Categories
Commodities Trading Ideas & Charts

Cronos Projected To Experience 11% Average Annual Volume Growth Based On 10-Year DCF

Business Strategy & Outlook

Cronos Group cultivates and sells cannabis predominantly in Canada and hemp-derived CBD in the U.S. but also participates in the global medical cannabis market. Cronos does not disclose its sales by recreational and medical end-markets. The entire Canadian market is forecasted to grow roughly 20% per year on average over the next decade, driven by the conversion of black-market consumers into the legal market and new cannabis consumers. Cronos is half the size or smaller than the majority of other Canadian licensed producers. This adds to the challenge of reaching profitability given a harder ability to scale overhead expenses. International medical cannabis exports are a small but growing part of Cronos. At present, Cronos exports into Germany, Poland, and Israel. The global market looks lucrative, given higher realized prices and the growing acceptance of cannabis’ medical benefits. Exporters must pass strict regulations to enter markets, protecting early entrants like Cronos. Roughly 20% average annual growth is forecasted over the next decade. Cronos’ U.S. operations largely center on hemp-derived CBD. 

CBD is generally viewed as a less attractive opportunity given the massive amount of competition and low barriers to entry. The company recognized a $236 million impairment in 2021, which confirms this concept. In June 2021, it acquired an option for a 10.5% stake in U.S. multistate operator PharmaCann, giving Cronos THC investment exposure. For THC, the U.S. market remains murky with individual states legalizing recreational or medical cannabis while it remains illegal federally. However, it is expected that federal law will be changed to allow states to decide THC legality within their borders by the end of 2023. Cronos’ strategy is geared for an eventual national distribution model more akin to alcohol and tobacco rather than today’s multi-state operator model. Speculation that national distribution will come anytime soon is met with skepticism, and the dispensary will hold most of the value nevertheless. The PharmaCann option is a good albeit small hedge should this scenario be the case in  the future of the U.S. market.

Financial Strengths

Cronos carries virtually no debt. At the end of its first quarter, the company had only about $9 million in lease obligations compared with a market capitalization of roughly $1.2 billion as of May 2022. Cronos continues to carry roughly $1 billion in cash, including short-term investments, which represents the majority of its current market value. The company continues to generate cash losses, but a $1.8 billion investment from Altria in March 2019 reduced the need for significant capital raises in the future. The company is projected to reach positive free cash flow in 2028 and that the Altria investment will be enough to fund expanded operations to meet surging demand growth in Canada and U.S. CBD. Benefiting its financial health, Cronos has generally relied on equity to fund acquisitions and expansion, with no significant debt raises in its history. The company is expected to rely on equity to fund capital needs, which is typical for growth companies such as Cronos to help alleviate potential pressure on its financial health.

Bulls Say

  • Altria Group’s investment of $1.8 billion provides Cronos with capital and a strategic partner with significant product development, branding, and regulatory experience. If successful, Altria Group may increase its ownership of Cronos or potentially acquire it. 
  • Altria’s distribution network gives Cronos an advantage in the hyper competitive U.S. CBD market and can be leveraged for eventual THC distribution. 
  • Cronos’ option to acquire 10.5% of U.S. multistate operator PharmaCann gives U.S. THC investment exposure and a hedge if the dispensary model persists.

Company Description

Cronos Group, headquartered in Toronto, Canada cultivates and sells medicinal and recreational cannabis through its medicinal brand, Peace Naturals, and its two recreational brands, Cove and Spinach. Although it primarily operates in Canada, Cronos exports medical cannabis to Poland and Germany. In addition, it has entered joint ventures in Israel, Colombia, and Australia to drive further international cultivation and distribution growth. In the U.S. the company directly sells hemp-derived CBD and has an option to acquire 10.5% of U.S. multistate operator PharmaCann.

(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.

Categories
Commodities Trading Ideas & Charts

Maintaining $135 FVE as FMC Reports Solid Q1; Shares Slightly Undervalued

Business Strategy & Outlook

FMC is a pure-play crop chemicals producer. The company is one of the five largest patented crop protection companies globally. FMC acquired Cheminova in 2015, increasing exposure to Europe and expanding its portfolio of crop chemicals. In late 2017, FMC acquired DuPont’s divested crop chemicals portfolio, which included blockbuster insecticide Rynaxypyr. At the same time, the company divested noncrop chemicals businesses. FMC is fairly balanced from a geographical standpoint among North America, Latin America, Asia, Europe, the Middle East, and Africa. Latin America is the largest region, contributing 32% of revenue in 2021, while the remaining regions accounted for 20%-25% each. The company is also balanced from a crop exposure standpoint, with soybeans being the largest at nearly 20% of total revenue.

As emerging-market food consumption rises, demand for patented crop chemicals should rise to facilitate yield improvements. FMC’s pipeline of new premium products should generate sales growth

above the general crop chemical industry. Both acquisitions greatly enhanced FMC’s research and development pipeline, which should allow the company to continue producing new crop chemicals as

older products roll off patent. The company plans to launch 10 new molecules over the next decade that feature new modes of action. FMC also plans to launch new biologicals, or environmentally

friendly pesticides. These new products should help farmers fight resistant pests, which are increasingly rendering older crop chemicals ineffective and require new crop chemicals.

FMC’s product portfolio currently skews toward insecticides, which generate over half of revenue. As genetically modified seeds, which are equipped with traits to fight insects, expand to new markets such as China and India over the next decade, the insecticide demand falling over the long term. Conversely, GMO seeds increase herbicide demand. For FMC, most of its new products in the pipeline are herbicides and fungicides, which should result in a more balanced portfolio among the three primary types of crop protection chemicals as new products are commercialized over the next decade.

Financial Strengths

FMC is in good financial health. To calculate a net debt/adjusted EBITDA ratio of roughly 2.5 times as of March 31, 2022. FMC’s leverage ratios fluctuate throughout the year as the company is subject to seasonality. With no large planned capital additions, the company should maintain its financial health and should be able to meet all its financial requirements, including dividends, going forward.

Bulls Say

  • FMC has transformed its portfolio to focus on crop chemicals, which should see strong growth prospects as yield gains are needed to support rising food consumption from emerging markets.
  • FMC has a large presence in Brazil, one of the few places with meaningful growth potential in arable land.
  • FMC’s pipeline should allow the company to continue expanding profits as the patents expire for its two largest molecules over the next decade.

Company Description

FMC is a pure-play crop chemical company. The company has diversified its sales to create a balanced crop chemical portfolio across geographies and crop exposure. Through acquisitions, FMC is now one of the five largest patented crop chemical companies and will continue to develop new products through its research and development pipeline.

(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.

Categories
Commodities Trading Ideas & Charts

Livent Corp Capitalises On Cost Advantage In Lithium Carbonate Production

Business Strategy and Outlook

Spun out of FMC in late-2018, Livent is a pure-play lithium producer. The company’s lithium carbonate production in Argentina is among the world’s lowest-cost lithium sources. As electric vehicle adoption increases, high-double-digit annual growth is projected for global lithium demand. Livent is looking to expand its Argentine brine-based lithium production capacity from 20,000 metric tons in 2020 to 100,000 metric tons on a lithium carbonate equivalent basis by 2030. The company also plans to increase its lithium hydroxide capacity from 25,000 metric tons in 2020 to at least 45,000 metric tons. Lithium carbonate is produced by pumping brine out of the ground (primarily in South America) or via pegmatite mining that produces spodumene, which is later converted to lithium carbonate. Lithium hydroxide can be produced either from the conversion of carbonate or directly from spodumene. Producing hydroxide from spodumene can cost less than starting from low-cost carbonate for fully integrated producers with low-cost spodumene operations. 

Livent’s strategy is to have the flexibility to produce either lithium hydroxide or carbonate. Hydroxide is a higher-quality and typically higher-priced product. It can either be produced as a derivative of lithium carbonate, or directly from spodumene. Livent is one of the lowest-cost carbonate producers globally but has a higher-cost position in hydroxide. Fully integrated hydroxide producers that start with high-quality spodumene assets can produce hydroxide at a lower cost than Livent, which may result in Livent’s position on the lithium hydroxide cost curve rising over time. Livent also increased its stake in the Nemaska lithium operation to 50%. The proposed project is a fully integrated hard rock operation in Quebec, Canada. While the project can be profitable, it carries risk as the previous owner, Nemaska, filed for bankruptcy due to cost overruns. The company is also planning to build a lithium recycling plant that will likely have tolling economics.

Financial Strength

As of March 31, 2022, Livent had a little over $240 million in debt and a little less than $70 million in cash. Net debt/adjusted EBITDA calculations show 1.5 times but all of the debt sits in long-term convertible bonds, which is anticipated to be converted into equity, leaving the company debt-free. Livent is in the midst of a major capacity expansion, planning to spend $1 billion in capital expenditures over the next three years. To fund these projects, Livent issued equity and raised over $250 million. Combined with increasing EBITDA and cash flow from higher lithium prices and sales volumes, the company should have adequate cash to fund the first wave of capacity expansion. Further, with a clean balance sheet, the company can draw from its untapped $400 million credit facility to help fund the expansion projects. However, with lithium prices rising, the company should be able to fund a decent portion of its capital expenditures from operating cash flow.

Bulls Say’s

  • Livent benefits from a low-cost position in lithium carbonate production, which is among the lowest cost globally. 
  • Livent’s decision to invest in increased lithium carbonate and hydroxide production should create value as the marginal cost of lithium production is well above the company’s cost position. 
  • As a lithium pure play, Livent is well positioned to increase profits from EV growth through lithium batteries.

Company Profile 

Livent is a pure-play lithium producer formed when FMC spun off its lithium business in October 2018. Livent should benefit from increased lithium demand via higher electric vehicle adoption, as lithium is a key component of EV batteries. The company’s low-cost lithium carbonate production comes from brine resources in Argentina. Livent also operates downstream lithium hydroxide conversion plants in the United States and China and has a 50% stake in a fully integrated Canadian lithium project.

(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 is 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.

Categories
Commodities Trading Ideas & Charts

Economic Recovery And Resurging Construction Demand To Increase Aggregate Shipment Volume For Vulcan Materials Co.

Business Strategy and Outlook

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. Strengthening demand growth for the public sector and modest growth for the private sector is forecasted. Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, public infrastructure spending is projected to grow by 6% per year on average, an acceleration from the last couple of decades. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty, but didn’t solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totaling $1.2 trillion. 

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan’s largest states by revenue–Texas, California, Virginia, Tennessee, and Georgia–have significant road spending needs and strong finances to support high growth. Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. Nonresidential spending growth is projected to slow to 4% in the longer term, as many key sectors are anticipated to make more efficient use of their construction spending. Additionally, residential starts are expected to converge to a long-term housing-start forecast of 1.5 million by 2030. Residential construction historically supports nonresidential construction growth.

Financial Strength

In 2021, net leverage was roughly 2.5 times net debt/adjusted EBITDA, compared with the company’s target of roughly 2-2.5 times. Continued improvement in construction markets should help leverage to improve further, falling below 1 times net debt/adjusted EBITDA by the end of 2024, all else equal. The weighted average debt maturity is 11 years (as of year-end 2021), so maturities look quite manageable. In June 2021, Vulcan announced the acquisition of U.S. Concrete. Given the healthy balance sheet before the close, the deal is unlikely to hamper Vulcan’s financial health. This case is bolstered by the relatively smaller size of U.S. Concrete. With the poorly timed and expensive acquisition of Florida Rock Industries in 2007, Vulcan’s debt surged from roughly $500 million to $3.7 billion. Combined with the recession that devastated construction activity, Vulcan’s leverage soared to more than 8 times debt/adjusted EBITDA. The company took difficult but important steps to protect its cash flow and improve its balance sheet in the aftermath. The company learned a lesson, given its current approach to M&A with more discipline. The acquisition of Aggregates USA in 2017 exemplifies Vulcan’s more disciplined, balance sheet-friendly approach.

Bulls Say’s

  • Vulcan has a favorable geographic footprint in states that have a strong need for increased road work and the capability to fund it. 
  • Not-in-my-backyard tendencies make the permitting process incredibly difficult for new quarries, forming high barriers to entry and protecting Vulcan’s business from incoming entrants. 
  • Vulcan has made significant progress on its cost cutting initiatives, demonstrated by its improving cost per ton despite relatively flattish demand.

Company Profile 

Vulcan Materials is the United States’ largest producer of construction aggregates (crushed stone, sand, and gravel). Its largest markets include Texas, California, Virginia, Tennessee, Georgia, Florida, North Carolina, and Alabama. In 2021, Vulcan sold 222.9 million tons of aggregates, 11.4 million tons of asphalt mix, and 5.6 million cubic yards of ready-mix. As of Dec. 31, 2021, the company had nearly 16 billion tons of aggregates reserves.

(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 is 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.

Categories
Commodities Trading Ideas & Charts

CMS’ Long-Term Resource Plan Settlement, Usage Growth Support Earnings Outlook

Business Strategy & Outlook

CMS Energy’s decade-long transformation into a high-quality regulated utility positions it for a long runway of growth. CMS’ 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 plans more than $14 billion of investment the next five years and could add to that as it 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 regulatory decisions. CMS has secured regulatory approval for almost all of its near-term capital investment as part of the state’s 10-year integrated resource plan framework. The regulators to approve CMS’ 10-year integrated resource plan settlement. If CMS can keep rate increases modest by controlling operating costs, 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 the Palisades nuclear plant and all of its 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. CMS has reduced its near-term financing risk with opportunistic refinancing. The CMS to maintain its current level of parent debt and take advantage of lower interest rates as it refinances. This should enhance returns for shareholders. Management appears committed to maintaining the current balance sheet and improving its credit metrics through earnings growth. The CMS’ consolidated returns on equity to top 13% for the foreseeable future, among the best in the industry due to this extra leverage. CMS has taken advantage of favorable bond markets to 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 ultimately could end up reducing CMS’ allowed returns, customer rates and earnings. Apart from financing the large Covert power plant acquisition in 2023, it doesn’t expect that 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. We expect the $930 million after-tax cash proceeds from the EnerBank sale will offset new equity needs through 2024. With constructive regulation, we expect 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 and 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.