Wednesday, December 13, 2017

A current AIM International Fund Holding: Iberdrola SA (IBDRY) by Thomas Dietz. "No More Wind in These Sails"

Iberdrola SA (IBDRY, $31.05): “No More Wind in These Sails”

By: Thomas Dietz, 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. 

 Summary  

Iberdrola SA (NYSE:IBDRY) is a globally diversified utility company headquartered in Spain, providing power and gas to over 31 million people worldwide.

IBDRY focuses primarily on wind and natural gas, with some nuclear and thermal plants still in use. IBDRY is the number one producer of wind energy in the world.

IBDRY is one of the largest utility companies on the planet, with most of the growth over its 70-year history coming from M&A activity.

IBDRY has a complex internal structure, with subsidiaries Scottish Power and Iberdrola USA operating semi-independently. 

Key points 

Iberdrola is a stable company that provides good global exposure and a healthy dividend, but valuations suggest that IBDRY is trading at or very near its intrinsic value.  Two of the main drivers that recently increased the stock price appear to now be priced into the stock.  UBS reported strong future cost cutting potential in their Scottish wind farms; they can accomplish this by implementing floating wind turbines that are less expensive to produce and can placed in further offshore in deeper waters where winds are stronger.  IBDRY stated that they will have an IPO for their Brazilian subsidiary’s assets to raise capital for increased infrastructure investment.  The market’s recognition of these catalysts leaves very little to spark new price movement.

Looking at the street’s top line and EPS projections reveals a company that is projected to grow 10% per year for the next three years and pay dividends at or above 4.5%.  Unfortunately, an average of the street’s forward EPS numbers times the forward P/E reveals a stock that sees little to no room for upside.  Furthermore, an analysis of their individual segments sees weak to no growth in their high margin UK and continental Europe businesses.  This puts additional strain to perform on their American segments.  This is worrisome because the US business sees tough profitability controls by the regulating bodies, and the Brazilian growth story is contingent upon the timely success of the IPO. 

What has the stock done lately? 

The past 6 months have seen no real direction, with the price oscillating between $30.50 and $33.  I take this as yet another indication that we are at or near the intrinsic value.

Past Year Performance: After a poor 2016, IBDRY started off the year quite well. IBDRY rocketed from a two year low of $23.75 to a five year high of $33.34.  Unfortunately, the back end of 2017 has been far less stellar, and $33 seems to be as high as the stock can climb.

1-Year Stock Chart vs. S&P ADR
Source: FactSet

My Takeaway 

IBDRY has run its course.  The stock lacks new drivers, and further problems in the European businesses could deflate the double-digit growth numbers that current valuations rely upon.  The current makeup of the international utility portfolio already has a strong South American presence between SBS and BIP, and BIP is more successful and profitable in European business lines.  I recommend replacement with an Asian utility, either in India or Southeast Asia. This will better serve for portfolio diversification and recognize the high growth opportunities to be found in India and Southeast Asia.  

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