Tuesday, November 7, 2017

A current AIM International Fund Holding: Iberdrola (IBDRY) by Derek Grifka "Powering Up"

Iberdrola (IBDRY, $31.07): “Headwinds and Tailwinds on the Horizon for Iberdrola”
By: Derek Grifka, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Iberdrola SA Sponsored ADR. (OTC:IBDRY) is a Spanish electric utilities company that distributes electricity and gas with an increasing emphasis on renewable energy. The company had over 34 million users across the globe in 2016 with 46% of revenue coming from Spain, 23% from the UK, and almost 21% from the US. Its primary facilities include more than 300 windfarms, over 100 hydro power plants, and hundreds of other power plants.

• Expansion in the Baltic Sea is providing energy across Germany.

• Political uncertainty in Spain presents danger for the company.

• Success in Brazil has greatly helped the company, thanks to increased wind generation.

• H1 2017 slow compared to exceptional H1 2016.

Key points:

70 wind turbines have been installed off the coast of the German island of Rugen, as of late October 2017. The 350 megawatt home should be able to power around 350,000 homes across the globe and save the environment 600,000 tonnes (1,000 kg) of CO2 emissions. This project created about 2,000 construction jobs.

Although only 5.4% of the company’s total revenue comes from Brazil, the country is becoming a major player in the company’s success. In August of 2017, the company decided it would incorporate the activity of its Brazilian subsidiary, Elektro, into Brazilian power distributor, Neoenergia.

This merger makes the company the largest electricity utility in Brazil, servicing more than 34 million people. Both companies combined for total FY 2016 revenue of 7.9 billion euros. Additionally, Iberdrola as a whole is reporting success in Brazil and reported about a 99% increase in wind generation in Brazil during Q3 2017.

Although H1 2017 was slower than H1 2016, the company is still seeing some positives. Its net profit grew 4.2% to 1.5 billion euros and it still maintains a generous dividend of 3.4%. However, Q1 EBITDA dropped 8.2% and fell 3.6% in Q2. Despite success across the globe, Spain saw lower output compared to the exceptionally high 2016.

What has the stock done lately?

The Catalan crisis in Spain caused the stock to dip to a low of just above $29 from mid-August to October 4th. In that time span, the stock decreased over 10%. The Catalan region of Spain is seeking independence to become its own independent and sovereign country because many inhabitants believe the unemployment throughout the country is slowing the region. Catalonia accounts for about 19% of Spain’s GDP, so if the region were to enact independence, this could have adverse effects on the company. However, the stock has rebounded in the recent weeks, mostly due to confidence that the break-up will not occur. This confidence comes with the ability of the Spanish government in Madrid to observe Article 155, which allows the government to intervene in the running of Catalonia.

Past Year Performance: Despite the recent blip due to the Catalan government crisis, the stock has done almost nothing but rise. In the past year, the stock rose over 19% with little volatility. Coupled with a strong dividend and a 52 week beta of -0.37, the stock is a rather safe investment with growth potential.
Source: FactSet

My Takeaway

The company still remains to be a dominant player in the utilities sector, despite slower H1 2017 results. It is a little concerning that the majority of revenue comes from Spain, and the company has been slightly struggling there. However, the slower 2017 should slightly be offset by the increase in success in Brazil and Germany. Despite the uncertainty with the Spanish government, the company should continue to be a major force across the globe.