A Current AIM Small Cap Equity Holding: Franklin Electric Co. Inc. (FELE, $53.31): “Franklin Electric Running Dry After Pumping All Time Highs”

Franklin Electric Co. Inc. (FELE, $53.31): “Franklin Electric Running Dry After Pumping All Time Highs”

By: Solomon Dworsky, 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

• Franklin Electric Co., Inc. (NASDAQ: FELE) is a manufacturer and distributor of water and fuel pump systems. The Water Systems segment services industries including Residential, Agriculture and Commercial Water Services. The Fuel Systems segment manufacturers products including submersible pumps, sumps, vapor recovery systems and fuel management systems. Franklin Electric Co., Inc. was founded in 1944 and headquartered in Fort Wayne, IN.

• Franklin Electric Co. generates revenue through three segments: Water Systems

(57%), Fueling Systems (22.2%) and Distribution (20.8%).

• FELE shares reached a new all-time high of $55.63 during Q1 of 2019 following record earnings in FY 2018 and continued momentum in earnings during 2019.

• Franklin Electric Co., Inc. has experienced price volatility in 2019 due to missing Q1 and Q2 earnings expectations.

• Water Systems has recently experienced difficulty in continuing Sales and Operating Income growth from 2018 leading management to lower 2019 EPS guidance from $2.47 to $2.37.

Key points: 

Franklin Electric Co., Inc. is focused on providing their customers with Quality, Availability, Service, Innovation and Cost. Management has developed Availability by expanding the distribution segment through strategic acquisitions by acquiring 4 major U.S. distributors and a foreign distributor located in Argentina during 2017 and 2018. The result of these acquisitions increased Operating Income of the Distribution segment by 70% from Q3 2018. The Fuel Systems segment has gained brand recognition, as major petroleum companies prefer Franklin Electric products over competitor offerings. The Fuel Systems segment experienced a 2% organic growth in sales, although currency translation marked down the slight growth to -1%. These factors resulted in increased Free Cash Flows by 65% following capital expenditure from Q3 2018.

Sales in the Water Systems segment missed management’s estimates for 3 consecutive quarters in 2019 due to unfavorable weather conditions, lowered government spending on water related projects and decreased foreign economic activity. Operating Income for the Water Systems segment was down 8% from the first nine months of 2018 as well. Management anticipates conducting strategic acquisitions to increase sales. Along with strategic acquisitions, the NOAA forecasted lowered precipitation levels within the United States during 2020 providing tailwinds to Water Systems Sales.

What has the stock done lately?

FELE appreciated by 13.91% over a 3-month period. FELE lowered 4.22% following 2019 Q3 earnings release, despite beating market expectations. The decrease in value can be attributed to decreased sales in the Water Systems segment missing management’s estimates.

Past Year Performance:

FELE’s YTD performance has been exceptional with a 24.32% increase in value. Strategic acquisitions increased the Distribution segment sales by 9.3% from 2018. The Water Systems Segment has decreased in organic sales growth by 1% from 2018. The Fuel Systems segment has top line sales growth at par with 2018 results and experienced record operating income within the segment largely due to sales in favorable product mixes. 

Source: FactSet

My Takeaway

Franklin Electric has produced record sales in FY 2018 and are indicating a slow down on top-line growth during 2019. Sales and operating income in the Water Systems segment have decreased and influenced management to lower 2019 Guidance on EPS by 10 cents. Water Systems segment has experienced headwinds including unfavorable weather conditions and poor sales mix. The Fuel Systems segment experienced a decrease in organic growth due to currency exchanges by -1% and remain at par in operating income growth from 2018. The Fuel Systems segment is gaining brand recognition and continued producing near record numbers from 2018. FELE was added to the portfolio with an expected value of $44.20 and has exceeded the valuation. Franklin Electric’s largest revenue segment, Water Systems, has stagnated in growth during 2019 while their other segments are continuing growth in top and bottom lines. With these factors, it may be time to reap the upside of Franklin Electric unless the firm finds solutions to spark organic or inorganic growth in Water Systems segment. 

Source: FactSet

A Current AIM International Equity Holding: Globant SA (GLOB, $102.07): “Huge Growth With Globant’s Disruptive Technologies”

Globant SA (GLOB, $102.07): “Huge Growth With Globant’s Disruptive Technologies”

By: Vicente Cabrera, 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:

• Globant SA (GLOB) engages in the delivery of information technology services; providing innovation, maintenance, and testing services for clients. GLOB software products help connect their clients with millions of consumers and employees and strives to improve their clients’ efficiency.

• GLOB has four main business segments: Media & Entertainment (24% of FY18 revenue), Banks, Financial Services & Insurance (22%), Travel & Hospitality (17%), and Technology & Telecommunications (15%).

• GLOB generates a majority of its revenue from the United States (78% of FY18 revenue) followed by Spain (5.8%), Chile (4.7%), and Argentina (3.6%).

• The company’s goal is to become a leading provider in the information technology that continues to leverage the latest technologies in the digital and cognitive space to help transform their clients technologically.

• The company has been achieving this goal by growing revenues with existing and new clients, creating innovative software solutions, obtaining highly qualified and trained employees, and successfully pursuing strategic acquisitions.

Key points:

• On May 22, 2019 Argentine Congress passed a bill approving a new tax benefit consisting of a promotional Knowledge Economy regime. This bill will promote economic activities that are knowledge-based by reducing the total amount of corporate income tax to companies like GLOB that endures expenses in the software research and development activities. This regime will be in force from January 1, 2020 until December 31, 2029. This bill will create fiscal stability for federal tax purposes, a reduced corporate income tax rate of 15%, and tax credit certificates. Currently, there is a similar incentive in place called Software Promotion Law that was extended to December 2019. Because of the new bill passed, GLOB will be able to continue to have the tax benefits in Argentina until 2029.

• On Nov 24, 2019 BBVA USA Bancshares Inc. invested $504,000 in GLOB making Hedge funds and other institutional investors 81.81% of the company’s stock.

• The company has a debt-to-equity ratio of 0.15 (Comps average: .75), a quick ratio of 1.65 (2.37), and a current ratio of 1.65 (2.38).

What has the stock done lately?

Over the past year, GLOB has been trading between $50.46-$112.33 and reached its record high in July 29, 2019. Since reaching its high, GLOB slowly dropped in price reaching $86.90. After reaching this low, GLOB had a steady increase in price and with a strong third quarter results, the stock continues to have a strong trajectory to reach new highs.

Source: FactSet

Past Year Performance: 

Over the past year, GLOB has outperformed the market significantly. While the SP 50-SPX(indexed to GLOB) has grown 20.56%, GLOB has outperformed the market by over 70%, achieving a wealthy 94.42% growth. On November 14, 2019, GLOB delivered their third quarter financial results with an EPS of $0.62 beating the estimated $0.59. The company also announced their third quarter revenue of $171.3 million, up 27.3% year over year.

Source: FactSet

My Takeaway

GLOB was pitched on March 22, 2019 and added to the international AIM fund at a price of $70.57, with an initial price target of $86.28. Even though GLOB has substantially passed the target price, I believe GLOB’s growth is not stopping anytime soon and should be kept in the International AIM Fund.

A Current AIM International Equity Holding: China Mobile Limited Sponsored ADR (CHL, $37.73): “The Mobile Services Giant Shows Potential for Rebound Following Ten-Year Low”

China Mobile Limited Sponsored ADR (CHL, $37.73): “The Mobile Services Giant Shows Potential for Rebound Following Ten-Year Low”

By: Adán Jiménez, 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

• China Mobile Limited (NYSE: CHL) is the world’s largest mobile telecommunications company with a market cap of over $160B USD. The company is headquartered in Hong Kong and also operates in mainland China, serving approximately 940 million customers. China Mobile generates its revenue from data services, voice services (fees associated with traditional phone calls), and sales of products, namely terminals.

• The telecommunications industry in China is shifting from rapid growth to high value services. The homogenous nature of mobile services has led to tight competition and high saturation which has made the industry suffer as a whole.

• Challenges from the world economy as well as a domestic slowdown has depressed China’s GDP growth to a 27-year low of about 6%. In addition, industry-wide increases in capital expenditures and decreasing returns from data traffic, largely due to regulation, present further challenges for China Mobile.

• Management is looking to find a balance between short-term growth and long-term development. They are hoping to leverage their economies of scale in maintaining their industry-leading profitability. China Mobile also believes that they will be the leading player in the development of 5G in China, hopefully boosting consumer sentiment and stock performance.

Key points: 

Feeling the effects of uncertainty from a quickly changing industry, China Mobile is currently trading at a 10-year low of $37.73 USD. Chairman Yang Jie observes that the digital world has shifted from “enabling infrastructure” to a core force that connects the rest of the real economy. China Mobile’s lack of readiness in navigating the changing landscape, along with increased competition and a global economic slowdown, continues to have adverse effects on the company’s performance.

Furthermore, and perhaps one of the most challenging risks the company faces, is the national “speed upgrade and tariff reduction” policy that has been implemented by the Chinese government. Telecommunication tariffs are the contracts between providers and the public which outlines rates, fees, and other charges. These tariffs, along with increased competition, have decreased revenue per mobile per month nearly 8% in 2018. These policies will continue to be a major risk going forward.

Despite its currently unfavorable position, there is strong reason to believe that China Mobile will rebound. The company had a tough year, but it remains a massive value company with an outstanding customer base and an abundance of resources.

Recognizing the reigning influence of the digital world, China Mobile has positioned itself to be a future leader in the 5G space. Building on existing 4G stations, the company plans to build 50,000 5G stations and launch 5G in over 50 cities. They have also increased their focus on building partnerships with internet companies that will increase their data traffic—up 132.5% in the first half of 2019 compared to the same time period in 2018 at an impressive 7.1 GB per user per month. China Mobile has certainly recognized several strategies to revitalize its performance in the near future. The company’s extensive network, powerful brand value, and economies of scale gives it the competitive advantage to outperform the industry and potentially rally its way back up.

What has the stock done lately?

In the five weeks following the third quarter earnings call on October 21, 2019, CHL stock has continued to plummet—down nearly 10% since the announcement. Operating income, down 0.2% from the same period last year, added further uncertainty to already declining market sentiment.

Past Year Performance: 

For many of the challenging factors previously mentioned, CHL is currently trading at a 10-year low of $37.73/share, down 22.6% from the same time last year and over 30% since the company’s announcement of its 2018 results in late March this year.

Source: FactSet

My Takeaway

China Mobile had one of the most difficult years in company history in 2018 and its market value has continued to suffer tremendously. The stock was initially added to the AIM International Equity fund at $57.52/share with a price target of $65.77 in May of 2016. For the most part, the price has seen a steady decline since its addition to the portfolio and a severe decline in the past year. The original drivers of 4G expansion, a successful acquisition of TieTong that resulted in greater distribution of broadband services, and a growing customer base have all been fulfilled. These drivers certainly supported China Mobile’s performance for a couple of years but management’s inability to adapt to the changing industry and increasing competition has done its damage on the company’s market value. Still, it seems that China Mobile has finally developed sound strategies that can be successfully implemented with their competitive advantage of cost-efficiency and massive customer base. Although it is unlikely that CHL will reach the original target price, the company has the ability to rebound from this recent drop and at least reduce our loss. For these reasons, it is recommended that China Mobile be held in the AIM International Equity portfolio under tight watch.

Source: FactSet

A Current AIM Small Cap Equity Holding: SolarWinds Corp. (SWI, $19.25): “SolarWinds Could Use a Tailwind”

 SolarWinds Corp. (SWI, $19.25): “SolarWinds Could Use a Tailwind”

By: Nicholas Arco, 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

• SolarWinds Corp. (NYSE:SWI) provides information (IT) infrastructure management software. SWI’s products are designed to help IT professionals manage and monitor their IT environments whether they are on-premise or in the cloud.

• Over the last 3 quarters, SWI has managed to grow subscription revenues substantially.  

• Management expects the company’s leverage ratio to fall to 3.5x by the end of the year.  

• A key risk to this stock, considering its high leverage, is the interest rate environment. Since being pitched, rates have remained favorable.

Key points: 

Part of the investment thesis for SolarWinds was its ability to drive recurring revenues higher. A high recurring revenue number is somewhat comforting to investors as it provides significant visibility into a company’s top line. In the case of SWI, it is derived, in part, by subscription revenues, which over the last three quarters, have seen significant accelerations. At the end of 3Q19, subscriptions comprised 34.6% of total revenues, versus 31.7% in the year ago quarter. Additionally, for this part of the thesis to play out, recurring revenues had to grow into the mid 80% range. SWI is well on its way, growing this number by almost 2% in the last 11 months.

After returning to the public markets from a two-year stint as a private company, SolarWinds, expectedly, carries a high debt burden. Key to this stock’s investment thesis was its ability to deliver on the promise of paying down debt. So far, SWI has been able to do just this, decreasing its leverage ratio from 5x in 2018 to 4.2x as of June 2019. At the end of the most recent fiscal quarter, the leverage ratio sat at 3.9x and SWI expects the number to be close to 3.5x at the end of 2019.

Much of SWI’s debt is attached to a LIBOR-based floating rate. If interest rates were to rise, the company could be subject to much higher annual payments—particularly burdensome to a company with high leverage. However, since December 2018, LIBOR rates have come down significantly and should remain depressed for at least the time being.

What has the stock done lately?

Over the last three quarters, the stock

 has returned 11.47%, but in the last nine quarters, this number drops to 1.91%. Ove the last 6 months, SWI has returned 7% versus the Russell 2000’s 7.84%. While only lagging its benchmark by 84 bps, SWI seems to have trouble substantially breaking through $20 and has been trading sideways over the last month (between $18.40 and $19.60).

Past Year Performance: 

SWI has increased 37.7% over the last year versus 19.03% for the S&P 500 and 6.76% for the Russell 2000. Again, while this seems impressive, the stock looks to have stagnated; so, going forward, it is possible that returns will be minimal until it has a breakout. However, on the other hand, investors should take comfort in the fact that the short-term downside seems to be limited due the tight range that it has been trading in.  

Source: FactSet

My Takeaway

The investment thesis for SolarWinds seems to be playing out quite nicely as management delivers on its promises. The substantial growth in subscriptions has driven recurring revenues higher even quicker than expected and leverage continues to fall at phenomenal rates. However, a plausible fear is that this type of deliverance may have come to be expected by investors. While performance has been strong (even when compared to consensus numbers), the stock has continued to trade sideways. For now, it remains a hold.

Source: FactSet

A Current AIM Small Cap Equity Holding: Nicolet Bankshares (NCBS, $70.19): “Is this the Peak for Nicolet?”

Nicolet Bankshares (NCBS, $70.19): “Is this the Peak for Nicolet?”

By: Andrew Diedrich, 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

• Nicolet Bankshares, Inc. (NAS: NCBS) is a holding company that engages in the provision of commercial and consumer banking services through its subsidiary, Nicolet Bank. Its principal business is banking consisting of commercial and personal checking accounts, savings accounts, money market accounts, CDs, and individual retirement accounts; as well as other ancillary banking related products and services. The bank operates Northeastern Wisconsin and the Upper Peninsula of Michigan. NCBS is headquartered in Green Bay, Wisconsin.

• NCBS acquisition of Choice Bancorp Inc. expands the company’s Northeastern Wisconsin niche.

• NCBS recently hit 52-week high on the heels of strong Q3 results. The strong Q3 results primarily driven by better than expected fee income.  

• Net interest margins detracted last quarter indicating that the company is feeling the pressure of the low interest rate environment.

Key points:

With the consolidation in the banking industry it is becoming more difficult to survive without proper scale. NCBS responded to this trend through the expansion of its Northeastern Wisconsin niche. The recent acquisition of Choice Bancorp Inc. allows NCBS to expand its presence in the promising Oshkosh marketplace. Oshkosh is consistently ranked highly in employment and education: 3^rd best job market in the US in 2018, #5 best college town in 2018, and #3 in under the radar cities with great tech career opportunities. Choice Bancorp had the largest market share in the area with $314 million in deposits. This acquisition further reinforces Nicolet as the lead local community bank throughout the Fox Valley region of Wisconsin.

In Q3 NCBS’s core fees were quite strong and increased higher than the street expected, growing at 5% during the quarter. This growth in fees was primarily due success in the home mortgages business. Mortgage originations in 2019 lean heavily to refinancing versus purchases given the recent decline in interest rates. NCBS is the #1 mortgage lender in Green Bay YTD. Fee income is important for banks because it diversifies their revenue streams away from lending.

In this low rate environment, banks face compressed margins due to reduced income from interest bearing assets. Despite this difficult backdrop, NCBS posted impressive numbers in Q3. Average loan growth and net interest income expanded further than the street expected at 5.3% and 0.8% respectively. However, net interest margin (NIM) detracted 9 bps in Q3 to 4.19%. The declining NIM is concerning since this is the primary driver of alpha in bank stocks.

The high competitiveness in the commercial banking space makes it difficult to grow organically. Digital capabilities are one of the final places that banks can invest in to grow their businesses from the inside. NCBS does not have any major active digitization improvement strategies, which concerns me about future organic growth. The continuous evolution of mobile banking will have a dramatic effect on client growth and retention. Generation Y, which includes people ages 10-30, currently relies heavily on mobile phones for paying bills, a trend that is expected to increase over he next five years. Companies with well-developed mobile platforms will be able to attract more young adults, ensuring their future deposit growth and lending capabilities.

What has the stock done lately?

Since Q3 earnings were released, NCBS has been on a tear. NCBS broke into a new 52-week high on November 7^th hitting a peak of $70.51. NCBS had its highest quarterly net income (13.5 million) and EPS (1.40) in the Company’s history. For the stock to continue its climb, the company will need to find a way to manage its costs effectively to improve the operating leverage of the company.

Past Year Performance:

NCBS has increased 43.50% in value over the past year. With the current shares trading at over 14 times the street’s 2020E EPS estimates, NCBS is currently at a deserved but substantial premium in comparison to its peers.  

Source: FactSet

My Takeaway

NCBS’s profitability is strong and the company is seeing steady loan growth. NCBS has proven it is an experienced and effective leader in M&A through its successful integration of its past three acquisitions of First Menasha, Baylake, and Financial Advisor purchases. Based on this past record of success, I believe the company will successfully integrate the resources of Choice Bank. However, I am concerned about the company’s ability to organically grow in the coming years. Currently, NCBS does not have any digital initiatives in place to improve its mobile banking operations. Because of this, I recommend holding the stock. It will be important to monitor the company’s initiatives to organically grow to determine whether the stock has a path for expansion.  

Source: FactSet

A Current AIM Small Cap Equity Holding: California Water Service Group (CWT, $50.25): “Is This Water Utility Drought-Proof?”

California Water Service Group (CWT, $50.25): “Is This Water Utility Drought-Proof?”

By: Tyler Bomba, 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

• California Water Service Group (NYSE: CWT) operates as a pure play water distribution company. Providing water service to over 2 million customers, CWT operates in California (94.1% of FY18 Revenues), New Mexico (0.7%), Washington (1.7%), and Hawaii (3.5%). The company was founded in 1926 and is headquartered in San Jose, California. 

• Operating revenues are $537.7M YTD, up 1.3% from 2018. Operating expenses were also up, YTD $458.6M, compared to $446.8M YTD 2018. Net income YTD 2019 is $51.8M, an increase of 3.1% from YTD 2018.

• On October 8, 2019 California Water and the California Public Utilities Commission (CPUC) Public Advocates Office filed a settlement in the 2018 General Rate Case (GRC), agreeing on $609 million of new capital authorizations.

• Capital spending is down 8.5% at $194.9 million YTD, compared to 2018. Estimates are higher for capital spending in 202O and 2021 due to the anticipated full GRC settlement.

• CWT’s subsidiary, Washington Water Service Company, has agreed to acquire Rainier View Water Company.

Key points: 

With the last quarter of 2019 remaining, net income and earnings per share are slightly up compared to 2018. This is primarily attributable to rate increases, offset in part by increases in operation expenses. Capital investments are down for the year, with the hope of increasing spending with the adoption of the new GRC.

General Rate Cases (GRCs) give utility companies the opportunity to address the costs of operating and maintaining the utility system. On July 2, 2018, CWT filed its 2018 GRC requesting $828.5 million in new capital investments over the period 2019-2021. As of October 8, 2019, $609 million of new capital authorizations and approximately $200 million authorized improvements initiated in 2018 and prior were settled on. There are still issues outstanding regarding the continuation of the Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism, balancing accounts for pensions and medical costs, depreciation rates, working capital, Allowance for Funds Used During Construction, and advanced metering. There is a decision scheduled to be made on the remaining disputed issues by the end of 2019, with new rates to go into effect January 2020.

Washington Water Service agreed to acquire Rainier View Water on November 6, 2019. Rainier View Water owns and operates 27 water systems that provides water to 35,000 people. This almost doubles CWT’s customer base in Washington to 81,500 people. This acquisition is subject to certain closing conditions, including appropriate due diligence and approval by Washington Utilities and Transportation Commission. No details about price have been disclosed as of November 15, 2019.

What has the stock done lately?

Since the settlement of the 2018 GRC on October 8, 2019 the stock is down about 4.5%. This is due in part to the outstanding issues within the GRC not being accepted as of October 8. Since the announcement of the acquisition of Rainier View Water Company, the stock is down almost 6%. Without any more information that what was discussed above, the market is left to guess what the impact of the acquisition will be.

Past Year Performance: 

CWT’s price has increased 10.7% over the past year. The stock hit its 52 week high on September 3^rd of $57.48 and has since dropped to $50.25. With a contract awarded to CWT to provide water to Travis Air Force Base for the next 60 years and an agreement of $550 million in unsecured revolving credit facilities, CWT has seen an overall increase in the share price. Volatility in the price is due to the uncertainty with the adoption of the 2018 GRC, which was mostly approved on October 8.

Source: FactSet

My Takeaway

California Water Service Group has positioned themselves well to remain relevant for the foreseeable future. With the partial adoption of the General Rate Case and the acquisition of Rainier View Water Company, CWT will see increases in top and bottom line numbers. The 2018 GRC will allow for the needed capital investment in the California Water infrastructure. However, due to the heavily regulated nature of the utility industry,  if there was any potential issues with the remaining parts of the GRC or adopting a new GRC in the future, CWT could face hardship. I rate this company a hold, with the potential of growth from the GRC and acquisition.

Source: FactSet

A Current AIM International Equity Holding: Enbridge Inc. (ENB, $38.20): “Don’t Burn this Bridge”

Enbridge Inc. (ENB, $38.20): “Don’t Burn this Bridge”

By: Max Rothweiler, 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:

·         Enbridge Inc. (NYSE:ENB) is a Canadian multinational energy transportation company engaged in the transportation, distribution, and generation of energy in North America. The company is North America’s third largest gas utility by consumer count and transports around 20% of U.S. consumed natural gas.

·         ENB doubled its EPS from 2018 to 2019 for the six months ended June 30 in each of these years. This was largely attributed to the company’s near 10% increase in operating revenues.

·         In liquids, ENB delivered a record 2.785 million barrels per day on their Mainline System in 2018.

·         As a natural gas provider, ENB delivers energy to approximately 3.7 million homes and businesses.

·         ENB has a $19 billion inventory of secured projects which are projected to be running between 2019 – 2023. Management considers these as “growth projects” which will build on several key business segments.

Key Points:

Enbridge has a low risk business model that enables steady and predictable cash flows – the firm estimates $3.5 billion per year in positive free cash flow by 2020. In 2018, Enbridge sold off $7.8 billion in non-core assets. These assets were gathering and processing businesses, and management believes they are more equipped to handle a pure utility and pipeline business. The profits from these divestments were used to strengthen the balance sheet by repaying debt. This helped bring down the debt to EBITDA metric to 4.7x which was below the target of 5.0x.

 According to the International Energy Agency, global energy demand will increase 25% by 2040. This increase is greatly driven by greater urbanization and population growth. As demand for energy continues to grow, demand for energy transportation and distribution will also grow.

Enbridge has the largest organic capital growth program across its industry. Since 2009, the firm has brought around $50 billion worth of projects into service which strengthened the firm’s strategic position and core asset base. Management projects that organic growth opportunities will cause annual distributable cash flow per share growth between 5-7% past 2020.

What has the stock done lately?

ENB is trading near its 52-week high, and the stock has experienced mild volatility as oil prices fluctuated. When oil prices dropped in late September 2019 (WTI and Brent were down around 15%), ENB dropped about 5%. Since then, the company has recovered and is up about 8%. Most recently, ENB met earnings estimates for Q3. The firm reported EPS at $.42.

Past Year Performance:

Over the past year, ENB’s stock price is up 19.38% from $32 to $38.20. The 52-week high and low are $38.34 and $29.21 respectively. In January 2019, ENB experienced a significant rise in stock price. ENB rose 17.8% during this month mostly due to a bounce back in the oil market and performance upgrades from analysts.

Source: FactSet

My Takeaway:

As 2020 approaches, ENB is positioned well for growth. Management is confident that their low risk business model combined with nearly $20 billion worth of new projects beginning operations in 2020 – 2023 will help drive free cash flow. Additionally, ENB has industry leading organic growth and disciplined capital allocation. The U.S. Energy Information Administration projects U.S. crude oil production to increase .9 million to 13.2 million barrels per day in 2020. This will further increase the demand for ENB’s crude oil and liquids transportation system which is the longest in the world. ENB has proven to be a strong performing company that should continue to grow.

Source: FactSet