expansion of gas operations will serve as an important source of generating strong and stable revenues and cash flows in the years ahead. Furthermore, the company has given an update on its plan to excavate coal ash basins in North Carolina in the 2Q’15 earnings conference call; according to the announcement, 12 additional coal ash basins will be removed in North Carolina, which brings the total number of ash basins to be removed to 24. DUK’s management has estimated that additional cost to close these basins will remain in a range of $700 million to $1 billion; however, the timing for incurring this cost has not been announced yet, which perhaps the company’s management will announce in 3Q’15. I recommend investors to wait for the upcoming call to get a clear picture on this issue. Investors Remain rewarded at DUK The company has a promising history of making regular cash returns to its shareholders. As a matter of fact, DUK’s wider regulated asset base helps the company generate stable cash flows. The company recently raised its quarterly dividend by 3.8% to $3.30 share and the stock currently offers a dividend yield of 4.60% , well above the industry average of 4%. I believe that the company will continue to increase its dividends at a healthy pace, which will portend well for the stock price. Given the strength of DUK’s strategic growth investments, analysts are also expecting consistent growth in the company’s book value per share and cash flow per share, in 2016 and 2017, as shown in the chart below. (click to enlarge) Source: 4-Traders.com Price Target I have calculated a price target of $76 for DUK, using dividend discounting method. In my price target calculation, I have used cost of equity of 7.3% and nominal growth rate of 4%. Based on the target price, the stock offers a potential price appreciation of 8%.   2015 2016 2017 Terminal Value DPS (In-$) 2.91 3.01 3.52 84.2 Present Value Of DPS (In-$) 2.7 2.6 2.85 68 Source: Equity Watch Calculations & Estimates Total present value of DPS = Price Target = $2.7 + $2.6 + $2.85 + 68 = $76/share Risks The company continues to face the risk of changes in regulatory restrictions. Also, the challenging Brazilian business environment remains an overhang on DUK’s earnings growth potentials due to the company’s international business operations. In addition, any laxness exhibited by the company’s management during the execution of its strategic growth plan will result in failure to grow sales as expected. Furthermore, unforeseen negative economic changes, foreign currency headwinds and growing carbon dioxide emission-related charges are key risks that might hamper DUK’s future stock price performance. Conclusion I reaffirm my bullish stance on DUK; the company has accelerated its efforts to get a large regulated asset base in order to secure its long-term growth. In this regard, DUK is investing heavily in its solar and gas-run operations, which portrays a positive picture of the company’s future sales, cash flows and earnings growth. Given the strong growth potentials, I believe the company’s future cash flows will improve, which will back its dividend growth. Also, analysts have projected a healthy next five-years earnings growth rate of 4.67% for DUK, as shown in the chart below. (click to enlarge) Source: Nasdaq.com 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.