Category: Financial Markets
Business Strategy & Outlook:
CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS Energy’s work with Michigan regulators and politicians has turned the state into one of the most constructive areas for utility investment. These constructive relationships will be critical as CMS pursues an aggressive clean energy growth plan. With regulatory and political backing, CMS Energy plans more than $14 billion of investment during the next five years. That investment plan could expand if the firm receives regulatory backing for new projects. Its goal to reach net-zero carbon emissions by 2040 is a key part of its growth plan, supporting 6%-8% annual earnings growth for many years. Michigan’s 2008 energy legislation and additional reforms in the state’s 2016 Energy Law transformed the state’s utility regulation. As a result of those changes, CMS Energy has achieved a series of constructive settlements and regulatory decisions.
CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s integrated resource plan framework. In June, regulators approved updates to CMS’ 20-year clean energy plan. If CMS can keep rate increases modest by controlling operating costs, the company expects it will continue to get regulatory support and could even add as much as $5 billion of investment on top of its current plan. CMS’ growth strategy focuses on investment in electric and gas distribution and renewable energy, which aligns with Michigan’s clean energy policies and is likely to earn regulatory support. CMS plans to retire its entire coal fleet by 2025, keeping it on track to cut carbon emissions 60% by 2025 and reach net-zero carbon emissions by 2040. Proceeds from its EnerBank sale in 2021 will help finance growth investment. CMS carries an unusually large amount of parent debt, which has helped boost consolidated returns on equity, but investors should consider the refinancing risk if credit markets tighten.
Financial Strengths:
Although CMS has trimmed its balance sheet substantially, its 65% consolidated debt/capital ratio remains high primarily because of $4 billion of parent debt. Accordingly, the company’s EBITDA/interest coverage ratio is lower than peers, near 5 times. Low interest rates and easy access to capital have allowed management to maintain the current balance sheet leverage and support its investment-grade credit ratings with earnings growth. The company expects CMS’ consolidated returns on equity to top 13% for the next few years, among the best in the industry due to this extra leverage. But with interest rates rising, management might be less eager to refinance parent-level debt, potentially leading to lower returns on equity in the future. CMS has taken advantage of favorable bond markets in recent years to reduce its refinancing risk and extend its debt maturities, including issuing three series of 60-year notes in 2018 and 2019. CMS now has $1.1 billion of parent notes due in 2078-79 at a weighted-average interest rate near 5.8%. CMS also has been able to issue 40- and 50-year debt at the utility subsidiary. Regulators thus far have not imputed CMS’ parent debt to the utilities, but that’s a risk that could lead to lower allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, the management doesn’t expect CMS to issue large amounts of equity after pricing a $250 million forward sale at an average $51 per share in 2019 and issuing $230 million of preferred stock in 2021 at a 4.2% yield. The company expects the $930 million after tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, CMS will be able to use its operating cash flow to fund most of its investment plan during the next five years.
Bulls Say:
- Regulation in Michigan has improved since landmark reforms in 2008 and 2016. Support from policymakers and regulators is critical to realizing earnings and dividend growth.
- CMS’ back-to-basics strategy has focused on investment in regulated businesses, leading to a healthier balance sheet and more reliable cash flow.
- CMS’ board has more than doubled the dividend since 2011. The company expects 7% annual dividend increases going forward even if the payout ratio remains above management’s 60% target.
Company Description:
CMS Energy is an energy holding company with three principal businesses. Its regulated utility, Consumers Energy, provides regulated natural gas service to 1.8 million customers and electric service to 1.9 million customers in Michigan. CMS Enterprises is engaged in wholesale power generation, including contracted renewable energy. CMS sold EnerBank in October 2021.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Business Strategy & Outlook
Targa Resources is primarily a gatherer and processor, or G&P, of natural gas with an attractive position in the Permian Basin and other key U.S. shale plays. The firm weathered a very difficult 2020 via sharply reduced capital spending, a nearly 90% dividend reduction, and expense cuts. With a more stable 2021, it reduced debt by $1 billion that year, which was a good move. With leverage now at reasonable levels, returning the dividend to $1.40 a share from $0.40 per share annually makes sense. Targa’s longer-term growth picture over the next few years will be its Permian G&P position (where it added substantial assets with Lucid), liquefied petroleum gas exports, and the ramp-up of the Grand Prix natural gas liquids pipeline. The long-term concerns about the G&P business, because the high level of competitive intensity within the Permian will keep returns extremely low.
Targa is by no means particularly conservative on capital spending plans–its initial 2021 growth spending plans were twice to original expectations, as the rest of the midstream space hunkered down. While one has long expressed concerns about the leverage impact of the repurchase of the Stonepeak joint venture assets, Targa bought back the assets for $925 million, and then immediately sold off the Grand Coast Express stake for $857 million, essentially making the deal leverage neutral as management expected. Despite concerns about the G&P assets, were optimistic about the future of LPG exports and Grand Prix. LPG exports are largely under contract and sent mainly to Asian and Latin American markets. India remains a potentially attractive option under a government scheme designed to encourage LPG usage. Targa has wisely expanded its export capacity recently, and volumes are at record levels. The Grand Prix NGL pipeline will be a highly attractive asset that takes advantage of Targa’s position in the Permian Basin to move over 425,000 barrels per day of NGLs by the estimates in 2022 (expandable to 550,000 b/d) to Mont Belvieu, and links Targa assets at both ends of the pipe, giving it more control over the molecules and ability to earn multiple fees.
Financial Strengths
In 2020, Targa’s financial health was among the weakest in the midstream coverage universe. That has changed in a strong energy market in 2021 and Targa’s own efforts to fix its balance sheet. Targa has repaid $1 billion in debt in 2021, funded with strong earnings and lots of free cash by cutting the dividend and capital spending, and leverage fell to 3.2 times by year-end, a commendable accomplishment for a firm that has historically run well over 4 times leverage. Before the Lucid deal for $3.55 billion, the expected leverage to decline to below 3 times in 2022, but it will end up around 3.5 times. After many years of operating as non-investment grade, Targa finally earned investment-grade ratings in 2022. Still, Targa’s exposure to weaker customers is greater than peers’, as it disclosed that less than half of its revenue by the estimates is from investment-grade or letter of credit-backed customers. Peers tend to be around 75%-85% investment-grade or letter of credit-backed. Targa has boosted the dividend to $1.40 per share annually in November 2021, up from the $0.40 annually it paid out since March 2020. Previously, the payout was $3.64 annually. Share buybacks seem less likely after the Lucid deal, as Targa will not have any excess cash flow in 2022.
Bulls Say
- Targa is leveraged to the high-growth Permian, and its Grand Prix pipeline has been an important growth engine.
- Targa has reduced debt by $1 billion in 2021, which is a good accomplishment for what has historically been a highly leveraged firm.
- Targa is a significant fractionation player at the attractive Mont Belvieu hub.
Company Description
Swatch Group’s biggest brands are Omega (number-two Swiss watch brand by sales after Rolex), Longines (the largest premium watch brand and number four by sales globally), Breguet, Tissot (the leader in mid range Swiss watches), and Swatch. Swatch group employs over 31,000 people, half of them in Switzerland. The Swatch Group makes about 28% of its sales from Omega, 18% from ultra luxury brands, 20% from Longines, 12% from Tissot, and 4% from Swatch. The Omega and Longines to be the group’s most profitable brands.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
