2014 – Bilan du blog

décembre 30, 2014

Les lutins statisticiens de WordPress.com ont préparé le rapport annuel 2014 de ce blog.

En voici un extrait :

Un tramway de San Francisco peut contenir 60 personnes. Ce blog a été visité 580 fois en 2014. S’il était un de ces tramways, il aurait dû faire à peu près 10 voyages pour transporter tout le monde.

Cliquez ici pour voir le rapport complet.

The 5 Reasons Apple’s Earnings Report Was Huge

avril 24, 2014


  • Apple’s earnings report is a big deal and represents a shift in shareholder-friendliness.
  • There are five key reasons Apple’s earnings report was so impressive.
  • Above all, this latest peek inside of Apple shows that the money-making machine is alive and well.

For a while it has been tough to own Apple (AAPL). It seemed for months like the most exciting thing to happen to the stock was when someone like Carl Icahn came along to try to get Apple to do something.

Whether or not it was Icahn’s doing I’ll never know or really care. But now Apple investors have something to get excited about.

Though the headline numbers are huge, this earnings report was much bigger than the headline numbers. Yesterday’s announcement was filled with news that should be music to the ears of shareholders.

I’ve highlighted the five major reasons that the Apple earnings report is such a big deal.

1. Apple destroyed analyst expectations for EPS and revenue

Apple reported diluted earnings per share (EPS) of $11.62 compared to analyst estimates of $10.18. The company also destroyed its revenue estimates. Apple reported $45.6 billion in revenue compared to analyst estimates of $43.53 billion.

Critics could point to dampened expectations ahead of earnings or the one-off boost from iPhone sales in China resulting from the completion of Apple’sdeal with China Mobile (CHL).

But Apple’s revenue numbers and EPS were huge any way you slice it. Exceeding revenue expectations by $2 billion is absurd. Many publicly traded companies don’t earn that much in a year. Many aren’t even profitable!

2. Apple’s gross product margin has stabilized

After peaking in 2012 at 47.37%, Apple’s gross product margin has fallen significantly. Considered an important measure of the health of a company’s profitability, it’s no coincidence that Apple’s stock price peaked shortly after the margins began to fall.

Apple’s margins bottomed in the second quarter of 2013 at 36.87%, a huge decline from the peak just 15 months earlier. Yesterday Apple announced that the gross product margin in the last quarter rose to 39.3%, which means three consecutive quarters of rising margins.

(click to enlarge)

AAPL data by YCharts

Apple’s ability to turn around its gross product margin will provide the fuel to send the stock higher.

3. Apple boosted its stock repurchase program

Last year Apple began to repurchase its own stock. The company announced $60 billion in planned repurchases to be completed by the end of 2015. Tim Cook announced yesterday that Apple has already repurchased $46 billion of the authorized $60 billion.

As Tim Cook reiterated that Apple executives and its board of directors believe the company to be undervalued, he announced an additional $30 billion in share repurchases. This is a 50% increase to what was already the largest stock buyback program ever. What it means is that between now and the end of next year, Apple will likely double what it has already invested in its own shares.

As the number of shares outstanding continues its precipitous fall, the value of my shares rises. Since I think Apple is a great value at these prices, I’m more than happy to let Apple buy a few dozen billion dollars worth of stock.

And if « a few dozen billion » seems ridiculous that’s because it is. Apple’s buyback program alone would be among the world’s 100 largest companies.

(click to enlarge)

AAPL Shares Outstanding data by YCharts

4. Apple announced a 7:1 stock split

Apple announced yesterday that it would split its stock, the first time it has done so since 2005.

Stock splits aren’t intended to change the value of a company. Rather, they have more of a psychological effect on investors.

A 7:1 split makes a single $700 share of stock turn into seven $100 shares of stock. The investor didn’t make or lose any money, but suddenly buying an additional share only costs $100 where it had cost $700 the day before.

Still, Apple’s upcoming stock split is a big deal. Per yesterday’s close of around $525, a 7:1 split will make Apple a $75 stock. Even if the price rises all the way to $600 before the split takes effect in June, each share will cost around $85. This is far more accessible to retail investors than the current price.

By making the stock trade at a more reasonable price, Apple should regain the attention of retail investors as it did in 2010-2012. Apple may also be included in the Dow Jones Industrial Average.

Better yet, the move suggests Apple is now willing to do what it must to appease investors.

5. Apple boosted its dividend and plans to continue doing so

Yesterday Apple raised its dividend for the second time in two years. All by itself, the 8% dividend hike is great news. But more important was the commentary by Apple executives that the company plans to increase its dividend every year.

When I heard that final bit on the conference call my ears perked up. I know the implications of such a statement.

Apple is now a dividend growth stock.

I had previously considered Apple to be a soon-to-be dividend growth stock, that’s why I personally own it in a retirement account with dividends reinvesting. But confirmation that Apple’s management team is taking it down the path of dividend growth stocks is terrific news.

The Bottom Line

A huge earnings beat with quality metrics, an 8% dividend boost, a 50% increase to the repurchase program and a stock split are certainly enough to move the needle for Apple shares today.

But I think what Apple just put in place will attract investors, not justtraders.

What I heard yesterday is exactly what I and many other Apple investors have been waiting for. A cash-rich, shareholder-friendly, money-printing machine is exactly the kind of company I want to own for a long time. And that’s exactly what is going to attract new investors to Apple right now and send shares flying higher.

Key Takeaways From Enterprise Products Partners LP’s

avril 4, 2014


  • EPD’s extensive asset base and forward-thinking management team provide lots of useful info about the direction of future commodity prices and investable trends.
  • At its recent Analyst Day, management again highlighted the movement of the opportunity set downstream, including LPG and refined-product exports.
  • EPD management reiterated the bullish outlook for the Permian Basin espoused by the largest oil-field services companies and the region’s producers.
  • EPD identified the deepwater Gulf of Mexico as an oft-overlooked source of upside for midstream operators.

The largest publicly traded partnership by market capitalization, Enterprise Products Partners LP (EPD) has amassed an unparalleled asset base in terms of its interconnections, geographic diversity and exposure to a wide range of hydrocarbons.

Equally important, the master limited partnership (MLP) boasts a forward-thinking management team that always seems to be ahead of the crowd in identifying and taking advantage of emerging growth opportunities in the rapidly shifting North American energy landscape.

Case in Point: Enterprise Products Partners was the first midstream operator to develop significant capacity to export propane, providing customers with a demand outlet for the growing oversupply and giving the MLP a built-in hedge against weak North American prices.

This unique combination of a well-integrated asset base and prescient management team makes the stock a foundational holding for investors and has enabled the partnership to increase its distribution in 38 consecutive quarters.

And the management team’s candor and insight make Enterprise Products Partners’ quarterly earnings calls and conference presentations must-attend events for investors looking to spot profitable trends in the energy patch.

The blue-chip MLP’s recent analyst meeting (slideswebcast) lived up to this high standard, with management sharing its updated forecast for North American energy markets and highlighting several emerging opportunities.

Commodity Outlook

Anthony Chovanec, Enterprise Products Partners’ vice president of fundamentals and strategic assessment, started his presentation with a familiar slide that emphasizes the decades of drilling ahead in the major US shale oil and gas plays.

(click to enlarge)
Source: Enterprise Products Partners LP

Although this massive resource base creates an impressive opportunity set for almost every link in the energy value chain, the shale oil and gas revolution hasn’t been without its fair share of growing pains and volatility.

Midstream (pipelines) and downstream (refining and marketing) operators continue to play catch up with the upsurge in US hydrocarbon production, creating short-term price dislocations and increasing the risk of volatility during temporary capacity outages.

The nation’s newfound energy abundance has also overwhelmed North American demand for natural gas and some natural gas liquids, depressing prices for these commodities and creating export opportunities.

Here’s Enterprise Products Partners’ updated assessment of this ever-shifting landscape.

1. Natural Gas

Enterprise Products Partners’ base case calls for US natural-gas production to reach 90 billion cubic feet per day (bcf/d) by 2020, an increase of 25 percent from the 72 bcf/d extracted last year.

(click to enlarge)
Source: Enterprise Products Partners LP

This forecast represents an upward revision from the MLP’s prior projections, which had targeted annual natural-gas output of 84.1 billion cubic feet per day by 2020.

Excluding demand constraints, Chovanec indicated that the US has the capacity to produce an average of 110 bcf/d to 115 bcf/d by 2020. However, the vice president of fundamentals and strategic assessment also warned analysts, « There’s no way we’re going to have that kind of market. »

At the Analyst Day meeting, Chovanec suggested that investors expecting a sustainable recovery in North American natural-gas prices likely would be disappointed.

Explaining this forecast, the executive cited the steady decline in production costs and solid profit margins in plays that also produce significant quantities of crude oil and natural gas liquids:

I have to tell you, I think that the forward curve is right on target with these numbers here today. So what you see is rather than gas prices going up, the producers are working to be able to get their cost down. And so it’s a break-even analysis that we do, as long as you have good benefits from processing the margins and from associated crude oil, you’re going to produce natural gas all that you can. So it’s hard, I don’t know exactly where that number runs, but it’s hard to get too bullish on natural gas prices.

But investors shouldn’t confuse the tepid outlook for natural-gas prices with a lack of opportunity for midstream and downstream operators.

Surging production from the Marcellus Shale creates a need for additional pipeline capacity to meet customer demand in the Northeast, especially when regional gas consumption jumps to 20 bcf/d in the winter.

And when demand tumbles to 9 bcf/d during the summer, producers need pipeline capacity that will move their volumes into the Midwest and to the Gulf Coast.

The promise of exporting liquefied natural gas (LNG) – Enterprise Products Partners’ outlook assumes that the US ships between 5 and 6 bcf/d internationally as we get closer to 2020-also creates opportunities for header systems that feed these terminals.

Meanwhile, investors shouldn’t overlook rising pipeline exports to Mexico and growing demand for natural gas among electric utilities in the Southeast.

2. Natural Gas Liquids

Natural gas liquids (NGL) are heavier hydrocarbons that occur underground with natural gas (methane) and comprise five distinct commodities: ethane and propanebutane and isobutane, and natural gasoline.

Source: Energy Information Administration, Energy & Income Advisor

The price of a mixed barrel of these hydrocarbons, some of which can replace naphtha and other oil derivatives in industrial and petrochemical processes, traditionally has tracked movements in the price of crude oil.

However, this relationship has broken down in recent years because of weakness in ethane and propane prices, the two most prominent NGLs by volume.

Enterprise Products Partners expects US NGL production to surge by 79 percent through 2020, thanks to superior price realizations relative to fields that produce primarily natural gas and rising exports of propane and butane.

(click to enlarge)
Source: Enterprise Products Partners LP

Higher propane prices and the construction of world-scale petrochemical facilities on the Gulf Coast should increase demand for ethane by 600,000 to 750,000 barrels per day.

Meanwhile, favorable cash costs relative to naphtha have stirred up interest in ethane exports-a niche opportunity that Enterprise Products Partners estimates at 100,000 barrels per day.

(click to enlarge)
Source: Enterprise Products Partners LP

Although the price spreads between ethane and naphtha (a derivative of crude oil) makes a compelling case for seaborne exports to European petrochemical companies, capital-intensive facility upgrades and a lack of specialized carriers present impediments to a near-term upsurge in shipments of this NGL.

Given the growth on the supply side, management expects the price of this commodity to remain depressed in North America, leading to ongoing ethane rejection in the Midcontinent region and other plays that are further from the fractionation complex on the Gulf Coast.

In contrast, favorable price spreads and growing export capacity should continue to encourage increasing US exports of propane and butane, helping to balance these markets and provide some price support.

To this end, Enterprise Products Partners’ rapid expansion of its dock capacity on the Gulf Coast last year enabled the US to overtake Qatar as the world’s leading propane exporter and helped to prevent the domestic market from slipping into an oversupply.

(click to enlarge)
Source: Enterprise Products Partners LP

3. Crude Oil

Enterprise Products Partners’ internal forecast calls for North American oil production to increase by more than 5 million barrels per day through 2020, with domestic supplies of light-sweet crude oil from the Bakken Shale, Eagle Ford Shale and Permian Basin largely displacing imports to the Gulf Coast and the East Coast.

(click to enlarge)
Source: Enterprise Products Partners LP

With imports of light-sweet crude oil already at negligible levels on the Gulf Coast, this outlook isn’t particularly controversial and appears to be more of a fait accompli.

However, the MLP’s projections also call for rising production of medium crude oil and the increasing availability of bitumen extracted from Canada’s tar sands to reduce Gulf Coast imports of these grades to 100,000 barrels from 3.4 million barrels.

William Ordemann, Enterprise Products Partners’ senior vice president of onshore crude oil and offshore, also warned about an emerging oversupply of condensate-a hydrocarbon that’s used to dilute heavy crude oil for pipeline transportation-and light-sweet crude oil:

Personally, I think there is going to be too much of it [light-sweet crude oil], that’s going to have to go some place. So I think it’s going to reach saturation. I have a growing concern into the front end units of these refineries and handling light-ins is limited without expansions or having a few expansions that have been announced. But at the same time when we bring the heavy crudes from Canada, you’ve got to remember what the diluents in there. That’s probably a 30 percent to 40 percent light end stream that has the end and the refinery as well. So I think we do at some point in time, if we hadn’t seen it already with the condensates, start to see some depressed pricing on the Gulf Coast with the light sweet stuff.

This outlook gibes with our concern that Light Louisiana Sweet (LLS) crude oil could be poised for another fall, especially during periods of heavy refinery turnarounds.

In fall of 2013, we pared our exposure to most US upstream operators and went overweight our favorite refiner. We would look for a downdraft in WTI and LLS as an opportunity to establish or build positions in EOG Resources(EOG) and other higher-quality producers.

As to the potential for US crude-oil exports, the blue-chip MLP’s management demurred from making any projections. (We tackle this thorny subject in The Push for US Crude-Oil Exports.)

Investment Implications

Based on Enterprise Products Partners’ existing asset base and outlook for North American energy markets, management highlighted a number of key growth opportunities that the MLP will pursue over the next few years.

Although an investor can profit from these opportunities via a position in Enterprise Products Partners, other names offer concentrated exposure to these trends and more upside potential.

1. Robust Opportunity Set Downstream

Enterprise Products Partners’ management team confirmed that the growing surplus of natural gas, NGLs and light-sweet crude oil continues to create investment opportunities on the demand side.

The MLP already emerged as the early leader in US propane exports, loading about 77 percent of US shipments from its facilities on the Gulf Coast. Next year, the partnership will complete projects that will more than double its current export capacity to about 16 million barrels of propane and/or butane per month.

Management also highlighted a number of opportunities to handle the surging supply of crude oil headed to the Gulf Coast and growing exports of gasoline, diesel and other refined products to international markets.

Investors looking to profit from these trends should consider a stake inOiltanking Partners LP (OILT), an MLP owns significant dock space on the Gulf Coast and has reaped the rewards of working with Enterprise Products Partners to build the nation’s largest export terminal for propane and butane.

Oiltanking Partners earns volume-based throughput fees on these shipments and a share in the margin received on every customer vessels loaded at the Houston Terminal.

In addition to its partnership with the leading US propane exporter, Oiltanking Partners owns significant storage capacity on the Houston Ship Channel and in Beaumont, Texas, and has ample opportunity to expand these facilities to take advantage of robust customer demand.

An anticipated secondary offering to fund a drop-down transaction from Oiltanking Partners’ general partner could give patient investors an opportunity to add exposure to this growth story.

2. Bullish on the Permian Basin

The Bakken Shale, the Eagle Ford Shale and the Marcellus Shale may get all the press as producers ramp up output in these plays, but the Permian Basin-an area in west Texas that’s been in production for more than a century-appears poised for a breakout this year.

As operators become more comfortable with the area’s complex geology and hone their drilling and completion techniques, activity will shift from a development to a highly efficient, manufacturing-based approach.

Enterprise Products Partners’ management team echoed this sentiment-which was also one of the major takeaways from the major oil-field services firms’ fourth-quarter earnings calls-and highlighted the opportunities for well-positioned pipeline and crude-oil storage owners:

So the other place I’m very excited about it is the Permian…I think if you look at it to the bottom of the slide, there’s 466 rigs working out there today…that’s about a third of the rigs working in the US. We project from Tony’s supply appraisal group 1 million barrels a day in production growth by 2020. That’s a lot of crude, a lot needs to be done with it.

We’ve got a good footprint out there, a fairly large system. And we’re excited about the opportunity. We have a number of projects under development, not ready to announce a lot of them today but they range everything from small well connects into our system all the way up to large trunk lines going out across the producing area. So hopefully we’ll see some of those come to fruition here in the next couple of months. I think we’re getting very close on a few of them….[M]oving ahead, the Permian is going to be one key area of our focus going forward.

I think we have something that could be special out there, and it’s our Midland terminal. Storage is going to be extremely valuable with all this additional crude coming on and having to get staged and moved to other markets, and we’re getting a significant interest from the industry.

Investors looking for leveraged plays on these trends should consider MLPs with gathering systems that serve some of the biggest producers in the Delaware and Midland basins.

Halliburton (HAL) and other major oil-field services names with a presence in this basin also stand to benefit from improving efficiency, as upstream operators transition to pad drilling-an approach that enables producers to sink multiple wells from a single site.

3. Deepwater Gulf of Mexico

With all the focus on the rapid production growth occurring in the nation’s major shale oil and gas plays, investors can easily lose sight of the rebound in activity in the Gulf of Mexico.

Enterprise Products Partners expects crude-oil production from this region to grow by between 1 and 1.4 million barrels per day by 2020, creating a number of exciting opportunities for midstream operators.

William Ordemann, Enterprise Products Partners’ senior vice president of onshore crude oil and offshore, highlighted the MLP’s bullish prospects in the deepwater Gulf of Mexico:

I guess the message here is we remain pretty high on the Gulf of Mexico. A little bit about what’s driving that growth, it’s all about the deepwater. I think that’s people understand that now. It’s all about oil. It’s not about gas.

But the second bullet point maybe is one of the more important ones. The quality of the oil that comes out of the Gulf of Mexico is the quality of the oil lot of the refiners here need. It’s not the light sweet crude that you see coming from the shale plays. It’s still the medium, medium heavy type of crudes. And we think we’re in pretty good position to capitalize on some of that, I’ll show you on the next map. Large inventory of discoveries, lot of appraisal going on, really getting geared up again after the Deepwater Horizon incident that takes couple of years kind of get back and step into Gulf. We think it’s getting there. Today, there’s 48 rigs drilling versus 44 pre-incident. And I think our view is, we expect 16 more to be coming into the deepwater Gulf by 2015. So we see a lot of activity, lot of opportunities. And again the projects will be, I’ll call them chunky.

There will be big projects. And they won’t be coming on quickly. But we’re in the process of evaluating a number of them right now. And we’ve got, I think the competition out there isn’t what it used to be. So I think we got a good leg up to get some more of these projects under our belts.



JinkoSolar: Mr. Market Demonstrates His Insanity

avril 1, 2014


  • JinkoSolar is trading at less than 3 times 2014 earnings.
  • Sooner or later, Mr. Market will have to raise his price.
  • Don’t be confused by the price, JinkoSolar is one of the best solar companies out there.

The price action of JinkoSolar (JKS) makes a fascinating case study to witness a very cheap stock that Mr. Market is willing to sell for no apparent reason, for almost nothing. You just don’t stumble upon a deal like JKS very often. In this article, I’ll go through the factors that make JinkoSolar one of the best solar companies in the world, and position it to explode in the very near future. Comparing the fundamentals to the ADR price reveals a very distorted valuation picture.

JinkoSolar’s business is thriving. Management has navigated Jinko to be one of the best solar companies in the world, while competing head-to-head with giants like Yingli Green Energy (YGE) and Trina Solar (TSL). Below, I list what makes Jinko a better solar company than others:


Up until last year, JinkoSolar wasn’t a very big company; in comparison with Yingli and Trina, its production capacity was small. Jinko owned 1.5 GW of wafer, cell and module capacity in Q2 2013. On January 10, 2014, the company issued a PR announcing it had agreed to take over the assets of Zhejiang Topoint. Topoint was going through the bankruptcy process when the bankruptcy administrator invited JinkoSolar to lease and operate Topoint’s facilities. You need to understand, by this move, Jinko immediately increased its production capacity by 33% with no capital expenses. This takeover of assets in China is something I expect to continue. The Chinese government is drafting M&A plans for the solar industry, and the big players will enjoy very cheap capacity expansions without increasing the overall capacity in the industry. Jinko’s management guides to module shipments of 2.3 GW-2.5 GW in 2014 and the building of 400 MW of utility-scale projects. Jinko’s module capacity is 2.1 GW, so it means either it is going to outsource the remaining 600-800 MW, or management expects further capacity expansions soon. In the last conference call, Jinko’s CSO, Arturo Herrero said:

Arturo Herrero – Chief Strategy Officer

« If without continue to expand our capacity on wafer and cells segments, I think definitely I think it was scale time to looking for some good assets to expansion, but therefore I think it will beat up, increase our module capacity by the end of this year, maybe to 3 gigawatt to 3.5 gigawatts by the end of this year on the module side, but to wafer and cell, we’re very I think great cautious. »

Source: JinkoSolar Q4-2014 earnings call

If you manage to read between the lines of the transcript, Jinko is seeing an opportunity to reach 3-3.5 GW of capacity by the end of 2014. This will mark more than a doubling of capacity in just 18 months. This is remarkable execution, given the fact that Chinese solar manufacturers are forbidden to build new facilities. A capacity of 3-3.5 GW will put Jinko at approximately the same size as Trina Solar and Yingli.

The Project Business

JinkoSolar is currently the market leader in building utility-scale projects in China, the largest solar market in the world. After installing 213 MW by the end of 2013, Jinko is planning to add 400 MW to its project portfolio. I will walk you through my logic to understanding the electricity sales revenues for 2014. JinkoSolar is building and operating solar power plants, and selling the electricity to the Chinese grid. In Q3 2013, Jinko recorded $6.5M in electricity sales, and in Q4 2013, it recorded $4.9M. The difference in numbers was mainly because in Q3 2013, Jinko received a big subsidy. Excluding that subsidy, sales for Q3 2013 were $3.7M. A quick look at the Jinko project list follows:

(click to enlarge)

Source: JinkoSolar Q4-2013 presentation

So in Q2 2013, production of 47 MW commenced prior to that quarter, 28 MW was connected in July 2013, and 10 MW was connected in September 2013. Assuming that both of the July/September facilities were connected on the 1st of each month, Jinko has a cumulative power production capacity of 78.3 MW. That means that each MW generated $47,254 in Q3. In Q4, 128 additional MW was connected. Assuming a uniform distribution, it’s like saying there was 64 additional MW working the entire quarter. There was 85 MW working prior to Q4 2013, so our magic number is 149 MW, each generating $32,885. Why the difference? Q4 had less sun than Q3. A rule of thumb I once heard from a solar company CEO is that Q1/Q4 has 40% of the sunlight, while Q2/Q3 has the other 60%. That fits well with the figures we just got. So how many MW will be built in 2014? Jinko’s management already told us that it plans to connect an additional 400 MW in 2014. Credit Suisse’s (CS) analyst was quoted by Barron’s as saying that he is confident in Jinko’s project business:

« All of the projects targeted for 2014 have permits and sites near interconnection points. Last year, the company interconnected 213MW of projects, above most peers with ~50MW or less. JinkoSolar has shown more progress in obtaining project funding for projects than most other peers, successfully securing CBD financing. »


Again, I assume a uniform distribution of installations in each quarter, and sequential growth throughout the year. Seventy MW in Q1, 90 MW in Q2, 110 MW in Q3, 130 MW in Q4. Skipping the math, these are my expectations for 2014 electricity sales:


Quarter Q1 Q2 Q3 Q4
Electricity Revenues $8.1M $15.5M $20.2M $18M


Of course, this projection could turn out lumpy (it is dependent on grid connection timing), so using the yearly number will be more accurate. This projects $61.9M of electricity revenues in 2014. Given that Jinko is seeing 30% of net income from this business, we are talking about $18.5M of net income, or $0.66/ADR. Looking into 2015, I see the solar projects’ net income contribution easily surpassing $1/ADR.

Balance Sheet

The management of JinkoSolar was wise to raise a very substantial amount of cash in recent months. In 2013, Jinko had a positive cash flow of $35M, and estimates its cash flow to be $100M-$200M in 2014. JinkoSolar’s shareholders’ equity rose 47% from last year to $332M.

Although the balance sheet is not yet in good shape, things are going in the right direction, and they are going there fast. With the support of China Development Bank and other Chinese banks, I expect Jinko not to have any problems operating until it becomes working capital positive, an event I expect to happen very soon.

Cost and ASP Dynamics

JinkoSolar is the lowest-cost solar module producer in the world. As of last quarter, the company managed to manufacture modules at a cost of $0.48/watt. The breakdown is $0.09 of polysilicon costs, plus $0.39 of non-polysilicon costs. Looking at Q4 2012, Jinko had a cost of $0.54/watt. That is an 11.1% cost reduction over 2013.

The ASP as of last quarter was $0.63/watt. In Q4 2012, the ASP was $0.57. That is a 10.5% increase in ASP over the past year for Jinko.

The current ASP/Cost environment lets Jinko squeeze about 23.8% of gross margins from the module-selling business. Looking at the current trend, I see the ASP coming down a bit in Q1, but going back to its uptrend, given demand is quickly approaching supply. Overall, I expect a modest cost reduction in 2014 in the range of 5%-6%. As for ASP, I expect a modest increase in the range of 5%.

My Projections

For 2014, my projections are as follows:

  • Revenues: Shipments of 2.45 GW resulting in $1.62B, at an ASP of $0.66. Electricity sales are coming up at $62M.
  • Gross Margin: I expect a gross margin of 29.6% for the entire year. Gross margins include the ~60% GM Jinko is getting for electricity.
  • OPEX: Going down as a percentage of revenues to 9.5%, which are $159M.
  • Other and Financial Expenses: Going down from last year to $60.6M.
  • Net Income: Summing all of the above, we reach $279M in net income.
  • EPS: Assuming no additional stock offerings, Jinko has 112.1M diluted shares. EPS is $2.49.
  • Earnings per ADR: Each ADR represents 4 ordinary shares, so earnings per ADR is $9.96.


I really believe my model is not optimistic. Looking at the solar market fundamentals, there is no reason to expect a substantial ASP decline in 2014. All of the major solar players expect stable ASPs. Looking at thefuture of the solar market, it is expected to continue to grow at high growth rates. JinkoSolar is even taking market share and growing its electricity business at very high rates. So why does Mr. Market suggest we purchase JinkoSolar at such low prices?

From time to time, you stumble upon a ridiculous valuation in the markets, so much so, it is almost hard to believe. The skeptics will just say: « Hey, if it is so cheap, something must be wrong with the company. » The thing is, old-fashioned fundamental analysis teaches us that there is nothing wrong with JinkoSolar. On the contrary, it is on its way to becoming one of the largest and best solar companies in the world in the coming year.

Even if JinkoSolar will trade at a P/E of 10, it could more than triple by the end of this year. Mr. Market will catch up sooner or later, as we can’t anticipate his behavior in the short term. I’m long JKS.

The Financial Crisis Is Over For Wells Fargo Dividend Investors

mars 31, 2014


  • Wells Fargo’s new quarterly dividend of $0.35 per share is now officially above the pre-crisis high of $0.34 per share.
  • The company’s dividend payout ratio is now twenty percentage points below where it was on the eve of the financial crisis.
  • The company’s high Tier 1 ratio indicates that Wells Fargo is much better prepared for the next financial crisis.

I think I’m finally starting to understand why Wells Fargo (WFC) is the largest bank holding for Warren Buffett, the largest bank holding for Charles Munger, and a regularly appearing bank stock in both the professionally managed portfolios of Seth Klarman and Donald Yacktman over the years.

To me, it seemed counterintuitive to accept that a megabank could possess superior qualitative characteristics. With name brands, I get it. I can understand how the Coca-Cola soda brand, or the Clorox cleaning brand, or the Colgate toothpaste brand, can create an economic moat that makes those companies superior over the long term. But once a bank has about a trillion dollars in assets, it seemed silly to me that an entity could possess the discipline to maintain high quality at such a vast size. Yet, evidence of Wells Fargo’s risk-management superiority is right there in the numbers: only 0.47% of loans are charged off, while Wells Fargo sets aside 1.81% of loans to cover against charged off loans so that the company could see 4x as many borrowers collapse and still be covered.

Because of the company’s superior business performance, Wells Fargo received approval yet again to raise its dividend, as the annual payout is increasing from $1.20 to $1.40 per share (a hike of 16.67%). With that, we can finally say that Wells Fargo’s business operations, in total, have moved on from the financial crisis.

When you study the bank now, you will see that Wells Fargo is stronger today than it was in 2007. On the eve of the financial crisis (i.e. December 2007), Wells Fargo reported a tier 1 common ratio of 5.99%. Today, that figure is at 10.82%. According to the Fed stress tests this week, a simulated recession in which stocks lost half of their value would bring Wells Fargo’s Tier 1 common ratio down to 6.1% (and that even includes Wells Fargo’s plan to pay out $1.40 per share in dividend and repurchase 350 million shares). Translating that into English, Wells Fargo’s capital is so high right now that it could endure another 2008-2009 type of crisis and still be better capitalized than it was entering the last recession in 2007.

The last element awaiting recovery for Wells Fargo shareholders has been the company’s dividend payout. In the summer of 2008, Wells Fargo began paying out a $0.34 quarterly dividend that ultimately had to get slashed to a nickel per share in 2009. With Wells Fargo announcing a new $0.35 quarterly payout for the second quarter, the company’s dividend payout has finally climbed above where it was during the start of the financial crisis.

The interesting thing, though, about the Wells Fargo dividend payout is that it is backed by noticeably higher profits now, compared to its pre-crisis figures. Before the financial crisis hit, Wells Fargo was making $2.38 in annual profits. The $1.36 dividend before the crisis hit accounted for 57.1% of the company’s profits. Now, Wells Fargo is going to pay $1.40 in dividends to shareholders while the company is making $3.89 in profits. The dividend only accounts for 35.98% of the company’s total profits. Even with a 16.67% dividend hike, Wells Fargo is still retaining twenty percentage points worth of additional profits compared to the pre-crisis figures of 2007.

The company also announced plans to repurchase 350 million shares of its stock. My expectation is that the company’s buyback program will boost its earnings per share figures by roughly three percentage points. The company first started buying back stock in 2012, and reduced the share count from 5.481 billion to 5.260 billion (which reduced the share count by slightly over 4.0%). The current buyback authorization allows Wells Fargo to retire 6.65% of its outstanding stock, and it will likely take the company about two years to complete this program.

For dividend investors seeking a conservative bank account, there is a lot to like about Wells Fargo. Its current tier one capital ratio is 80% higher than it was on the eve of the last crisis. The company is only charging off 0.47% of loans. The company will be paying out $7.36 billion in dividends while making almost $21 billion in profits. The share count is getting reduced by about 3% annually. The dividend payout ratio has a bit of room to climb still, suggesting that Wells Fargo investors might get a couple double-digit dividend increases. Looking at Wells Fargo’s capitalization, profitability level, and dividend payout, the bank is now officially better than it was in 2007.

Led By Mobile, Baidu Beats By More Than 40%

février 4, 2014

« Hundreds and hundreds of times » – that is the meaning of Baidu (BIDU), one of the largest web service companies in China. Their name exhibits their persistence to achieve the highest quality for their company, including both customers and investors.

Baidu is slated to announce 2013 Q4 earnings after the bell on February 4, 2014. After this release, investors will gain a better understanding if Baidu.com’s persistence has paid off.

Back in 2013 Q3, Baidu.com announced earnings of $498M on $1.453B in revenue. This represents an increase of 1.2% and 42.3% from 2012 Q3, respectively. This disconnect between the growth of revenue and net income rattled investors, putting Baidu into a week long downward trend, shaving 10% from its market cap.

Since then, shares have increased to the same levels as seen before 2013 Q3. The Q4 earning’s release can show investors the continued lack of net income growth, or a turnaround in the makes.

In the most recent quarter, Baidu recorded a shareholder equity of approximately $5.8B, compared to a current market cap of $53.86B. However, analysts are predicting a $40 EPS next year (according to Yahoo!), leaving Baidu at a forward P/E multiple of just about 4.

Several questions come to my mind when I look at these numbers – why is Baidu.com trading at such a discount to its peers, and how will they achieve a 25% year over year expected EPS growth?

The lowest EPS estimate for next year is $33.81, putting it a forward P/E of less than 5. How could this be?

Upon further persistent analysis, I discovered that analysts had left their estimates in RMB, even for a stock that trades in USD . This is perplexing to me, and clearly makes up for Yahoo! Finance’s (YHOO) numbers, stating a forward P/E of just 3.86 and a price target of $1128.96.

When we convert these estimates to USD, they make a lot more sense. An average 2014 EPS estimate of $6.58, forward P/E of approximately 24.25, and a price target of $186.27. After looking at these numbers, we see that Baidu is no longer at a major discount to its peers, but instead valued above market averages. This leads me to my second question: Baidu’s evaluation.

Baidu continues to expect close to 50% revenue growth, while there is no indication (in their release) about increasing net revenue growth.

Baidu has acquired several companies, include PPS’s online video business for $370M. While initially it looks like a PC play (#1 in Desktop Client Installations), it is also the leader in mobile applications, adding to Baidu’s mobile initiative.

Baidu has also recently acquired 91 Wireless for approximately $1.9B, to compete with its rival Qihoo (QIHU) 360 Technology in its mobile business. While the price seems excessive for a company with approximately $50M in revenue last year, it shows the price Baidu is willing to pay in order to continue its growth (91 grew its revenues by more than 300% last year). While other companies are trying to target Baidu’s PC business, Baidu is expanding into mobile.

It’s investment in mobile began to payoff in Q3, with 130M active daily search users. Credit Suisse anticipates a continued growth in these numbers, giving Baidu an Outperform target, with an increase in net income growth (25% for the next two years).

Operating margin began a sudden drop several quarters ago, but now seem to be stabilizing and entering an upwards trend.

As seen in the chart above, Baidu began taking steps nearly a year ago to invest in its future (mobile), and they should began to payoff in the coming year. The guidance released by Baidu in Q4 should give investors an idea of future margins.

I believe that Baidu already gave several clues in its Q3 conference call including this:

Not only is Baidu growing in several of its recent investments, but its core business remains strong:

I believe that Baidu’s case is similar to Yahoo!’s. As Marissa Mayer, Yahoo!’s CEO says:


« People then products then traffic then revenue… »

-Marissa Mayer, Yahoo! CEO, Q2 2013 Earnings Call


In my Yahoo! article, I analyzed Mayer’s idea, and now believe that it is also very comparable to Baidu. Baidu maintains more than an 80% market share in the Chinese search market, as well as several growing initiatives. They have attracted the users, and the revenue (approximately 50% year over year revenue growth).

Now Baidu can turn its attention to its attention to monetizing its web assets. It currently has 35% net margins, down from approximately 48% a year ago.

Analysts predict revenues of approximately $7B next year, up from $5.2B this year. Baidu is expected to earn $1.73B next year (25% margins), though a turnaround seems imminent. As seen previously, Net Margins are beginning to bottom out at approximately 30%, with tremendous upside to previous highs.

Because of previous persistence and preparation, Baidu could earn upwards of $2.5B if margins bottom out with help from its mobile products. With profitability in multiple divisions in the works, it would not be surprising if Baidu beats analyst EPS estimates by upwards of 40% next year. Baidu’s persistence may pay off, starting with the Q4 earnings report and peek into the future.

Apple: Panic Time Already?

janvier 7, 2014

So it is that time of year again. We are just a couple of weeks away from the start of earnings season. Over the last year or two, this pre-earnings season rush has resulted in an interesting phenomenon, one I have covered extensively when it comes to Apple (AAPL). I call this event « panic time », because a number of wall street analysts are notorious for issuing negative reports about Apple in the weeks leading up to Apple’s quarterly report. Well, just like clock work, it is happening again. Today, I’m going to detail what’s going on this time, see what it means for Apple’s stock, and discuss what investors should do as we get closer to earnings.

The first of the three negative reports:

We had not even reached 2014 yet before the first analyst decided to put a rain on Apple’s parade. Wedge Partners analyst Jun Zhang came out and declared that the China Mobile (CHL) deal would not be a bonanza for Apple. The pieces below are from the linked article, describing the analyst’s main points.

In a report highlighted at Barron’s Tech Trader Blog, the firm said iPhone 5s (with contract) pre-orders in the first two days were roughly 100K units, which is down from China Unicom’s (CHU) 120K pre-orders and China Telecom’s (CHA) 150K pre-orders earlier in the year. Unlocked iPhone pre-orders for China Mobile in the first two days reached about 150K, compared with 400-500K pre-orders for China Unicom and China Telecom when the iPhone 5s initially launched in China in September, the analyst also noted.

Zhang believes Phone 5s/5c sales dropped about 35% since China Mobile announced its iPhone deal from the week that pre-orders started. He estimates that when China Mobile launches the iPhone with a clear subsidy package, non-China Mobile iPhone sales from the open market and other competitors will drop to 35K units per week and 1.4 million units per month.

I have to disagree with the analyst in a sense, and the article does state that the two launches may not be exactly comparable. In fact, and I know this is a bad joke, but it is an apples to oranges comparison. When Apple launched the iPhone 5S/5C in September, pre-orders began on September 13th, with the phone going on sale on September 20th in China.

However, the deal with China Mobile was completely different. Pre-orders for the iPhone began on Christmas, but the phone wouldn’t be availableuntil January 17th. That’s a span of more than three weeks, so the two time periods are completely different. It is one thing to pre-order a phone that is available in a week or less, but another when it doesn’t become available for three weeks or more. The analyst also does see monthly iPhone sales of roughly 1.5 million from China Mobile. While that may not be a « bonanza » for Apple, it is certainly an opportunity that didn’t exist a few months ago.

The second, and more important, negative report:

Just last week, analyst Maynard Um from Wells Fargo downgraded Apple from Outperform to Market Perform, but kept his valuation range of $536 to $581 ($558.50 average). The main argument provided by the analyst is listed below.

Our bullish thesis on Apple had been predicated on the expectation for gross margin expansion driven by the 5s cycle. While we still have conviction in the gross margin thesis (and the potential for iPad/iPhone unit upside), we believe this may be largely embedded into the valuation.

Um sees positive catalysts in 2014, including the iPhone 6, iBeacon, and iWatch, along with the potential for increased dividends and/or buybacks. There are three concerns Um notes:

  1. Gross margin coming under pressure later this year with the iPhone 6 cycle;
  2. Limited amount of market opportunity for existing product segments Apple participates in; and
  3. A shift in the balance of power from handset vendors back to wireless providers

On gross margin concern, Um said, Gross margins have decreased by an average of 225 basis points in the period following the launch of new form factor iPhones while increasing ~225bps in the two quarters following an « s » launch. With the secular story, in our opinion, largely over, we believe the stock may be more susceptible to trend with margins.

Okay, I certainly understand how gross margins would be impacted by a new form factor for the iPhone. Gross margins did take a hit when Apple launched the iPhone 5, but margins also dropped then do to the much lower margin iPad mini. I can also understand how the analyst downgraded the stock, mostly on valuation, because Apple had rallied into the analyst’s price target. It is important to note that Apple had been in this range for more than a month, so why did the analyst wait until this point to downgrade the stock? I can’t answer that.

I have two issues with this downgrade, both of which have to do with timing in a sense. First, before we start worrying about the iPhone 6, which won’t be launched for another 8 months probably, can we at least see how the 5S/5C are doing? Seriously, we haven’t even gotten the first full sales quarter for these two phones yet. Also, Apple’s deal with China Mobile will start in a few weeks, and that will have a huge impact on fiscal Q2. I understand the concerns about gross margins with a new form factor phone, but let’s see how the previous models are selling first.

The second issue I have is that this analyst issued a positive note on Apple just about 10 days prior. Maynard Um said « While the China Mobile announcement had long been anticipated, we believe the official announcement, and the consequent certainty, should be viewed as a positive. » The analyst stated that the China Mobile deal should give confidence to iPhone sales estimates for both the December and March ending quarters.

So ten days later, the analyst downgrades Apple? This doesn’t make sense. Why maintain your outperform rating on the stock, when it already is inside your valuation target range? The analyst says that the deal is a positive, and could cause estimates to rise. A week or so later, some non-comparable pre-sales data is out and the analyst flip-fops? The analyst did not raise his price target range based on the China Mobile deal, which I think is wrong to begin with. But to flip-flop like this just seems a bit funny to me. I’ll expand on this in the next section.

But wait, it gets worse:

I had originally submitted this article for Monday publication, but we got another downgrade on Monday. This time, Standpoint Research downgraded Apple from Hold to Sell on moral reasons. Here’s what the analyst said:

« For Apple Computers to pay their workers $2 an hour while they have $150 billion in the bank is nothing short of obscene… They have workers who are doing back-breaking and eye-burning work in depressed states of mind and in many instances have already committed suicide. Instead of treating their employees like human beings, they are treated like animals. If it were not for their employees, Apple would not be where it is today. But instead of giving these people a better life, they give these people the bare minimum and defend this action with the argument that the wage is higher than the average there and in-line with what their competitors are paying. »

Okay, so this one is just flat out ridiculous. First, of all, « Apple Computers » is not the name of the company. Apple is not just a computer company anymore. Also, to downgrade Apple because it doesn’t pay people enough? If Apple paid people more, profits would be less, and then I’m guessing more analysts would downgrade Apple at that point too. Apple can’t win here, and this is another effort to criticize Apple for whatever it does. But the best part is the last part of that summary: « defend this action with the argument that the wage is higher than the average there and in-line with what their competitors are paying. » So if Apple is paying above average and all the competitors are doing the same, I don’t see a problem. This may have been the worst downgrade of all time.

Don’t worry Apple fans, the same analyst on Monday downgraded cigarette giant Philip Morris (PM) because he wants to see the annihilation of the tobacco industry. I understand the moral side of the argument, but if you don’t like the name, just don’t cover it. The last time Standpoint Research downgraded Apple, which was from Buy to Hold, shares were under $457. Apple shares rallied more than 18% between those two notes from Standpoint. Apple shares initially fell on Monday thanks to this downgrade, and the breaking of the 50-day moving average, but in the end, shares end up about $3.00. This downgrade was pointless, and Monday’s trading action supports that notion.

Why does this occur?

With a few weeks still left until Apple reports, I wouldn’t be surprised if we get some more negative analyst notes. Someone will come out and be sour on something, whether it be margins, sales, forward looking guidance, etc. Every quarter, I always seem to have an article like this, because the process just keeps happening. Every quarter, my wonderful readers always ask me why this happens. Here are my main reasons, which I’ll expand on:

  1. It’s a way for analysts to cover both sides of the stock.
  2. If analysts do cut estimates with these negative notes, it increases the chance of a beat.
  3. This is a way to lower investor expectations just in case Apple does miss on the quarter or guidance.
  4. An analyst just wants to be negative (the moral reason).

I think the first point I made is evident in the analyst note(s) mentioned above. The analyst was positive on the China Mobile deal, so if Apple does well, the analyst can turn to that. But if Apple disappoints in some way, the analyst can say that he downgraded the stock prior to earnings. There are a few dozen analysts that cover the stock, so you will see some analysts that have a negative view at times. But each quarter, a few of them decide to take the negative view, because if they are right, they’ll look much better than the majority. They also wait until just a few weeks before, just like clock work.

The second point I made was more prevalent in the earlier quarters during fiscal and calendar 2013 for Apple. In the weeks leading into earnings, we saw estimates coming down for both the soon to be reported quarter as well as the quarter Apple would be giving guidance for. Back in October 2012, this process helped Apple to turn a complete miss into a mixed report. This was more prevalent earlier in 2013 when analysts were constantly taking down Apple estimates. Recently, the process has gone in the opposite direction, with estimates rising into the quarter.

The final point ties in with the second one. If a few analysts issue negative notes prior to the quarter, investors might lower their own expectations, and not expect the moon from Apple. I recently cautioned investors as well, which turned out to be right. Most thought a China Mobile deal would start on December 18th. Sales actually are starting a month later, and that has a huge impact on estimates. With estimates rising so much in the past month or two, investors needed to be careful.

Those expectations have a key partnership with stock price. When I told investors to temper their expectations, Apple shares were a bit above where they are currently. In fact, Apple’s close on Friday was its lowest since November 26th. Apple shares are more than $30 off their 52-week high. Obviously, expectations are much different with Apple at $544 than they are when shares are at $575. With a couple negative notes from analysts taking down the stock price recently, it helps to lower expectations into Apple’s report.

Honestly, I’m not a fan of this analyst negativity parade, but investors do have to be careful. In recent quarters, I actually recommended shorting Apple into earnings because of this « event ». More often than not, that trade did work. Just look at Apple late last week and into Monday morning. After Thursday’s downgrade, Apple lost more than $27 in two plus days, which would have been a great short trade. I’m not recommending a short on Apple here, and in fact I might recommend the opposite side.

Current estimates and comparisons:

I mentioned above that Apple’s estimates are on the rise. Since this will be my last formal Apple article before my official Apple earnings preview, I wanted to share a bit on current estimates. The image below shows a Yahoo! Finance screen shot of current Apple estimates for fiscal Q1 and Q2, as well as the current fiscal year (ending September 2014) and the following one.

(click to enlarge)

On December 9th, the day I did my « temper expectations » article, analysts were expecting $57.24 billion in revenues and $13.99 in earnings per share for fiscal Q1. Those estimates are a little higher now. However, as I’ve been stating, the rise in estimates was mostly based on a China Mobile deal starting in December. That would have given Apple a week or maybe ten days of sales in fiscal Q1. Estimates for fiscal Q1 have stopped rising in recent days, probably because the China Mobile deal doesn’t start for a few more weeks. Remember, Apple guided to revenues of $55 billion to $58 billion for the quarter, and the midpoint of its other guidance numbers plus the fiscal Q4 share count gave me a midpoint for EPS of $13.51. Obviously, the buyback will help with that, and Apple coming in at the high end for revenues, gross margins, etc. would help as well.

With a concrete deal in place with China Mobile, fiscal Q2 estimates are moving up rather nicely. On December 9th, analysts were looking for $45.47 billion and $10.76, respectively. Even though Apple has given more realistic guidance in the past few quarters, I wouldn’t be surprised if fiscal Q2 guidance is slightly conservative. Apple may not build in a tremendous quarter thanks to China Mobile sales up front, just to be conservative. Thus, I think Q2 guidance could be a little lighter than some might expect, but I do expect guidance to be fair and mostly in line with expectations. I’ll have more on this in my earnings preview, which will be in the week before Apple earnings, scheduled for Monday, January 27th.

I said above that Apple could be a decent buy right now, and my $600 plus price/fair value target reflects that. Why am I so positive on Apple? Well, you get a complete package. You get a fair amount of growth, a solid dividend, and a tremendous buyback. But the main reason I like Apple is valuation. The following table shows some key top tier tech names’ growth and valuation numbers, comparing Apple to Google (GOOG), Microsoft (MSFT), Intel (INTC), and Cisco Systems (CSCO).

*Estimates and P/E values are non-GAAP.

In their respective fiscal 2014 years, Apple provides the second most amount of growth for both revenues and earnings. The only name with more potential growth is Google. However, Google does not pay a dividend and is not buying back shares. Google shareholders are getting further diluted each quarter. Additionally, Google’s valuation on a GAAP basis is even higher, so you’re paying nearly double Apple’s valuation for Google. In my opinion, this is one of the most ridiculous items in the market today, but that’s how the market works. This valuation comparison doesn’t even take into account cash piles, which makes the case for Apple even stronger. That’s a discussion for another day, and I’ll probably explore that sometime in February.

The other three names have their issues as well. Intel has struggled with revenues and earnings in the past two years, with 2014 being up in the air right now. Intel currently trades for a 8% plus premium to Apple, which is ridiculous in my opinion. Take out cash and the difference is even more staggering. Cisco is in the midst of a terrible year, but Cisco does trade at an equal valuation or discount to Apple, depending on the GAAP conversion you make. Microsoft does offer investors the third highest expected amount of growth, but Microsoft shares trade at a premium to Intel. Microsoft is an interesting name for 2014 as well, because the company still is looking for a CEO, and that could impact how the company operates going forward. Intel, Cisco, and Microsoft all have a bit of uncertainty that makes me a little nervous, which is why I like where Apple stands, especially at current prices. Analysts seem to agree on Apple, with the average rating being a buy and the mean/median price target numbers around $600.

Final thoughts:

When it comes to Apple, analysts are back in panic time mode. This happens every quarter before earnings, in an effort to reduce investor expectations and hedge against a miss. During 2013, some of these concerns were legitimate as estimates were dropping. These days, these analysts seem rather funny as estimates are rising, with one analyst basically flip-flopping just days after a positive report. Another analyst downgraded Apple on moral concerns. This whole scenario is just another reason why Apple is held to a different standard, as you don’t see multiple negative notes on Google or Microsoft going into every single earnings report. In the end, Apple shares have pulled back a bit, and that might provide a decent entry point for investors. However, be warned, because additional negative notes could push this stock lower if they come. $27 lower before Monday’s turnaround is an example of that.

COSTCO Is still slightly undervalued currently

décembre 31, 2013

With a $51 billion market capitalization, Costco (COST) is the 4th largest retailer in the US and in the world as well. Through 92.6M square feet area, averaging 143,000 per warehouse, the company has employed 185,000 employees worldwide.

The aim of this article is to estimate the prospective price movements in the company’s stock which would help investors in their assessments of the stock.

Industry Outlook

The discount and variety store industry is very competitive and there are a lot of factors affecting business. The main factors are price, member service, goods’ quality and warehouse location. Costco has a widespread range of regional, national and global wholesalers and retailers which include super markets, internet-based retailers, supercenter stores, gasoline stations and department and specialty stores. Wal-Mart (WMT), Kohl’s (KSS), Amazon.com (AMZN) and Target (TGT) are the major merchandise retail competitors of Costco. The company also faces competition from many single-category operators or narrow range merchandise operators such as Whole Foods (WFM), PetSmart (PETM), Home Depot (HD), Trader Joe’s, OfficeDepot (ODP), Walgreen (WAG), Lowe’s (LOW), Best Buy (BBY), CVS and Kroger (KR). Although the US economy is recovering the consumer expenditure will likely be constricted because of deleveraging. Consumer’s price-consciousness indicates the fact that there are better prospects at discount stores. But as discount and variety stores strive to win customers, their competition could shake their margins in the future.

Considering the performance of the last twelve months’, the company has not been able to successfully outperform the industry. Its net profit margin of 1.95% for trailing twelve months is well below the industry figure of 4.51%. Additionally, the return on asset of 6.72%, five years growth rate of 7.73% and return on equity of 17.15% are inferior to the industry figures of 8.78%, 9.87% and 18.81%, respectively.

Nevertheless, the company has produced some positive results which indicate the optimistic future of the Costco. The company has a price to sale ratio of 0.49 for trailing twelve months which is much better than the industry ratio of 1.12. The current ratio of 1.17% for the most recent quarter is slightly above the industry ratio of 1.1%. Moving ahead, Costco’s asset turnover of 3.45% against the industry average of 2% shows that the company is better at fetching sales despite the existence of massive competition.

The interest coverage ratio (TTM) of 73.21% is evidence of Costco’s ability to easily pay interest on outstanding debt compared to the industry average of 39.77%. The company does not have short term debt which denotes the fact that there will be no major cash outflows in the near future. Another positive aspect of most recent quarter’s performance is that Costco’s total debt to equity ratio of 44.44% is beneath the industry average of 47.57%.

During the first quarter of 2014 net sales were 5% higher than the first quarter of 2013. This increase was driven by comparable warehouse sales that increased by 3% during the first quarter of 2014. Net sales also include the contribution from 29 new warehouses that were opened since the start of the second quarter of fiscal year 2013. Costco has a very loyal customer base which is depicted by the almost 90% renewal rate in the US and Canada. The total number of membership cardholders is 72.5M compared to 68M in the first quarter of 2013. Membership fees were 2.24% of net sales in the first quarter of 2014 compared to 2.20% last year. Gasoline is a magnet for membership for Costco. Richard Galanti, CFO, in his last conference call specified that in spite of fluctuations during the year gasoline is always lucrative for Costco. An average gas station is not able to beat the annual revenue of Costco’s gas station.

The company was able to generate a 10.81% gross margin, as a percentage of sales, while the same ratio was 10.68% during the first quarter of fiscal year 2013.

Net income in the first quarter of fiscal year 2014 was $425M compared to $416M last year which resulted in earning per share of $0.96 compared to $0.95 last year. This increase was the result of a growth in membership fees and enhanced sales of discretionary stuffs. The company declared a dividend of $0.31 per share compared to $0.275 last year.

Future Prospects

Since retail is a very competitive industry it is necessary for discount and variety stores to be located in as many places as possible because customers are attracted to their convenience and the variety of products available under one roof. Costco is well prepared to tackle this task quite efficiently. The company has a history of continuing capital expenditures to cater to the needs of new facilities and warehouses. This will be done to fulfill current customers’ needs and to expand the customer base as well.

Currently Costco is operating 648 warehouses worldwide. A major portion of the company’s business comes from the US market where the company operates 461 warehouses. Additionally, the company has 87 warehouses in Canada. The membership renewal rate in the US and Canada is around 90% which means that the company has its most loyal customer base among these two regions.

As per available statistics, Costco still has a long way to go in order to capture a broader clientele through covering more area by introducing new warehouses and expanding its service spectrum. Management is well prepared for this situation and is pursuing the company’s history of capital expenditures. Figure 6 demonstrates Costco’s expansion policy for fiscal year 2014.

According to Trefis, Costco’s stock price is composed of four divisions. A major portion of the stock price is driven by US core merchandise. Figure 7 shows the proportion of each division.

As discussed earlier, the company is focusing on expanding its facilities including warehouses and gas stations. Costco has a stable record of selling products by substantially discounting the price customers pay and this results in a considerably lower price to sales ratio. Fitch Ratings has declared an Issuer Default rating of Costco at A+ with a stable outlook.

In view of all the given information and by interpreting the facts and figures, I have used the multiple based valuation method to evaluate Costco’s intrinsic value. Market consensus estimates are used to give weightage to the different multiples of the price to earnings, price to book value, price to sales and price to operating cash flows.

As per my analysis, Costco is undervalued and has upside potential of at least 6%. Seeing the future growth opportunities, the company is well prepared and determined to succeed. My recommendation is BUY.

Enterprise Products Partners Distributes Too Little

décembre 13, 2013

Investors in Enterprise Products Partners (EPD) have enjoyed a great run in 2014 with units rallying 22% on top of a solid and growing 4.5% distribution. Over the past five years, units have more than tripled making this company one of the top performers in the pipeline sector. However after this massive run, is it time for investors to take some money off the table or does EPD have more room to run?

(click to enlarge)

With a market capitalization of $57 billion and enterprise value of $75 billion, Enterprise Products is among the largest pipeline companies in the world. However, the company is different than many of the well-known MLPs like Kinder Morgan Energy Partners (KMP). Most MLPs have separate general partners who take a sizable fee for running the partnership known as an IDR (incentive distribution rights). EPD’s GP, which is owned through several private affiliates, does not collect an IDR meaning that EPD is being run for its limited partners. IDR fees can consume in excess of 20% of cash flow, which gives EPD a significant edge over MLPs with that structure.

Basically while many MLPs have two mouths to feed, EPD is only feeding one. Given that, it might seem underwhelming that the company only sports a 4.5% distribution when other firms have similar or higher yields with KMP at 6.8%, Plains All American (PAA) at 4.9%, and Markwest (MWE) at 5.25%. Management’s capital allocation strategy at EPD is the cause of some controversy. Many investors enjoy MLPs because they distribute all of their excess cash back to investors. Some like PAA keep a 10% buffer to protect against underperformance and offset a fraction of growth capital programs. EPD keeps a very conservative distribution that it tends to cover by an additional 50%.

As you can see, the company retains significant portions of cash every year as underlying cash flow generation grows at a faster pace than distribution. EPD now has a 1.6x coverage ratio excluding one-time items, meaning it could pay a $1.10 quarterly distribution vs. the $0.69 it has just paid. Why does EPD keep so much excess cash?

Management argues that this strategy is actually in the long-term interest of investors as the company uses retained cash to invest in growth projects. Without this excess cash, the company would have to borrow more on the debt market, increasing interest expense, or issue more equity, slowing the pace of future distribution growth. Right now, the company has a significant portfolio of growth projects with $7.5 billion in outlays. As these projects come online over the next three years, EPD’s distributable cash will grow by 20-24%, providing significant upside to the payout.

In fact while EPD pays out far less than it could, it has shown strong distribution growth of 6.2% in the last quarter (quarterly data availablehere). With growth projects coming online and EPD’s geographic focus on regions with tremendous production potential for over three decades, EPD will be able to easily grow its distribution in the 5-7% range for the foreseeable future without cutting the coverage ratio. Thanks to prudent capital management, EPD maintains an extremely strong balance sheet with debt only accounting for 23.3% of enterprise value.

The pros and cons of EPD’s distribution policy seem clear. Investors receive less now, but the distribution is rock solid and could grow faster thanks to less debt and fewer new units issued. On the whole, should investors be happy with this policy? To me, EPD has a case for maintaining a higher coverage ratio than peers. As I mentioned above, the company does not have to pay IDRs, which saves it upwards of 20% of cash flow. EPD could very easily argue that rather than pay out that 20% to unitholders, it reinvests that 20% in growth projects, which will be accretive in the long run.

As a consequence, I believe it is reasonable for EPD to keep a distribution coverage ratio of 1.2-1.3x like it had in 2009 and 2010. Over the past three years though, management has not increased its distribution as quickly as it should have, and the coverage ratio in the 1.5x-16.x time is too high for an MLP. EPD should start increasing its distribution by more than 5-7% and closer to 12-15% to lower the coverage ratio over the next 12-18 months.

MLPs trade in a large part off their distribution, and with a decent but not great 4.5% yield, faster distribution growth will be needed to power units much higher. A distribution in the $0.90 range could send shares up another 15% with ease. The current distribution is too low and undermines the purpose of being an MLP (returning virtually all cash to shareholders). With a lack of IDR payments, EPD is in a great competitive position and has the capacity to give investors higher distributions without threatening the coverage ratio. Unfortunately, EPD is being conservative beyond the 20% savings. At current prices, I think EPD is fairly valued and would rather invest in a more unitholder friendly MLP. EPD is a great company with tremendous potential, but management is conservative to a fault.

JinkoSolar: A Rock Star Of The Solar Industry Is Born

décembre 1, 2013

As we review the results of this year’s third quarter, it is becoming apparent that the solar industry is no longer an ecosystem made up of the same organisms, only differentiated by their individual names and the size of their capacities. In the past, most likely due to its own inefficiency, the market quite often moved the sector up and down in ruthless harmony. Using almost flawless precision, low performers matched the uplifts of the leaders, and often the sector was brought down based on the poor result of a single entity.

Since a certain amount of predictability was built on those characteristics, an ability to see beyond that strategy is becoming necessary to understand the current status of the industry. In this model profitability becomes a factor, which moves companies to a new level of scrutiny.

During this quarter, three Chinese companies reported profit. We already wrote about Canadian Solar Inc. (CSIQ), so it would be desirable to compare results from the other two.

Certainly, Trina Solar (TSL) has assured clout with Wall Street. The company has one of the cleanest balance sheets among its peers. It has a solid capacity, and at the height of its glory, it has been recognized as a champion of the last solar high cycle. This impression continues to this day.

This year, JinkoSolar Holding Co., Ltd. (JKS) made its first profit in Q2, ahead of everyone else. Thanks to the newest equipment among peers and debottlenecking-born efficiency, combined with high conversion modules, the company delivered over 18% in gross margins, already cueing a powerful third quarter. Surely enough, Jinko surpassed all expectations.

Jinko earned $0.72 per share, with revenue of $320M. Its net income was $16.9M, and revenue-generation per share was $13.9. The net income margin was 5.1%. Jinko’s operating profit margin was 12%. Gross margin was 22.3% on a gross profit of $71M.

In the case of Trina, the company made $0.14 per share on revenue of $548M. The net income was $9.9M, with the revenue-generation means of $7.7 per share. The net income margin was 1.8%. Operating profit margin was 1.1%; in dollars, Trina made $6M from its operations. Gross margin was 15.2% on the gross profit of $83M.

Removing the per-share calculation for a moment, Trina had 71% greater revenue, but due to lower margin, its gross profit dropped down to 16% greater over Jinko. When comparing income from operations, Jinko blasted 660% over Trina. This means Jinko’s business was more than 6 times more effective in obtaining operational income. Operating expense ratio (OER) for Trina was 14.1%, and Jinko’s was 10%. Trina’s operating expenses (Opex) took 92% of gross profits.In the case of Jinko, this percentile was 55%. Considering that Trina took provision for doubtful accounts and Jinko recovered money from this line, Trina looked unfavorable in comparison.

The problem here is that while Trina is expanding its sales potential, without any savings efforts, its Opex will grow with it. In absolute terms, the company will have an opportunity to make a profit, but its operating expenses will impede bottom dollars. Meanwhile, in the case of Jinko, its ability to keep the same structure, while increasing sales, will raise its earnings per share more effectively.

While the next segment of the income statement refers to the financing aspect of the company, the order of entries for the most part is fixed and does not increase impacts with more revenues. Trina has dropped its $6M generated by operations to around $4M of earnings before income taxes (EBIT), helped considerably by foreign exchange and other income. An application of the tax benefit doubled the net income.

The increase in market value of the convertible senior notes caused a $14M deduction on Jinko’s income statement. Management pointed out that change in fair value of bonds and capped call options impeded the earnings, which would be $1.36 without this non-cash item.

Summarizing this section, Jinko was just a lot better at earning money during this quarter. Having $157M in project assets versus Trina’s $69M, Jinko shows more progress into an EPC business today. By holding power generating capacity, Jinko has become an energy supplier, growing at the fastest pace of anyone listed in the US. Our ED Reports also demonstrated a positive reversal, at least in the third quarter, with Jinko exporting more modules quarter over quarter, where the opposite was true for Trina. Those global exploits, besides increasing revenue for JKS, reduced the average selling price gap between the two companies.

In the case of Trina, certainly its financial balance sheet is its largest advantage, and with the operational ingenuity of Trina’s executives, the company should not be neglected by current and prospective investors. Let’s throw out some stats to support this.

Trina had $558M in cash and equivalents at the end of Q3, with $1.1B in debt. Trina also had $600M in accounts receivable, a potential trouble area in tough times, but a quick cash generator in times of prosperity. Jinko had $218M in cash and restricted cash, less than half of Trina’s. However, the company had $138M in short-term investments, which are as good as cash, but are term deposits with less than a year maturity. Accounts receivable were at $138M. Debt-wise, Jinko had $641M in financial debt. Per share, Trina had $8 of cash, Jinko had $15 if including short-term investments. Debt-per-share, Trina had $15 while Jinko’s debt was $30. Still, in terms of comparison, both companies had a similar proportion of cash to debt, where naturally, less debt is more comforting to investors.

Trina’s plans for entering the solar farm business can be fully supported by cash on hand, but this expansion still remained only a goal during this quarter, with the sale of a 3.5MW Italian plant for $9.9M. That said, Trina’s CFO Terry Wang estimated a completion rate of 100 to 200MW projects per quarter in the next year.

Analysts’ estimates predict Trina to make $0.35 in 2014. If Trina simply does what it did in Q3, this is at least $0.56 per share. I think it’s reasonable to assume that Trina can get at least $1 in 2014 on its manufacturing efforts alone. At the price the stock is trading, it seems to have a P/E of 14. The upside is in project sales, producing 20% gross margins or FiT income at Jinko’s levels.

Jinko is looking to expand its module capacity up to 2GW in 2014, with what is currently the most efficient processing operation in the world. Its solar plants’ portfolio will double in the fourth quarter and reach 500MW in 2014. In our opinion, an average analysts’ estimate of $2.76 per share does not even consider the whole module business potential.

Excluding non-cash deductions, the company already made $1.36 during Q3. The entry, which affected it, will still play a role in the forthcoming quarter, as the particular bonds are $13M undervalued to their face value. Jinko’s excellent operational performance increased the fair value of its market-traded financial instruments, having non-cash consequences on the income statement.

By just repeating Q3 results in 2014, even on a fully diluted basis, $5.00 is highly probable, as long as $32M retained for prior module sales is included. With $65M of FiT income from 200MW of solar plants at 60% GM, Jinko can possibly make $39M gross profit, and net profit of 30% will result in $19.5M. Including the additional 300MW of projects planned for 2014, calculating only half-a-year contribution will boost earnings per share by an extra $1.34 per share.

At $6.34 EPS for 2014, Jinko is a new rock star among peers. Its potential lies in the $50 to $63 range per share, using 8 to 10 price-to-earnings ratio. Trina’s market’s valuation seems to consider the manufacturing model only, but if plant sales come on line at the speed described by Wang, modification will be required.