Tag Archives: latin-america

Duke Energy- Investors Do Not Like The Piedmont Deal, Nor Do I

Summary Duke Energy is expanding its natural gas operations in the Carolinas by acquiring Piedmont. Investors doubt the steep premium being offered for Piedmont, as do I. Duke has failed to quantify the anticipated earnings accretion as I think that the company´s acquisition track record is mediocre at best. The only real appeal comes from the dividend yield as earnings multiples are inflated due to the low interest rate environment. The increase in leverage makes me very cautious amidst the historical and relative steep multiples at which Duke is trading as the future of the industry is becoming more uncertain. Duke Energy ( DUK ) announced a sizable deal as the company is looking to acquire Piedmont Natural Gas ( PNY ) in a $4.9 billion cash deal. Investors in Duke balk at the high premium being offered for Piedmont´s shares, as I fail to see real appeal as well. Add to that the poor acquisition track record of Duke, an increase in leverage, and increasingly uncertain future for the regulated industry, and I am very cautious. For these reasons, shares remain a no go in my eyes as the dividend is the only appealing factor for the shares. Amidst risks to the valuation in case interest rates rise and non-compelling dividend growth, I would be very cautious. A Strategic Deal.. Duke is looking to expand its operations in the Carolinas and Tennessee as ownership of Piedmont will give the company access to a million customers in those states. Roughly 90% of these customers are residential and customer growth has averaged roughly 1.5-2% per year. These are fairly attractive growth rates in comparison to Duke which is reporting customer growth rates of around 1% per year. The increased scale and expansion of Duke´s natural gas platform are not the only reasons behind the deal. Both companies have been working together in the $5 billion Atlantic Coast Pipeline project. Piedmont has a lot of interests in other joint ventures as well including Hardy Storage, Pine Needle LNG Storage, the Cardinal pipeline and Southstar Energy Services, among others. It must be said that the vast majority of both earnings and assets are generated through Piedmont´s regulated utility business however. Besides increasing Duke´s scale, the deal allows for the expansion of its gas infrastructure platform and the transformation towards becoming a highly regulated business. Ahead of the deal, Duke generated 85% of its earnings from regulated utility operations in the Midwest, Carolinas and Florida. Roughly 10% of the earnings are generated from the international operations in Latin America as commercial wind and solar project generate the remainder of the profits. This latest deal will only increase the relative profit share of the regulated business. The company has not discussed cost or revenue synergies from the deal besides the strategic benefits. On the deal conference call , management actually admits that no synergies have been considered in the decision to pursue this deal. It must be stated that Duke has the ability to borrow cheaply. Additionally, Duke is making a large bet on continued oversupply of natural gas in North America, keeping prices low for a long time to come. This should make natural gas the preferred energy option for decades to come, at least in Duke´s opinion. This shifts the company away from coal based generation as the electricity business is suffering from lower long term demand for electricity following increased efficiency of usage. ..Comes At A Price To obtain ownership of Piedmont, Duke is willing to pay a roughly 40% premium for Piedmont´s shares. This translates into a purchase price of $60 per share. Including the $1.8 billion in debt, the deal price comes in at $6.7 billion. While this is a sizable amount, Duke expects to finance just $500 to $750 million in the form of newly issued equity with the remainder coming from additional debt. Despite the fact that the board of both companies have already agreed in favor of the deal, and Piedmont´s shareholders are likely to do the same given the fat premium offered, closing is only anticipated late in 2016. Regulatory approval is always a tedious issue in this industry, which makes that it takes more time before deals finally close. Despite the fact that Duke is paying a 40% premium, the company anticipated accretion to adjusted earnings per share in 2017. Unfortunately Duke does not quantify this anticipated accretion although it cites that the cheap cost of debt of 4% alone is sufficient to result in accretion. This is even the case if no synergies are being realized. Adding To The Long Term Targets The vast majority of Piedmont´s business is a regulated business which is allowed to earn a return on equity of 10-10.2% from its operations. Duke anticipates that the faster growth rate of Piedmont will improve the overall growth profile as it reinforces its position as the largest US utility business. The company previously anticipated that earnings will come in at $4.55 to $4.75 per share in 2015. The deal are complementing the company´s plans to grow earnings per share by 4-6% per year through 2017. Investors should like the sound of this as the company sticks to its 65-70% payout ratio, having paid dividends for 89 years in a row now. The deal actually allows the company to make a big step with its investments plans for the years 2015-2019. The company outlined a $23-$26 billion spending plan for these four years with respect to new power generation, infrastructure investments as well as compliance and other investments. By acquiring Piedmont, Duke will complete a major step with regards to its infrastructure investments. With the deal, Duke is pulling a lot of its investments forwards in time. This does have an impact, namely that the leverage position will continue to increase in the short to medium term. Duke itself operated with a net debt load of roughly $40 billion ahead of the deal as the purchase of Piedmont will increase this number to roughly $46 billion. This corresponds to pro-forma EBITDA of some $9.7 billion, for a 4.7 times leverage ratio. The Market Is Not Buying It Shares of Duke Energy have fallen some 2.5% in response to the deal, wiping out roughly $1.2 billion in shareholder value. This wealth destruction is pretty much equivalent to the $1.4 billion premium being offered for Piedmont. The skepticism of investors can be understood, even as the deal is relatively small compared to Duke´s enterprise valuation of roughly $84 billion. The negative reaction is driven by the large premium and the fact that the deal will face some uncertainty, given that Duke already has a large presence in the Carolinas. This could potentially raise some anti-trust issues down the road. Other concerns include the mediocre track record with regards to large strategic deals which Duke has made in the past. This mostly relates to the $26 billion purchase of Progress Energy back in 2012. This deal has created some problems for Duke in recent years as it made the company an owner of nuclear plants, as Duke ended up paying multi-million dollar settlements in the years following as well. Back in 2007, Duke Energy has actually spun-off gas assets into Spectra Energy (NYSE: SE ) . Ironically, it are similar kind of assets which the company is now aiming to buy back through the purchase of Piedmont. All these deals have not really paid off for investors. While pro-forma revenues of $25 billion have increased by two-thirds over the past decade, the outstanding share base has increased by 70% as well. As a matter of fact, the book value of the company and earnings per share have only moved down, so have dividends. Of course investors have received a stake in Spectrum, although that does not make up for the disappointing results. This makes that Duke´s prime attraction is the 4.6% dividend yield amidst a very modest track record. The trouble is that this yield is very attractive on a relative basis, as those looking for income have pushed up shares of ¨yield¨ plays in recent years. As a result, Duke is now trading at similar multiples as the general market. This makes shares very risky in case the interest rate environment will change and trend upwards. Add to that the increasing leverage and an increase in the uncertainty faced by the still regulated industry, and you understand why current levels do not look appealing for long term investors. This is based on my assumption that the regulated industry model will come under pressure as advancements in notably wind and energy power generation have the potential to undermine the regulated industry business model. If you combine everything you will note that this is a very dangerous situation for long term holders of the stock. While the strategic rationale behind the increased focus on gas makes sense, the premium seems very steep as much more infrastructure has gone for sale in the form of limited partnerships in the last year. The high valuation, increasing leverage, pricey deal and the long term uncertainty for the industry all outweigh the appeal of the current dividend.

Emerging Market Asset Flow Rebounds: ETFs In Focus

Emerging market equities seem to have gained some traction. The latest data from Bloomberg showed that emerging market ETFs experienced near $1 billion in net asset inflow last week ended October 9, driven mainly by movements in India, Mexico and Russia. This was a sharp rebound from the prior week ended October 2, when outflows from these funds more than doubled from the week-ago level. Inflows into emerging-market ETFs totaled $936 million last week, more than offsetting the $828 million in outflows over the previous two weeks. Stock funds gathered $982.4 million in assets but bond funds exhaled $46.4 million. Notably, the MSCI Emerging Markets Index rose 6.9% last week, the fastest pace since the week ended December 2, 2011. Per Bloomberg, India witnessed the biggest inflow with collections of $150.9 million, compared with an outflow of $25.4 million in the prior week. Stock funds accumulated $151.7 million while bond funds moved out $0.8 million. The huge inflow in Indian ETFs can be attributed to the Reserve Bank of India’s move to cut its key interest rate by 50 basis points (bps) to 6.75% in a bid to boost economic activity as well as the IMF forecast of India retaining the world’s fastest growing economy status. According to IMF, the Indian economy is expected to grow 7.3% in 2015, compared with 6.8% growth in China and 2.6% in the U.S. Mexico experienced the second biggest inflow. Investors added $135.9 million to this country’s ETFs last week, as compared to $35.3 million of redemptions in the previous week. Stock funds gained $141.4 million, while bond funds fell $5.5 million in the week. Latin America’s second biggest economy has been recovering from the oil price crash. Domestic strength, improving U.S. economy, decreasing unemployment rate and subdued inflation bode well for the Mexican economy. Russia recorded the third biggest movement with $133.9 million in inflows. Stock funds added $135.7 million while bond funds saw an outflow of $1.7 million last week. The surge in Russian ETFs can be attributed to the rebound in oil price and stabilization of the ruble, raising hopes that the nation’s economic situation may not deteriorate to the level apprehended. Below we highlight four emerging market ETFs that have experienced significant net asset inflow in the week ended October 9. Goldman Sachs ActiveBeta Emerging Markets ETF (NYSEARCA: GEM ) – $157.26 Million This recently launched smart beta ETF tracks the Goldman Sachs ActiveBeta Emerging Markets Equity Index, designed to generate returns by selecting equities based on four well-established attributes of performance – good value, strong momentum, high quality and low volatility. The fund has the highest exposure to Asia, ex-Japan (68%), followed by Europe, Middle East and Africa (18.3%) and Latin America (13.6%). About a quarter of the assets in its portfolio are tied to financial firms. The ETF has amassed roughly $184 million in its asset base while it trades in a volume of roughly 74,000 shares a day. It charges 45 bps in fees from investors per year. Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) – $139.29 Million This is the top asset grossing emerging market ETF, which follows the market-cap weighted FTSE Emerging Index that measures the performance of roughly 850 large and mid-cap companies in 22 emerging markets. This fund is highly focused on China (26.6%), followed by Taiwan (14.1%) and India (12.7%). Sector-wise, about a quarter of its total assets are related to financial services firms. VWO has garnered nearly $38 billion in assets and trades in a heavy volume of roughly 16 million shares per day. It charges 15 bps in annual fees and carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook. Market Vectors Russia ETF (NYSEARCA: RSX ) – $129.56 Million This ETF tracks the Market Vectors Russia Index, providing exposure to publicly-traded companies that are domiciled in Russia. The fund is heavily biased toward energy, followed by materials and financials. It has gathered around $2 billion in assets and trades in a hefty volume of nearly 12 million shares a day. It charges 63 bps in fees per year and carries a Zacks ETF Rank #4 (Sell) with a High risk outlook. iShares MSCI India (BATS: INDA ) – $119.14 Million INDA follows the MSCI India Index, which measures the performance of equity securities of the top 85% of companies in the Indian securities market. The fund gives the highest weight to the information technology sector, followed by financials and healthcare. It has garnered $3.8 billion in assets and trades in a solid volume of 2 million shares per day. It charges 68 bps in investor fees and carries a Zacks ETF Rank #2 (Buy) with a High risk outlook. Original Post

4 Commodity Currency ETFs Outshining Dollar To Start Q4

The China-induced global economic uncertainties lashed out on the most risky asset classes to close Q3 and restrained the Fed from hiking key interest rates almost after a decade. Though the Fed attributed a wavering global financial market and a subdued inflation profile as the main cause for the deterrence of a lift-off, the sailing wasn’t smooth at home too. This was because the U.S. economy reported sub-par jobs data in September. The year-to-date monthly pace of job gains now averages 198K and the pace for the last three months was much lower at 167K. This compares with the monthly average of 260K for 2014. A weaker jobs report crushed all chances of a sooner-than-expected rate hike in the U.S., as it points toward slowing U.S. growth momentum. As a result, this latest bit of employment information stabbed the strength of the greenback which ruled the currency world for over a year and did magic for most commodities and the related ETFs to start of the fourth quarter. Dollar ETF PowerShares DB US Dollar Bullish ETF (NYSEARCA: UUP ) lost about 1.5% in the last 10 days (as of October 9, 2015) while most commodity-centric currencies turned out as surprise winners. Apart from the range-bound U.S. dollar, an oil price rebound following falling crude oil production, the commodities behemoth Glencore PLC’s ( OTCPK:GLCNF ) ( OTCPK:GLNCY ) announcement to close its supply of many actively traded commodities from zinc to copper and a slowly stabilizing Chinese market (which happens to be a foremost user of metals) boosted trading in commodities. Prior to this, commodities witnessed horrendous trading and it goes without saying that such huge and prolonged sell-offs have made the commodities’ valuation so cheap that any single driver would easily take the commodity currency ETFs to new heights. Though we believe the trend might tumble once the rising rate worries are back on the table, at the current level many investors may try to remove some of the dollar risk from their portfolio and focus on currency ETFs that are outdoing the dollar to start Q4: Below, we highlight four such currency funds that are shooting ahead of the greenback in October: WisdomTree Brazilian Real Strategy Fund (NYSEARCA: BZF ) – Up 6.1% Brazilian real was at a two-decade low at the end of September. But central bank intervention, easing political dispute over the budget, a subsiding lift-off and a commodity market bounce added to the real strength to start Q4. Since, Brazil is a commodity-centric economy, the recent surge in real is self-explanatory. Brazil’s Congress okayed most of the budget cuts, pension reforms and tax hikes planned by Rousseff’s government to contain spending and limit above-goal inflation. This fund seeks to achieve total returns reflective of both money market rates in Brazil available to foreign investors and changes in value of the Brazilian real relative to the U.S. dollar. Both AUM and average daily volume are paltry at $15.4 million and 20,000 shares, respectively. The product charges 45 bps in annual fees and is down 23.1% so far this year (as of October 9, 2015). It has a Zacks ETF Rank of 5 or ‘Strong Sell’ rating with a High risk outlook. However, the fund added over 6.1% in the last 10 days. WisdomTree Commodity Currency Fund (NYSEARCA: CCX ) – Up 4.5% This fund provides investors exposure to the currencies and money market rates of countries commonly known as commodity exporters. It seeks to achieve total returns reflective of both money market rates in select commodity-producing countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. With this approach, investors can embark upon a variety of economies around the world. The product invests in eight currencies – Australian Dollar, Brazilian Real, Canadian Dollar, Chilean Peso, Norwegian Krone, New Zealand Dollar, Russian Ruble, and South African Rand – almost in equal proportions. The fund is often overlooked by investors as depicted by its AUM of just $6.3 billion and average daily volume of about 1,500 shares. It charges 55 bps in annual fees. The ETF was up 4.5% over the past 10 days. WisdomTree Dreyfus Emerging Currency Fund (NYSEARCA: CEW ) – Up 4.8% Thanks to the commodity strength, even emerging market currencies took the lead. Currently, the fund has a focus on Asian currencies (42%), followed by Latin America (25%) and Europe (17%). This currency ETF also sees solid volume of about 45,000 shares a day on comparable $57.1 million in AUM. CEW charges 55 bps in fees. CEW advanced about 4.8% in the last 10 days (as of October 9, 2015). Guggenheim CurrencyShares Australian Dollar Trust ETF (NYSEARCA: FXA ) – Up 4.3% This fund offers a great play to capitalize on the future rise in the Australian dollar relative to the U.S. dollar. It tracks the movement of the Australian dollar relative to the USD, net of the Trust expenses, which are expected to be paid from the interest earned on the deposited Australian dollars. The product has amassed $180.1 million in its asset base while trades in moderate volume of 45,000 shares per day on average. It has an expense ratio of 0.40% and was up 4.3% over the past 10 days. Original post .