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.
