Tuesday, April 21, 2020

An AIM International Equity Holding: Iberdrola SA Sponsored ADR (IBDRY, $39.10): “Thinking about 3 Years, not 30” by: Thomas Biegler, AIM student at Marquette University

Iberdrola SA Sponsored ADR (IBDRY, $39.10): “Thinking about 3 Years, not 30”
By: Thomas Biegler, AIM Student at Marquette University

iberdrola-logo - Vigeo Eiris

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 (IBDRY) is a holding company that engages in the generation and transmission of electricity through renewable and conventional methods. Through its operations in Spain (39.8% of total revenue), Brazil (18.8%), the United Kingdom (15.9%), the United States (14.6%), Mexico (6.7%), and others, IBDRY has become the third-largest electricity company in the world by stock market capitalization. The company was founded in 1901 and is headquartered in Bilbao, Spain.

• IBDRY is the largest owner of wind farms in the world, which represent roughly one-third of their portfolio and is a key contributor to their growing renewable portfolio.
• In 2019, IBDRY’s two largest subsidiaries, Iberdrola Group and Iberdrola España, installed a combined additional 78,706 MW of power, 48,567 MW of which were renewable.
• IBDRY has held an ESG rating of AAA over the last five years due to their focus on reducing emissions and transitioning away from conventional energy methods as quickly as possible. Additionally, the company is partners with European Commission, UN Global Compact, We Mean Business, World Business Council for Sustainable Development and Corporate Leaders Group (CLG), and others in the fight against climate change.

Key points: IBDRY was added to the AIM International Fund in February 2016 with a price target of $35.01. The investment thesis behind this purchase considered a favorable regulatory state, an increasing capacity to meet rising demand, and overall financial strength to support expansion. Since being bought, regulation in which the company operates under has changed with the conclusion of the Clean Energy for All Europeans Package in June 2019 as well as the addition of the Affordable Clean Energy rule in the United States that same month which replaced 2015 standards. 

Furthermore, 2019 introduced new sets of tariffs in both the United States and Brazil with the intention of moving projects into the hands of domestic companies. Despite these challenges, IBDRY was able to achieve net income growth of 7.5%, up from 4.9% in 2018, as a result of rising demand. In fact, according to the Intergovernmental Panel on Climate Change (IPCC), future regulations that are set to be implemented to reduce emissions by 45% by 2030, with zero net emissions in 2050, will increase the demand for renewable energy by up to 71%. To date, however, these regulations have yet to be implemented.

In order to drive revenue and prepare for an increase in global demand for renewable energy, IBDRY has been heightening their investments in the renewable space. When this stock was pitched in 2016, renewable energy accounted for only 4% of revenue. Today, this sentiment has shifted which can be seen through the launches of the Núñez de Balboa photovoltaic solar plant in Spain, the Montague, Patriot and Karankawa wind farms in the United States, and the inauguration of the Baixo Iguaçu hydroelectric plant last year. If one thing is certain, IBDRY will be ready whenever and wherever this energy is wanted.

What has the stock done lately?
The last twelve months have yielding a per share range of $34.88-$$49.89 for IBDRY. At the beginning of 2020, they experienced a sharp spike followed by a massive drop due to the spread of Covid-19 and the volatility of markets that accompanied it. Due to its low beta of just 0.5, IBDRY has been able to remain around the same price as one year ago and has already begun to make its way back up.

Past Year Performance:
IBDRY saw a fairly large increase in its P/E ratio between 2018 and 2019, jumping from 14.6 to 17.6, despite margins staying fairly consistent over the past five years. Furthermore, their sales per share has been on the steady decline for the past two years, hinting that this stock is getting more expensive.

Source: FactSet
My Takeaway
Since IBDRY was added to the AIM International Fund in February 2016, it soared past its price target and currently lies above it by nearly $5 per share. Despite projections for increasing demand, regulation has yet to be passed and due to the Covid-19 outbreak, the likelihood of climate change being emphasized to the same degree is unlikely. Therefore, the value for the company is unclear and it is recommended to sell the stock in order to allow cash to be moved to a higher beta stock that can yield a greater upside.

Source: FactSet