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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.

USA

My key takeaway from the events over the last several months is that there is no place like home. It is apparent that U.S. economy is doing better than most and that U.S. based companies are more rapidly adapting to the global competitive landscape and are making the hard and needed strategic changes in their businesses to thrive, no matter what the economic landscape may be. Yes, that may be an overly simplistic generalization but it is by and large true. You cannot look in the rearview mirror any longer as these companies are changing so rapidly in front of your eyes. Take GE (NYSE: GE ) for example as it exits nearly half its businesses, namely finance related, and focuses entirely on its rapidly growing and higher return industrial businesses. Over $350 billion in assets are being sold off in the process. On the other side of the spectrum, take a look at Google (NASDAQ: GOOG ) (NASDAQ: GOOGL ) which announced on Thursday a new strategic focus moving forward. Its stock added a record $65 billion to its value in one day. I will discuss the banks later as there is no sector going through greater strategic changes to adapt to Dodd-Frank and a new global financial environment. Banks and financials remain the largest part of our portfolio and achieved multi-year highs last week. My investment process combines a top down global macroeconomic outlook with bottom up microanalysis of each region, industry and company. Quite frankly, in years past, I spent a lot more of my time deciding on asset allocation and sector emphasis based on my view of the global economy but now the dynamics of each region and each company within a sector are more complicated. I have to drill down further into each region, industry and company. I tend to run a more concentrated portfolio than most, as I must have first hand in-depth knowledge of each investment. I am an analyst at heart. Also my turnover tends to be low as I invest rather than trade. Once I understand a company’s strategy and buy into it, I monitor closely to see if it is adhered to. If so, I gain added confidence in the investment and if not, I pare back the position as there are many fish in the sea. My long-term objective is to double the value of each portfolio every 5 years including dividends and maintain liquidity at all times. I have successfully exceeded this objective for 35 years after fees. Recognizing and taking advantage of change is my greatest strength. Tomorrow is not today nor yesterday. I tend to look for long-term trends. Simplistically, I invest long in companies increasing volumes/revenues with rising margins and rates of return on capital as well as a competitive advantage and short those on the other side of the spectrum. This investment strategy is time tested and works. Now let’s take a look at what happened last week by region and consider the investment implications going forward. Approval of the third bailout by Greece and members of the Eurozone was the main news out of the region last week. It is clear to many members of the Eurozone, the IMF and to me that Greece’s economic and financial problems are far worse than initially believed and probability of success even with this bailout is very low. The IMF chimed in that the Euro just does not work in its current form and that the Eurozone needs major financial and regulatory reforms to succeed. Sound familiar? It was obvious that the ECB granting Greece another 85 billion euros over three years would weaken the euro and it did falling below 109 to the dollar. Germany ironically is the clear winner of a weaker euro benefiting exports although the government won’t admit it. The European stock markets rose and interest rates fell in Spain and Italy but rose in Germany. Basically the can was kicked down the road and Greece exiting the Euro was postponed for another day. Major change is needed in the Eurozone to succeed and be a meaningful global economic unit. Doubts remain about China despite the continued rally in the stock market and a reported 7% gain in its economy in the second quarter. Chinese banks lent a staggering $209 billion to margin lenders to stabilize the markets. My concern is that the government is resorting to short-term fixes that run counter to long-term goals. Secondly, I was bothered that outstanding loans for companies and households rose to 207% of GNP at the end of June up from 125% only 7 years ago. China has not de-leveraged like in the United States and Europe. I still hope that the government enacts programs to reduce leverage and excessive risk to build a sounder foundation for the future. Fortunately, the government has the resources to smooth the transition to a consumer led economy. It will take time and patience but I am confident that China can sustain long-term growth over 6% per annum. The economic outlook for the United States seems pretty good. The Fed’s Beige Book was released last week confirming a continued improvement in the domestic economy with a pick-up in employment. Important data points reported last week included a 0.3% increase in industrial production, capacity utilization rose to 78.4%, housing starts rose 9.8%, consumer prices rose 0.3% in June but only 0.1% over the last year, producer prices rose 0.4% while import prices fell 0.1%, the budget deficit remained near a seven year low and finally retail sales, the big one, fell a disappointing 0.3% in June. Janet Yellen, Fed Chair, during both sessions before Congress reiterated her view that the first rate increase will come this year and that future increases will be scattered and moderate depending on the economic data points. I believe that the Fed is hamstrung by problems overseas, strength in the dollar and weakness in commodity prices. The dollar hit a 10-year high last week. Finally, if it matters, the White House cut its projections for growth in 2015 and 2016 to 2.0% and 2.6% respectively and lowered its inflation forecast, too. I should add that the nuclear deal with Iran appears to be moving forward and its impact on oil prices declining was seen right away. In addition, Japan lowered its growth targets for 2015 and 2016 and maintained its commitment to expanding the monetary base by $648 billion over the next year. My core beliefs remain intact so I see no reason to change my positive fundamental outlook for stock markets while remaining negative on bond markets as the yield curve steepens. But what became crystal clear last week was that all stocks are not alike and there are tremendous opportunities to make money if you recognize and invest in change. I mentioned earlier GE, Google and the banks. But the list could go on and on as their managements are acting as their own activists and are dramatically altering their business plans to succeed in a slow growth competitive world. I have never seen such broad based movement in companies large and small. And it is starting to happen overseas, too. The bottom line is that United States domiciled companies are leading the way in change. In addition, our economy is acting better than most others and has also built a strong foundation for the future. The dollar is showing the way. A successful investor needs to be patient and let change play out, as the benefits over time will be enormous. My biggest concern remains lack of growth and politics. But the positives far outweigh the negatives. If there ever was a time to review all the facts, step back and reflect, pause once again and then decide on asset allocation and do hard research on specific investments, it is now. Change is everywhere and as Soros would say “play the trend until it ends.” Invest Accordingly!

GLD: Capitulation Time?

Summary Given what’s occurring in the gold stocks, it seems only a matter of time before GLD breaks down. When it’s all said and done, the 2011-? bear in gold stocks might be the worst on record, one that will most likely never be beaten. For the first time, I see the finality of this bear market in GLD. The reason I’m bullish on GLD for the long-term is continued strong money supply growth, flat to declining gold production, increasing interest payments on US debt, and low valuations. Most gold companies will be able to survive a lower price environment. It’s been a few weeks since I gave an update on the SPDR Gold Trust ETF (NYSEARCA: GLD ). In my previous article, I discussed the move in GLD after the Federal Reserve meeting concluded: GLD has risen to the 115 level, as it rocketed higher after the Fed meeting this past Wednesday. So just more of the same indecisiveness; however, the gold stocks aren’t really following GLD’s move to the upside. From the beginning of this bear market, it’s the gold stocks that have been leading the way lower. GLD’s strength might just be temporary due to a knee jerk reaction to the Fed statement. In the past, these initial moves turn out to be incorrect in terms of which way GLD is ultimately going to go. Since that time, GLD has weakened considerably and actually temporarily moved below the 110 level today (Wednesday), which is major support that held in November 2014 and March 2015. If this is the final sell-off of this bear market, then that 90-100 target that I have been talking about since last year comes into play – and fast too. The weekly MACD also shows another negative crossover, which could portend new lows are ahead. (Source: Schwab) Given what’s occurring in the gold stocks, it seems only a matter of time before GLD breaks hard to the downside. The NYSE ARCA Gold Bugs Index ($HUI) is comprised of 16 gold companies and it includes the biggest names in the sector. The index has been incredibly weak as of late, and when you see the gold producers selling off like this, usually GLD isn’t too far behind. This looks like capitulation, which I have been waiting many months for. So without question, if GLD breaks aggressively lower, this will be the final sell-off for this bear market. I wasn’t sure if it was going to happen but now the likelihood grows everyday the more gold stocks collapse. This would be a most welcome turn of events as this bear market is very long in the tooth. When it’s all said and done, the 2011-? bear in gold stocks might be the worst on record, one that will most likely never be beaten. The HUI hit an all-time high of 630 in late Summer of 2011, which means it has declined 78% from that point to today’s levels. If GLD enters that final leg lower, you could get some major panic selling in the shares of these precious metal companies. It’s not out of the question for the Gold Bugs Index to be cut in half if GLD hits 90 (or about $950 for gold). That would put the HUI at 70 and change, which is an 89% sell-off from peak to trough. We have to go back to the Great Depression to see that kind of carnage in a U.S. stock index, as the Dow declined from 381 in 1929, all the way to 41 by 1932. An 89% sell-off as well. But it only took a few months for the Dow to double off of the lows, and a year later it had tripled from the bottom. I expect a similar rebound in terms of percentage and swiftness should the HUI move substantially lower over the coming weeks/months. (click to enlarge) (Source: StockCharts.com) No market index is going to lose 80%-90% of its value and just remain at those levels for years. These size percentage losses only occur in major oversold events where investors misprice assets to the extreme. At bubble tops, peak prices last for just a few days/weeks, the same goes for bear market bottoms. The lows in the Nasdaq during 2002 (after the tech/internet bubble burst) only lasted a few days. 2-3 months later the index was up 50%, a year later the Nasdaq was up 100% from the lows. If we go back and look at the previous bear market in the HUI (which ended in late 2000), the bottom was very short-lived. History will repeat here as well. These gold stocks are already at deep deep discounts to their fair values. The further they move to the downside from current levels, the tighter the rubber band is pulled, and the faster and harder it will snap back. I’m Still On The Sidelines With GLD and the gold producers acting very weak over the last few months, I have been in mostly cash. For the first time though, I see the finality of this bear market. During previous lows that have occurred over the last few years, it was questionable. While gold and precious metal share prices were cheap, they weren’t at extremes levels that would mark a final bottom. This would be more definitive now, as gold anywhere under $1,000 is simply unsustainable. I still believe that GLD is in its bottoming stage while the stock market is in its topping stage. I don’t see a market crash occurring in the next few months, rather I expect this chopping action to continue. Marginally higher highs could be hit in the major US indices, or we could just see a series of lower highs. Next year though (and maybe towards the end of this year) will not be pretty for the market. Many investors look for reasons why GLD has been performing so poorly since 2011-2012. This has nothing to do with the strength of the USD, as so many people believe. It’s simply the result of the huge bull market in stocks that has occurred. But the stock market is not attractive at the moment as valuations are extremely stretched. And with the Fed about to embark on raising rates probably sooner rather than later, it’s time to be booking profits. Why Am I A Long-term Gold Bull? I’m currently bearish on GLD’s short-term outlook, long-term though I’m pounding the table. I know for a lot of investors it’s hard to see this sector ever returning to its former glory of 2011. But this is going to be the best performing asset class over the next several years. Gold will continually move higher in price as long as we have a non-gold backed fiat currency system. You have M2 surpassing the $12 trillion level in the last few weeks. With the money supply constantly expanding at a very brisk pace, it’s only a matter of time before the gold price catches up. (Source: Federal Reserve) You also have the major gold producers showing a flat to declining production profile over the next several years. This is in stark contrast to what the landscape looked like in 2011, when many gold projects were being developed and growth in output for most gold companies was very strong. Some might worry about the Fed raising rates, which investors believe would put further downward pressure on the price of gold. But we are in a negative interest rate environment, and the Fed Funds rate would have to hit 2% for that to change. I doubt the Fed gets past 1.0-1.5% before this economy starts to buckle. That figure could move higher if inflation and GDP growth pick up in the short-term. But it’s not just the economy that will feel the pressure of rising rates, it’s the U.S. Government’s debt position that will be impacted the most. The Government is a huge beneficiary of this low interest rate environment, as it means lower interests. The second rates increase, so will interest payments. If rates “normalize” to the 4% level, interest will skyrocket. From the Congressional Budget Office’s updated projections for 2015-2025: Interest Payments. CBO expects the government’s interest payments to rise sharply during the coming decade , largely as a result of two conditions. The first is the anticipated increase in interest rates as the economy strengthens. Between 2015 and 2025, CBO projects, the average interest rate on 3-month Treasury bills will rise from 0.1 percent to 3.4 percent and the average rate on 10-year Treasury notes will rise from 2.6 percent to 4.6 percent. Second, debt held by the public is projected to increase significantly under current law….Together, the rising interest rates and federal debt are projected to more than triple net interest costs-from $229 billion in 2015 to $808 billion in 2025. So as confirmed by the CBO, should rates normalize, the interest that the U.S. will be paying on the debt will go from $229 billion to $808 billion over the next decade (this doesn’t include interest credited to Social Security and other government trust funds). The faster the Fed raises rates, the faster these payments balloon. The simple fact is the U.S. will be running $1+ trillion deficits again in the not too distant future. Of course GDP is projected to increase as well over the next decade, so a $1 trillion deficit won’t be the same in terms of “percent of GDP” as it was say 5 years ago. But that’s also a reflection of the amount of inflation/growth in the system, so gold will respond positively to this. The U.S. is still dealing with a ever increasing debt obligation that simply can’t be repaid. This stealth inflation that has been in place since the 2008 financial crisis will remain. Gold will have its turn as it must adjust for higher levels of money supply growth. The biggest reason though to be a long-term gold bull is simply because of the extremely compelling valuations in the sector. Sure, they will get even cheaper if GLD takes one last plunge. It wouldn’t be out of the realm of possibility to have many producers/developers/explorers selling at or below cash values soon, as their businesses will be worth nothing to investors. This is exactly what occurred in tech/internet stocks in 2002, the general stock market in 2008, and housing in 2009-2010. At a certain price point, an asset becomes as close to a “sure thing” as it will ever be. What’s The Timing Of This? Should GLD break down decisively, I’m expecting this bottom/capitulation process to last 2-4 months for GLD and the gold stocks. That would mean investors should be looking to be buy sometime in the September-November timeframe. The window to acquire GLD and precious metal shares at or near the absolute lows will be small and will not hold for many days. Timing though isn’t extremely important providing investors are purchasing somewhere near the bottom. Once the bottom is reached, I expect a V-shaped recovery with GLD moving back swiftly to the 115 level. Will There Be A Mass Wave Of Bankruptcies In The Gold Stocks? Given a possible low of $950 for gold, and the debt loads for many of these companies in the sector, investors might assume that we will see a wave of bankruptcies come this Fall. But that is unlikely for a few reasons. 1. While net debt levels are high for some gold producers, much of this debt is long-term in nature. Barrick Gold (NYSE: ABX ) for instance, the most indebted company in the sector, has plenty of cash on hand to cover its debt obligations (including interest) for the next several years. The majority of companies will be able to survive a trip down below $1,000. Most of the weak ones have already perished (Allied Nevada for example), the rest have adapted to this low gold price environment and can withstand more downside. Unfortunately their stock prices will suffer. 2. As I mentioned earlier in this article, as well as in previous articles on the sector, gold under $1,000 isn’t sustainable. The simple reason is cash costs will never be able to get down to that level across the industry without a serious supply disruption. And we haven’t had a big enough increase in total gold output worldwide over the last 15 years that would warrant/necessitate a decrease in production. Gold producers have done a tremendous job with reducing their costs structures since the precious metal started to decline in 2011, but to ask them for more is too much. Everything that could be done (to reduce All-in Sustaining costs), has been done. The only other avenue would be to take offline some of this lower margin supply. I just don’t see that happening though because of the disruption this would cause to the industry. In Summary This feels like the start of capitulation in GLD, and in typical fashion it’s the gold stocks leading the way lower. Should GLD break down hard (and we don’t have some last gasp stick save event), I’m expecting the ETF to bottom out around the 90-100 region (probably closer to 90). The gold stocks have much further downside than GLD, and we could see the HUI fall as much as 90% from the 2011 peak when it’s all said and done. There is much to be bullish about when looking at the long-term for GLD. Production growth is flat to declining, M2 is still rising at a very strong pace, net interest for the U.S. will skyrocket which will cause the deficit to hit $1 trillion again, and valuations in the gold sector are extremely compelling already. If “this is it” then I expect the bottoming process to last for 2-4 months. We won’t see a mass wave of bankruptcies in the sector either during that time. Net debt levels are high for some gold producers, but much of this debt is long-term in nature. I also don’t expect gold to remain under $1,000 for long, so it won’t be an issue for most companies. 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.