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Avista Corporation: Solid, But Price Not Spectacular

Summary Avista Corp has demonstrated a history of solid fundamental performance. There are currently a couple positive factors – mostly favorable rate case settlements – which should support earnings estimates going forward. Shares seem fairly priced at current levels – not a spectacular discount, but not overpriced, either. The Thesis The thesis here is that Avista (NYSE: AVA ) is a solid company in the utilities space with a history of solid fundamentals. While there are several specific company challenges, there are also some positive trends which should make earnings estimates realistic. At current share price levels (about $32), shares seem priced close to valuation. While not a screaming discount at the moment, this company may fill a need in a portfolio looking for dividend income and long-term growth. This article will review historical performance of company fundamentals, including past trend per-share results for book value, earnings, revenue, and debt. Several company-specific positive trends and challenges will be presented, and a suggested company valuation will be provided. Lastly, two specific strategies will be offered for consideration. Avista Corp: History of Fundamental Performance As usual I find my F.A.S.T. Graphs subscription to be very valuable to study a company’s fundamentals. Using the “F.U.N. Graphs” feature allows a visual of each company fundamental. To assess the trend of fundamentals for AVA, I chose to review metrics going back 20 years. This historical view gives evidence of management success or struggles in growing these particular fundamentals over time. Book Value Per Share Trends The ideal for this metric is a trend of steadily rising book value per share. Why? This number is difficult to manipulate and a rising metric suggests management has made decisions to add value over time. In my view, AVA demonstrates very effective growth of this metric, as demonstrated by the growing green bars over time. (click to enlarge) source: fastgraphs.com Earnings History In order to conduct a reasonable valuation analysis, earnings are a key metric to consider. Historical earnings are worthy of review, in my opinion, because a person gets data on consistency over time and several cycles. Of course the idea is for the company to generate consistent earnings growth over time. As the graph below seems to illustrate, AVA has delivered earnings over time. My read of this graph is that earnings are generally predictable, but not spectacularly so. Overall, given this space and how the company performs relative to peers, in my view AVA demonstrates a reasonable earnings growth historical track record. (click to enlarge) source: fastgraphs.com Revenue History As would be expected in this industry, revenue (not considering the anomaly in 1999) has been quite consistent. And given the company’s recent success with rate settlements, there is no reason to believe these trends will not remain supported for the foreseeable future. (click to enlarge) source: fastgraphs.com Debt The idea here is to review debt to gain a perspective on use of debt over time to finance company obligations. In my opinion, AVA has utilized debt as one would expect in this industry and management has delivered results which position the company well for the future. (click to enlarge) source: fastgraphs.com In my humble opinion, based on the data Avista Corp management has delivered a solid foundation of fundamental metrics over time. This suggests a level of predictability and offers balance sheet strength to build upon in the future. Company-Specific Trends This article suggests that AVA is about fairly priced right now – neither excessively overvalued or extremely undervalued. As one considers trends or issues that may impact earnings going forward, the following seem relevant: (sources include the company web-site, earnings calls and 10-k) Positive Trends The company is getting the benefit of the Alaska Electric Light & Power acquisition last summer Rate case settlements suggest earnings will increase for this year and 2016 Management continues guidance for consolidated earnings to be in the range of $1.86 to $2.06 per diluted share The board of directors raised the dividend for the first quarter Challenges AVA operates in a highly regulated environment – this tends to add costs and time to various initiatives Weather and costs are always a bit unpredictable; the weather affects sales as well as the cost of natural gas and supply power Energy resource risk management can affect earnings – the company hedges some commodity pricing costs and this can cause variability based on fluctuations All things considered, in my opinion AVA is well aware of the challenges of the environment and is doing an effective job to address those challenges going forward. The results are in the past fundamental performance and estimated results for the future. But what about the price to value relationship? This article suggests AVA is priced about to value. Let’s have a look at some data to substantiate this view. A Valuation Method When valuing a company, I like to compare that company against its own historical valuation. Again a F.A.S.T. Graphs subscription is an excellent tool to visually demonstrate the history of a company’s own valuation past record. In the chart below, the orange line represents earnings history and what could be considered “fair valuation” at a price/earnings multiple of 15X. The blue line represents an historic normalized average PE. Finally, the black line is the market price of AVA. Note that a normal PE for AVA over the past 20 years has been 15.7X earnings. When considering just the past 8 years since the Great Recession, the normal PE ratio has been about 15X earnings. Today AVA is priced at 16.5X earnings. Visually, the graph demonstrates this data well: first, notice how historically the market price (black line) follows the valuation line (blue PE line). And notice how today the black line (market price) is very near historical valuation lines. (click to enlarge) source: fastgraphs.com What Might Be A Strategy to Consider? AVA seems to present a potential opportunity for a person seeking dividend, but not expecting excessive upward price movement. If an individual desired to take a position, it may be reasonable to begin a position (albeit not 100% of the entire allocation to this company) at these levels. Alternatively, a person could consider selling puts (at a strike price below the current market price) as a possible way to either a)keep the premium if AVA rises or b)purchase shares at a discount from the price today. All of the above in my opinion offered for your consideration. Thank you very much for your time. 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.

Securities Lending – The Dark Side Of Mutual Funds

A topic that hasn’t been discussed by market observers and regulators for a while is securities lending, but it might be on the agenda again soon. iShares – the exchange-traded fund (ETF) arm of the world’s largest asset manager, BlackRock (NYSE: BLK ) – has announced that the firm will increase its engagement in securities lending and has therefore scrapped its self commitment on the percentage of securities held by the firm that can be lent to third parties. This step is rather surprising, since securities lending by ETFs was one of the main points raised by critics in the past. The reaction of the ETF industry to this announcement was for some ETF promoters to introduce a ban on securities lending, while others such as iShares introduced a maximum percentage of securities that can be lent. From my point of view, this discussion did not go far enough, since securities lending is not done only by ETFs. The vast majority of securities-lending activity is done by actively managed mutual funds, since the overall assets under management are much higher in this market segment. Is securities lending bad for the investor? Don’t get me wrong, securities lending is not bad per se , but one needs to think twice about getting a fund involved in this kind of activity, since it can have negative impacts on the fund’s performance. The first point to take into consideration is that most counterparties that lend securities use them to build short positions. If this works, the fund and therefore the shareholder of the fund will face a loss on the given position, since it is still a long position for the portfolio. This raises the question of whether securities lending is in the best interest of the fund owner/investor, since the loss might have a higher negative impact on the fund’s performance than what the lending fee adds on the positive side. Income from securities lending as a source of return The income from securities lending is the second point one needs to take into consideration, since the fund does not benefit from the full lending fee. Even though the fund and therefore the investor bear the full risk of the default of a borrower, the lending fee is normally shared between the investor and the fund promoter. Securities-lending activities offer a free lunch to fund promoters, since they get return without bearing any risk. This stream of risk-free cash might be one of the reasons iShares has scrapped its restrictions on securities lending. iShares has lowered dramatically the management fees for some of its ETFs on major market indices to compete with Vanguard in Europe. This means the revenue of iShares and therefore the revenue of the asset manager, BlackRock, might have decreased, and they may want to regain profit by increasing their securities-lending activity – one of the easiest ways to achieve this goal. I think it would be much fairer if the fund promoter got a fixed handling fee for its involvement in the securities-lending activities of the fund instead of a large percentage of the overall income generated by these activities. Again, the fund promoter does not bear any risk and should therefore receive only a small part of the income. An investor should carefully read the annual report of the fund, especially where it is stated how much revenue the fund has made from securities lending and how much of this revenue has been paid to the fund promoter. Collateral as an additional source of risk One may argue that the investor bears no risk from securities-lending activities, since normally all transactions are secured by collateral. That is right, and in most cases these transactions are even over-collateralized. But, since the current regulations on which securities can be used as collateral are rather weak, some market participants may use the collateral to offload toxic or illiquid paper from their balance sheet. If a bank wants to reduce risk on its balance sheet, it may borrow some government bonds from a fund and return unrated or other risky assets as collateral to the lender. This may not look like a serious issue for fund shareholders at first sight, since they won’t own this paper as long as the borrower does not default. But if there is a default, it would be questionable whether all the securities within the collateral are liquid and at what price they can be sold to pay the dues. In this case even an over-collateralization might not protect the investor from a loss in the net asset value of the fund. Increased market efficiency-the bright side of securities lending Even though securities lending seems to be a questionable practice from a shareholder’s point of view, it has some positive effects on the markets. One of these positive effects is increased liquidity in the markets, since all transactions done by the lender increase the liquidity in the underlying security and therefore in the overall market. But it is not only liquidity that makes a market efficient. In addition, the different market participants need to have the ability to “bet” against a security, if the valuation seems to be too high. In this regard, securities lending does help increase the efficiency of markets, since short selling has the effect of bringing down the price of a security. The strategy of a short seller is to search for securities that seem to be overvalued and try to bring the price of the security to a lower level, i.e., a price that is closer to the real value of the security. Monitoring securities-lending activities-a call for investors and regulators From my point of view, the idea of securities lending is not bad at all. But to follow this strategy with securities held in a mutual fund, which is owned by long-term retail investors who can’t evaluate the risk of this kind of activity is a bad idea, especially when the revenue from securities lending is shared between the fund promoter and the investor. Again, I don’t think securities lending is necessarily a bad thing, but investors in a fund should know about these activities before they buy the product. Regulators should force fund promoters to disclose in the key investor information document (KIID) whether they are doing securities lending or not and how the revenues are shared. In addition, the regulator should set clear guidelines on the quality of the securities used as collateral, since this could decrease the level of risk for the investor. It would be helpful for the investor if all funds and not only ETFs would disclose on their website the collateral they accept for the securities they lend out. This would help fund selectors and investors make educated decisions on the risk they might have from securities lending within the fund and would lead to more educated decisions in the fund selection process. Even though some promoters may find this level of transparency hard to achieve, investors should claim a need for this information; they own the assets of the fund and the promoter is the fiduciary who should act in the best interests of the investor. On the other hand, it might be possible that regulators should ban all securities-lending activities from retail mutual funds, if fund promoters are not willing to disclose all the information needed by investors to make a proper evaluation of a mutual fund. After the financial crisis of 2008 investors have become very cautious on the use of derivatives, securities lending, and the involved collateral of mutual funds. I could imagine that it might be a competitive advantage for an asset manager to not be employing any of these techniques when the next crisis hits the market. The views expressed are the views of the author, not necessarily those of Thomson Reuters.

Principal To Launch Global Opportunities Equity Hedged Fund

By DailyAlts Staff The Principal Financial Group is actively working to expand its presence in the liquid alternatives arena. On July 9, the firm launched its first ETF, the Principal EDGE Active Income ETF (NYSEARCA: YLD ), which uses a risk-managed approach to invest “opportunistically” across a wide range of income-generating asset classes. This alternative income ETF joined the firm’s alternative mutual fund, the Principal Global Multi-Strategy Fund (MUTF: PMSAX ). And now Principal is planning the launch of a new liquid alternative, the Global Opportunities Equity Hedged Fund, according to a recent SEC filing . Global Opportunities Equity Hedged The Global Opportunities Equity Hedged Fund will seek long-term capital appreciation with lower volatility than the global equity markets. It will pursue these ends by means of investing in U.S. and emerging-market equity securities paired with equity derivatives at the time of purchase. Under normal circumstances, the fund’s holdings will include securities from at least three foreign countries, and foreign securities will constitute at least 30% of its assets. Portfolio managers Christopher Ibach, Xiaoxi Li, and Principal CIO Mustafa Sagun select investments on the basis of value and/or growth potential, and they use a hedging strategy intended to reduce volatility by investing in equity derivatives. Currency forwards may also be used to hedge currency risk. According to the fund’s SEC filing, its net exposure will vary over time, but the fund will always maintain more long equity exposure than it has short exposure through derivatives. Shares of the Global Opportunities Equity Hedged Fund will be available in A-, P-, and institutional-class shares with an investment management fee of 1.10% and respective net-expense ratios of 1.55%, 1.30%, and 1.25%. The minimum initial investment for A-class shares will be $1,000. P- and institutional-class shares have no minimums for qualified investors. Principal’s Other Alternative Fund The Principal EDGE Active Income ETF only launched on July 9, and thus doesn’t have a performance record to speak of. The Principal Global Multi-Strategy Fund, however, debuted back in October 2011, and has earned a three-star rating from Morningstar. For the year ending June 30, 2015, the fund had returns of 2.41%, ranking in the top 29% of all funds in its Morningstar category. For more information, visit principalfunds.com .