Can These 2 Natural Gas Stocks Heat up Your Portfolio This Winter?

Posted on by The INO.com Team

During the winter months, energy prices typically experience favorable conditions due to increased heating demand in colder weather, which widens the gap between supply and demand. The use of natural gas tends to reach its peak at the beginning of the winter season as households and office buildings turn to heaters.

The Energy Information Administration (EIA) raised U.S. natural gas consumption estimates by 230 MMcf/d to 93.28 Bcf/d for the fourth quarter of 2023 and by 240 MMcf/d to 104.22 Bcf/d for the first quarter of 2024.

Colder U.S. Conditions Drive Energy Prices Higher

Natural gas prices yesterday added to Tuesday’s gains and reported a 4-week high. Gas prices surged Wednesday on forecasts for colder U.S. temperatures, which would drive heating demand for natural gas. Forecaster Maxar Technologies said that a storm next week will bring wintry conditions to the nation’s eastern half and snow in the Midwest from June 8 to June 12.

On the other hand, the U.S. Climate Prediction Center stated that there is a greater than 55% chance the present EI Nino weather pattern will remain strong in the Northern Hemisphere through March, keeping temperatures above average and weighing on gas prices. As per AccuWeather, El Nino will limit snowfall across Canada this season in addition to causing above-normal temperatures across North America.

Last Thursday’s weekly EIA report was bullish for natural gas prices as natural gas inventories for the week ended December 22 declined by 87 Bcf to 3,577 Bcf, a larger draw than expected 79 Bcf decline; however, less than the 5-year average draw of – 123 Bcf.

As of December 22, natural gas inventories were up 12.1% year-over-year and 10% above their 5-year seasonal average, signaling adequate gas supplies.

Record U.S. Oil and Gas Production and Exports

Winter weather can be a significant tailwind for natural gas prices, with colder temperatures more supportive of heating demand, particularly from residential and commercial segments. But with high gas inventories, a price rally may not persist this winter.

U.S. oil and gas production has grown at a much faster pace, offsetting most of the OPEC+ efforts to push up energy prices by coordinated supply cuts.

Earlier, various OPEC+ oil producers announced voluntary production cuts totaling 2.2 million barrels per day (bpd) for the first quarter of 2024. Leading the cuts is OPEC's kingpin and the world’s biggest crude exporter, Saudi Arabia, which extended a voluntary oil output cut of 1 million bpd, priorly intended by the end of December 2023.

The U.S. is currently producing more than 13 million bpd of crude oil and is headed to a continued increase in the short and medium term. According to data from the EIA, U.S. output hit a new monthly record of 13.252 million bpd in September 2023 and kept the pace at 13.248 million bpd in October. As a result, the country’s crude oil exports also surged.

Meanwhile, U.S. LNG exports are breaking records. The U.S. exported more LNG during the first half of 2023 than any other nation, the EIA reported earlier this year. The average LNG exports during this period were 11.6 billion cubic feet per day (Bcf/d), up 4% from the first half of 2022. Also, October 2023 witnessed record LNG shipments, as per EIA data.

2 Natural Gas Stocks Which Could Benefit from Strong Winter Demand

With a $40.35 billion market cap, Cheniere Energy, Inc. (LNG) is an energy infrastructure company that mainly engages in liquified natural gas (LNG) related businesses in the U.S. The company owns and operates the Sabine Pass LNG terminal in Cameron Parish, Louisiana and the Corpus Christi LNG terminal near Corpus Christi, Texas.

In addition, Cheniere Energy owns the Creole Trail pipeline, a 94-mile pipeline interconnecting the Sabine Pass LNG terminal with several interstate pipelines and operates the Corpus Christi pipeline, a 21.5-mile natural gas supply pipeline interconnecting the Corpus Christi LNG terminal with various interstate and intrastate natural gas pipelines.

On November 29, 2023, LNG and Cheniere Energy Partners, LP (CQP) announced that Sabine Pass Liquefaction Stage V, LLC entered a long-term Integrated Production Marketing (IPM) gas supply agreement with ARC Resources U.S. Corp., a subsidiary of ARC Resources Ltd. (ARX), a prominent natural gas producer in Canada.

Under the IPM, ARC Resources agreed to sell 140,000 MMBtu per day of natural gas to SPL Stage 5 for 15 years, commencing with commercial operations of the first train of the Sabine Pass Liquefaction Expansion Project. This deal will allow Cheniere to deliver high quantities of Canadian natural gas to Europe.

“We are pleased to build upon our existing long-term relationship with ARC Resources, and further demonstrate Cheniere’s ability to construct innovative solutions that help meet the needs of customers and counterparties along the LNG value chain while delivering value to our stakeholders,” said Jack Fusco, Cheniere’s President and CEO.

On November 2, LNG’s subsidiary, Cheniere Marketing, LLC, entered a long-term liquified natural gas sale and purchase agreement (SPA) with Foran Energy Group Co. Ltd, a leading natural gas company based in China.

Under the SPA, Foran will purchase nearly 0.9 mtpa of LNG for 20 years from Cheniere Marketing on a free-on-board basis for a purchase price indexed to the Henry Hub price, plus a fixed liquefaction fee. Deliveries will commence upon the start of commercial operations of the second train of the SPL Expansion Project in Louisiana.

Also, on October 30, Cheniere’s Board of Directors declared a quarterly cash dividend of $0.435 ($1.74 annualized) per common share, up nearly 10% from the previous quarter, paid on November 17, 2023, to shareholders of record as of the close of business on November 9, 2023. The dividend increase reflects the company’s commitment to return enhanced value to its shareholders.

LNG’s trailing-12-month gross profit margin of 86.74% is 83.3% higher than the 47.32% industry average. Likewise, its trailing-12-month EBITDA margin and net income margin of 85.84% and 50.83% are considerably higher than the industry averages of 34.76% and 13.93%, respectively.

Furthermore, the stock’s trailing-12-month ROTC and ROTA of 41.15% and 29.82% favorably compared to the respective industry averages of 9.30% and 7.49%.

In the third quarter that ended September 30, 2023, LNG reported total revenues of $4.16 billion, while its LNG revenues came in at $3.97 billion. Its income from operations was $2.76 billion, compared to a loss from operations of $3.02 billion in the previous year’s quarter.

Also, the company’s net income attributable to common stockholders came in at $1.70 billion, or $7.03 per share, compared to a net loss attributable to common stockholders of $2.39 billion, or $9.54 per share in the prior year’s period, respectively.

During the quarter, the company generated a distributable cash flow of approximately 1.2 billion. As of September 30, 2023, Cheniere’s cash and cash equivalents stood at $3.86 billion, compared to $1.35 billion as of December 31, 2022.

For the full year 2023, the management expects consolidated adjusted EBITDA to be between $8.30 and $8.80 billion. The company’s distributable cash flow is projected to be in the range of $5.80-$6.30 billion.

CEO Jack Fusco commented, “Persistent volatility in commodity markets continues to reinforce the value of our commercial offering and the stability and visibility of our cash flows, and we are confident in achieving full year 2023 results at the high end of our guidance ranges.

“Looking ahead to 2024, construction on Corpus Christi Stage 3 continues to progress ahead of plan, and I am optimistic first LNG production from Train 1 will occur by the end of 2024,” Fusco added.

Analysts expect LNG’s EPS for the fiscal year (ended December 2023) to increase 519.5% year-over-year to $34.94. Further, the company’s EPS is expected to grow 23.3% per annum over the next five years. Moreover, Cheniere topped the consensus EPS estimates in all four trailing quarters, which is impressive.

Shares of LNG have surged more than 10% over the past six months and approximately 20% over the past year.

Another stock, Pioneer Natural Resources Company (PXD), could benefit from solid natural gas demand during the winter season. PXD operates as an independent oil and gas exploration and production company in the U.S. It explores for, develops, and produces oil, natural gas liquids (NGLs), and gas. The company has operations in the Midland Basin in West Texas.

During the third quarter of 2023, Pioneer’s continued operational excellence in the Midland Basin allowed the company to place 95 horizontal wells on production. More than 100 wells with lateral lengths of 15,000 feet or greater were placed for production during the first three quarters of last year.

In total, the company has more than 1,000 future locations with 15,000-foot lateral lengths in its drilling inventory.

On November 2, PXD’s Board of Directors declared a quarterly base-plus-variable cash dividend of $3.20 per common share, comprising a $1.25 base dividend and a $1.95 variable dividend. This represents a total annualized dividend yield of nearly 5.4%. The dividend was paid on December 22, 2023, to stockholders of record at the close of business on November 30, 2023.

PXD’s trailing-12-month gross profit margin of 52.23% is 10.4% higher than the 47.32% industry average. Moreover, its trailing-12-month EBITDA margin and net income margin of 48.07% and 26.22% compared to the industry averages of 34.76% and 13.93%, respectively.

Additionally, PXD’s trailing-12-month ROCE, ROTC, and ROTA of 22.32%, 14.57%, and 14.04% are higher than the respective industry averages of 19.99%, 9.30%, and 7.49%. The stock’s trailing-12-month levered FCF margin of 11.96% is 104.1% higher than the 5.86% industry average.

For the third quarter that ended September 30, 2023, PXD’s total production averaged 721 thousand barrels of oil equivalent per day (MBOEPD), near the top end of quarterly guidance. The company’s revenues and other income from the oil and gas segment came in at $3.46 billion. Cash flow from operating activities during the quarter was $2.10 billion, leading to a solid free cash flow of $1.20 billion.

However, the company’s net income attributable to common shareholders was $1.30 billion and $5.41 per share, down 34.4% and 31.8% from the prior year’s quarter, respectively.

As per the updated full-year 2023 guidance, Pioneer increased the midpoints of full-year 2023 oil and total production guidance with ranges of 370-373 MBOPD and 708-713 MBOEPD, respectively. But it decreased drilling, completions, facilities and water infrastructure capital guidance to $4.375-$4.475 billion.

Also, the company lowered full-year 2023 capital guidance for exploration, environmental and other capital to $150 million.

Street expects PXD’s revenue and EPS to decline 19.8% and 30.5% year-over-year to $19.50 billion and $21.25, respectively. But for the fiscal year 2024, the company’s revenue and EPS are expected to grow 14.8% and 8.8% from the prior year to $22.38 billion and $23.12, respectively.

PXD’s stock has gained nearly 12% over the past six months and more than 10% over the past year.

Bottom Line

Colder temperatures prompt households and office buildings to rely more heavily on natural gas as a heating fuel. As a result, natural gas prices witness a surge.

However, with natural gas inventors still above the five-year average, the prices may not witness a sustained rally this winter.

Despite relatively weaker prices, oil and natural gas production will continue to climb, creating ample growth opportunities for energy infrastructure companies. Amid this backdrop, investors could consider adding fundamentally sound energy stock LNG to their portfolio for potential gains.

However, given its mixed last reported financials and bleak near-term outlook, it could be wise to wait for a better entry point in PXD.

Buy Alert: How BlackRock Partnership Positions JPM Stock in Cryptocurrency Surge

Posted on by The INO.com Team

Bitcoin is the digital world's non-sovereign reserve currency and serves as a unique way to diversify portfolios, consequently enhancing total risk-adjusted returns. However, despite numerous possibilities for capitalizing on this preeminent virtual asset, there remained one notable deficiency: the creation of a spot bitcoin ETF.

The pursuit of a spot bitcoin ETF has been a considerable endeavor. The SEC (Securities and Exchange Commission) has denied all 33 previous applications spanning across multiple filers ever since the Winklevoss twins first initiated their bid over a decade ago.

However, due to recent developments like BlackRock Inc (BLK) – managing an incredible $8.5 trillion in assets under management (AUM) – joining the fray in June, Grayscale's court triumph against the SEC rescinding its past application disapproval, followed by the fresh approvals of a leveraged Bitcoin futures ETF and Ethereum futures ETFs, we have come closer than ever.

Further adding to this progress, according to recently disclosed data, BLK has submitted an application for a spot Bitcoin ETF despite unwavering prior rejections from the SEC.

The SEC has previously spurned applications on the basis that Bitcoin's decentralization and volatility could hinder fund managers from safeguarding investors against market manipulation. Currently, all U.S.-traded bitcoin ETFs are tied to futures contracts traded on the Chicago Mercantile Exchange.

In its application, BLK announced JPMorgan Securities as one of the "Authorized Participants" for its proposed Bitcoin ETF.

U.S. banks like JPMorgan Chase & Co. (JPM), governed by strict regulations, currently cannot hold Bitcoin directly. However, the proposed structural change to spot bitcoin ETFs could alter this scenario. The modification would enable APs to create new shares within the fund using cash instead of strictly relying on cryptocurrency. This paves the way for these regulated banking entities that are unable to hold crypto assets directly.

Authorized participants generally oversee the creation and redemption of ETF shares in the primary market, ensuring the ETF’s price aligns with the value of the underlying securities, in this case, Bitcoin.

Securing authorized-participant agreements is typically straightforward for ETF issuers, yet concerns were raised that bitcoin funds could face challenges due to cryptocurrencies being a relatively new asset class.

If approved, JPM could potentially serve this role for the first such ETF in the U.S., a move anticipated to attract billions in institutional capital and stimulate the cryptocurrency market.

Critics have been quick to note the contradiction in JPM's involvement, given CEO Jamie Dimon's repeated criticism of Bitcoin, advocating for a government ban on cryptocurrencies due to concerns over their legitimacy.

However, Bloomberg Intelligence analysts suggest the SEC could approve spot Bitcoin ETF proposals committing to cash-only creations and redemptions, provided there are agreements with authorized participants. They estimate a 90% probability of SEC approval, with several firms expected to launch a spot Bitcoin ETF as early as January.

A spot bitcoin ETF is an investment tool that enables investors to gain exposure to the price fluctuations of bitcoin in their typical brokerage accounts. Unlike derivative contracts, this ETF directly invests in bitcoin as the underlying asset.

APs are economically motivated to leverage arbitrage opportunities in the market, a process involving the trading of ETF shares or underlying securities when minor price discrepancies arise between the two.

In scenarios where ETF shares trade at a premium or discount relative to bitcoin's actual price, APs step up to either create or redeem ETF shares in larger volumes. This action essentially arbitrages any difference, aligning the ETF share price with Bitcoin's cost.

Spot bitcoin ETFs present a spectrum of possibilities for both retail and institutional investors looking to speculate on bitcoin. They circumvent the technical complications of managing a cryptocurrency wallet and alleviate security concerns related to the safeguarding of private keys.

The appointment of JPM as an AP could positively influence the bank's share value, as it demonstrates the bank's readiness to engage in the burgeoning cryptocurrency sector and opens possibilities for a new stream of revenue via arbitrage and liquidity provision.

Nevertheless, the financial performance of JPM is not solely determined by this engagement. It is also contingent on external factors like the SEC’s verdict on approving the spot bitcoin ETF, the market's demand and mood toward bitcoin and other cryptocurrencies, and the overall regulatory and competitive landscape of the banking industry. These elements could concurrently sway the stock performance of JPM.

Bottom Line

The potential for a U.S. spot bitcoin ETF cannot be understated, given the vast expanse of the American capital market. According to figures from the SIFMA, American-held assets represent an impressive 40% of total global fixed-income assets and equity market cap. Moreover, ETFs in the U.S. are more prevalent as part of the total asset picture than they are in other regions. They make up 12.7% of the equity assets in America, compared to 8.5% in Europe and 4.4% in the Asia-Pacific.

This equates to a U.S. ETF market valued at around $7 trillion, significantly larger than Europe’s $1.5 trillion or Asia-Pacific’s $1 trillion markets. Judging from another angle, considering that the assets handled by broker-dealers, banks, and registered investment advisors (RIAs) in the U.S. reach into the trillions, a minute fraction of these managed and brokerage assets transitioning into a spot bitcoin ETF could significantly affect the financial landscape.

It's also worth highlighting that the U.S., according to Chainalysis's Global Crypto Adoption Index, ranks fourth in crypto adoption. This high level of acceptance might translate well into investment. Banking institution JPM's openness to engaging with this burgeoning market might lead to advantageous outcomes.

However, prospective investors should consider various additional factors. For instance, JPM's recent earnings were boosted by Republic's purchase, an influence expected to wane in upcoming quarters.

Notably, card delinquencies rose in November, potentially impacting both the card business and JPM's overall financial standing adversely. Commercial R/E, Sovereign Debt, and recession reports add complexity when attempting to reconcile them with JPM's high stock value.

The bank has recorded two instances of flat dividend growth over the 12 quarters, while inflation rates were significantly high. JPM has not been a reliable dividend growth investment over the past five years, with growth approximating only about 10%.

Investors in search of steady returns may want to tread carefully. JPM's forward dividend yield currently stands at 2.44%, lower than its four-year average yield of 2.91% and below the 3.32% sector median.

Moreover, the relatively low Price/Earnings ratio of 10.34x suggests market apprehension.

Given this scenario, investors should wait for a better entry point in the stock.

2024 Buy or Sell: Analyzing the Volatile Journey of Plug Power (PLUG) Stock

Posted on by The INO.com Team

Plug Power Inc.’s (PLUG) shares have taken shareholders on a roller-coaster ride in recent years. Nearly five years earlier, the stock traded for around $1 per share when no one cared much about it. During 2020 and 2021, high investor enthusiasm led to the stock surging above $70. But it has been on a downtrend since then, currently trading under $5.

Shares of PLUG finished at $3.22 on November 10, 2023, their lowest level since April 2020. The company’s shares dived on its “going concern” warning and tax credit fight that could cause its hydrogen industry efforts to go wasted.

The stock has plunged nearly 55% over the past six months and more than 60% over the past year.

Now, let’s discuss the key factors that could impact PLUG’s performance in the near term:

Trembling Liquid Hydrogen Market

PLUG raised a “going concern” warning regarding a severely constrained liquid hydrogen market in North America. The market has been dealing with several frequent force majeure events, resulting in volume constraints, which have delayed Plug’s deployments and service margin improvements.

The hydrogen fuel-cell marker has been grappling with liquidity issues and has lost more than half of its market capitalization since the start of 2023. Plug Power’s 2023 overall financial performance has been negatively impacted by “unprecedented” supply challenges in the hydrogen network in North America.

“The company is projecting that its existing cash and available for sale and equity securities will not be sufficient to fund its operations through the next twelve months,” PLUG said.

PLUG will require additional capital to fund its operations. The company added that it was pursuing various debt capital and project-financing solutions, including corporate debt and a loan program from the U.S. Department of Energy.

Stringent Hydrogen Regulations

The hydrogen producer and fuel-cell maker’s future is heavily dependent on support from the federal government. In November 2023, PLUG was counting on what later turned out to be delayed “government support through a potential loan and clarity on hydrogen tax credits.”

The tax credit could apply to companies, including Plug Power, that use green hydrogen, which is produced by splitting water via electrolysis and could de-carbonize the shipping and heavy industry sectors.

On December 22, the White House unveiled highly anticipated strict hydrogen regulations in support of environmentalists but opposed by business and clean power industry groups. 

Plug Power labeled the new rules on how hydrogen projects can qualify for a tax credit “disappointing” but also expects restrictions around a critical measure of Joe Biden’s signature climate law to get looser once the Treasury Department finalizes them.

“We do expect the regulations to loosen up,” Andy Marsh, president and chief executive officer of Plug Power, said in an interview on Bloomberg Television. “I’ve talked to many senators who tell me it will get easier — not harder.” 

In order to qualify for the tax credit worth as much as $3 per kilogram, hydrogen projects would need to use electricity from newly built clean energy sources and, beginning in 2028, ensure that production occurs during the same hours as those clean sources were operating. The Biden administration is taking public comment on the requirements, which could change before being finalized.  

Marsh, in his interview, said the company’s modeling showed these regulations would reduce U.S. hydrogen output by 70% by 2030. Plug and other hydrogen producers are planning an aggressive effort to “help straighten the regulations out,” he added.

According to Northland analyst Abhishek Sinha, while the policy document has nuances suggesting a possible pathway for PLUG’s plans to qualify for credits, some of its plans could come “under direct scrutiny.”

“Georgia plant could be entangled in additionality factor but PLUG believes RECs (renewable energy credits/certificates) should qualify for PTC,” Sinha added. “Although Texas plant gets power supply from wind farm, the issue for PLUG would be to meet the hourly matching requirements after 2028. NY plant gets hydro power but there is ambiguity around that too in terms of eligibility. All in all, hourly matching is the most concerning factor for PLUG.”

Deteriorating Financial Performance

For the third quarter that ended September 30, 2023, PLUG reported net revenue of $198.71 million, missing analysts’ estimate of $221.73 million. This compared to the net revenue of $157.99 million in the same quarter of 2022. The company’s gross loss widened by 199.5% year-over-year to $137.97 million.

The hydrogen producer’s operating loss came in at $273.97 million, compared to $159.75 million in the prior year’s quarter. Its loss before income taxes worsened by 70.3% year-over-year to $288.21 million. PLUG’s net loss widened by 66% from the previous year’s quarter to $283.48 million.

Plug Power posted a net loss per share of $0.47, compared to $0.30 in the same period last year. This also missed the consensus loss per share of $0.31.

Furthermore, PLUG’s cash and cash equivalents stood at $110.81 million as of September 30, 2023, compared to $690.63 million as of December 31, 2022. The company’s current assets were $2.24 billion versus $3.31 billion as of December 31, 2022.

As of September 30, 2023, the company’s current liabilities increased to $930.59 million, compared to $635.28 million as of December 31, 2022.

“This was a difficult quarter,” CEO Andy Marsh told investors during the company’s earnings call.

“Over the past several months, there have been enormous challenges associated with the availability of hydrogen, primarily due to downed plants, including our Tennessee facility, and temporary plant outages across the entire hydrogen network,” Marsh added. “Additionally, the price of these stations for hydrogen has been over $30 per kilogram at the pump, about twice the normal price.”

Mixed Analyst Estimates

Analysts expect PLUG’s revenue for the fourth quarter (ended December 2023) to grow 82.9% year-over-year to $403.75 million. However, the company is expected to report a loss per share of $0.32 for the same quarter. Also, Plug Power has missed the consensus EPS estimates in each of the trailing four quarters, which is disappointing.

For the fiscal year 2023, Street expects PLUG’s revenue and loss per share to widen 52.9% and 21.6% year-over-year to $1.07 billion and $1.52, respectively. In addition, the company’s revenue for the fiscal year 2024 is expected to increase 56.8% from the previous year to $1.68 billion.

But analysts expect the company to report a loss per share of $0.89 for the ongoing year.

Elevated Valuation

In terms of forward EV/Sales, PLUG is currently trading at 2.90x, 58.6% higher than the industry average of 1.83x. Likewise, the stock’s forward Price/Sales of 2.52x is 73.7% higher than the industry average of 1.45x.

Decelerating Profitability

PLUG’s trailing-12-month gross profit margin of negative 32.84% compared to the 30.28% industry average. Moreover, the stock’s trailing-12-month EBITDA margin and net income margin of negative 92.24% and negative 106.74% are favorably compared to the industry averages of 13.73% and 6.09%, respectively.

Furthermore, the stock’s trailing-12-month ROCE, ROTC, and ROTA of negative 24.57%, negative 11.57% and negative 17.42% compared to the respective industry averages of 12.30%, 7.05%, and 4.99%. Also, its trailing-12-month levered FCF margin of negative 158.88% compared to the industry average of 5.98%.

Rating Downgrades

PLUG’s stock has already been beaten up; however, Morgan Stanley sees more concerns for the clean energy company’s future. On December 6, Morgan Stanley analyst Arthur Sitbon downgraded Plug’s shares to Underweight from Equal Weight and slashed his price target on the stock from $3.50 to $3.

Sitbon added that Plug Power is plagued by “liquidity concerns and worsening hydrogen economics.”

Another Morgan Stanley analyst, Andrew Percoco, sees a “negative risk-reward” for PLUG shares. “Even after the underperformance in 2023, we see significant risk around PLUG’s business model given the operational challenges that the company has faced in commercializing its first few green hydrogen facilities,” Percoco said.

He added, “On paper, PLUG’s strategy makes sense to us, but we have reduced confidence in the company’s ability to execute on that strategy barring a potential dilutive capital raise and a near-perfect execution going forward.”

Analysts at JPMorgan, Oppenheimer, and RBC Capital also downgraded the stock and lowered their price targets.

“While we believe Plug Power can cycle past its current cash flow issues, the current operating and capital markets environments are challenging and we believe PLUG shares are likely to be range bound over the next several quarters until clarity around its balance sheet are sorted out,” said J.P. Morgan analyst Bill Peterson.

The analyst downgraded PLUG’s stock to Neutral from Overweight.

Bottom Lin

PLUG reported significant earnings miss in the third quarter of 2023. The hydrogen fuel cell maker’s higher-than-expected losses were hit by “unprecedented supply challenges” in the hydrogen network in North America. The company further projected its potential inability to fund its operations over the next 12 months amid supply constraints and a severe cash burn rate.

Also, the company will likely be affected by the proposed hydrogen tax rules. PLUG CEO Andy Marsh dubbed the new rules on how hydrogen projects can qualify for a tax credit “disappointing.”

Several analysts downgraded PLUG’s stock and cut their price targets, given concerns about mounting losses, funding requirements, and supply chain disruptions, which have dampened Wall Street's sentiment about the clean energy company.

Given Plug Power’s dismal financial performance, declining profitability, high cash burn rate, elevated valuation, and bleak near-term outlook, it could be wise to avoid this stock now.

2024 Outlook: Analyzing RIVN’s Competitive Edge Gained From AT&T Partnership

Posted on by The INO.com Team

The automotive industry is witnessing a major seismic shift toward technological advancements. Electric vehicles (EVs) are becoming mainstream at an unprecedented rate, showing no signs of slowing down in the upcoming decade. The U.S. EV sales surpassed the 300,000 mark for the first time in 2023's third quarter.

Despite the turbulence created by widespread price wars throughout 2023, coupled with inflation and surplus inventory, the EV market continues to ascend. Even though the growth hasn't been as vigorous as initially forecasted, companies like Rivian Automotive, Inc. (RIVN) continue to carry momentum into 2024, recently enhancing its prospects with positive news.

Wireless carrier AT&T Inc. (T) has entered into a partnership agreement with RIVN, announcing its decision to receive a range of pilot electric delivery vans (EDVs), R1T pickup trucks, and R1S sport utility vehicles commencing in 2024. The main objectives of this joint venture are to assess cost-efficiency, amplify safety measures, and reduce the carbon footprint.

For many years, T has been progressively converting its commercial fleet into vehicles operating on alternative fuels, including compressed natural gas and hybrid electric vehicles. To meet its ambitious goal of achieving carbon neutrality by 2035, T is leveraging EVs coupled with route optimization and artificial intelligence (AI). Adding to this initiative, T is the exclusive provider of connectivity for RIVN vehicles, facilitating seamless over-the-air (OTA) software updates.

Considering stringent environmental, social, and corporate governance (ESG) goals and emission reduction targets, companies are fiercely competing to transition toward zero-emission fleets. High interest rates have posed affordability challenges for consumers as they increase the already hefty price tags of EVs compared to traditional gas-powered vehicles, leading to raised concerns over softening demands.

RIVN reported considerable interest and demand for its electric vans. In November, the company announced it was in dialogues with other potential customers, reinforcing speculations of additional EDV partnerships on the horizon for RIVN despite not revealing any specific names.

Last month, RIVN ended its exclusivity deal with Amazon (AMZN) for its EDV. This move provides RIVN with the opportunity to market its EDVs to a broader client base, with T reportedly being its first outside customer. The termination doesn’t impact the previously stated commitment from RIVN to fulfill an order of 100,000 vans for AMZN by the end of this decade. Indicative of progressive momentum, AMZN already had over 10,000 Rivian EDVs in operation as of October.

Moreover, RIVN also outlined its production strategy for the near future. The manufacturing plant in Normal, Illinois, is scheduled to cease operations for a single week at the closing of 2023 in anticipation of a more extended shutdown in mid-2024.

This hiatus aims to facilitate extensive line modifications and advancements, including part design changes, component simplification, and optimizations to elements such as the HVAC system and vehicle body structure. While these temporary production halts are expected to reduce output in the short term, they are deemed necessary to enable cost reductions and augment long-term production capacity.

“The impacts of the shutdown are temporary in nature, but the benefits will be there for the future,” said RIVN’s chief financial officer, Claire McDonough.

Outlook

Last month, Irvine, California-based RIVN raised its production forecast for the full year by 2,000 vehicles to 54,000 units on the back of sustained demand for its trucks and SUVs. Management forecasts 2023 adjusted EBITDA of negative $4 billion.

Analysts expect RIVN’s revenue to surge 164.6% year-over-year to $4.39 billion, while EPS is expected to stay negative at $4.92 for the fiscal year ending December 2023.

Moreover, RIVN’s stock is trading above its 50-, 100-, and 200-day moving averages, indicating an uptrend. Wall Street analysts expect the stock to reach $25.63 in the next 12 months, indicating a potential upside of 8.9%. The price target ranges from a low of $15 to a high of $40.

What are the Bumps in the road for RIVN?

Since its IPO two years ago, the automaker has experienced a tumultuous journey due to overall market conditions and operational challenges. Widespread supply-chain disruptions have further exacerbated conditions for the entire automobile industry, with RIVN facing its unique set of complexities during its launch. Some challenges the company encountered included product recalls and price rises that were subsequently required to be reversed.

RIVN’s products remain strong, even with a relatively limited product line. Moreover, it is expected to begin production in 2026 in Georgia on a lower-cost consumer EV called the R2. Given the steady increase in production, it is not anticipated that RIVN will reach profitability imminently.

The company's quarterly cash expenditure is estimated to be approximately $1 billion. Given its significant distance from attaining mass production levels required for improved cost efficiency, RIVN may face additional challenges in the foreseeable future.

Bottom Line

RIVN's operation has seen decent stability in the past year, although its share value contends with apprehensive investors troubled by unmet production benchmarks, expanding debts, and considerable financial losses. So far this year, RIVN shares have appreciated by roughly 28%. Yet, they currently trade 70% lower than its IPO price of $78.

The earlier-than-expected bond issuance in October took shareholders by surprise, triggering a sell-off that significantly undercut the stock's value. However, market analysts foresee possible improvements as the company extricates itself from supply chain predicaments that have plagued recent quarters.

The automaker's upbeat forecast serves as a glimmer of hope for a sector grappling with the adverse effects of inflated costs, sagging consumer interest, and price reductions aimed at stirring demand. In a departure from the norm, RIVN has opted not to lower prices, choosing instead to manufacture its Enduro powertrains in-house, a decision aimed at decreasing supplier dependence and cost overheads.

Despite delivering vehicles for eight consecutive quarters, the company still posts negative gross margins. RIVN's immediate priority is achieving a positive gross margin, which will place it on the path to operating profit. This feat, however, cannot be accomplished until gross profits outperform rising operating expenditures, currently estimated at an average of about $1 billion per quarter.

Following this, RIVN needs to generate sufficient operational profit and cash flow to fund its CAPEX, consequently transitioning RIVN to cash flow positivity. Achieving this landmark will require a minimum of five years, given that sales of R1 and EDV models alone will not secure profitability or positive cash flow. The successful launch and profitable scaling of the R2 model by 2026 is integral to the realization of this goal.

Its primary challenge is attaining positive free cash flow to sustain growth independent of balance sheet reserves. Although the financial outlook has improved, there are enduring concerns over whether its $7.94 billion cash reserve, as of September 2023, would suffice, considering that RIVN postponed previously anticipated CAPEX this year. An initial CAPEX projection of $2 billion in 2023 has been revised to $1.1 billion.

RIVN can leverage capital markets for additional funding. While debt financing may not be the most attractive approach amid the prevailing high-interest-rate climate, interest rates could potentially decrease by the time RIVN finds a pressing need for such resources, likely not before 2026. Another plausible circumstance suggests that an increased valuation for RIVN could render equity financing a more appealing strategy to accrue funds instead of accumulating debt.

In either case, it's noteworthy to mention the company’s commendable efforts toward curbing its cash burn rate. Investors are advised to keep a vigilant eye on RIVN's financial activities in the coming year to monitor whether this trend sustains. An unforeseen increase in cash burn over a span of a few quarters would not necessarily amount to a significant detriment to the firm, given the time it has before the requirement to inject more capital arises.

Keeping these considerations in mind, investors should wait for a better entry point into the stock.

 

Is Verizon (VZ) Stock a Buy Ahead of January 23 Earnings Release?

Posted on by The INO.com Team

With a market cap of $156.86 billion, Verizon Communications Inc. (VZ) is a leading provider of communications, information technology, and entertainment products and services to consumers, businesses, and governmental entities globally. The company is scheduled to report fourth-quarter 2023 earnings on January 23, 2024.

Analysts expect VZ’s revenue and EPS for the fourth quarter (ending December 2023) to decline 2% and 8.9% year-over-year to $34.55 billion and $1.08, respectively.

For the fiscal year 2023, Street expects the company’s revenue to decrease 2.5% year-over-year to $133.47 billion. The consensus EPS estimate of $4.69 for the current year indicates a decline of 9.4% year-over-year.

Shares of VZ have plunged nearly 1% over the past five days but gained more than 2% over the past six months. On the other hand, the benchmark S&P 500 has surged approximately 1.7% over the past five days and more than 9% over the past six months.

While VZ’s stock has underperformed the S&P 500 lately, the telecom company remains attractive for income-focused investors, given its reliable dividend.

Now, let’s review the key factors that could influence VZ’s performance in the near term:

Mixed Last Reported Financial Results

For the third quarter that ended on September 30, 2023, VZ reported revenue of $33.34 billion, slightly surpassing analysts’ estimate of $33.31 billion. However, this compared to the revenue of $34.24 billion in the same quarter of 2022. The decline was primarily due to reduced wireless equipment revenue and lower postpaid upgrade activity.

But the company’s wireless service revenue came in at $19.30 billion, up 2.9% year-over-year. This increase was mainly driven by targeted pricing actions implemented in recent quarters, the larger allocation of administrative and telco recovery fees from other revenue into wireless service revenue, and growth from fixed wireless offerings.

During the quarter, total broadband net additions were 434,000, representing the fourth straight quarter in which Verizon reported more than 400,000 broadband net additions. Total broadband net additions included 384,000 fixed wireless net additions, an increase of 42,000 fixed wireless net additions from the third quarter of 2022.

The telecom giant currently has nearly 10.3 million total broadband subscribers, including around 2.7 million subscribers on its fixed wireless service. The company reported 72,000 Fios Internet net additions, up from 61,000 Fios Internet net additions in the prior year’s quarter. 

Verizon’s third-quarter operating income declined 5.3% year-over-year to $7.47 billion. Its net income was $4.88 billion, a decrease of 2.8% from the prior year’s quarter. The company posted an adjusted EPS of $1.22, surpassing the consensus estimate of $1.18, but down 7.6% year-over-year.

The company’s adjusted EBITDA for the quarter grew 0.2% year-over-year to $12.20 billion. Its year-to-date cash flow from operations was $28.80 billion, up from $28.20 billion in 2022. Also, free cash flow year-to-date totaled $14.60 billion, an increase from $12.40 billion in the prior year.

VZ’s unsecured debt as of the end of the third quarter decreased by $4.90 billion sequentially to $126.40 billion. At the end of third-quarter 2023, the company’s ratio of unsecured debt to net income (LTM) was nearly 5.9 times, and its net unsecured debt to adjusted EBITDA was approximately 2.6 times.

Raised Free Cash Flow Guidance

“We continued to make steady progress in the third quarter with a clear focus on growing wireless service revenue, delivering healthy consolidated adjusted EBITDA and increasing free cash flow,” said Verizon Chairman and CEO Hans Vestberg. 

After reporting solid third-quarter results momentum, Verizon raised its free cash flow guidance for the full year 2023. The company expects free cash flow above $18 billion, an increase of $1 billion from the previously issued guidance. Cash flow from operations is expected in the range of $36.25 billion to $37.25 billion.

In addition, for 2023, the company expects total wireless service revenue growth of 2.5% to 4.5%. Its adjusted EBITDA and adjusted EPS are projected to be $47-$48.50 billion and $4.55-$4.85, respectively.

Attractive Dividend

On December 7, VZ declared a quarterly dividend of 66.50 cents ($0.665) per outstanding share. The dividend is payable on February 1, 2024, to Verizon shareholders of record at the close of business on January 10, 2024.

“We are committed to delivering value to our customers and shareholders as we execute on our focused network strategy,” said Hans Vestberg. “Our financial discipline and strong cash flow continue to put the company in a position for the Board to declare a quarterly dividend.”

Verizon has around 4.2 billion shares of common stock outstanding. The company made more than $8.2 billion in cash dividend payments in the last three quarters.

VZ pays an annual dividend of $2.66, which translates to a yield of 7.13% at the current share price. Its four-year average dividend yield is 5.42%. The company has raised its dividend for 17 consecutive years, the longest current streak of dividend increases in the U.S. telecom industry.

Progress in 5G Network Buildout

On December 21, Verizon announced the expansion of its reliable 4G and high-speed 5G service throughout Florida, Kennesaw, GA, and Aiken County, SC, among other areas.

This service is part of the company’s massive multi-year network transformation, which has not only brought 5G service to more than 230 million people and 5G home internet service to nearly 40 million households but has also added more capabilities, upgraded the technology in the network, paving the way for personalized customer experiences and offering a platform for enterprises to boost innovation.

According to a report by Grand View Research, the global 5G services market is projected to reach $2.21 trillion by 2030, expanding at a CAGR of 59.4% during the forecast period (2023-2030). Meanwhile, North America 5G services market is expected to grow at a CAGR of 51.6% from 2023 to 2030.

The growing demand for high-speed data connectivity worldwide, rising investments in 5G infrastructure, and rapid integration of advanced technologies like IoT and AI are estimated to propel the adoption of 5G services. Verizon is well-positioned to capitalize on the significant 5G adoption and fixed wireless broadband network momentum.

Fierce Competition

While Verizon continues to accelerate the availability of its 5G ultra-wideband network across the country, the company faces heightened competition from wireless industry players, including AT&T, Inc. (T), T-Mobile US, Inc. (TMUS), Vodafone Group Plc (VOD), and SK Telecom Co., Ltd. (SKM).

Mixed Historical Growth

VZ’s revenue grew at a CAGR of 1.5% over the past three years. But its EBIT decreased at a CAGR of 0.3% over the same period. The company’s net income and EPS improved at CAGRs of 4.5% and 4% over the same time frame, respectively.

Further, the company’s levered free cash flow increased at a CAGR of 20.1% over the same period, and its total assets improved at a CAGR of 9%.

Robust Profitability

VZ’s trailing-12-month gross profit margin and EBIT margin of 58.69% and 22.87% are 20% and 183.1% higher than the industry averages of 48.90% and 8.08%, respectively. Likewise, the stock’s trailing-12-month net income margin of 15.58% is significantly higher than the industry average of 3.21%.

Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 22.56%, 7.04%, and 5.43% are considerably higher than the respective industry averages of 3.41%, 3.55%, and 1.24%. Its trailing-12-month levered FCF margin of 13.31% is 73.9% higher than the industry average of 7.65%.

Mixed Valuation

In terms of forward non-GAAP P/E, VZ is currently trading at 7.95x, 49.1% lower than the industry average of 15.62x. The stock’s forward EV/EBITDA of 6.96x is 20.3% lower than the industry average of 8.73x. Also, its forward Price/Book and Price/Cash Flow of 1.57x and 4.23x compared to the industry averages of 1.99x and 10.03x, respectively.

However, the stock’s forward non-GAAP PEG multiple of 32.47 is significantly higher than the industry average of 1.54. Its forward EV/Sales of 2.49x is 34.7% higher than the industry average of 1.85x.

Analyst Price Targets

On December 19, Oppenheimer analyst Timothy Horan maintained a Buy rating on VZ and set a price target of $43 on the stock. In addition, Verizon received a Buy rating from Citi’s Michael Rollins in a report issued on December 13. However, Well Fargo maintained a Hold rating on VZ’s stock.

Bottom Line

Verizon’s disciplined approach to driving strong cash flow, operating the business, and serving its customers allowed it to raise its dividend for the 17th consecutive year.

However, analysts appear bearish about the telecom company’s near-term prospects. Verizon’s revenue and EPS growth will likely face challenges, and this slowdown is primarily attributed to fierce competition from leading industry players such as AT&T and T-Mobile, which are consistently undergoing significant changes in their operations.

Given slowing revenue and EPS growth, heightened competition, and mixed valuation, it seems prudent to wait for a better entry point in this stock.