Updates from Internet Wealth Builde on Encana Corp., Microsoft Corp., Onex Corp.
Encana Corp. (ECA, Financial) Encana shares tumbled on Wednesday after the company announced a surprise second-quarter loss of $505 million. (Although Encana is based in Calgary it reports in U.S. currency.) But the loss was all on paper and was due entirely to foreign exchange losses ($246 million) and natural gas hedging contracts ($340 million), a fact that clearly frustrated CEO Randy Eresman.
"We are reporting a loss in second quarter net earnings as a consequence of mark-to-market accounting despite the fact that our price hedges, covering about 60% of our production, were almost 50% higher than benchmark natural gas prices, and our natural gas production is about 10% more than one year ago," he said in a statement accompanying the financial results. "That's why we believe cash flow and operating earnings are a far better measure of Encana's financial performance."
Second-quarter cash flow was $1.2 billion ($1.65 per share). The company emphasized that the commodity price hedges which generated the huge paper losses actually contributed $263 million (36c per share) in realized after-tax gains to cash flow.
However, there was no escaping the fact that operating earnings dropped dramatically from $472 million (63c a share) in the second quarter of 2009 to $81 million (11c a share) in the most recent quarter. Note that comparisons to the first half of 2009 are on a pro forma basis as the company spun off Cenovus Energy (TSX, NYSE: CVE) in August last year.
On the positive side, production was up 12% over last year at approximately 3.3 billion cubic feet of gas equivalent per day (bcfe/d) and the company increased its total production guidance for the year by 65 million cubic feet.
Costs are also coming in lower than expected. "To date, 2010 operating costs are tracking about 17% below guidance and as a result we have lowered our operating cost guidance by 10 cents to 80 cents per thousand cubic feet of gas equivalent," Mr. Eresman said. "As we look ahead, we expect to see substantial additional cost savings through expanded use of multi-well gas factories and as we continue to extend the reach of our horizontal wells."
Investors appeared to be especially upset with the company's announcement that it will increase its 2010 capital spending by more than 11% to $5 billion. Encana said the $500 million increase will "accelerate long-term growth projects and build productive capacity of the company's vast North American natural gas portfolio for 2011". In a research report, RBC Capital Markets said that although Encana had indicated the move was coming, "higher spending and accelerated natural gas supply growth are both unpopular given the oversupplied state of the market". However, the brokerage firm retained its "outperform" rating on the stock with a price target of US$37.
The market's disappointment with the results offers a buying opportunity. Encana remains one of our best natural gas plays and, despite the second-quarter loss, is very profitable even with the current depressed gas prices.
Action now: Buy. - G.P.
Microsoft Corp. (MSFT, Financial)
Originally recommended by Gordon Pape on Jan. 20/03 (IWB #2303) at $25.73. Closed Friday at $25.81 (all figures in U.S. dollars).
Investors have clearly soured on Microsoft. No matter what the company does, it seems to have no effect on the share price. They started paying dividends. The market yawned. They spent billions of dollars to buy back shares. No one cared. This week the company announced record fourth-quarter revenue and beat analysts' earnings estimates by a mile. The market shrugged. Microsoft is so yesterday. Google and Apple are where the action is now.
The financials released on Thursday after the markets closed were truly impressive. Revenue for the final quarter of the 2010 fiscal year (to June 30) was just over $16 billion, a 22% increase from the same period last year. Operating income was $5.9 billion (up 49% over last year), net income came in at $4.5 billion (a 48% advance), and the company earned 51c a share, fully diluted, which was 50% ahead of 2009.
For the full fiscal year, Microsoft reported record revenue of $62.5 billion, a 7% increase from the prior year. Operating income, net income, and diluted earnings per share were $24.1 billion, $18.8 billion, and $2.10 respectively, which represented increases of 18%, 29% and 30% when compared with the full year 2009 results.
Pretty impressive for a firm which some people regard as moribund. But what did the stock do on Friday? It fell 3c to close at $25.81, almost exactly where it was when I first recommended the company back in 2003. In fact, except for a brief surge in mid-2008 and a subsequent tumble to around $15 in early 2009, the shares have traded around the $25 level for most of the time we've owned them. The dividend helped ease the pain a little but the fact remains that the stock has never been able to gain sustained traction since I picked it.
Some analysts still love it. Thomson/First Call tracks the recommendations of 32 brokerage firms that follow the stock. The average rating is 1.8 (1 being a strong buy, 5 a strong sell), which means the tilt is clearly to the buy side. The median price target is $35 a share.
Maybe we will see $35 again some day but we've waited long enough. There are better places for your money right now.
Action now: Sell. - G.P.
Onex Corp. (ONEXF)
Originally recommended by Irwin Michael on Oct. 6/08 (IWB #2835) at C$26.84, US$24.74. Closed Friday at C$26.82, US$25.68.
It seems that volatility has once again gripped the markets. Investors are seeking liquidity and safety as global growth expectations are revised lower. Moreover, given the recent substantial market weakness and the appearance of an increasing number of significantly undervalued stocks, we have decided to recommend the sale of shares in Onex Corporation and have liquidated those assets in our own funds. While this sale will bolster cash reserves, the advice to sell is primarily based on the following three reasons:
First, Onex has actually performed well on a relative basis during the past two months of market volatility. The stock has declined only about 10% while Blackstone, a U.S.-based peer in the private equity sector, has declined over 35%. We believe that this is a testament to management's long-term track record of excellent performance.
Second, the equity market decline has compressed the company's net asset value. A component of the NAV is made up of publicly-traded investments, which have obviously fallen along with the general market. More importantly, we also believe that the value of Onex's private direct investments could be negatively impacted. We had originally believed that one to three of these investments could be floated to the public this year. This would have been accretive to the NAV. However, we now believe that the reception to new IPOs will be more muted and market valuations will be lower. Onex might even choose to defer the IPOs until markets stabilize and show some recovery.
Third, after discussions with management we became concerned that our assumptions about the company's management business may have been too optimistic. In Onex's 2010 first-quarter news release, they stated that "the current annualized rate of management fees is US$88 million, which offsets the company's operating costs". Subsequent discussions led us to believe that the business is operating at a breakeven level. We are disappointed that Onex's management business isn't showing better profitability given the significant fee revenue.
In short, a sale of Onex shares at this time will provide some liquidity amid difficult market conditions and allow investors to redeploy the cash into investment ideas with a better risk/reward tradeoff.
Encana Corp. (ECA, Financial) Encana shares tumbled on Wednesday after the company announced a surprise second-quarter loss of $505 million. (Although Encana is based in Calgary it reports in U.S. currency.) But the loss was all on paper and was due entirely to foreign exchange losses ($246 million) and natural gas hedging contracts ($340 million), a fact that clearly frustrated CEO Randy Eresman.
"We are reporting a loss in second quarter net earnings as a consequence of mark-to-market accounting despite the fact that our price hedges, covering about 60% of our production, were almost 50% higher than benchmark natural gas prices, and our natural gas production is about 10% more than one year ago," he said in a statement accompanying the financial results. "That's why we believe cash flow and operating earnings are a far better measure of Encana's financial performance."
Second-quarter cash flow was $1.2 billion ($1.65 per share). The company emphasized that the commodity price hedges which generated the huge paper losses actually contributed $263 million (36c per share) in realized after-tax gains to cash flow.
However, there was no escaping the fact that operating earnings dropped dramatically from $472 million (63c a share) in the second quarter of 2009 to $81 million (11c a share) in the most recent quarter. Note that comparisons to the first half of 2009 are on a pro forma basis as the company spun off Cenovus Energy (TSX, NYSE: CVE) in August last year.
On the positive side, production was up 12% over last year at approximately 3.3 billion cubic feet of gas equivalent per day (bcfe/d) and the company increased its total production guidance for the year by 65 million cubic feet.
Costs are also coming in lower than expected. "To date, 2010 operating costs are tracking about 17% below guidance and as a result we have lowered our operating cost guidance by 10 cents to 80 cents per thousand cubic feet of gas equivalent," Mr. Eresman said. "As we look ahead, we expect to see substantial additional cost savings through expanded use of multi-well gas factories and as we continue to extend the reach of our horizontal wells."
Investors appeared to be especially upset with the company's announcement that it will increase its 2010 capital spending by more than 11% to $5 billion. Encana said the $500 million increase will "accelerate long-term growth projects and build productive capacity of the company's vast North American natural gas portfolio for 2011". In a research report, RBC Capital Markets said that although Encana had indicated the move was coming, "higher spending and accelerated natural gas supply growth are both unpopular given the oversupplied state of the market". However, the brokerage firm retained its "outperform" rating on the stock with a price target of US$37.
The market's disappointment with the results offers a buying opportunity. Encana remains one of our best natural gas plays and, despite the second-quarter loss, is very profitable even with the current depressed gas prices.
Action now: Buy. - G.P.
Microsoft Corp. (MSFT, Financial)
Originally recommended by Gordon Pape on Jan. 20/03 (IWB #2303) at $25.73. Closed Friday at $25.81 (all figures in U.S. dollars).
Investors have clearly soured on Microsoft. No matter what the company does, it seems to have no effect on the share price. They started paying dividends. The market yawned. They spent billions of dollars to buy back shares. No one cared. This week the company announced record fourth-quarter revenue and beat analysts' earnings estimates by a mile. The market shrugged. Microsoft is so yesterday. Google and Apple are where the action is now.
The financials released on Thursday after the markets closed were truly impressive. Revenue for the final quarter of the 2010 fiscal year (to June 30) was just over $16 billion, a 22% increase from the same period last year. Operating income was $5.9 billion (up 49% over last year), net income came in at $4.5 billion (a 48% advance), and the company earned 51c a share, fully diluted, which was 50% ahead of 2009.
For the full fiscal year, Microsoft reported record revenue of $62.5 billion, a 7% increase from the prior year. Operating income, net income, and diluted earnings per share were $24.1 billion, $18.8 billion, and $2.10 respectively, which represented increases of 18%, 29% and 30% when compared with the full year 2009 results.
Pretty impressive for a firm which some people regard as moribund. But what did the stock do on Friday? It fell 3c to close at $25.81, almost exactly where it was when I first recommended the company back in 2003. In fact, except for a brief surge in mid-2008 and a subsequent tumble to around $15 in early 2009, the shares have traded around the $25 level for most of the time we've owned them. The dividend helped ease the pain a little but the fact remains that the stock has never been able to gain sustained traction since I picked it.
Some analysts still love it. Thomson/First Call tracks the recommendations of 32 brokerage firms that follow the stock. The average rating is 1.8 (1 being a strong buy, 5 a strong sell), which means the tilt is clearly to the buy side. The median price target is $35 a share.
Maybe we will see $35 again some day but we've waited long enough. There are better places for your money right now.
Action now: Sell. - G.P.
Onex Corp. (ONEXF)
Originally recommended by Irwin Michael on Oct. 6/08 (IWB #2835) at C$26.84, US$24.74. Closed Friday at C$26.82, US$25.68.
It seems that volatility has once again gripped the markets. Investors are seeking liquidity and safety as global growth expectations are revised lower. Moreover, given the recent substantial market weakness and the appearance of an increasing number of significantly undervalued stocks, we have decided to recommend the sale of shares in Onex Corporation and have liquidated those assets in our own funds. While this sale will bolster cash reserves, the advice to sell is primarily based on the following three reasons:
First, Onex has actually performed well on a relative basis during the past two months of market volatility. The stock has declined only about 10% while Blackstone, a U.S.-based peer in the private equity sector, has declined over 35%. We believe that this is a testament to management's long-term track record of excellent performance.
Second, the equity market decline has compressed the company's net asset value. A component of the NAV is made up of publicly-traded investments, which have obviously fallen along with the general market. More importantly, we also believe that the value of Onex's private direct investments could be negatively impacted. We had originally believed that one to three of these investments could be floated to the public this year. This would have been accretive to the NAV. However, we now believe that the reception to new IPOs will be more muted and market valuations will be lower. Onex might even choose to defer the IPOs until markets stabilize and show some recovery.
Third, after discussions with management we became concerned that our assumptions about the company's management business may have been too optimistic. In Onex's 2010 first-quarter news release, they stated that "the current annualized rate of management fees is US$88 million, which offsets the company's operating costs". Subsequent discussions led us to believe that the business is operating at a breakeven level. We are disappointed that Onex's management business isn't showing better profitability given the significant fee revenue.
In short, a sale of Onex shares at this time will provide some liquidity amid difficult market conditions and allow investors to redeploy the cash into investment ideas with a better risk/reward tradeoff.
