PotlatchDeltic Corporation (PCH) CEO Mike Covey on Q3 2020…

PotlatchDeltic Corporation (NASDAQ:PCH) Q3 2020 Earnings Conference Call October 27, 2020 12:00 PM ET

Company Participants

Jerry Richards – Vice President & Chief Financial Officer

Mike Covey – Chairman & Chief Executive Officer

Eric Cremers – President & Chief Operating Officer

Conference Call Participants

Ketan Mamtora – BMO

Steve Chercover – D.A. Davidson

Paul Quinn – RBC Capital Markets

Mark Weintraub – Seaport Global

Buck Horne – Raymond James

John Babcock – Bank of America

Operator

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Third Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Jerry Richards

Good morning, and welcome to PotlatchDeltic’s Third Quarter 2020 Earnings Conference Call. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com.

I’ll now turn the call over to Mike for some comments, and then I will cover our third quarter results and our outlook.

Mike Covey

Thank you, Jerry, and good morning. Historic third quarter spotlights the power of PotlatchDeltic’s leverage to lumber prices. Timberlands and Wood Products as well as the total company all established new quarterly EBITDDA records this quarter. Although lumber prices are currently declining from unprecedented highs, we expect fourth quarter EBITDA will be higher than third quarter’s $135 million.

As a reminder, we expect to close a large Minnesota conservation sale in the fourth quarter. We also believe that strong housing fundamentals point to a solid outlook for lumber pricing.

I want to thank our employees, whose outstanding execution on all three businesses drove our strong quarterly results. This includes their continued focus on operating safely during this challenging time. Safety remains our top priority in managing the risks presented by the COVID pandemic requires continued diligence.

Our Wood Products business generated $82 million of adjusted EBITDA in the third quarter. We ran as much overtime as we could in our sawmills to meet strong customer demand, and our Saint Maries and Warren sawmills, both set quarterly shipping records.

Overall, our lumber shipments exceeded the top end of the range that we provided on last quarter’s earnings call by 11 million board feet. We ended the third quarter with a lumber order filed that extends into early November. While it will be down sequentially, we expect Wood Products’ adjusted EBITDA to remain well above trend levels in the fourth quarter.

Our Timberlands business harvested 1.7 million tons in the quarter, which is a quarterly record. Given that about 70% of our Idaho sawlog deliveries are indexed to lumber prices on about a six-week lag basis, we expect our Idaho timberlands adjusted EBITDA will remain strong in the fourth quarter.

Sawlog pricing remains relatively flat across our Southern markets, with little change expected anytime soon. In our Real Estate business, we continue to expect that the sale of approximately 72 acres in Minnesota to the conservation fund for about $48 million will close in the fourth quarter.

In addition, sales activity in our Chenal Valley Masterplan community in Little Rock has fared better than we expected when the COVID pandemic began, and we expect to sell approximately 130 residential lots for the year.

Looking ahead, housing fundamentals are stronger than at any point since the great financial crisis. This sets the stage for continued growth in lumber demand. U.S. single-family housing starts continued to increase through the summer and exceeded 1.1 million units in September.

That’s single-family alone. This was a 9% increase from August, and is up 22% compared to last year. Single-family starts are important to lumber demand, because each single-family home utilizes three times more lumber than does a multi-family start.

Many industry experts believe that the new residential construction — that new residential construction is on the cusp of a multiyear boom. Massive underbuilding since the great financial crisis, record low inventories of homes for sale, historically low mortgage rates and millennials entering their prime home buying years, all set the stage.

U.S. housing permits at 1.55 million units in September, homebuilder confidence at an all-time high and September order growth of 49% reported by four homebuilders last week, all suggest that housing construction will remain robust in the near-term. Additionally, a shift from urban to suburban living appears to be positively affecting housing demand.

The repair and remodel segment is also expected to continue to grow. That view is supported by the age of U.S. housing stock, which is now 42 years on average high levels of home equity and the work-from-home trend.

The random lengths framing lumber composite peaked at $955 per thousand board feet in September, or 64% higher than the prior nominal peak which was reached, in June of 2018. The record high prices reflected industry inventory drawdowns at the beginning of the COVID crisis, combined with strong demand and COVID-related operating disruptions.

Now the long order files stretch into a seasonably weaker part of the year, the pace of new lumber orders has slowed down and as expected lumber prices have begun to retreat. That said, underlying lumber demand remains strong. And lumber inventories are estimated to be at the low end of their historic range.

The strong housing and repair and remodel outlook, coupled with the limited announced lumber supply increases suggest that lumber prices should settle, at attractive levels. We are very optimistic about the setup heading into the 2021, building season.

Switching now to capital allocation for a minute, we returned $96 million to shareholders in the form of dividends and share repurchases, so far this year. We are committed to growing the dividend sustainably which we’ve increased 116%, since 2012. Discretionary mill capital projects represent some of for our highest potential returns.

We recently added $14 million of new projects to the slate, with a weighted average IRR of about 35%. We plan to complete these attractive projects, over the next 18 months. Accretive acquisitions represent the third leg of our capital allocation priorities. We are invested in acquiring timberlands, mills or a combination of the two, near our current operating areas.

We recently published our inaugural environmental, social and governance report in September. PotlatchDeltic has a strong ESG story. And we’re committed to do our part, to mitigate climate change. And continue our legacy of responsibility, across the ESG spectrum. We look forward to updating you regularly on our progress in this area.

To wrap-up my comments, business conditions remain good. We expect to report strong results for the fourth quarter as well. PotlatchDeltic is well positioned to take advantage of favorable industry fundamentals. And our strong liquidity and low leverage provide a high degree of flexibility, as we seek to maximize shareholder value.

I’ll now turn it back to Jerry, to talk about the third quarter and our outlook.

Jerry Richards

Thank you, Mike. Starting with page four of the slides, adjusted EBITDDA of $135 million, in the third quarter was $100 million higher than the second quarter. The increase was driven primarily by the historic run in lumber prices. And seasonally higher harvest volumes.

I’ll now review each of our operating segments. And provide more color on the third quarter results. Information for our Timberlands segment is displayed on slides 5 through 7. The segment’s adjusted EBITDDA was $59.7 million in the third quarter, compared to $25.6 million in the second quarter.

We harvested 555,000 tons of sawlogs, in the North, in the third quarter. This is up seasonally from the 303,000 tons that, we harvested in the second quarter. Northern sawlog prices were 30% higher on a per ton basis in the third quarter, compared to the second quarter.

The higher sawlog prices were primarily the result of significantly higher prices, for indexed sawlogs. In the South we harvested 1.1 million tons in the third quarter. This was 15% higher than the second quarter and reflected strong sawlog demand. Our Southern sawlog prices were 2% higher in the third quarter compared to the second quarter.

A higher proportion of higher-priced hardwood sawlog of volume, more than offset slightly weaker pine sawlog prices. Turning to Wood Products on slides 8 and 9 adjusted EBITDDA was $81.7 million in the third quarter, compared to $10.9 million in the second quarter.

Our average lumber price realization increased 55% from $412 per thousand board feet in the second quarter, to $637 per thousand board feet in the third quarter. Note that, the effect of increasing lumber prices on our results lags the spot prices reported by random links by roughly four weeks due to our record order file link.

To provide context, it’s helpful to look at our lumber prices by month. Our average lumber price realizations increased about $100 per thousand board feet in July relative to our second quarter average. They increased another $100 per thousand board feet in August and then accelerated to $779 per thousand board feet in September. The September average price is 22% higher than the third quarter average.

Lumber shipments increased from 249 million board feet in the second quarter to 291 million board feet in the third quarter. Higher production hours led to better fixed cost absorption, which more than offset the effect of higher index log costs in our Idaho mills.

Moving to Real Estate on slides 10 and 11. And the segment’s adjusted EBITDDA was $13.4 million in the third quarter compared to $9.3 million in the second quarter. The increase was primarily due to sale of more rural acres compared to the prior quarter.

Shifting to financial items, which are summarized on slide 12. Our total liquidity remains strong at nearly $530 million. This amount includes $149 million of cash and availability on our revolver, which remains undrawn. We did not repurchase any shares during the third quarter.

The 10b5-1 plan that we announced last month becomes effective this Thursday. This reflects our ability and commitment to repurchase our shares at attractive prices as part of our broader capital allocation strategy focused on increasing shareholder value over the long-term.

We plan to refinance $46 million of debt scheduled to mature in December 2020 and have locked the interest rate. Annual interest expense will decline approximately $800,000 on this debt beginning in December.

Capital expenditures were $10.7 million in the third quarter. As Mike mentioned, we added some high-return mill projects to the slate. We currently expect that our capital expenditures will be $46 million to $49 million in 2020. Note that the amounts I just mentioned include real estate development expenditures, which are included in cash from operations in our cash flow statement and exclude timberland acquisitions.

I will now provide some high-level outlook comments, the details are presented on slide 13. Harvest volumes in the North are planned to be seasonally lower in the fourth quarter compared to the third quarter. We expect Northern sawlog prices to increase significantly in the fourth quarter due primarily to higher index prices as well as higher cedar sawlog prices.

Harvest volumes in the South are expected to decrease seasonally in the fourth quarter. We expect Southern sawlog prices to be comparable to the third quarter. We ended the third quarter with a lumber order file that stretched into early November. Our average lumber price thus far in the fourth quarter, including orders booked but not yet shipped is approximately 7% higher than our third quarter average lumber price.

We expect the long order files will dampen the sequential decline in our fourth quarter realizations relative to print prices. As a reminder a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis. We plan to ship 260 million to 270 million board feet of lumber in the fourth quarter.

Shifting to Real Estate, we expect to sell 73,000 to 74,000 acres of rural land and approximately 60 to 70 Chenal Valley lots in the fourth quarter. We still expect to close the previously announced 72,000 acre Minnesota transaction in the fourth quarter.

Overall, we expect fourth quarter total adjusted EBITDA to be higher than the third quarter, which would establish a new quarterly record for the company. The amount of the sequential increase depends upon the level at which lumber prices settle.

The primary risk to achieving our fourth quarter outlook remains the pandemic’s potential to disrupt our mill operations. We’re encouraged by industry fundamentals and we believe that we are well-positioned to grow shareholder value over the long term.

That concludes our prepared remarks. Lindsay, I’d now like to open the call for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Ketan Mamtora with BMO. Your line is now open.

Ketan Mamtora

Good afternoon, Mike, Eric and Jerry. And congrats on a strong quarter.

Mike Covey

Thank you.

Jerry Richards

Thanks.

Ketan Mamtora

First question maybe to start-off on that. Some of the projects that you all highlighted on the lumber side, can you just clarify how much of that will show up in 2020 versus maybe 2021? And if you can just highlight kind of maybe one or two kind of big projects within that and what you all are doing there?

Eric Cremers

Yes. So Ketan, this is Eric. As Mike and Jerry had mentioned, we’re going to pull forward about $14 million of capital projects into our current thinking for our [Indiscernible]. Of that $14 million, roughly $6 million will get spent this year, $5 million will get spent in 2021 and then about $4 million is going to get spent in 2022.

Some key projects that we’ve got at our Ola sawmill, we’re going to put in a green stacker, a new stacker. Right now, that mill’s production volume is constrained by the stacker. And by adding the new stacker which will happen early next year, we expect our production volumes to increase at that Ola sawmills. Another key project for us is, also — this will happen in Q2 of 2021. But our Bemidji mill, we are going to put in a new auto grader.

As you probably are aware, our recovery — excuse me, our grade yields at our sub mills are really important and help us serve our home center customers. So that new auto grader is going to increase our high-grade subs that we produce at that Bemidji sawmill. Those are just some examples.

Ketan Mamtora

Got it. That’s very helpful. And then, just turning to lumber realization and I was a little bit surprised at pointing to Q4 realization kind of just down quarter-over-quarter, given sort of the lengthy order files and given how much prices continue to go up through Q3. Maybe just help provide some sort of color on what are the — either sort of the offsetting things or some other things that I may be missing?

Eric Cremers

Yes. So Ketan, our price in Q3 was around $637, it was our gap price. We are expecting prices to fall in Q4 mid single-digit kind of a number. If you look at what resi is thinking, if you look at what FEA is thinking, they’re talking about 15%, 20% kind of drops for lumber prices in Q4. So you saw a gap in Q3. It looks like the index did a lot better than us due to the lag in prices, but now, it’s going to reverse as we get out into Q4.

And while we were shipping in August and September out into October and November, there is going to be a December price and that December prices who knows where it’s going to settle out it, but it may be down in the $500 kind of range. So, that’s going to pull the average down for the quarter. But like I said, we expect to do much better than the index for the quarter.

Ketan Mamtora

Got it. So, did I hear you correctly that, you said you expect your realizations to be down sort of mid-single digits on a percentage basis in Q4?

Eric Cremers

That’s correct.

Ketan Mamtora

Got it. That’s very help. And then just final question from my side, before I turn it over. On capital allocation, net leverage is down to just a little over two times. Q4 should be another strong quarter from a cash standpoint. Just sort of — I’m just curious to sort of understand, how you all are thinking about whether it’s in terms of leverage target or do you sort of feel comfortable building some sort of cash considering the volatility in lumber prices?

Jerry Richards

So Ketan, this is Jerry. In terms of leverage, our overall goal is to keep leverage kind of under four times through a cycle. And certainly, it’s moving towards one as we’ve talked — as we’ve discussed publicly recently. So, leverage is really low. And certainly, you look at it on a relative position that gives us a lot of strength and a lot of financial flexibility as we think about allocating capital to grow shareholder value over time.

So we’re not going to borrow money just for the sake of keeping leverage higher in the range, within the range of our target. In fact, we’re getting ready to refinance some debt, but certainly don’t have any near-term plans to borrow. If we were, it most likely be because, there was an attractive large acquisition. So, the short answer is, I think it’s most important to invest the excess cash in the right type of return opportunities as opposed to putting it to work near term. And given high valuations on the mill side as well as kind of light activity on the timberland side, I think it’s fair to say that we probably will hold a bit excess cash for a bit, but we are very excited about the opportunity to look for opportunities to put that cash to work.

Ketan Mamtora

Got it. That’s very helpful. I will turn it over.

Operator

Our next question comes from the line of Steve Chercover with D.A. Davidson. Your line is now open.

Steve Chercover

Thanks. Good morning, everyone.

Mike Covey

Hi, Steve.

Steve Chercover

So I wanted to start with Minnesota. Once you’ve completed the land sale there, I think, you’ll be down to about 30000 acres in the state so I would assume that’s barely operational scale. So does the residual land there consist of HBU?

Eric Cremers

Yes. So what’s going to happen after we sell a large number of acres to the conservation fund here in the fourth quarter, we’re still going to have some residual acres left over maybe 20000 or so. But don’t forget that 16 of those are already contracted for again with TCS and what we call the Plan B transaction. About half of that is going to go in 2021 and half of that is going to go in 2022. So there’s going to be a couple of thousand acres left over once we’re done here that are unspoken for. And we continue to believe we’ll sell those out probably in 2021 if I had to guess.

Steve Chercover

Got it. Okay. Thanks for clarifying that. And then I want to talk a little bit about the Saint Maries sawmill. I mean that’s — I think — it’s 185,000 board feet. Can you tell us how much of that is cedar? Because cedar has still got ahead of steam and it looks like it’s going to be really good for 2021.

Eric Cremers

Yes. Steve, we don’t produce any cedar at our Saint Maries sawmill. We do produce a lot of cedar volumes about 10% of our Idaho sawlog harvest each year is cedar. And cedar continues to perform very well. Prices were up about 20% in Q3 and we’re looking for about another 12% here in Q4. Cedar demand is really driven by a lot of the repair and remodel work that you hear about. So we’re continuing to be optimistic about Cedar.

Mike Covey

We sell those logs to half a dozen customers in the Northwest.

Eric Cremers

Yes. And they process them.

Steve Chercover

Got it. Okay. Thanks for that clarification. And then given your optimism for 2021, maybe you can hazard a guess of what your 2021 tax rate might be?

Jerry Richards

Steve, we will come back to you on that one once we go through our budgeting process. So not prepared to give any, sort of, 2021 guidance on this call. We’ll do that on the Q4 call.

Steve Chercover

Can’t blame us for trying. Okay. Thank you.

Jerry Richards

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Paul Quinn with RBC Capital Markets. Your line is now open.

Paul Quinn

Okay. Great. Thanks, guys. I got to call late so I sort of missed some of the front-end stuff, but I’m just curious as to your — I mean, obviously, balance sheet is in a great spot and it looks like it’s going to improve going forward. But what are your capital allocation priorities at this point?

Mike Covey

Well, this is Mike. We spoke to that a little bit earlier, but so far this year, we have done a combination of — in returning cash to shareholders and the share repurchase that we executed on in the first half of the year as well as obviously the dividend continues. With the cash that we have on the balance sheet and growing, we’re certainly in a meaningful position to do an acquisition if one should come along that is either timberland or timberland and mills that are adjacent to our own property that continues to be one of our priorities for kind of geographic compatibility with where we already are.

We stepped up and accelerated a little bit Paul some CapEx this year in the Wood Products business just $14 million. It’s kind of above and beyond the normal amount on some attractive high-return projects. So I think in sum — and as you probably can infer the balance sheet’s in solid shape. We’ve got debt in a position where we really can’t do much more with a weighted average cost of debt of about 2.3% I think. So there’s really not a lot of opportunities there. So really it comes down to acquisition opportunities growing the dividend. And if we see our stock fall significantly below what we think is fair value then we’ll buy back our stock through a 10b5-1 program we just put in place which goes effective this Thursday.

Paul Quinn

Okay. That’s great. And then just talking about the M&A opportunities. I think you referenced high valuations at the mill side. Just wondering how high those are and what the expectation on the timberland side for potential acquisitions?

Mike Covey

Well. The timberland acquisition pipeline is — it’s been pretty quiet, for the whole year. But it’s starting to see a little bit of life. We’ve seen a couple of properties that have come to market, through investment bankers and others. So, there’s starting to be a little bit of activity on the timberland side and at least in the U.S. South.

And on the mill side there’s not been a lot of transactions. But certainly based on the cost of some of these new construction projects, which I think are north of $600 per thousand board feet. You have to think that the valuations on the mill side are pretty high. And obviously buying at the top of this cycle has never been a way to measure success.

Paul Quinn

All right, that’s all I had. Best of luck, guys.

Mike Covey

Thanks.

Operator

Our next question comes from the line of Mark Weintraub with Seaport Global. Your line is open.

Mark Weintraub

Thank you. And just one more on capital allocation, in particular, how would you be thinking about the dividend recognizing it’s a Board decision. It’s been a few years, since you made a move on it. What sort of would have changed, in terms of the cash-generating capability that would support a type of move in the dividend? And if there’s any sort of, directional sense you could share that be appreciated.

Mike Covey

Well. We always use the word sustainable and dividend, in the same sense. We’ve tried to make dividend increases that are sustainable. And we don’t want to have to go through a period of either suspending it, or lowering it.

In the recent events that have given us a bit more confidence certainly the Deltic acquisition is — I think we’ve exceeded the synergy expectations that we had there, largely on the backs of a really strong lumber market. And a really strong real estate market on that property that we didn’t really foresee.

That’s done better than expected. I think that would be one thing, we’d point to today the dividend can be supported by a stronger business there than we thought. The Idaho sawlog price recovery since the great financial crisis has been really exceptional.

The cedar market is part of that. And that’s tended to be, I think a sustainable increase step-wise, that’s made a difference. The higher return Wood Products projects, those can come and go with the vagaries of the lumber market.

But those are a couple things that we’d point to. And I think we’re gaining confidence that especially with the cash balance that we have, that are raising the dividend on a modest amount is a pretty low-risk proposition and is well substantiated by the strength of the business.

Jerry Richards

The only thing that I would add to what Mike just said Mark, is the fundamental underlying demand for lumber remains pretty positive, the story does, if you think about where housing starts are headed. We’ve seen a lot of people are forecasting starts are heading back to 1.6, 1.7, over the next few years.

Repair/remodel markets are incredibly strong. So we’ve got a generally pretty bullish outlook on, lumber demand base case. As Mike said, there’s not a lot of new mill construction right now. And it’s costing over $600, a thousand of capacity to build a new mill. And it takes two years to get it done. It’s hard to see people stepping up to make those kinds of investments. So we have a fundamental, favorable outlook on lumber.

Mark Weintraub

All makes sense. Thank you. Just one little quick follow-up too, on the lumber, you had mentioned, shipments 260 million to 270 million. And then, when you gave the up 7% you noted that, that included shipped plus already booked. Roughly how much of that 260 million 270 million might effectively have been included in the plus 7%, that’s a number you have handy?

Jerry Richards

Yeah. I have that handy, Mark. That’s about 90 million feet. And that’s a combination of ship to-date. But plus also priced and still in the order file.

Mark Weintraub

Okay. Thank you.

Jerry Richards

All right, Mark.

Operator

Our next question comes from the line of Buck Horne with Raymond James. Your line is open.

Buck Horne

Hey. Thank you. Thanks a lot guys, comment on, quite a lot question here. I think you’ve mentioned it. I just wanted to maybe dive in a little further if you can add any additional color on just the state of how you guys see lumber inventories in the supply chain right now in terms of the kind of the standoff between buyers and sellers at the moment with these extended order files?

And maybe it’s a little spec-ed a little bit. How do you think some of this resolves itself? And do you think that, you’re going to see more buyers, in anticipation of what’s probably going to be a very robust spring selling season for homebuilding and repair/remodel next year? Is there a need to restock inventories, maybe above trend ahead of that, or how do you think the supply chain plays out over the next couple of months?

Mike Covey

Yeah. That’s a great question Buck. So, our view is that inventories in the supply chain are at relatively low levels. And it kind of makes sense when you step back and you think about it, who would want to overbuild their inventory levels when we’re selling for $800, $900 a thousand. There’s not a lot of people who want to do that.

People were ordering just to meet immediate needs, is our view. And so they depleted their existing inventories to very low levels, knowing that there’s seasonal weakness in the fourth quarter almost every year as you get into wintry weather and construction slows, demand for lumber tends to come off and prices tend to come off.

So, we think lumber inventories are very low throughout the supply chain. And today, most mills are probably living off of lengthy order files from when prices were sky high. There will be price discovery. There is price discovery taking place now as we speak, especially in Southern Yellow Pine.

Prices are starting to find the floor, we think. And so this will continue over the next month, six weeks, eight weeks. And then you’re going to see dealers have to step in and build inventories to support the coming season, which as you mentioned, looks like it’s going to be pretty strong next year between new housing starts, Mike mentioned, those new homebuilder orders, up 40% pretty spectacular, plus continued strength in R&R.

Both the resi and FEA have indicated they think R&R markets are going to continue to be strong next year. So, our view is that dealers are going to step back in and have to rebuild inventories as we get out into the first quarter. And that should help support industry pricing.

Buck Horne

That’s the idea I was hoping to you get [ph]. That’s really helpful. Thank you so much for that.

Mike Covey

Sure.

Buck Horne

And maybe also — maybe switch gears on to the timber harvesting side. Are there any cost items or things that are moving around that could affect harvesting margins from — going from the third quarter to fourth quarter? Whether it’s diesel fuel or anything else that we should keep in mind in terms of harvesting margins sequentially?

Eric Cremers

No. Our — the largest cost item for our timberlands business is our harvesting and our hauling, we call it Log and Haul. And those costs are relatively flat year-over-year. They have been for several years now. There’s a little bit of inflationary creep, I suppose. This year prices are a little bit lower perhaps because of lower diesel prices, but not a lot of movement there.

Buck Horne

Okay. Perfect. Got it. Thanks, guys.

Mike Covey

Thank you.

Operator

Our next question comes from the line of John Babcock with Bank of America. Your line is now open.

John Babcock

Thanks for taking my questions. Just actually wanted to quickly follow-up on the Timberland segment. I was wondering, just the solid volumes and the movement that you’re expecting from 3Q into 4Q, is that largely seasonal, or is there anything else to be mindful there?

Mike Covey

Yeah. The real big effect there, John, is as you probably recall we index about 70% of the price of our sawlogs in our Idaho business. And we have on about a six-week lag. So, we have a pretty significant price move on Idaho sawlogs Q4 to Q3. That would be the other big factor on side.

John Babcock

I guess I was more wondering about volumes than pricing.

Mike Covey

Yeah. So in terms of volumes, it’s just seasonally down. So we were at 1.7 million tons in Q3, and we’ve guided a range of 1.3 million to 1.4 million. And it’s just a seasonally lighter part of the year.

The other thing is we had pretty favorable harvest conditions for the most part early in the year. So, we were able to get a large part of our harvest complete going into the fourth quarter. That plays a role.

And as you probably recall, we do expect our Southern harvest will be lower than planned this year and that’s largely the COVID disruption that occurred early in the year that we’ve said, we’re not going to make that volume up.

John Babcock

Okay. And then just quickly on the dividend. Does the Board meet, is that in December? Am I remembering that correctly?

Mike Covey

The Board does meet in early December, yes.

John Babcock

Okay. And then, just the last question. I was just wondering, with the large land sale that you have in real estate this upcoming quarter, the Minnesota timberlands there. Could you give any sense as to whether EBITDA will still be up excluding that land sale?

Jerry Richards

Will EBITDA for real estate be up excluding that land sale?

Mike Covey

No, no overall. So, the short answer is, no. I mean, that sale was about a $48 million sale and what we have is a situation where that particular transaction’s effect on EBITDA sequentially will outweigh the lumber price decline and the volume decline that we’ve talked about, both on the harvest and the lumber shipment side.

John Babcock

Okay. Thank you. That’s all I had.

Mike Covey

Thanks.

Operator

Our next question comes from Ketan Mamtora with BMO. Your line is now open.

Ketan Mamtora

Thank you. Jerry, if I may on the northern sawlog prices, you said a couple of times it will be up substantially. I also know there is this offsetting drag impact in Q4 from density. Is there a way to sort of frame it, sort of its high single digits on a net basis, low double digits? Can you hazard a guess in terms of kind of directionally what it could be?

Eric Cremers

Yes. So Ketan, this is Eric. Yes, there is going to be a little bit of density drag in the fourth quarter. It’s about 5%, 6%. But more importantly, those high lumber prices that we saw particularly in September are really going to work in our favor as we get out into Q4. And we expect our Northern sawlog prices to be up about 40% in Q4 versus Q3.

Ketan Mamtora

And this is net of the density or this is without the density?

Eric Cremers

This is net of the density.

Ketan Mamtora

Net of the density. Got it.

Eric Cremers

That’s 4-0, 40% 4-0.

Ketan Mamtora

Got it. I have done it all. Thank you.

Operator

At this time, I’m showing there are no more questions. I’ll now turn the call back over to Jerry Richards.

Jerry Richards

All right. Thank you, Lindsay. And certainly, I appreciate everybody’s interest in PotlatchDeltic. Available for the detailed modeling questions the rest of the day and look forward to catching up on our next quarter’s earnings call.

Operator

This concludes today’s conference call. You may now disconnect.

Source

Navient: A Misunderstood Business

Thesis Summary

Navient Corporation (NAVI) primarily provides loan management services for student loans. Its revenues and the balance sheet have been shrinking since 2015, and the stock now trades at around half the price of its all-time highs. We see this as an excellent value investing opportunity. Despite falling revenues, Navient has been able to increase its profitability, as evidenced by the increases in EPS. As long as the financial ratios can be maintained, the company can easily sustain the dividend and pay off its obligations, even under the assumption of falling revenues. Therefore, we rate NAVI a strong BUY.

Company Overview

The Navient Corporation is a loan management company, primarily servicing and collecting student and healthcare loans, but the company operates in four different segments; Federal Education Loans, Consumer Lending, Business Processing, and Other. To understand the path that Navient has been on and where it is going, we must zoom out and see how revenues and income have been moving over the last few years:

Source: 10-K

Above, we can see a breakdown of select operating data going back to 2015. This was an important year because it represented a peak in both EPS and share price. The company’s revenues have for the most part been falling since then. This is due primarily to the reduction in Education loans, specifically those under the FFELP (Federal Family Education Loan Program). The company’s asset base has decreased considerably since 2015. Having said this, the fall in revenues has been “offset” by lower operating costs and sustained profitability, allowing Navient to achieve similar EPS in 2019 as in 2015, despite the setbacks.

2019 showed a promising outlook, especially given the increase in consumer lending, but the events of 2020 have meant that revenues are once again down, around 30% compared to the first two quarters of 2019. Once again though, Navient is “weathering the storm” thanks to reduced delinquency rates and improved profitability metrics, as well as by delivering value to investors through share buybacks and dividends.

Source: Investor Presentation

As we can see, core earnings return has improved above expectations, while net interest margins for both consumer and federal loans have increased significantly. Lastly, it is worth talking about the financial solidity of the company, so let’s look at the balance sheet:

Source: 10-Q

The company currently carries around $88 billion in long-term debt, mostly funded by senior notes. Against this, we have just over $91 billion in assets. For investors, it is concerning that the company’s D/E ratio is at its highest ever, just over 37. The biggest worry here is that the company will not be able to meet its financing needs, especially if the current trend of falling revenues and fewer assets continues.

Financial Metrics

A company like Navient relies heavily on outside credit, and as such, investors and financiers are always looking at financial metrics for the company. Even small changes in margins and delinquency rates can have big effects on the cash flow, which, in turn, affects their ability to repay debt. Worsening metrics could lead to a lower credit rating, which, in turn, would significantly hamper the valuation of the company. Let’s look at how these metrics have evolved in the last few months in the two most significant segments:

Source: Investor Presentation

The Federal Education Loans segment, which represents the biggest part of NAVI’s portfolio, has improved significantly on most accounts. Net interest margin is up by 32%, while delinquencies are down significantly. Of course, this might have to do with the increased rate of forbearance. Expenses are down by 21%, and net income is higher than a year ago.

Source: Investor Presentation

Looking at the Consumer Lending Segment, we see similar positive results. NIM and charge offs are both down by 38%, and delinquency rates have decreased by 60%. It is also worth noting that average private education loans have increased since this time last year, as has net income.

Overall, the company has been improving its profitability metrics for the last couple of years. The net income margin has been rising steadily since the second quarter of 2018, and this makes us confident that the company can meet its obligations.

Source: Investor Presentation

Navient claims to pursue a “conservative” approach to debt and has reduced its debt load by around 10% in the last year. Combined, Navient’s education portfolios are projected to generate 9.4 billion in cash flows, which is more than enough to cover the debt burden. Furthermore, we expect Navient could recover its previous BB rating in the near term, despite the recent downgrade to BB- by Fitch.

Future Outlook

NAVI’s future outlook will be unavoidably tied to that of the average American consumer. A strong economic recovery will aid NAVI in growing its portfolio and reducing defaults. For the most part, we remain bullish on the medium-term outlook given the most recent advancements in finding a COVID-19 vaccine and lower than expected unemployment rate.

Source: Tradingeconomics.com

Trading Economics projects that unemployment should trend around 6.5% in 2021 and 4.5% in 2022. At the same time, GDP is projected to grow around 1.7% in 2021 and 1.9% in 2022.

This is relatively good news for Navient, especially as it relates to its portfolio of consumer loans. In 2019, Navient increased its Private Education Loans by 75% YoY, and we expect this trend to continue over the mid term. We also see the potential for further growth in the healthcare sector and business service sector, where the company already has a presence following the acquisition of Xtend. More recently, the company acquired Earnest, which will also aid it in positioning itself in the fast-growing fintech space.

Of course, much of what happens in the next year will depend on the results of the upcoming elections. A Trump win, combined with further stimulus would be a tailwind for NAVI, and the stock could certainly jump on the news, which also gives us the opportunity of locking in profits in a short amount of time.

On a final note, it is worth mentioning that the company recently updated its EPS forecast for 2020 at around $2.95, significantly higher than analyst consensus. Navient has a long track record of beating EPS estimates (11 out of the last 12 quarters), giving us reason to trust their forecast.

Valuation

We have estimated a return on investment in Navient’s common stock, using our valuation method.

The valuation method is based on our estimates of potential unlevered free cash flow to common shareholders. To do this, we analyze some key ratios regarding investment, revenue, and operating expenses.

As an indicator of investment levels that drive revenue, we look at the level of long-term assets for operations and use the recent trend for their relation with previous and future revenues to estimate the levels of investment and revenue in the future. We do the same for operating expenses and working capital, relative to revenue. Note that we may include some items in the operating expenses which are not considered operating in the official income statement, but we think are a regular part of the company’s activity.

We also use recent trends in ratios to estimate the rest of the items, which usually include financial income or expenses (based on the net level of debt, as per our interpretation of the balance sheet), minority interest (based on the level of net income), dividends to preferred equity (based on the level of preferred equity), and the level of net debt (based on the recent trend in leverage). For Navient, we have chosen not to separate operational and financial concepts since they operate in finance, so all assets and liabilities are considered operational.

We may add manual changes to some items or ratios based on qualitative analysis and information from the latest quarterly reports. For Navient, we see that our model projects a similar fall in revenue to that of consensus estimates by 2022 (near 1bn of revenue), so we did not make any changes to that. The estimated 5-year CAGR for revenue is -7.84%.

The final valuation is a sum of the discounted value of future unlevered free cash flow to common shareholders, minus the current level of debt (none in this case). To evaluate cash flow potential, we assume a net investment of 0 in the fifth year of the forecast, which we use to calculate terminal value. In this case, since the revenue, earnings, and cash flow are projected to fall and to err on the pessimistic side, we assumed cash flows will continue to fall perpetually by the same rate as the revenue in the fifth year of the forecast (-4.6%).

With Navient, as you can see in the forecast and valuation summary below, we get an expected return of 38% for common stock at the current price of $9.05 (October 26). Items are in millions of USD except ratios and per-share items.

Source: Author’s work

Risks

Navient does face significant risks in three main areas; political, legal, and structural. Politically, it is believed by most investors that a blue win would hamper the prospects of Navient. Democrats could enact legislation that directly affects student loans and healthcare. If the government were to take over these areas or issue some kind of debt relief, Navi could be left “holding the bag”. Having said this, polls and analysts may be understating the likeliness of a Trump win, which is leading to a high discount on NAVI’s stock. Evidence of this can be found in the recent numbers to come out regarding voter registration in key states such as Florida and Arizona, which show that Republicans are outnumbering Democrats.

Legally, Navient is still involved in six different lawsuits that claim the company may have misinformed borrowers to its advantage. Nonetheless, we don’t expect litigation costs to have a significant effect on income.

Lastly, Navient would be in deep trouble if the economy fails to recover. High unemployment leading to higher delinquencies would reduce income margin and could even force rating agencies to downgrade Navient’s debt status. The company’s reliance on capital markets is certainly a weak point to watch out for.

Takeaway

We believe Navient to be a misunderstood company. Investors see falling revenues as a bad sign, but a company like NAVI can still return value to investors even with negative growth. The key lies in the fact that it has been able to continually increase its profitability. Given our cash flow projections, we believe NAVI is a sound investment, the dividend is more than covered and there is little risk of insolvency. While political and structural changes remain a risk factor, the reward far outweighs the risk in this scenario.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Money Market Fund Closures Signal Trouble

Liquidity is oxygen for a financial system. – Ruth Porat

While the Federal Reserve’s current expansionary monetary policy supports the broader market and the economy, it isn’t helping out yields. Rates are low and struggle to maintain any move back up, as shown in the graph below. No upside is in sight as, according to Federal Reserve Chairman Jerome Powell, the Fed is “not even thinking about thinking about thinking about” raising rates.

Risks to low rates

You may be asking yourself, what’s the harm in low rates? After all, low rates prompt more borrowing and can bolster economic expansions. But rates are so low, even Treasury ETFs are generating negative returns, as shown below.

Rates this low are disastrous for money market funds. Recall, money market funds are mutual funds that invest in highly liquid, short-term instruments. A money market fund’s goal is to offer high liquidity and low risk yet still providing yield.

Breaking the buck

As a mutual fund, money market funds trade to Net Asset Value (NAV) with money market funds specifically aiming to maintain a NAV of $1. If a money market fund’s NAV falls below $1, it is called “breaking the buck,” and if not rectified, this can trigger a wave of redemptions that force the fund to liquidate. In 2008, the well-known Reserve Primary Fund broke the buck as it held obligations from Lehman Brothers when it filed for bankruptcy. The subsequent liquidation of the Reserve Primary Fund sent shocks throughout the rest of the market.

Fund closures

As regulations have tightened in the aftermath of the 2008 financial crisis, money market funds under pressure today are waiving fees or simply shutting down. Managers of the T. Rowe Price Cash Reserves Fund recently waived fees to avoid yield negative returns. Fund giants Vanguard, Northern Trust, and Fidelity have recently closed funds.

Money market assets

The number of holdings in money market funds is staggering, with total money market holdings peaking at over $5 trillion earlier this year. In contrast, for most of this decade, total holdings were closer to $3 trillion. The total holdings are on the decline in the third quarter of 2020, though still well above historical levels. The chart below shows the total money market holdings over time.

Source: Federal Reserve

Searching for safety

Instead of parking liquidity in money market funds, I’d suggest you consider the Case For Gold I recently made. Specifically, I’d recommend using the iShares Gold Trust ETF (NYSEARCA:IAU), which enables you to hold physical gold without the encumbrances of transporting and storing the metal. Gold can be a reliable inflation hedge, as excess central bank liquidity is likely to increase inflation expectations. Also, gold functions well during heightened volatility, making it an attractive place to hold funds until volatility settles down after the election.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Week Ahead – The Final Stretch

The countdown is on

The next couple of weeks will be crucial to how we end the year in financial markets and investors are standing by, waiting to respond. It’s deal making time, with months – or in the UK’s case, years – of negotiations coming to a head as the clock ticks down. The US election is in the final stretch and every passing week brings us one step closer to a COVID vaccine. A huge amount of event risk that will ensure it’s a fascinating end to an otherwise horrific year.

Country

US

In addition to the November 3rd Election Day, the focus in the US will fall on the advance reading of GDP, the COVID-19 spread, and big tech earnings. The US economy is expected to post a record-breaking rebound in economic growth in the third quarter. The Q3 growth measure is expected to rise 32.0%, erasing away the -31.4% contraction seen in the prior quarter. This is the last big data release before the election and could influence some voters on the direction of the economy.

The virus spread is intensifying in the US and record high cases seem very likely. The third wave of the virus continues to cripple the Midwest, but hospitalizations are not rising as sharply as many younger individuals are getting exposed. For now, the US has not seen anything close to the lockdown and restrictive measures happening in Europe, but that could change if another surge happens.

The third week of earnings season heats up with some mega-cap tech results from Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN). Close attention will also fall on industrials and transport earnings reports from General Electric (NYSE:GE), 3M (NYSE:MMM), Airbus (OTCPK:EADSF) (OTCPK:EADSY), Boeing (NYSE:BA), UPS (NYSE:UPS), Caterpillar (NYSE:CAT) and Honeywell (NYSE:HON).

US Politics

It is all about the Senate race. President Trump had a strong performance in the final and civil debate, but it was not likely enough to move the needle. Former-VP Biden did not have any major slip-ups, although will some argue his oil statement was an unforced error. Biden did a good enough job to keep his lead intact. President Trump will likely see a bump in the polls, but with almost a quarter of the vote likely in and the number of undecided voters being in single digits, Wall Street can continue to price in a Biden victory.

Just as important is the Senate race and that will likely take a big queue after the confirmation of Amy Coney Barrett to the Supreme Court. Biden has stated he will come out with a clear position before Election Day about where he stands on expanding the Supreme Court. This could be the biggest risk to the blue wave. Republicans who disapprove of President Trump may want to vote red for the Senate to keep the conservative majority on the Supreme Court. Several Senate races are up for grabs and it appears we won’t have a clearer picture until after Election Day.

EU

The ECB meeting next week could lay the groundwork for more easing in December as the euro area economy flirts with a double-dip recession. COVID is wreaking havoc once again which means more restrictions across the bloc. This is particularly taking its toll on the services sector with manufacturing performing relatively well, aided by the economic rebound in China. Policy makers have kept a lid on the euro after Christine Lagarde’s blunder in the last press conference and easing hints next week would go some way to easing deflationary pressures for now.

Brexit

Negotiations are back underway, with Michel Barnier arriving in London on Friday promising to intensify talks and work towards a deal, one based on mutual compromise. This follows months of both sides pushing the other for concessions and, it seems, last week’s post-EU summit comments were a step too far. Neither side can be seen to be getting a raw deal and comments from Barnier in recent days have convinced Number 10 to return to the negotiating table. A breakthrough now looks possible that will enable both sides to claim a success and avert no-deal. Interestingly, sterling never came under much pressure in response to talks breaking down, with traders clearly having had enough of political theatre and empty threats of the last four years. There is clearly more optimism now that the foundations are in place for compromise and a deal in the coming weeks.

UK

The UK is continuing to see rising COVID cases and hospitalisations forcing tighter restrictions around the country. The situation is going to get much worse before it gets better, which is going to be a drag on the economy. Expect more stimulus from the Bank of England this year. Brexit remains a huge downside risk for the economy but negotiations took a significant step forward this week.

Turkey

The CBRT has a real credibility issue and recent actions haven’t helped. The currency hit new record lows against the dollar this week, bringing losses for the year to 25%, as the central bank refrained from raising interest rates, despite markets expectations of a 175 basis point hike. They appeared to have engaged in a tightening cycle last meeting in order to stabilize the currency and address inflation issues, but this week showed it still prefers to tighten conditions using other means. Clearly politics is continuing to play a role in the decision making and that comes at a cost for the currency and, ultimately, the economy.

China

China Communist Party plenum runs Monday to Thursday to set new 5-year plans. Potentially important policy releases to come on Friday.

China Industrial Profits Tuesday should continue the growth tone of recent data, supporting the CNY and China equities.

Ant Financial IPO opens Tuesday-Thursday with payment Nov. 2nd. Potentially strong tailwind for China tech stocks next week.

China Official PMIs released Saturday, 31st October, followed by Caixin PMI Monday, 2nd. Main risk is disappointing numbers that could lead to a large fall in equities Monday, November 2nd.

Hong Kong

All eyes will be on the Ant Financial IPO this week, which will open and close this week with trading starting after the Nov. 3rd US election. Bullishness on IPO should mollify any risk based selling ahead of the US election.

USD/HKD at the bottom of its trading band with heavy buying from the HKMA. The demand for HKD is due to the Ant Financial IPO this week.

HK GDP and BoT expected to show the real economy remains deep in recession with Cathay Pacific (OTCPK:CPCAY) (OTCPK:CPCAF) announcing massive layoffs this week.

India

No significant data this week.

Indian Rupee continues to weaken after appalling GDP data. Rampant COVID-19 continues to crush economic activity and India’s potential recovery. Weak BoP, monetary and fiscal positions with stagflation potentially India’s biggest headache. Continues to be Asia’s weakest link along with Indonesia.

New Zealand

Landslide victory for Labour at elections boosted NZ Dollar. Equities mostly unmoved. No significant data this week.

RBNZ continues to telegraph negative rates and the NZ Dollar could come under sustained pressure this week ahead of the US election as risk is taken off the books globally.

Australia

Australian markets shrug off reports of China coal bans now, focusing on a potential rate cut from the RBA on November 3rd. COVID-19 restrictions eased. Financials and resource sector outperformance to continue.

Copper and iron ore remain near year highs supporting the resource sector and offsetting China’s bans in minor Australian export sectors. Australian markets will remain resilient unless China starts messing with copper, iron ore or LNG. Unlikely at this stage. The rise in risk aversion tensions is threatening to flip the Australian Dollar into a potentially large downward technical correction. This remains the major risk factor next week.

Australian Dollar and equities may suffer downside pressure this week as risk is reduced globally ahead of the US election. That should be a temporary state of affairs, though. The lucky country should remain lucky with domestic data showing recovery remains on track.

Japan

Japanese Yen rallies strongly on haven demand from onshore investors ahead of the US election. USD/JPY could potentially fall to 102.50 ahead of the election, especially if the US Senate result is too close to call, or odds of contested election increase.

Heavy data week with Leading Index, Retail Sales, Tokyo CPI and Industrial Production. All are expected to underperform as Japan’s domestic and export recovery remains sluggish in contrast to Taiwan and South Korea.

Bank of Japan rate decision on Thursday. Unchanged at -0.10% but a high chance of increased measures to pump money into the economy via lending facilities, and potentially an increase in JGB buying. Yen negative theoretically, but repatriation flows will subsume. The BoJ should be equities positive, offsetting risk reduction flows into the US election.

Markets

Oil

Oil prices were given a big boost on Thursday, as Vladimir Putin refused to rule out postponing production increases planned for January by OPEC+. This was by no means a commitment to do so, nor an acknowledgement that it had been discussed, but his openness to it has been welcomed.

OPEC+ cuts remain at 7.7 million barrels but are scheduled to fall to 5.7 million in January. This is a significant increase that could hit oil prices if the global economy falters in the coming months, as many expect, due to COVID-related restrictions. At this time, the group sees no reason to delay anything but that view may change between now and December, when they’re scheduled to meet and Russia will be critical to any delay.

WTI is back above $40 on the comments which, as we’ve seen so often before, could simply be a simple means of manipulating prices in their favour in the near-term. But if not combined with action, should demand slip as expected, it will only be a short-term boost. Brent continues to see considerable support around $41.80, with WTI seeing it around the $39.50 region.

Gold

There isn’t an enormous amount to add on gold in recent days and weeks. The yellow metal continues to hover around $1,900, as we await movement on some of the major risk events that are coming to a head in the coming weeks.

Momentum is just about with the bulls, despite gold spending a little time below $1,900 yesterday, but ultimately, the next move will be event driven and that will probably come from the stimulus talks on Capitol Hill. We may not have to wait too long for movement on that front. A close below $1,900 may signal that talks are collapsing, with a break above $1,930 perhaps meaning good news from Washington.

Key Economic Events

Monday, Oct. 26

– New Japanese Prime Minister Yoshihide Suga addresses parliament for the first time as premier.

– The Chinese Communist Party’s Central Committee begins its 4-day all-important plenum, where it’s expected to outline the plan for the economy’s development for the next 15 years.

– WTO holds a dispute settlement meeting where it’s expected to grant the EU legal authority to impose retaliatory tariffs on $4 billion of US exports.

– India Energy Forum (4-day event) by CERAWEEK.

– US Senate Republicans are expected to confirm Judge Amy Coney Barrett to the Supreme Court.

Economic Events

• US new home sales
• Mexico economic activity
• Japan PPI, leading index
• Singapore industrial production
• Germany Ifo business climate

Tuesday, Oct. 27

Economic Events

• U.S. durable goods, FHFA house price index, Conference Board consumer confidence
• Mexico trade balance
• New Zealand trade
• South Korea GDP
• China industrial profits
• Spain unemployment
• Hong Kong trade

Wednesday, Oct. 28

– The CEOs of Facebook, Google and Twitter (NYSE:TWTR) to testify before a Senate hearing on hate speech, misinformation, and privacy on their platforms.

– Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Wilkins hold a press conference to discuss the Bank’s expected decision to keep rates on hold.

– Dallas Fed President Robert Kaplan takes part in a virtual discussion with former BOE and Bank of Canada Governor Mark Carney.

– Weekly EIA crude oil inventory report.

– South Africa releases medium-term budget.

Economic Events

• US wholesale inventories
• Canada rate decision
• Brazil rate decision
• South Korea consumer confidence
• Turkey economic confidence
• CPI: South Africa, Australia
• Spain retail sales

Thursday, Oct. 29

– European Central Bank rate decision: Expected to keep Main Refinancing Rate unchanged at 0.00%.

– The advance reading of US Q3 GDP is anticipated to be the strongest on record, a 32.0% rebound from the record dive of -31.4%. Weekly Initial Jobless Claims will also be released.

– Big Tech Earnings from Facebook, Amazon and Apple will closely be watched.

Economic Events

• US Q3 Advance Q/Q: 32.0%e v. -31.4% prior, Weekly Initial Jobless Claims, pending home sales
• Bank of Japan rate decision: Expected to keep policy unchanged
• Japan retail sales, consumer confidence, department store sales
• New Zealand ANZ business confidence
• Australia NAB business confidence
• Euro-area economic/consumer confidence
• Germany unemployment, CPI
• Italy manufacturing/consumer confidence
• UK mortgage approvals
• Singapore unemployment
• Hungary Central Bank: Decision on 1-week Deposit Rate(primary transmission for short rates)

Friday, Oct. 30

Economic Events

• US personal income/spending, MNI Chicago PMI, University of Michigan Sentiment
• GDP: Canada, Mexico, Germany, France, Italy, Spain, Austria, Portugal, Czech, Hong Kong
• Euro-area Q3 Advance GDP Q/Q: 9.4%e v -11.8% prior; Y/Y: -7.4%e v. -14.7% prior, CPI, unemployment
• South Korea industrial production
• Japan CPI, jobless rate, vehicle production, housing starts, industrial production
• Australia private sector credit, PPI
• Trade balance: South Africa, Turkey
• Polish CPI

Sovereign Rating Upgrades

– Finland (Fitch)

– Romania (Fitch) Czech Republic (S&P)

– Denmark (Moody’s)

– Netherlands (Moody’s)

– Saudi Arabia (Moody’s)

– Italy (DBRS)

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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Reckitt Benckiser: Performance Is Improving

U.K. consumer goods manufacturer Reckitt Benckiser (OTCPK:RBGPF)(OTCPK:RBGLY) continues to see uplift from the COVID-19 crisis, as shown in its recently released third quarter numbers. However, the effect is less than it was earlier in the year and its nutrition business continues its underperformance.

The Company Continues to Benefit from Pandemic Headwinds

The company manufactures a number of brands with clearly established connections to household hygiene in consumers’ minds, such as Lysol and Dettol. So it is no surprise that it has seen a sales benefit during the pandemic. This continued during the third quarter, when like for like revenue was 19.% higher in its hygiene division than last year. That is an impressive figure. Like for like revenue in its two other divisions also rose versus the prior year, though the health division growth is slower than it had been in the year to date.

Source: company Q3 trading statement

It’s also worth noting out the impact currency shifts have on this global company: while like for like is a useful measure of business health, the key question for shareholders is how much coin comes into the company, and when taking exchange fluctuations into account, the nutrition division’s performance is actually less than last year. With significant swings in sterling, the dollar, the Chinese yuan and more in the current year, that is a substantial drag when Reckitt comes to convert profits into sterling. The company provided specific standalone guidance on this point here.

Performance continues to be very unevenly spread. While the company’s three geographic regions all did well, North America by far showed the strongest growth. That was led by Lysol, Finish and Airborne, according to the company. It seems fair to infer that the Lysol and Airborne surges have been motivated by the pandemic: while sales volumes may continue to be elevated versus their pre-pandemic level next year, I suspect that this year’s high growth rate may turn out to be a one-off phenomenon.

Note that Reckitt hasn’t purely benefitted from the pandemic. While hygiene brands such as Dettol have seen sales surges, it also owns the Durex condom brand. With many people locked down in recent months, condom demand had withered. It now shows signs of increasing again, with the Durex brand showing double-digit growth in the quarter. This was driven by some markets where lockdown restrictions were relaxed, but I expect to see similar firming in other markets in coming months. The company has also just launched its first polyurethane condom, which its thin fit should further improve performance in the Durex segment.

The question on the minds of investors eyeing long-term uptick in Reckitt’s performance under the current management, which remains fairly new, is how much of the recent strong revenue performance is due to structural shifts not the rather opportunistic COVID-19 uplift, and also how the profit line is faring as well as the revenue line. There are some positive indicators: a productivity program is said to be ahead of schedule, with £300m of savings in the year to date. E-commerce sales continued to grow, with 45% growth in the third quarter, and now stand at an estimated 12% of group net revenue year to date. I remain skeptical about whether that helps the company – I favor consumers goods company focussing on working with distribution channels not trying to run them – but that is the company strategy and they are performing well against it.

The company upgraded its full year outlook for like for like net revenue growth from high single digits to low double digits. While that is positive – and makes sense given the third quarter performance – there is no update to profit guidance, which is a bit disappointing for investors.

Nutrition

Reckitt Benckiser’s nutrition acquisition turned out to be a bit of a lemon. For now, it remains unclear whether the company is turning it around. This has been one of the biggest drags on the company’s shares – and the acquisition is the reason for the bloated debt burden which continues to drag on financial performance – so management needs to prove that it can fix nutrition to gain credibility longer term.

The quarterly performance was disappointing, and revenue reported in sterling continued to fall.

Chart compiled by author using data from company quarterly filings

While the fall is not huge in percentage terms – this year’s third quarter was 98% of last year’s – it is still a fall, and the trend this year is not good. Bear in mind that this division includes Airborne, for which the company said there was “very strong demand” in the quarter, with revenue on that brand more than doubling. So the core problem – the infant formula business – may continue to be more problematic than is obvious from the numbers above. Travel restrictions seem to be heavily affecting this business, especially in its core China market. The company specifically called out difficulties in markets including a decline in sales in Hong Kong due to far fewer shoppers crossing over from mainland China and purchasing infant formula. Additionally, the pandemic is expected by the company to lead to a reduction in birth rates, a further headwind to the nutrition business which it explicitly called out.

Overall, there is little firm evidence to date that the baby and infant formula business is being turned around. While travel restrictions in a key market are outside the company’s control, they may hang around in some form for the foreseeable future. For now, there are few concrete indicators that the formula business (when stripped out from the reporting segment “nutrition”) is holding its own let alone improving. No matter how well the hygiene division does – and it is flying – the company needs to prove it has a plan to fix the formula business and have proof that it works before the shares deserve positive rerating.

Conclusion: Reckitt Is Improving

I think Reckitt Benckiser is showing progress in key areas. It is more focussed than before and its hygiene brands are doing excellently, especially in North America. That is not purely by accident: the company deserves credit for building a brand portfolio well suited to the current consumer environment and responding well to the pandemic.

However, some of this gain – while welcome – is clearly opportunistic, and the formula business which carried such a high price tag continues to weigh down sentiment on the name. So, while I think a lot of work remains to be done, we are starting to see some signs of strategic recovery. At their current price of 7,090p, the shares trade on a p/e of 20x and yield 2.5% so I don’t see them as a value play. However, if the company can turn in another good quarter next quarter – which it may – it may merit reassessing its long-term valuation prospects. For now, although there is increasing evidence of growth, I remain neutral.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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SVXY: More Upside Remains For This Volatility ETF

Over the past month, the ProShares Short VIX Short-Term Futures ETF (NYSEARCA:SVXY) has recovered somewhat following its decline earlier this year with shares trading up nearly 5%.

It is my view that purchasing SVXY at these levels makes for a good trade for long-term investors. For shorter-term investors, better prices will likely be available in the coming weeks; however, I view the long-run trend of SVXY as a net positive to shareholders and believe a long position is warranted.

About SVXY

To start this piece off, let’s perform a deep-dive analysis on SVXY’s methodology. In the volatility ETP space, there are several different strategies employed and luckily SVXY follows one of the more simple indices out there.

SVXY is an ETF which is giving a half-leveraged inverse exposure to the S&P 500 VIX Short-Term Futures Index. This index holds and rolls exposure in the first two months of the VIX futures curve – it starts a month 100% in the first contract and ends a month 100% in the second-month contract (at which point the front contract expires, the second month becomes the first month, and it starts the process over again). It’s a relatively simple and straightforward method for tracking VIX futures and tends to exhibit the highest degree of correlation to the short-term changes in the VIX as seen in the following chart.

To understand why one would even want to short this volatility index, have a look at the below chart.

Yes, you are seeing this chart correctly – it really does drop that fast and it really has dropped for this long. What you are looking at is an index which has collapsed fairly consistently for the past 10 years at an annualized rate of nearly 50%. Here’s another chart that looks at the year-over-year changes seen in this index over the past decade.

While there have been brief spikes in the index which have resulted in yearly gains, a shocking 90% of the time for the last decade have seen this index lose money on a year-over-year basis. This is the appeal of wanting to short this index. It loses value quickly and it consistently loses money through time.

While some investors may be tempted to simply jump in and buy SVXY based on the above charts, I believe we get the best value from understanding what is driving this key relationship. This will help us understand and frame up expectations for a trade in this instrument and better enable us to profit from what’s driving the changes here.

To understand the problem in a nutshell, here is the current VIX futures curve.

At present, the VIX futures curve is in what is called “backwardation,” which means that futures prices decrease in value along the curve. If we were to assume that the spot VIX level of about 28-29 were to not change over the next seven months or so, then each of these prices would move to eventually approach the spot level. In other words, if you were holding VIX futures, your gain or loss on the futures contract itself is more than just a function of the changes in the level of the VIX: it is subject to the degree to which the futures contracts you are holding converge to the spot price on any given day.

This may seem a bit dense, but if this is an unfamiliar concept, I’d encourage you to read through that last paragraph until it clicks. The reason why it’s important to understand this concept is that this is almost the sole driver of returns in SVXY over lengthy time periods.

But wait a minute, didn’t you just say the curve is in backwardation and wouldn’t that mean that futures would be increasing in value as they approach the spot and therefore SVXY would be losing money since it short these futures?

Yes, at present, the slight backwardation seen in the curve is a detriment to SVXY holders – SVXY is shorting futures which are slightly below the spot level of the VIX and are converging by increasing in value during a typical trading month.

However, the catch here is this: the VIX futures curve has historically been in contango (futures above spot) the vast majority of the time. For example, over the past decade, the first few VIX futures contract have been above the spot price of the VIX a whopping 85% of the time. In other words, on 85% of all days for the past 10 years, VIX futures holders have been suffering from futures slowly converging to the spot price. This relationship is so strong that it can be seen simply through averaging the level of the spot VIX and various VIX futures contracts over the past 10 years for each trading month.

This chart shows the average price of various futures contracts and the VIX itself using the last 10 years of data and grouped by the days until expiry in every month during this time period.

Notice the clear trend? On average, VIX futures are priced above the spot level and on average the front contract converges to parity by the time of expiry with other contracts converging as well, but to a lesser extent depending on the time until expiry of the futures contract. In other words, futures converge to the spot price, which means that since they’re largely priced over the spot, futures are losing value through time.

This is the winning thesis for the long SVXY crowd. Since it is short a persistent relationship seen in VIX futures, it is poised to capture this convergence. However, it is important to note that this relationship plays out over time and is a gradual impact upon prices. In other words, if you’re going to capture this relationship, you need to have a fairly long holding time period. To gauge the duration of holding of a short position needed to capture this, here is the historic probability that the short-term index was lower over a certain number of months using the last 10 years of data.

This chart shows the percentage of occurrences in which the index SVXY shorts has historically fallen grouped by the holding period. On average, if you had held a short position in the short-term VIX futures index, you would have made money in 72% of all months and 90% of all years. In other words, the longer you hold a short position, the greater the chances you have historically seen of earning a profit.

The thing to watch out for however is VIX spikes. This is the negative side of a short VIX strategy. It is entirely possible that the VIX will rally by 100% or more in short time periods which can result in devastating losses for unhedged long traders in SVXY, since it is in essence short the VIX. For this reason, I suggest that any long positions be hedged with put options.

I suggest puts because some movement in VIX futures may result in a position which gaps sizably against you and a simple stop-loss order won’t be able to be executed in a market which gaps rapidly from one price to another. Alternatively, I’d suggest ownership through calls or call spreads. In other words, I believe that very firm risk management needs to be in place prior to buying SVXY because while the returns are fairly consistent, the downside risk can be enormous if you are not appropriately hedged.

I believe that this relationship of higher futures prices along the curve will continue going forward for several reasons. The most important of which is the logic of the relationship. Put simply, during “normal” times, it makes absolute since for the VIX futures curve to be in contango.

Contango (prices increasing in value along the curve) would imply that the market expects higher levels of volatility in the future. Volatility tends to rise during abnormal times, but remain low during normal times, which would mean that most of the time (which is normality by definition), the VIX futures curve should be in contango due to the market’s expectation for higher volatility at some point in the future. This relationship is logical and established in the data as seen by 85% of the time (or the normal times), VIX futures are in contango. A VIX futures curve in contango means futures are rolling down into the spot, which means that a short position in these futures will earn this return.

Based on this clear relationship as well as the logical continuity of it, I suggest buying SVXY at this time. Short-term traders may benefit by waiting for a pullback in the instrument; however, the long-term numbers clearly suggest this is likely going to be a winning trade – provided of course risk management is firmly managed.

Conclusion

SVXY has continued trading higher in a move which has started to erase the gains seen earlier this year. SVXY is shorting an index which has exhibited negative yearly returns for 90% of days of the last decade. VIX futures are normally in contango, which means that long-dated strategies on SVXY are likely going to prove profitable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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NextEra Energy’s (NEE) CEO Jim Robo on Q3 2020…

NextEra Energy, Inc. (NYSE:NEE) Q3 2020 Earnings Conference Call October 21, 2020 9:00 AM ET

Company Participants

Matt Roskot – Investor Relations

Jim Robo – Chairman and Chief Executive Officer

Rebecca Kujawa – Executive Vice President Finance and Chief Financial Officer

John Ketchum – President and Chief Executive Officer-NextEra Energy Resources

Conference Call Participants

Steve Fleishman – Wolfe Research

Julien Dumoulin-Smith – Bank of America

Shar Pourreza – Guggenheim Partners

Michael Lapides – Goldman Sachs

Michael Weinstein – Credit Suisse

Operator

Good morning and welcome to the NextEra Energy, Inc. and NextEra Energy Partners Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Matt Roskot of Investor Relations. Please go ahead.

Matt Roskot

Thank you, Andrea. Good morning, everyone, and thank you for joining our third quarter 2020 combined earnings conference call for NextEra Energy and NextEra Energy Partners. With me this morning are Jim Robo, Chairman and Chief Executive Officer of NextEra Energy; Rebecca Kujawa, Executive Vice President and Chief Financial Officer of NextEra Energy; John Ketchum, President and Chief Executive Officer of NextEra Energy Resources; and Mark Hickson, Executive Vice President of NextEra Energy, all of whom are also officers of NextEra Energy Partners; as well as Eric Silagy, President and Chief Executive Officer of Florida Power & Light Company. Rebecca will provide an overview of our results and our executive team will then be available to answer your questions.

We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today’s earnings news release and the comments made during this conference call, in the Risk Factors section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our websites, nexteraenergy.com and nexteraenergypartners.com. We do not undertake any duty to update any forward-looking statements.

Today’s presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today’s presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure.

With that, I will turn the call over to Rebecca.

Rebecca Kujawa

Thank you, Matt and good morning, everyone. NextEra Energy delivered strong third quarter results and continue to perform well on managing the ongoing impacts of the COVID-19 pandemic.

NextEra Energy’s third quarter adjusted earnings per share increased by more than 11% versus the prior-year comparable quarter, reflecting strong execution at Florida Power & Light Company, Gulf Power and Energy Resources.

Year-to-date, we have grown adjusted earnings per share by over 10% relative to 2019. We continue to execute well on our major initiatives, including continuing to capitalize on the best renewables development period in our history and we are well positioned to meet our overall objectives for 2020 and beyond.

Before moving on, I would like to say a few words about hurricanes Isaias, Laura, Sally and Delta. As you know, residents throughout the eastern and southeastern U.S. were recently impacted by the severe effects of these dangerous and deadly storms. Our deepest sympathies are with those, who have been impacted by these storms widespread destruction. We are grateful for the support that others have given us over the years and we were fortunate to be in a position to assist other utilities this year. As part of our assistance efforts, we sent several thousand of our employees and contractors as well as transmission equipment to help rebuild the grid to support the restoration efforts of the impacted utilities.

Gulf Power itself was impacted by Hurricane Sally, which experienced an unexpected change in intensity and path before striking the service area. Approximately, 285,000 customers or more than 60% of Gulf Power’s customers experienced outages as Sally brought heavy rain and severe flooding. Through a restoration workforce that totaled approximately 7,000 workers, including approximately 2,000 FPL employees and contractors. Gulf Power was able to restore service to essentially all impacted customers within five days.

We are pleased with the efficient and safe restoration response to Hurricane Sally, which was made more challenging by the ongoing impacts of the COVID-19 pandemic. Our focus on preparation and execution, including our annual storm drills helped ensure a timely response to the hurricane despite the pandemic.

Our Florida Power & Light earnings per share increased $0.14 year-over-year. All of the major capital projects including one of the largest solar expansions ever in the U.S. remain on track as we continue to advance our long-term focus on delivering outstanding customer value. FPL’s typical residential bill remains 30% below the national average and the lowest among all of the Florida investor-owned utilities. All while FPL maintains best-in-class service reliability and an emissions profile that is among the cleanest in the nation.

As part of our continued focus on doing what is right for our customers, last month, FPL announced that among other measures, it was offering direct relief of up to $200 per customer to those that are experiencing hardship and are significantly behind on their bills due to COVID-19. We remain committed to supporting our customers during this challenging time.

Gulf Power also had a strong quarter of execution as we continue to deliver on the cost reduction initiatives and smart capital investments that we have previously outlined. We remained focused on improving the Gulf Power customer value proposition by providing lower costs, higher reliability, outstanding customer service and clean energy solutions, and continue to expect that this strategy will generate significant customer and shareholder value over the coming years.

At Energy Resources, adjusted EPS increased by roughly 23% year-over-year, building upon the success of recent quarters, our development team had the best quarter of origination in Energy Resources’ history, adding nearly 2,200 megawatts of signed contracts to our renewables backlog.

After accounting for the removal of several projects, which I’ll talk about more in a moment, our backlog increased by approximately 1,450 megawatts, and now totaled more than 15,000 megawatts. To put this into perspective, our backlog, which we continue to expect and expect to construct over the next several years is now larger than Energy Resources entire existing renewables portfolio, which took us more than 20 years to complete.

Our engineering and construction team also continues to execute, commissioning more than 800 megawatts since the last earnings call and keeping the remainder of the – more than 5,200 total megawatts of wind and solar projects that we’re expecting to complete this year on track to achieve their 2020 in-service dates. Overall, with three quarters complete in 2020, we are pleased with the progress we are making in NextEra Energy and are well positioned to achieve the full-year financial expectations that we’ve previously discussed, subject to our normal caveats.

Now, let’s look at the detailed results beginning with FPL. With the third quarter of 2020, FPL reported net income of $757 million or $1.54 per share, an increase of $74 million and $0.14 per share respectively year-over-year. Regulatory capital employed increased by more than 11% over the same quarter last year and was the principal driver of FPL’s net income growth of roughly 11%.FPL’s capital expenditures were approximately $1.3 billion during the third quarter and we expect our full-year capital investments to total between $6.5 billion and $6.7 billion, which is a reminder, is higher than our expectations at the start of the year.

Our reported ROE for regulatory purposes will be approximately 11.6% for the 12 months ending September 2020, which is at the upper end of the allowed band of 9.6% to 11.6% under our current rate agreement. During the quarter, we restored $258 million of reserve amortization to achieve our target regulatory ROE leaving FPL with a balance of $994 million.

As we’ve previously discussed, we expect FPL and Gulf Power operating as a single larger Florida utility company, we’ll create both operational and financial benefits for our customers. Earlier this month, we were pleased to receive for – approval for an internal reorganization, whereby Gulf will merge into FPL in January of 2021. Gulf Power will continue as a separate operating division during 2021 serving its customers under separate retail rates. We continue to expect the companies will file a combined rate case in the first quarter of next year for new rates effective in January of 2022.

Turning to our development efforts. all of our major capital initiatives at FPL are progressing well. The next six SolarTogether projects, totaling approximately 450 megawatts remain on track to be placed in service later this year. The final 600 megawatts of the roughly 1,600 megawatts community solar program are expected to be placed in service next year. This significant solar expansion combined with low-cost battery storage solutions such as Manatee Energy Storage Center that remains on track to be complete next year represent the next phase of FPL’s generation modernization efforts. Beyond solar, construction of the highly efficient roughly 1,200 megawatt Dania Beach Clean Energy Center remain on schedule and on budget as it continues to advance towards its commercial – projected commercial operations date in 2022.

During the quarter, we are pleased that the Florida Public Service Commission approved FPL’s Storm Protection Plan settlement agreement that allows for clause recovery of storm hardening investments, including undergrounding. The agreement supports the continued hardening of FPL’s already storm-resilient energy grid in a programmatic manner through the deployment of billions of dollars of incremental capital for the benefit of customers.

Let me now turn to Gulf Power, which reported third quarter 2020 GAAP earnings of $91 million or $0.18 per share, an increase of $0.02 per share relative to Gulf Power’s adjusted earnings per share in the prior-year period. Gulf Power’s reported ROE for regulatory purposes will be approximately 10.5% for the 12 months ending September 2020. For the full-year 2020, we continue to target a regulatory ROE in the upper half of the allowed band of 9.25% to 11.25%.

During the quarter, Gulf Power’s capital expenditures were roughly $350 million and we expect our full-year capital investments to total between $1 billion and $1.1 billion. All of Gulf Power’s major smart capital investments continue to progress well. The Plant Crist coal-to-natural gas conversion and associated natural gas laterals are expected to be complete later this year, supporting NextEra Energy’s coal phase-out strategy and commitment to remain a clean energy leader. Although Gulf Power has not completed the final accounting, our preliminary estimate of the Hurricane Sally recoverable storm restoration costs is roughly $200 million. The storm restoration costs have been deferred and recorded as a regulatory asset on Gulf Power’s balance sheet.

Under the terms of Gulf Power’s current rate agreement, beginning 60 days following the filing of a cost recovery petition with the Florida Public Service Commission and subject to a review and prudence determination of our final storm costs, Gulf Power is authorized to recover storm restoration costs on an interim basis from customers through a surcharge.

Similar to FPL, Gulf Power’s Storm Protection Plan settlement agreement was also approved during the quarter. We expect that these future hardening investments will lead to a stronger and more storm-resilient grid at Gulf Power and support an even more rapid recovery from storms in the future.

Similar to other parts in the country, the Florida economy continues to recover from the impacts of the ongoing COVID-19 pandemic. Recent economic data reflects an improvement in the Florida unemployment rate since the start of the pandemic and an increase in consumer confidence that are roughly in line with the changes to the national averages of each metric. We continue to believe that the financial strength and structural advantages which Florida entered the crisis and the continued attraction of the state to both new residents and new businesses will support a rebound as we move beyond the pandemic.

We will continue to do our part to support that outcome, including pursuing our smart capital investment program and economic development efforts, which help create jobs, provide investment in local communities and further enhance our best-in-class customer value proposition.

During the quarter, FPL’s average customer growth was particularly strong, increasing by nearly $80,000 from the comparable prior year quarter. FPL’s third quarter retail sales increased 2.8% year-over-year as customer growth, weather and underlying usage per customer all contributed favorably. For Gulf Power, the average number of customers increased approximately 1.1% versus the comparable prior year quarter. Gulf Power’s third quarter retail sales declined 6.7% year-over-year, primarily as a result of unfavorable weather comparison relative to the particularly strong third quarter last year and a decline in underlying usage, primarily associated with Hurricane Sally.

At both FPL and Gulf Power, third quarter weather-normalized retail sales were roughly in line with our expectations at the start of the year, and we do not believe that the pandemic had much of an overall impact on underlying usage. At FPL, we continue to expect the flexibility provided by our reserve amortization mechanism will offset any fluctuation in retail sales or bad debt expense and support a regulatory ROE at the upper end of the allowed band of 9.6% to 11.6% under our current rate agreement.

Let me now turn to Energy Resources, which reported third quarter 2020 GAAP earnings of $376 million or $0.76 per share and adjusted earnings of $551 million or $1.12 per share. This is an increase in adjusted earnings per share of $0.21 or approximately 23% from last year’s comparable quarter results, which have been restated to reflect the results of our NextEra Energy Transmission business, formerly reported in corporate and other.

New investments attributed $0.06 per share, primarily reflecting continued growth in our contracted renewables program. The contribution from existing generation assets was flat year-over-year as the decline in wind resource and costs associated with the retirement of our Duane Arnold nuclear facility were roughly offset by increased PTC volume from our repowered wind projects as well as the lack of an unfavorable state tax item, which impacted last year’s third quarter results.

Contributions from both NextEra Transmission and our customer supply and trading business increased by $0.01 year-over-year. All other impacts increased results by $0.13 per share, driven primarily by the absence of the write-off of development costs, the negatively impacted 2019 results.

The Energy Resources development team continued to capitalize on what we believe is the best renewables development environment in our history during the quarter, with the team originating a record of nearly 2,200 megawatts. Since our last earnings call we have added 580 megawatts of new wind, 911 megawatts of solar, 594 megawatts of battery storage and 86 megawatts of wind repowering. The significant additions include a new 325 megawatts four-hour battery storage system. This project which is the largest standalone storage project in the world is expected to support California’s aggressive clean energy goals and help improve reliability across the regional electric grid when it comes online in 2023. We also executed 180 megawatts solar build-own-transfer agreement during the quarter, which is not included in our backlog additions.

Partially offsetting this quarter’s strong origination success was the removal of several projects we had previously included in our backlog. A majority of the reductions are the result of an unfavorable ruling from the Alabama Public Service Commission related to several solar plus storage projects. We expect the customer to hold a future procurement for this generation capacity, and are hopeful that the projects may receive new contracts during that process.

After accounting for these projects, removals the Energy Resources backlog had a net increase of 1,446 megawatts during the quarter. Reflective of our customer demand for low-cost wind, solar and battery storage projects that is stronger than ever. The repowering projects added this quarter include our first project for beyond 2020, and adds to the recent significant increase to our 2021 new wind and repowering backlog, which now totals roughly 2,000 megawatts. With the addition of the 2021 repowering project we are now introducing repowering expectations for 2021 and 2022 period of 200 megawatts to 700 megawatts.

Continued cost and technology improvements have supported an expanding opportunity set for both new wind and repowering over time. As a result, we are beginning to evaluate incremental repowering opportunities for beyond 2022. Through the first three quarters of 2020 we have added nearly 4,800 megawatts to our renewables backlog, which now totals more than 15,000 megawatts and is the largest in our history. To reflect the current backlog and strong origination success we are raising the low end of our 2019 through 2022 development expectations to 15,500 megawatts, which is above the midpoint of our original range. And we are increasing the top end of the expectations to reflect the incremental repowering expectations that we added this quarter.

Additionally, with more than 4,000 megawatts of renewables projects already in our backlog for post 2022 we are well positioned to execute on our long-term growth objectives. We continue to believe that by leveraging Energy Resources’ competitive advantages, we can further capitalize on the best renewables development environment in our history going forward.

As we’ve previously discussed, we are optimistic about the potential for green hydrogen to support an emissions-free future. Consistent with our toe in the water approach to new opportunities Energy Resources has developed a pipeline of approximately 50 potential green hydrogen projects spanning the power, transportation and industrial sectors. These projects serve a variety of end uses, and similar to the strategy employed in wind, solar, battery storage and other areas, provide the opportunity to develop early learnings with relatively small investments to set the stage for much larger capital deployment as cost declines and technology improvements are realized. Over the next several quarters we expect to add to this pipeline, while advancing select projects as we position ourselves to continue to be a leader in the decarbonization of the energy sector.

We remain excited about hydrogen’s long-term potential to further support future demand for low-cost renewables, as well as accelerate the decarbonization of transportation fuel and industrial feedstocks. Beyond renewables, we are pleased with the recent progress to resolve the outstanding permit issues required for Mountain Valley Pipeline’s construction. Among other progress since the last earnings call, MVP has received its revised biological opinion, approval of the project’s nationwide 12 permit by the Army Corps of Engineers and a recent order by FERC authorizing forward construction to resume along the majority of the project route.

Following receipt of this approval, MVP resumed construction work across West Virginia and Virginia. Despite the recent progress we were disappointed with the Fourth Circuit Court’s decisions to administratively stay MVP’s nationwide 12 permit. We disagree with the court’s decision and continue to work with our partners to move the project forward. Depending on the outcome of these issues, we continue to target an in-service date of the pipeline for during 2021.

Consistent with our focus on growing our rate-regulated and long-term contracted business operations, during the third quarter NextEra Energy Transmission announced an agreement to acquire Grid Lines, which owns three FERC-regulated transmission utilities spanning six states. Subject to regulatory approvals, the approximately $660 million acquisition, including the assumption of debt is expected to close in 2021, and to be immediately accretive to earnings. The proposed acquisition has strong expansion potential and attractive markets with significant expected renewables growth, and furthers our goal of growing America’s leading competitive transmission company.

Turning now to the consolidated results for NextEra Energy. For the third quarter of 2020 GAAP net income attributable to NextEra Energy was $1.229 billion or $2.50 share.

NextEra Energy’s 2020 third quarter adjusted earnings and adjusted EPS were $1.311 billion and $2.66 per share respectively.

Adjusted earnings from Corporate and Other segment declined $0.10 year-over-year, primarily due to other corporate expenses, which includes interest.

During the quarter NextEra Energy issued $2 billion of equity units as we continue to focus on opportunistic and prudent capital management to enhance the strength of our balance sheet. The equity units will convert to common equity in 2023. And the proceeds are expected to be primarily used to redeem a portion of NextEra Energy’s outstanding hybrid securities and to finance the acquisition of GridLiance and NextEra Energy’s continued renewables expansion.

In addition to the redemption of hybrid securities in the fourth quarter, we are also considering several other potential refinancing activities to take advantage of the low interest rate environment. In total, these initiatives could generate negative adjusted EPS impacts of roughly $0.20 in the fourth quarter before translating to favorable net income contributions in future years and an overall improvement in net present value for our shareholders. Consistent with our efforts to position NextEra Energy well for long-term growth and take advantage of the low interest rate environment, during the quarter, we entered into $2 billion in forward starting interest rate swaps to further support future debt issuances.

Finally, in July, as part of its 2020 annual review, Moody’s reduced NextEra Energy’s CFO pre-working capital-to-debt downgrade threshold from 18% to 17%. The favorable adjustment was based on recognition of NextEra Energy’s leading position in the utility and renewable energy sectors and stable cash flow generation profile.

As we announced last month, based on the ongoing strength of the renewables development environment and continued execution across all of our businesses, we increased NextEra Energy’s financial expectations for 2021 and 2022, and extended our long-term growth outlook to 2023.

For 2021, NextEra Energy’s adjusted EPS expectation ranges increased by $0.20, and we now expect adjusted earnings per share to be in the range of $9.60 to $10.15. For 2022 and 2023, we expect to grow 6% to 8% off of the expected increased 2021 adjusted earnings per share. The increased adjusted earnings expectations are supported by what we believe is the most attractive organic investment opportunity set in our industry, largely as a result of the significant renewables investment opportunities that we expect to capitalize on, we now expect our total capital expenditures from 2019 to 2022, to total roughly $60 billion, an increase from the $50 billion to $55 billion range we introduced at the Investor Conference last year.

During the quarter, the Board of NextEra Energy approved a four-for-one common stock split, which is intended to make stock ownership more accessible to a broader base of investors.

Trading will begin on a stock split adjusted basis on October 27. And our fourth quarter and full year 2020 financial results will reflect the post split share count. As a result of the stock split NextEra Energy updated its adjusted EPS ranges to reflect the increase in its – in outstanding shares.

In 2020, the company now expects adjusted earnings per share to be in the range of $2.18 to $2.30. The adjusted EPS ranges for 2021 and beyond are included on the accompanying slide.

from 2018 to 2023, we expect that operating cash flow will grow roughly in line with our adjusted EPS compound annual growth rate range. We also continue to expect to grow our dividends per share at roughly 10% per year through at least 2022 off of the 2020 base. As always, our expectations assume normal weather and operating conditions.

In summary, despite the challenges created by COVID-19 pandemic, NextEra Energy has continued to deliver terrific operational and financial results through the first three quarters of 2020. Based on the resiliency of our underlying businesses and our strong growth prospects, we will be disappointed if we are not able to deliver financial results at or near the top end of our adjusted earnings per share expectations ranges in 2020, 2021, 2022 and now 2023, while at the same time, maintaining our strong credit ratings. We remain intensely focused on execution, and believe NextEra Energy remains well positioned to drive shareholder value in the coming years.

Let me now turn to NextEra Energy Partners. The NextEra Energy Partners portfolio performed well and delivered financial results in line with our expectations. Adjusted EBITDA was down slightly compared to the third quarter of 2019 and cash available for distribution increased 10% versus the prior year comparable quarter.

On a year-to-date basis, adjusted EBITDA and cash available for distribution have increased by 16% and 50% respectively, versus 2019. Yesterday, the NextEra Energy Partners board declared a quarterly distribution of $0.595 per common unit, or $2.38 per common unit on an annualized basis, continuing our track record of growing distributions at the top end of our 12% to 15% per year growth range.

During September, NextEra Energy Partners completed the successful conversion of approximately $300 million of convertible debt into roughly 5.7 million common units. This financing, combined with a related capped call, that NextEra Energy Partners entered into at the time of the debt issuance, generated significant value for LP unitholders.

Following receipt of the capped call settlement, the debt had roughly $0 three-year cumulative cash cost. Relative to issuing equity at the time of the financing, 25% fewer units were issued. And NextEra Energy Partners generated approximately $50 million in cumulative cash savings. The convertible debt financing highlights the value of NextEra Energy Partners, utilizing low-cost financing products to support growth and efficiently issue equity over time. Overall, we are pleased with the year-to-date execution at NextEra Energy Partners and are well positioned to meet our 2020 and longer-term expectations.

Now, let’s look at the detailed results. Third quarter adjusted EBITDA was $312 million, a decline of approximately 1% year-over-year. Cash available for distribution was $162 million, up approximately 10% from the prior-year comparable quarter. new projects added $24 million of adjusted EBITDA and $16 million of cash available for distribution. Adjusted EBITDA from the existing assets declined year-over-year as lower wind resource was partially offset by growth at the Texas pipelines as a result of the expansion project going into service.

Wind resource was 96% of long-term average versus a particularly strong 107% in the third quarter of 2019. cash available for distribution from existing projects benefited from a reduction in debt service payments, primarily as a result of the retirement of outstanding notes at our Genesis project and receipt of higher year-over-year PAYGO payments. The reduction in project level debt service was partially offset by higher corporate level interest expense. As a reminder, these results include the impact of IDR fees, which we treat as an operating expense. The additional details are shown on the accompanying slide.

We are pleased to announce that NextEra Energy Partners has successfully completed its first two organic growth investments ahead of schedule and on budget. The repowering of the 175 megawatt Northern Colorado wind project was recently placed into service. The repowering provides multiple benefits to NextEra Energy Partners, including increased production, an uplift in project cash flow, a longer asset life and lower O&M costs. The remaining 100 megawatts of wind repowering, remains on track to be in service later this year.

Additionally, during the quarter, the backup compression capacity on the Texas pipelines also reached commercial operation. The expansion opportunity is supported by a long-term contract and is expected to deliver attractive returns to LP unitholders. The ability to complete these projects as planned, despite the challenges created by the pandemic is a testament to the best-in-class engineering and construction team that NextEra Energy partners is able to leverage to execute its organic investments. We continue to expect to execute on additional attractive organic growth opportunities as the NextEra Energy Partners portfolio further expands.

Let me now turn to NextEra Energy Partners’ expectations, which remain unchanged. NextEra Energy Partners continues to expect December 31, 2020 run rate for adjusted EBITDA to be in a range of $1.225 billion to $1.4 billion, and cash available for distribution to be in a range of $560 million to $640 million, reflecting calendar year 2021 expectations for the portfolio at year-end 2020.

As a reminder, our expectations include the impact of anticipated IDR fees, as we treat these as an operating expense. NextEra Energy Partners is also considering several potential refinancing activities to take advantage of the low interest rate environment. If pursued, these initiatives could generate costs in the fourth quarter, before translating to favorable cash available for distribution contributions in future years and an overall improvement in net present value for our unitholders.

From a base of NextEra Energy Partners’ fourth quarter 2019 distribution per common unit at an annualized rate of $2.14, we continue to see 12% to 15% per year growth in LP distributions as being a reasonable range of expectations through at least 2024. We expect the annualized rate of the fourth quarter 2020 distribution that is payable on February 2021, to be in a range of $2.40 to $2.46 per common unit.

We continue to expect to achieve NextEra Energy Partners’ 2020 distribution growth objectives, while maintaining a trailing 12-month payout ratio of approximately 70% highlighting the significant flexibility we believe NextEra Energy Partners has going forward. as we previously discussed, while we continue to be opportunistic, NextEra Energy Partners’ favorable position should give it flexibility to achieve its long-term distribution growth objectives, without the need to make any acquisitions until 2022. As always, our expectations assume normal weather and operating conditions.

We are pleased with a strong year-to-date performance in NextEra Energy Partners and continue to believe it offers a compelling investor value proposition going forward. with significant expected long-term renewables growth combined with the strength of NextEra Energy Partners existing portfolio and continued access to low-cost sources of capital, we believe NextEra Energy Partners is uniquely positioned to take advantage of the disruptive factors reshaping the energy industry.

NextEra Energy Partners continues to maintain flexibility to grow in three ways; through our great organic growth, third-party acquisitions or through acquisition from NextEra Energy resources, unparalleled portfolio of renewables projects that now totals roughly 28 gigawatts, including signed backlog. These factors provide us with as much confidence in NextEra Energy Partners’ long-term future as we have ever had. We look forward to delivering on that potential in the coming years.

In summary, we continue to believe that both NextEra Energy and NextEra Energy Partners have some of the best opportunity sets and execution track records in the industry and we remain as enthusiastic as ever about our future prospects.

That concludes our prepared remarks. And with that, we will open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Steve Fleishman of Wolfe Research. Please go ahead.

Steve Fleishman

Hello. Thank you. I guess, two questions; first of all, the – does the backlog increase that you announced today include the NiSource NIPSCO projects that were just announced this morning or would those be additive?

John Ketchum

Steve, this is John Ketchum. Yes, it does include the NiSource projects.

Steve Fleishman

Okay. And then second question would just be this will probably be the last time we hear from you before the election results. So just maybe, one more time. Could you just talk about in the event that Biden wins the election, thoughts on what that could mean for renewables opportunity? And also thoughts on how NextEra is positioned for any tax reform changes. Thanks.

Rebecca Kujawa

Thanks, Steve. As you well know and kind of consistent with our history, we focus on analyzing a variety of impacts and one of our key focus for going into the election is to ensure that we’re well positioned to be successful regardless of the outcome. And looking back in the last couple of years, obviously, we’ve done quite well across all of our businesses in the environment that we’ve been in.

So, should Trump win a second term, we would expect to continue our strong momentum and continued focus on our strategies and execution on them. If Biden is the new President, he has clearly made clear across this platform, across the Democratic platform that they had strong support for renewables. To date, their plan is more focused on broad goals as opposed to specific plans for how they would get there, but we could easily see, whether it’s extension of incentives, focus on storage, potentially focus on hydrogen, et cetera, to further accelerate the expansion of renewables across the U.S. beyond the already strong demand that we’re seeing, that’s clearly based on the economic value of renewables relative to the alternatives.

As it relates to tax reform, obviously, that’s part of some of the things that Biden has been talking about. It certainly could be on the agenda. I think there’s a question as to whether or not it would be one of the first things that a new administration would want to focus on, particularly as we will likely find ourselves still in recovery mode from the pandemic and we will evaluate, as there’s – if there are more details and as there are more details, we’ll evaluate the overall impacts.

If you look at the prior tax reform as an example, clearly, a change in the tax rate, an increase in the tax rate, as Biden has talked about, would have some negative adjusted earnings impacts, positive cash impacts, all else being equal. But we need to think about, one, the details of any policies that they put forward; but two, together with the other things that would come along with the new Biden administration, including the strong demand for renewables that we would expect. So more to come as we learn more and, obviously, the results from the actual election unfold.

Steve Fleishman

Great. Thank you.

Rebecca Kujawa

Thanks, Steve.

Operator

Our next question comes from Julien Dumoulin-Smith of Bank of America. Please go ahead.

Julien Dumoulin-Smith

Good morning to you. Thanks for the time. Appreciate it. If I can follow-up on a couple of things here. First; transmission, you guys did this interesting announcement in the quarter. How does that enable a further expansion of potentially larger-scale projects? And how does that complement essentially larger-scale renewable ambitions you might have across the core Midwest territories that they serve today?

Rebecca Kujawa

Yes, Julien. thanks for the question. We are thrilled with the acquisition, of course, subject to approvals of GridLiance, and it is the three different transmission companies across six states, where their existing assets are located. First, there are investment opportunities in those existing investments that we have – that we would have in GridLiance. But it also positions us to have a seat at the table in these regional ISOs as they contemplate new transmission projects. And obviously, GridLiance would seek to compete effectively for those opportunities. The comment around renewables is that as we think about a broad and substantial expansion of renewables across the U.S., it becomes important and increasingly so over time, to continue to invest in the transmission grid across the U.S.

So, we want to be a part of that solution and capitalize on those investment opportunities via our competitive transmission business, but also, we’ll depend on that in order to realize the significant expansion of renewables over time. So, it’s both an enabler and an investment opportunity from our perspective.

Julien Dumoulin-Smith

Thank you. Perhaps, if I can pivot over to the more strategic side of the equation here and perhaps I’ll frame it this way. So, you all have recently received greater latitude when it comes to your debt metrics on an FFO to debt basis from the agencies. Can you talk about how you might receive yet further latitude as you think about the percent regulated the business needs to get to, to unlock yet for lower metrics, if that makes sense? And perhaps in tandem with that, might you expose your latest thought process on strategic thinking from here beyond, perhaps some of the comments you previously provided to the extent relevant.

Rebecca Kujawa

Yes, of course. So, a strong balance sheet is incredibly important to us. And one of the things that we spend a lot of time talking with the agencies about is how strong a cash flow generation profile all of the businesses have, how diverse in a variety of metrics, including geography, technology, customers, et cetera, and how that profile compares very favorably to other peers in the industry and their own respective cash profiles.

So, we did realize the improvement in downgrade thresholds, specifically at Moody’s this period that 18% to 17% downgrade threshold improvement and we’ll continue discussing with the agencies about the high-quality characteristics of our cash flows and seek improvements in additional flexibility as appropriate. There is the opportunity to have extensive dialogues with the agencies around potential regulated M&A. So any time, we do contemplate transactions; we have those conversations to evaluate whether or not the profile of the cash flow generation changes such that it would move those metrics. And as we have those dialogues and have those conversations with respect to potential M&A, we factor those in to any deal transaction economics. It remains incredibly important to us to be able to maintain consistency with our objectives around M&A, which is that they’re value accretive from an earnings perspective. They also are in strong regulatory environments and create opportunities for us to invest capital. But being accretive is incredibly important to us.

As you know, when we think about metrics, there are quite a number of ways to think about the balance of our business between the competitive generation business and regulated. And one of the key ways that we continue to maintain that balance is through capital recycling. And that’s one of the reasons why NextEra Energy finds value in its long-term relationship with NextEra Energy Partners, is the clear ability to recycle capital in a very efficient way with NextEra Energy Partners.

Julien Dumoulin-Smith

Got it. But there’s no specific percent regulated that you want to achieve to get that number down to 16% or 15%, right?

Rebecca Kujawa

No. We’re not prescriptive about a specific balance. We think about a variety of factors when we think about what’s the optimal balance of our business and there’s not one answer at a given point in time. And certainly, that can be influenced over time as things change and our perspective and the agency’s perspective changes.

Julien Dumoulin-Smith

Excellent. Thank you, all. Best of luck.

Rebecca Kujawa

Thank, Julien.

Operator

Our next question comes from Shar Pourreza of Guggenheim Partners. Please go ahead.

Shar Pourreza

Hi, good morning, guys.

Rebecca Kujawa

Good morning.

Shar Pourreza

Just a quick follow-up on Julien’s question. And it’s really bent on sort of that mix. Obviously, FPL and Gulf are posting very solid regulatory capital deployment, but the NEER development platform keeps signing contracts. And as you guys sort of highlighted that the backlog is now larger than the existing portfolio. So, curious on how we should sort of think about the growth trajectory of NEER as we’re sort of thinking about a mix. I mean, is 70%/30%, Rebecca, no longer relevant on what you sort of target there? Have you sort of sanitized the additional growth opportunities with NEER with the rating agencies?

And then how do you sort of stay within a potential mix? Obviously, recycling capital into NEP is an option, but that has a lot of constraints and limits. Slowing down NEER likely isn’t an option. So really is the path of least resistance, more regulated acquisitions. So maybe, if you could just drill down a little bit further into the prior question?

Rebecca Kujawa

Thanks, Shar. And then I certainly appreciate the premise of the question, which is, we have terrific organic growth prospects at both the regulated utilities and in the competitive energy business. One of the things that we think is really important from the competitive side of the business is so long as we can find projects that are attractive, that have attractive returns. We don’t want our teams to be capital constrained because we believe that these are very strong value-accretive project investment opportunities for our shareholders. So, we set them off and hope that they can find all of the best projects and that we can secure the wins and build those projects.

As you know, a significant amount of the value creation of developing renewables projects and owning and operating them long-term is in that development process, constructing them and beginning and putting them into operations. So, if we can continue to do that with value-accretive projects, and to the extent that we want to manage a balance of the mix of business across the different companies. We will take advantage of that capital recycling as one of the best ways and most value-accretive ways for NextEra Energy shareholders to recycle capital either to NextEra Energy Partners or potentially even to other third parties depending on market characteristics at the time. So, I think we’ve got a lot of levers. And again, most importantly, in a terrific position of win-win of having a lot of places to place our capital and, obviously, we’re pleased with raising our capital investment ranges for the four-year period.

Shar Pourreza

So just a follow-up. So that 70%/30% regulated non-utility mix, should we sort of just move away from that sort of target that we’ve discussed in the past?

Rebecca Kujawa

Shar, I think the key takeaway is there’s not a specific number that is the right number. And we’ll be – we think about it in a variety of different ways over time. And there are a variety of levers that we can utilize to maintain a balance, but we’re not prescriptive on a specific number that it needs to be.

Shar Pourreza

Got it. Got it. And then just on the battery side, you obviously added 594 megawatts, which includes a single 325, four-hour project. Can you sort of just maybe talk about the economics of storage you’re seeing, especially with the four hours project? Just maybe from an LCOE perspective, and with the current backlog of storage opportunities, is four hours of storage sort of that peak capability? Or are you seeing some longer storage opportunities?

Rebecca Kujawa

Well, let me take that last part first. I don’t know that there’s a constraint or a peak capability of storage. There are clearly a variety of storage solutions that could make sense in a given application. What our energy resources team is largely focused on is providing solutions that our customers want to buy, that solve our customers’ needs. And most recently, four-hour storage has been very attractive and particularly interesting to our customers. So, we have sold quite a number of four-hour storage projects. From a return standpoint, these storage facilities are often sold together with other renewables projects, specifically other solar projects, and we found the returns to be very attractive, comparable to solar and wind project returns on an overall basis.

John Ketchum

Yes. And Shar, this is John Ketchum. I have a couple of things that I would add to that are: One, remember, there are three ways that we really look to grow the storage business. One is pairing it with solar. The second are trifecta opportunities that we’ve advertised in the past that we’ve been successful executing on, combining storage with wind and with solar. If we were able to get – ever to get a stand-alone storage ITC, obviously, that would help what is the largest wind portfolio in North America. And then the stand-alone opportunities along the lines of what we’re able to advertise today.

So, when you combine those three potential opportunity sets, we have a significant growth opportunity in storage. You see that in our 2021 CapEx plan, that is over $1 billion in storage. Nobody has the existing fleet that we have. And so the opportunity to pair storage at existing solar facilities, existing wind facilities and then look for stand-alone opportunities, I think, puts us in a different class, just based on the existing operating fleet that we have. And then as you think about batteries going forward, four-hour duration may make sense in certain markets, two hours in others. But in two to three years, we could be moving to solid-state batteries, which could also provide longer duration, more efficient at a reduced cost. And then hydrogen certainly is a long-term alternative. We mentioned the 50 pilot projects today in electricity, in transportation and industrial applications.

So, we see hydrogen as really a long-term solution, particularly if we end up in 100% decarbonized energy policy by 2035, where hydrogen could really be the solution for that last 10% to 15% where it gets very expensive to do with batteries, much cheaper and more manageable to do with hydrogen.

Shar Pourreza

Terrific guys. Thank you very much.

Rebecca Kujawa

Thank you.

Operator

Our next question comes from Michael Lapides of Goldman Sachs. Please go ahead.

Michael Lapides

Hey, guys. Thank you for taking my questions. On the renewable front, it seems that after years of not really doing a lot, that pretty much every regulated investor-owned utility has its own renewable growth strategy and rate base. Can you talk about – now the broader market has massive tailwinds? But can you talk about how that move by the regulated IOUs is impacting the competitive dynamic for people developing, especially all given your scale, renewables on the non-regulated side of the business. Like how does that just kind of flow-through or impact the market dynamic?

Rebecca Kujawa

Thanks, Michael. We appreciate the question. Well, let me highlight first and at the risk of sounding a little too flip. We now have a backlog of over 15,000 gigawatts, and we do get a lot of questions about whether or not we’re concerned about the competitive dynamic, but the team is doing pretty well in this dynamic. And keep in mind that we’ve got customer base that’s investor-owned utilities, munis and co-ops and C&I customers. And the dynamics of wanting to build and rate base really are predominantly focused on the investor-owned utility side.

And there are opportunities even within investor-owned utilities to compete effectively for the business and partner with them in many cases to create win-win opportunities for them to get the best built projects for their customers, own some of it in rate base, enable us to operate it in some cases, enable us to power purchase agreement – enter into those power purchase agreements and sell it to them over time. And then, of course, we continue to have strong opportunities to sell under contract to the munis and co-ops and C&I customers. So the outlook is very bright. Our team is doing a terrific job executing, and we’re looking forward to continuing to deliver against those growth opportunities.

John Ketchum

Yes. And just, Michael, picking up on a couple of the comments that Rebecca made. With IOUs, let’s just take a look at what happened with NIPSCO this quarter. If you add on the 400 megawatts of wind that we announced last year, we’re now at 2-gigawatts with just one customer, one investor-owned utility in Indiana, in NIPSCO. So, we still see significant opportunities for investor-owned utility renewable buildout, being able to bring low-cost solutions that combine not only traditional renewables, but with storage applications and then obviously around hydrogen. Munis and co-ops have always been a core part of the business. And then C&I, as Rebecca mentioned at the end, the C&I market is really accelerating. And as ESG has really come into the fold, a lot of the investor pressure that formally nontraditional buyers of renewables are facing from their investor base has really expanded the opportunity set for us to sell many different products to those potential customers.

And one of the things that we’re seeing in the decarbonized U.S. economy is not only the chance to sell renewables, but also to play to our others ranks. So a lot of adjacencies, a lot of adjacencies around clean energy, where we are the natural fit to be a leader in some of those specific markets. And those are some of the things that we are continuing to look at and spending a lot of time as a senior team focusing on.

Michael Lapides

Got it. And if you don’t mind a follow-up on the regulated side. In the event sometime over the next couple of years, there are higher corporate income tax rates and we’ll see, obviously, policy changes and is fluid. How do you think about what that means for the customer, given the cost of service would obviously have to reflect the higher tax rate? But also the excess accumulated deferred federal income taxes that currently is being refunded by many utilities around the country, part of that would actually potentially, I think, reverse.

So it would kind of put on the backs of the customer a decent bit of a rate increase and a little vary by jurisdiction and by utility. How does that impact the dynamic over a multiyear period? Yes, it raises cash flow, but it could also raise the customer bill. And what do you think the opportunity set is for NextEra in terms of either offsetting that impact? Or even improving your competitive position at the utility level relative to some of your peers?

Jim Robo

Hey Michael it’s Jim. Let me take that because we’ve been doing a lot of thinking around, obviously, different scenarios around, obviously, different scenarios around what happens with taxes depending on what happens with the federal elections. Remember, what happened in 2017 around tax reform is that the industry very effectively, I think, came together, and they were really two industries that were carved out for different treatment in the 2017 tax reform scenario. One was real estate, and I’ll let you speculate as to why real estate might have gotten singled out. And the other was the utility sector and the utility sector, I think, was very effective in laying out what the impacts to customers and to balance sheets were around tax reform.

I think to the extent that there is any tax discussion next year. Let’s assume for a minute that Biden wins, I think it’s very – I think it’s – we’re obviously in a scenario planning around both outcomes because I think you can’t really handicap it one way or another right now. The best thinking that we’ve had around this is that in the middle of a pandemic it’s probably not the time to have a tax increase period. And so in terms of the timing around tax reform, I’d be surprised if it was next year, honestly, even in a Biden administration. Who knows, right? I mean that’s a bit of speculation on my part.

But the other thing I think we would be very effective as an industry being able to do is to lay out how any tax increase on utilities is really simply a tax increase on all customers and non- corporations but on everyday Americans. And I think that message will resonate in Washington. And so that’s a message that we, as an industry, haven’t been able to lay out yet, obviously, because it’s premature to do so.

So I think a lot of the angst around tax reform, one way or another, is I think a little premature right now. And obviously, we’ll see what happens in the election. But then if Biden does win, then there’s going to be, where does it stand up in the list of policy priorities for the newer administration if there should be one.

Michael Lapides

Got it. Thank you, Jim. Much appreciated.

Operator

Our next question comes from Michael Weinstein of Credit Suisse. Please go ahead.

Michael Weinstein

Hi, guys. A couple of questions on the possibility of higher taxes on the other side of it, wondering if that would potentially reduce your need to use tax equity for projects going forward. And also, I understand as the largest player out there, you guys don’t really ever have a problem attracting tax equity investors. But can you just comment on the status of the tax equity market in general right now? I guess, it’s pretty tight for some of the smaller players. Is that something that could improve under a Democratic administration if the tax rates go up and tax credits are extended, et cetera?

Rebecca Kujawa

Sure. Let me start with this year first. From a tax equity market standpoint, that was one of the things that we and everybody else in the industry, and of course, the tax equity providers were thinking about in the early stages of the pandemic. We have secured all of our tax equity commitments for this year and have already started the dialogues with tax equity partners about our pipeline of projects for next year. And we feel confident about our ability to secure tax equity.

I do think as you go out a year into 2021 and maybe into 2022, it’s certainly possible that the tax equity providers are going to have more limited capacity. And that may affect others further down the chain a little bit smaller or a lot smaller than we are and could be an issue. As it relates to tax reform, it’s – without knowing the details of it and the kind of having more of the specifics, it’s hard to answer the question of whether or not the needle has moved enough to not need tax equity. It also somewhat presumes that there’s an extension of incentives because, obviously, if the incentives phase out like they are currently expected to, there’s a less need for tax equity over time.

And that’s actually one of the things that we’ve highlighted in terms of our future power purchase agreement prices, is optimization around financing, so seeking lower cost source of financing other than tax equity would be a positive. So I think there’s pluses and minuses, puts and takes. What I do feel very comfortable with is the outlook and demand for renewables is really strong, and we’ve continued to realize attractive returns, and we’re excited about keeping – continuing to capitalize on these opportunities.

Michael Weinstein

Great. Great. And also on the wind repowerings, is there – what’s the primary consideration that you’re looking at to increase those numbers as you look at 2021, 2022 and beyond?

Rebecca Kujawa

Yes. I think the key focus there is really the economics of the repowering projects and ensuring that they are attractive returns and meet the requirements from a tax perspective and, obviously, are also something that our customers are interested in. So, we’ve continued those dialogues over time. And as we’ve gotten closer to the time frames in which we would do these repowerings, obviously, the rubber starts to hit the road, and we’ve been able to start to secure some of those and have increased visibility to those incremental investment opportunities, obviously, in that range that we discussed today.

Michael Weinstein

Right. Would an extension of tax credits really allow you to really increase that or increase the opportunities anyway?

Rebecca Kujawa

It’s certainly possible that it could. Again, a little bit subject to the details of what an extension of incentives looks like, and all the other factors that go into whether or not a project is attractive, but absolutely.

Michael Weinstein

One last question. On FERC 2222, it improves the ability of residential solar to sell into grid services. And I’m just wondering, if the value – that value that comes from FERC 2222 makes –changes your mind at all about residential solar, is it possible investment opportunity for next year?

Rebecca Kujawa

We’ve looked at distributed generation investments. Obviously, we have a very strong business on the – more of the commercial and industrial side. We’ve looked at residential over time. But one of the key factors for us is that we’re a significant sized company, and we like to deploy a significant amount of capital, and inevitably, these are much smaller investment opportunities. But we do look at the business over a long period of time. And obviously, we’ll enter it where we think it makes sense. But we’re really focused on kind of a little bit larger scale investment opportunities for the most part.

Michael Weinstein

Okay. Thank you very much.

Rebecca Kujawa

Thank you.

Operator

This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today’s presentation and you may now disconnect.

Source

Sterling Bancorp: Distressed Valuation Coupled With Solid Earnings Power

Investment Thesis

Headquartered in Montebello, New York, Sterling Bancorp (STL) is a $30.8 billion asset holding company and parent to Sterling National Bank. Sterling hangs its hat on being able to offer complete solutions to every client no matter the complexity or relationship size. While most banks its size have a wide-ranging footprint, STL only has 80 branches located throughout the New York City and Long Island areas, not to mention the Stony Point and Goshen areas (which are technically a little upstate from NYC).

Sterling also has a pretty diverse loan portfolio. The traditional lending categories like Commercial and Industrial, Commercial Real Estate, and Multi-Family, which make up 16.7%, 28.9%, and 22.8% respectively (total of 68%). After that there are some more “exotic” lending that makes up the remaining balances. Riskier items like equipment finance and asset-backed lending also make up a total of 12.6% of the portfolio.

While I do not think STL has gone over the top in terms of adding risk, I do feel like any potential investors should be made aware of these typically more risky loan categories. However, these riskier loans typically do have better yields and carry higher returns.

When it comes to STL, I am bullish on the stock but only when it comes to the long term. I would not recommend this bank to anyone thinking to hold it for just 6 to 12 months. That said, STL does have a strong earnings profile and on a relative basis appears to be very cheap, near all-time lows on a price to tangible book value per share valuation.

I think the earnings potential is better than average, which should more than support positive earnings growth in the coming quarters. With that being said, I believe the current credit profile appears to be pretty solid, but it’s hard to have a large amount of faith since this recession’s length is unknown and the past recession was rather tough on the bank. While the bank has changed over the past decade, some above-average turbulence might be felt if this recession is drawn out. If you are looking to invest for the long haul, I would suggest averaging into the shares today.

Data by YCharts

Revenue Outlook

Because STL has such a diverse lending portfolio, when compared to Northeast United State bank peers, the net interest margin (NIM) is a little better than average. This in particular can be seen in the second quarter net interest income results which continued to grow off of first quarter levels. While the overall revenue result was positive, I do believe it is foolish to assume the future NIM is immune to future margin compression.

While most banks saw something to the tune of 25 basis points in margin compression, STL had just one basis point. It was made possible by the rapidly decreasing yields on the cost of liabilities. While most banks have their loans reprice significantly faster than deposits, STL had a fairly matched downward compression. Also, the yield on investment securities dropped just 9 basis points, which proved to be very insulated relative to the 10-year treasury yield’s first and second quarter free-fall.

Similar to most banks, STL saw its gross loans increase $586 million in the quarter. However, while most banking peers had material core loan growth run off (to the tune of 3%+) only to be masked by sizable PPP loan growth, STL had just $63 million, or 0.3% linked quarter, organic loan compression. In my mind, this is a bit of a testament to the bank’s long-term relationship it has with its clients. While some banks look for a single loan, STL looks to capture the entire relationship.

Source: SEC Filings and Author’s Estimates

When looking at the chart above it should be very clear that I am assuming a little more NIM compression. While the bank has done a great job matching loan yield compression with deposit cost compression, I don’t think that perfectly balanced scenario can work forever.

In my mind, while the loan portfolio continues to reprice lower, I see limited cushioning effects from lower liabilities yields. However, when taking the larger picture into context, I am only expecting about 10 basis points of further NIM downside. Also, most Northeast banks are closer to ~2.50% on their respective NIMs, which means that STL is still operating much better than peers, even if its margin comes in a little from current levels.

Credit Review

While the chart below is a little alarming, I believe that STL has turned the page on its credit and underwriting standards. One must remember, STL today is not STL of 2008. The major deal with Astoria Financial Corporation in 2017 changed everything about this bank. In 2008, STL was just $2.8 billion in assets relative to its current size of ~$31 billion. While future net charge-offs (NCOs) could be a little higher than the average bank, I am not under the assumption that it will nearly double the national average like it did in 2010.

Source: SEC Filings

While the bank has changed quite a bit over the past decade, the necessity to build a loan loss reserve has not. In the first quarter, the provision expense was $138 million, while the second quarter saw a material step down to just $56 million.

Source: SEC Filings

While the provision expense saw a significant reduction in the second quarter, I believe the bank is appropriately funded today. As one can see in the chart above, criticized loans (orange bars) have continued to increase since the turn of the year.

However, my favorite ratio for looking at banks in the early stages of a recession, “Criticized Loans/Reserves” (the black line) looks to be in good standing. While criticized loans have increased, management was even more prudent with the provision when adding to the reserve.

I would be remiss to not remind investors, since STL does have a little more “exotic” lending categories, like asset-based lending and equipment finance, they do typically do have a tougher time in recessions. While these loans do carry a higher yield, it is done so in order to compensate the bank for taking on more credit risk. That said, I believe STL looks good today, and if things get worse it does have the earnings power to quickly add to the provision/reserve again should that become necessary.

Concluding Thoughts

When getting to the bottom line: I think STL is a great bank to own, if you can buy and hold for the next five years. As I tried to articulate at the beginning of this article, if you can’t handle a year of choppy trading, then this bank probably isn’t for you. This bank is higher risk and will likely have more volatility, but mathematically speaking, a higher beta is a necessity in order to achieve above-average results.

In my mind, this is a way to buy a strong bank with great earnings power at a very distressed level. While a low valuation might get even lower, I believe the second half of 2020 should prove to investors that this bank is likely to perform well once we find the other side of this economic slowdown.

Source: SEC Filings and Author’s Estimates

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Halliburton’s Earnings: Don’t Trust The ‘Bottom Theory’

Halliburton (HAL) shares are off to the races, up nearly 4% as I write this sentence, on the day that the energy services company reported third quarter results. Analysts had been expecting to see revenues reach $3.1 billion, but the 46% YoY top line decline was worse than anticipated. Adjusted EPS of $0.11, on the other hand, topped consensus estimate by two cents.

Bullishness seems to have come primarily from CEO Jeff Miller’s upbeat remarks about the struggling North America market, as he believes that “we are getting closer to an activity bottom.” It probably also helped that the OPEC+ group committed to a balance in the oil and gas market, which pushed crude prices higher on Monday.

Credit: Halliburton

On the results of the quarter

Expectations about the future aside, Halliburton’s third quarter results did not deviate much from the numbers posted by peer Schlumberger (SLB) on Friday. With the exception of Latin America, a small market that accounted for barely 10% of revenues in 3Q19, all of Halliburton’s operating and geographic segments saw revenues decline both sequentially and YoY. See table below.

Pockets of strength could be observed in higher stimulation activity in US land, which did little to prevent North America revenues from falling by two-thirds YoY. Internationally, Argentina, Colombia and Mexico saw increased activity across the board. However, the larger Middle East and Asia geographic group failed to gain traction due to reduced well construction and project management activity.

Source: table provided by Halliburton

Also in line with the performance of its main competitor, Halliburton did a good job at containing expenses and preserving cash in the face of severely adverse market conditions. Across completion and production, drilling and evaluation, the company managed to operate profitably. Cash flow from operations for the year has remained very much in line with the comparable 2019 metric, which has helped Halliburton to improve its net debt position compared to the start of 2020 – $7.7 billion now vs. $8.1 billion then.

On the stock

A painful third quarter of performance may have been largely predicted by analysts and baked into the share price ahead of earnings. Now, investors are faced with a decision: to turn bullish on the management team’s more optimistic (and contrarian) view of the energy service space, or stay cautious on the heels of financial results that remain highly discouraging and a macroeconomic landscape that appears far from stable.

I could justify a buy of HAL at current levels on a few key arguments. First, energy services tend to be a longer cycle business, and Halliburton should be able to see demand levels beyond the immediate term. Also, the company has been doing a competent job at playing defense, after five years of a painful and ongoing downcycle have prepared Halliburton well for a challenging 2020. Lastly, share price is way off the all-time peak reached in 2014 (see chart below), and bargain hunters may be tempted to place a speculative bet here.

Data by YCharts

On the other hand, the oil and gas space has been “in a funk” for years, and a few head fakes in the past half decade have caused occasional investor optimism to be crushed. More specifically to Halliburton, the company is traditionally more heavily exposed to the North America market than its peer Schlumberger, which I believe is an increased risk factor. Lastly, even compared to the highly volatile energy sector as a whole (XLE), HAL share price has been more jittery since the start of the industry’s secular decline, reaching lower lows during times of distress.

Due to the sizable risks, I prefer not to trust “the bottom theory.” Sure, the worst of the 2020 crisis may have been left behind. But I am not willing to endure high volatility and the prospect of further losses in the hope that Halliburton may be right about market stabilization and a pick-up in drilling and production activity. Instead, I prefer to place more calculated bets outside the oil and gas sector at this moment.

Beating the market by a mile

I do not own HAL because I have been focused on creating superior risk-adjusted returns in the long run using a different strategy – which has been very successful. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Smead 3Q 2020 Quarterly Letter: Breaking Big Tech

You are probably aware that we do a great deal of reading, writing and watching at Smead Capital Management/the Smead Value Fund. We recently read Peter Doran’s book, Breaking Rockefeller, which is a fabulous economic history of the world from 1840-1920 and focuses on how the monopoly created by John D. Rockefeller was broken from 1890-1910. We also watched a documentary called, “The Social Dilemma,” which explains, through the eyes of some of the social media creators, how incredibly damaging the monopolies, created by internet technology, are to society.

Here is what we learned:

1. John D. Rockefeller knew Standard Oil was a monopoly and did everything he could to cut prices to kill the competition. He called this “cut-to-kill.” He would then buy out his crippled competitors.

Jeff Bezos, Mark Zuckerberg, Larry Page and Tim Cook all know that they have a monopoly via the addiction/control they have over their “users.” Amazon, Facebook and Google gave away the primary product, ensuring that nobody could compete on price. They “cut-to-kill” right from the beginning. What they couldn’t “cut-to-kill,” they acquired.

2. The Sherman Antitrust Act of 1890 had nothing to do with end customer prices. Sherman recognized that, “The popular mind is agitated with problems that may disturb the social order,” he wrote, “and among them all, none is more threatening than the concentration of capital into vast combinations.”

3. In the documentary, “The Social Dilemma,” the people who were creating the addictions to the “free” product, were then using the scale of info to addict and manipulate the “user!” Their customers are the advertisers who want to have users manipulated into purchases or votes or associations. It is truly a bunch of frogs in the not-yet-boiling water.

4. Standard Oil was broken up before the automobile and airplane exploded the importance of refined oil products.

5. COVID-19 has put the addicted “users” in a state of near-complete dependence on today’s “vast combinations.” How do we put this genie back into the bottle and how do we deal with a stock market completely addicted to their success and the S&P 500 Index investors who are tied to their hip? After all, the “vast combinations” have two billion frogs already addicted.

Source: Goldman Sachs research September 2020, p 33

Long-time clients also notice that we have never owned tobacco, alcohol and gaming companies. We decided a long time ago that we would make all the money we could outside of businesses which ruin the lives of their best customers. How are these “vast combination” companies (AMZN, GOOGL, AAPL, MSFT, FB, etc.) “disturbing the social order?”

Suicides among 10-18-year old kids have soared with email/social media addiction. Friendships are broken over politics. Civil discourse has disappeared. Violent protests are off the charts. Homicides in major cities have skyrocketed. Folks are siloed into like-minded groups and all this is being exacerbated by the COVID-19 quarantine. People are ignoring their loved ones to satisfy the addiction to the phone or online shopping or social media or to YouTube videos. What have we done?

Source: Cypress Capital Sept 9, 2020

You must love us capitalists. We are not only frogs in boiling water as addicted “users,” but we are enjoying free delivery, free social media and free search at the expense of societal disturbance. On top of this, the wealthy are getting rich from owning these “vast combinations.” It is enough for you to want to take a rocket into outer space (they are)!

Since we can’t sell our soul to make money from these businesses, where can we find opportunities in the post-COVID-19 world? The answer is to look for favorable supply and demand circumstances over the next three to five years with companies which meet our eight criteria for common stock selection. We believe those favorable supply and demand circumstances come in pharma, energy, real estate and mobility.

Source: Fundstrat

We have lots of over 60 folks and will keep healthcare costs down by Amgen (AMGN), Merck (MRK) and Pfizer (PFE) providing them medicines which extend their life and their health.

We intend to satisfy 30-40 years of oil and gas needs by owning Chevron (CVX) and Continental Resources (CLR). Even if electric cars dominate in 20 years, the stock market is seriously undervaluing the oil in the ground (see below).

Source: Bloomberg.

There are huge proven reserves behind each share of these major oil producers and there are numerous unproven reserves in the property owned by each company. On top of these looking attractive at $40 per barrel of oil, the price of oil is historically cheap in relation to gold:

Source: Bloomberg.

We will build houses for 90 million millennials with NVR (NVR), Lennar (LEN) and D.R. Horton (DHI). American households are in the best financial shape they have been in 40 years, as represented by the Federal Reserve Board’s Household Debt Service Ratio. These stocks will correct along the way, but we believe we are in the fourth inning of a nine-inning home building era.

Source: Bloomberg

We expect continued intra-country migration and household formation. Therefore, we like the mobility that Credit Acceptance Corp. (CACC) gives to auto buyers with damaged credit scores. We also like moving them with Amerco (UHAL) vehicles and storing their extra junk in the meantime.

We believe that when the hammer comes down on these “vast combinations,” investors will suffer permanent capital damage. When Rockefeller’s Standard Oil got broken up in 1910, the oil business had its best days ahead of it. The shares of the individual companies were cheap and did well. Amazon Web Services funds the “cut-to-kill” in the Amazon e-commerce business. The high price-to-earnings (P/E) multiples on the common shares could get obliterated when the two get separated and the company gets taxed like everyone else.

Source: Bespoke Sept 22, 2020

Since COVID-19 is likely a pinnacle of dependence for “users” of these “vast combinations,” growth stocks are likely a disaster waiting to happen. Companies which provide necessities to the enormous millennial population are due to succeed on a relative basis. History would argue that when this changeover occurs, labor and physical assets will be the winners. History also argues that when labor and physical assets win, society becomes less disturbed. Value has beaten growth by over 3% per year for 94 years (Ibbotson) and is the most depressed it has been in 57 years. We look forward to the next five years as we believe the remedies will play out and are very grateful for our faithful end owners.

Smead Capital Management, Inc.(“SCM”) is an SEC registered investment adviser with its principal place of business in the State of Arizona. SCM and its representatives are in compliance with the current registration and notice filing requirements imposed upon registered investment advisers by those states in which SCM maintains clients. SCM may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Registered investment adviser does not imply a certain level of skill or training.

This newsletter contains general information that is not suitable for everyone. Any information contained in this newsletter represents SCM’s opinions and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. SCM cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of this newsletter bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice. SCM, its officers, directors, employees and/or affiliates, may have positions in, and may, from time-to-time make purchases or sales of the securities discussed or mentioned in the publications.

For additional information about SCM, including fees and services, send for our disclosure statement as set forth on Form ADV from SCM using the contact information herein. Please read the disclosure statement carefully before you invest or send money.

Disclosure: I am/we are long AMGN, MRK, PFE, CVX, CLR, NVR, LEN, DHI, CACC, UHAL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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