Comcast: Consider Adding More?

Applause for debt reduction

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In the midst of the net neutrality scuttle, investors should consider adding?

As of its recent nine months operations, Comcast, a $170 billion Comcast Cable and NBCUniversal operator, generated 61.6% of its business revenue from its cable communications (excluding eliminations).

According to filings, Comcast’s Cable Communications consists of the operations of Comcast Cable, which is one of the nation’s largest providers of video, high-speed Internet, voice, and security and automation services to residential customers under the XFINITY brand; Comcast also provides these and other services to business customers and sell advertising.

The cable communications also reported an operating margin of 24.8% compared to 24.85% a year earlier.

Comcast’s NBCUniversal cable networks business, meanwhile, generated about 9% revenue has delivered more profitability at 31.5% (vs. 28% a year earlier).

Overall, Comcast reported revenue rise of 4.2% year over year for its nine months of operations to $48.7 billion along with a 20.8% increase in profits to $7.7 billion.

From December, the media company also increased its cash by $813 million to $4.1 billion as of September. This is despite its responsible $5.1 billion reduction as a result of financing activities (includes $2.1 billion dividend payouts and $4.2 billion buybacks).

The company, nonetheless, has a debt-equity ratio of 1.17x (vs. 1.13x a year earlier).

In addition, Comcast had 818 thousand more total high-speed internet customers to 25.5 million as of September.

Comcast’s video and voice customers, meanwhile, lost 118 thousand and 122 thousand, respectively in the same period.

In the past three years, Comcast generated $25.7 billion in free cash flow and allocated $23.3 billion in dividends and share buybacks. The company also raised $8.9 billion in debt (net repayments).

Analysts have an average buy recommendation with a target price that is 23% higher than today’s price of $36.32 to $44.83.

Using historical growth rates and multiples with a 15% margin on the company’s revenue figures indicated a per share figure of $33 a share.

Disclosure: I have CMCSA preferred shares.

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Bye Bye to Net Neutrality?

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Skirmish has begun a while back

Happy Thanksgiving!

Even the smiley Federal Communications Commission (FCC) chief Ajit Pai failed to simplify for viewers to understand ‘what is net neutrality.’

But one thing is clear, he does not like net neutrality.

Net neutrality was a rule created in 2015 that prevents internet service providers from blocking or discriminating against internet traffic.

To simplify, wireless, cable firms can affect the quality of videos being streamed to customers by increasing or slowing one’s (like Netflix’s) internet traffic unless Netflix (or customers?) pay up to the service.

This event is not a possibility. It has already happened.

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Some two or three years ago, Comcast slowed down Netflix’s streaming until Netflix and the former agreed to an arrangement.
On July 2017, Verizon ‘tested’ and slowed down YouTube, Netflix, and other video streaming services.

Meanwhile, Verizon, AT&T, Comcast, and Charter altogether value to about $660.5 billion, while YouTube operator alone is now valued at $725 billion. Netflix is valued at $85 billion, on par with Charter Communications.

As a former lawyer for Verizon, some of Ajit Pai’s accomplishments were as follows:

  • Stopped nine companies from providing discounted high-speed internet service to low-income individuals
  • Withdrew an effort to keep prison phone rates down
  • Scrapped a proposal to break open the cable box market

Anyhow, all these findings may be to make Mr. Pai’s image look bad as the source is the New York Times.

In 2014, Mr. Pai also hit Netflix with allegations of the video streaming company was working to “effectively secure” Internet “fast lanes” for its content. Netflix pacified this later, saying that its tools do not advantage its content.

Nonetheless, FCC rolling back net neutrality rules should interest even a less discerning internet user.

Disclosure: I have shares in Verizon, AT&T, Comcast, and Google.

A Warning Shot at the Philippine Oil Industry

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Investors should prepare for any backlash spoiled Philippine oil giants may have

Philippine Stocks involved: Petron (PCOR), Pilipinas Shell (SHLPH)

The Philippines’ Department of Energy has identified Petron, Pilipinas Shell, and Chevron as the major oil companies in the country.

As of June 2017, Petron held a market share of 28.6% of total petroleum products, Pilipinas Shell with 20.7%, and Chevron with 6.6%.

At the time of this writing, Petron has a full market value of 90.8 billion pesos, and Pilipinas Shell at 96.7 billion pesos. Talking about some overvaluation for Shell, but this could be further dissected at a separate time.

Chevron Philippines, meanwhile, is not publicly listed but operates nearly 700 Caltex service stations in the country with other business interests including its 45 percent non-operated working interest in the Malampaya gas-to-power project, according to the company’s website.

Using historical data, there was actually an asymmetric pattern response in Philippine retail gasoline price response to crude oil price changes. This was found in a study made by Jaewook Kim in 2012 whereby oil price information was gathered from 2005 to 2010.

(Link to the study: Behavior of Retail Gasoline Prices in the Philippines to Changes in Crude Oil Prices: Is it Symmetric or Asymmetric? Jaewook Kim)

Kim stated that rather than using WTI or Brent oil price in comparison, Dubai crude oil is more fitting when comparing to the Philippines retail gas price.

In a more recent period, Dubai crude price has climbed 4.1% to $55.58 a barrel since January to October 2017, but the Philippine retail gas price has risen 300% more than Dubai’s or at a rate of 12.4% to 48.85 pesos per liter in the same period.

In the United States, where latest oil & gas technologies are being applied, retail gasoline price has risen 4.4% to $2.59 per gallon.

Are these local refiners grinding more and therefore need to raise their prices this much? Or these unified price hikes are just a market manipulation managed by the big oil players in the Philippines?

To boot, the Philippines has not suffered like what Texas to Louisiana areas have to deal with the hurricanes Harvey and Maria recently this year where refineries were shut down and refined products drop afterward.

Nonetheless, one thing Filipinos should hope for and also vigilantly follow is the newly re-assembled investigative team, the Department of Energy and the Department of Justice Task Force, in determining if there are market abuses being employed by the oil companies.

If proven, painful penalties could be a result.

Disclosure: I do not have shares of any of the companies mentioned.

The Philippines Does Not Have Enough Oil Reserve

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The passionately growing country is heavily dependent on oil imports

Four days ago, Bloomberg reported that the Philippines has cemented its position as one of the fastest-expanding in the world.

According to the latest report from the Philippines’ Department of Energy, part of the executive branch where the President resides, the country has a crude oil and petroleum products inventory supply of 24.9 million oil barrels that could last the country for about 56 days, as of June 2017. This is actually 24.6% higher than the same period last year, which we could consider, an improvement?

Nonetheless, crude oil reserves in the Philippines, with a country of 103 million people, has been left unchanged at about 100 million barrels in the nearly recent decade (2006-2015), according to data and statistics website IndexMundi.

Meanwhile, Malaysia, with a population of 31 million people, has 4 billion in reserves; Thailand, made up of 69 million people, has 500 million in reserves.

This certainly means that the Philippines mostly rely on imports to help feed Filipinos’ car engines and other oil-dependent machinery.

As of June 2017, the Philippines’ Department of Energy specifically stated that 34.9% of its crude oil supply was from Saudi Arabia, 28.4% from Kuwait, and 15.6% from the United Arab Emirates. Russia also supplied another 7.8% while Qatar formed 5.6%.

Brought by this certain arrangement, the Philippines (like most other net oil importer countries) is unavoidably exposed to any wild fluctuations in oil price.

On the other hand, plenty of proven reserves does not mean automatic panacea for a country. Just look at Venezuela. Unfortunately, political upheaval and oil price crash in recent years brought its citizens to starvation and destruction.

How about those gas guzzlers?

Interestingly, car registration in the Philippines totaled 104 thousand as of 2013, according to official data gathering website Trading Economics. Malaysia had 102 thousand registered cars, and Thailand had 35 thousand as of August 2017.

Nonetheless, the Philippine President Duterte’s order of 30-day government-matter processing should help propagate the endless bureaucratic red tape that engulfs the nation.

Who knows, some big oil discovery may just pop out somewhere out of the country’s 7,000 plus islands.

 

Too Late To Catch a 20% Yield: Siemens Gamesa

Siemens Gamesa Renewable Energy appears to be promising

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Stock: Siemens Gamesa Renewable Energy SA 0H4N, GCTAF, GCTAY 

Siemens Gamesa Renewable Energy, a €7.2 billion 40-year-old Europe-based company, is the world’s fourth-largest Original Equipment Manufacturer (OEM) in the onshore wind industry.

The company has had an unimaginable 20% trailing dividend yield.

In further observation, however, the dividend appeared to be unsustainable given that the Zamudio, Vizcaya, Spain-based company has just provided a little more than €1 billion in payouts while having generated just €176 million in profits in the recent 12 months of its operations.

As it turned out, Siemens Gamesa Renewable Energy (Siemens Gamesa) paid out €1.07 billion in extraordinary and ordinary dividends just in the period between April to September 2017 secondary to its recent merger agreement.

The company paid out (€3.6/share) and an ordinary dividend (€0.11/share) in the recent six months.

According to filings, Siemens Gamesa is the result of merging Siemens Wind Power, which is the wind power division of Siemens AG, with Gamesa Corporación Tecnológica (Gamesa).

As reported in 2016, Siemens Gamesa Renewable Energy is to be 59%-owned by Siemens AG and 41%-owned by Gamesa Corporacion shareholders.

Siemens Gamesa engages in wind turbine development, manufacture and sale (Wind Turbine division) and provides operation and maintenance services (Services division).

As reported by the Wall Street Journal, the Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Xinjiang Goldwind Science & Technology, Denmark’s Vestas Wind Systems, and General Electric, according to FTI Consulting.

Meanwhile, Siemens-Gamesa reported poor €135 million losses on revenue of €5 billion in its April to September operations.

*Statement of Simens-Gamesa (highlights by author)

The group’s financial results in the second half of 2017 (the first six-month period in which the merged company was operational) reflect the impact of higher volatility in some of the company’s main markets, such as India and the US. That volatility is the result of the transition towards fully competitive wind energy models, which has resulted in a decline in onshore sales volume and also in an inventory impairment, with no cash impact, as a result of price pressure in those markets.

Consequently, sales in the six-month period declined by 12% with respect to the pro-forma sales figure for the same period of the previous year, and the underlying EBIT margin, excluding the impact of the PPA, stood at 3.8% , and at 6.5% excluding the inventory impairment. Excluding the impact of the hiatus in the Indian market, which was main cause of the decline in sales volumes, group sales fell by 2.4% year-on-year, mainly due to the currency effect, and the underlying EBIT margin pre-PPA and before the inventory impairment was 7.3%. The company ended the period with a net cash position of €377 million, after paying out a €3.6/share special dividend in April as part of the merger agreement, and a €0.11 ordinary dividend out of 2016 earnings.

Although all of these business reduction results seemed disappointing and obviously unappealing, Siemens Gamesa reported that excluding the halt in the Indian market business, the company would have had a 2.4% revenue reduction instead.

The company also stated that it experienced a temporary suspension in the Indian market, but also the reduction in installations in the UK.

Siemens Gamesa also expects that its business in the Indian market will normalize in 2019.

In September 2017, the company also bagged a project to develop India’s first large-scale commercial hybrid wind-solar project.

 “Siemens’s offshore [wind business] is a world market leader, but offshore alone is not enough to become profitable,” said Christoph Niesel, a portfolio manager at Union Investment, a Siemens investor. Mr. Niesel said the deal with Gamesa would allow Siemens to fill this hole in the business (The Hindu Business Line)

As of September, Siemens Gamesa had nearly €7 billion in goodwill and intangible assets, €1.28 billion in debt, €1.7 billion in cash and cash equivalents, and €6.45 billion in book value (vs. market cap  €7.2 billion).

Buying shares of the Siemens Gamesa as of the moment may be a little late if one is trying to have that 20% yield payout, and maybe a little early in anticipation of improved results in the coming future.

In addition, having negative cash flow and having increased its overall debt by €230 million since March of this year may indicate a pass. Some speculative investors may want to capture the newly merged wind company’s shares as it already had provided -11.7% total losses so far this year.

There’s no telling when Siemens Gamesa may deliver healthy positive free cash flow and consistent earnings, but somehow the company sees its operations better by the year 2019.

Meanwhile, the company is a pass.

Disclosure: I have GE notes.

Do PLDT and Globe Allot Enough for Service Improvement?

PLDT has cut its spending dramatically to possible detriment of its subscribers’ experience

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(Average Connection Speed, Akamai)

Stock: PLDT (PCOMP: TEL) and Globe Telecom (PCOMP: GLO)

Looking at the Akamai visualization below, the Philippines could be one of the slowest countries out there in terms of internet connection speed.

Certainly, the country far underperforms its neighbors, including Vietnam, Indonesia, and Malaysia. (LINK).

It is right to criticize both PLDT and Globe as both giants hold 84% of the Philippines’ mobile market. In addition, PLDT alone proudly held 70% market share in fixed broadband.

Financially, PLDT has allocated 184 billion Php in captal expenditures (capex)* in the past five years. Globe, meanwhile, spent nearly 140 billion Php.

*Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. It is often used to undertake new projects or investments by the firm (Investopedia).

These capex figures, nonetheless, are just broad figures.

Calculating these expenses as per the respective company’s total revenue and in percentages is more useful and could be compared to other big telecommunications companies overseas.

Going back, PLDT has allocated 22% of its revenue in capex on average in the past five years, while Globe’s capex represented 26%.

Comparing these figures collectively to Indonesia’s biggest telecommunications companies, Telkom, Indosat & XL Axiata, in the same time period, the Philippine phone companies spent 24% of its revenue in enhancing its telecommunications business while Indonesian companies spent 28% of theirs.

For comparison’s sake, 8,207 miles to the east—big United States telephone companies (AT&T, Verizon, and Sprint)—altogether has spent 16.2% of its revenue in capex allocations in the past half decade.

Recent six months of operations and capex allocations

Reviewing capex allocations in both Globe and PLDT’s in its recent six months operations should also be interesting since this period covers the period since President Duterte’s took his oath of office.

Globe’s capex increased 30%, while PLDT’s has actually fallen -43% year over year.

PLDT, according to its filings, actually verified this decline in expenses having stated:

…Our consolidated capital expenditures, including capitalized interest, in the first half of 2017 totaled Php5,727 million, a decrease of Php14,305 million, or 71%, as compared with Php20,032 million in the same period in 2016, primarily due to lower capital spending of Smart Group and PLDT

Globe’s capex, meanwhile, rose 30% having stated:

…Globe spent around P27.5 billion in capital expenditures as of end-June of 2017 to support the growing subscriber base and its demand for data

So if this comparison boils down to the subscriber base, PLDT has 58.7 million mobile subscribers and 1.83 million broadband subscribers as of June, while Globe has 59.7 million and 1.2 million, respectively.

There should actually be no reason for slower capital spending by PLDT with this amount of subscribers knowing that it has significant market share and services that should responsibly be provided to the Filipinos.

Sure, PLDT lost 9.6 million subscribers since the last year, but 58.7 million subscribers are still a bunch of people relying on its services. Besides, PLDT gained 220 thousand more broadband subscribers.

Why then is PLDT trimming its capex this much anyway?

Summing it all up, PLDT failed further to impress as it allocated less cash to improve its operations in recent months. On the other hand, both Philippine phone companies exhibited near at par cash allocations to its expenditures in the past half-decade but failed to provide similar positive gains (such as an increase in internet speed).

Being the chief executive of the Department of Information and Communications Technology, President Duterte (PTV Sa Totoo Lang Video: skip to 1 hour 24 mins onwards) has admitted he may bring new competition in the country to lower down rates paid by the Filipino to these incumbent, spoiled phone companies.

“I was hurrying up the competition.” Philippine President Rodrigo Roa Duterte

Disclosure: I have shares in Globe, AT&T, and Verizon.

Celgene Punishment: Unwarranted

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Severe market price drop is not warranted given the company’s historical growth performance

On Friday, Celgene lost a $15 billion of its market value after announcing its third-quarter results that ended in September.

This is a hell of a punishment while having determined that the company would not be able to deliver with its outlook by 2020.
The now $74.8 billion New Jersey-based biotech company has announced that it expects net product sales of $19 to $20 billion (from $21 billion) by 2020 and an adjusted diluted earnings per share (EPS) of more than $12.50 (from >$13). This indicates a rather pessimistic revenue change of $2 billion at most.
In addition, Celgene also revised its GAAP diluted EPS this year down to the range of $4.78 to $5.19 indicated a forward PE ratio of 19.2x (vs. three-year average 54.3x) suggesting a marked discount at current price levels of $95.64 (at the time of writing).
Reviewing its nine months revenue and profit changes, Celgene recorded 15.4% (3-year ave:20%) and a more impressive 92% (3-year ave: 11.3%).
A closer look indicated that Revlimid–Celgene’s top revenue generator–grew 16% in the recent nine months from last year (2-year ave: 18.4%) to $6 billion or 63% of net product sales. Pomalyst, meanwhile, the second most revenue generator grew 25.6% to $1.17 billion or 12.3% of total revenue (vs. 2-year ave: 39%).
Otezla, a recent product that was launched in 2014, grew 27.5% in the recent three quarters compared to an outstanding 115.6% in the fiscal year 2016.
Mark J. Alles, Chief Executive Officer of Celgene Corporation
“In consideration of certain market dynamics and recent pipeline events, we are updating our 2020 outlook, and remain confident in our ability to deliver industry leading growth.”
“Over the coming months, we look forward to sharing data supporting our innovative, next generation pipeline products and significant growth drivers.”
As of September 30, Celgene had $11.8 billion in cash (+$6.7 billion from same period last year), $14.3 billion in debt (-$38 million year prior), and equity of $9.85 billion (+$4.3 billion).
In the past three years, Celgene spent $10.6 billion in research & development, $697 in capital expenditures, raised $10.9 billion in debt, generated $8.6 billion in free cash flow, and repurchase represented 97.9% of the stated free cash flow.
Meanwhile, 34 analysts have an overweight recommendation with a target price of $148.43 a share vs. $99.86 at the time of writing. Using historical revenue growth and multiple averages and a 20% margin indicated a per share figure of $144.90.
In summary, Celgene is a buy with $145 target price.
Disclosure: I do not have shares at the time of this writing, and may buy accordingly.