Category Archives: Utilities

600 million (!!!) without power in India–the negative investment case in a nutshell

August 1, 2012 By in Asian economic development, economics, emerging markets, Utilities Tags: , , , , , , 3 Comments

Indian power outages

Media reports tell us that 620 million in India have no power, due to widespread failure of the country’s electricity grid.  That’s half the population of that country–and almost 10% of the world!  And we on the East Coast of the US think we have power problems!

For the twenty years or so that I’ve been following India, the south Asian giant has been touted as being the next big thing for emerging market investors.  But the dream has never become reality.

investment plusses…

The attractions are obvious:

–a mammoth domestic market,

–a significant number of entrepreneurs,

–a large pool of hard-working, well-educated workers, and

–the fabulous success of the IT outsourcing industry in Bangalore.

…and minuses

Three negatives, however, are just as prominent:

–the immense power wielded by a small number of industrial conglomerates that control much of Indian commerce, and which are not particularly interested in foreign competition,

–highly bureaucratic government at the national and regional levels, which tends to be highly inwardly focused and which is subject to religious, ethnic and class tensions, and

–the resulting lack of infrastructure, particularly roads and electric power.

the post-WWII development model

The classic post-WWII development pattern for emerging countries is to encourage technology transfer from highly skilled foreign firms.  These are typically induced to set up operations in the emerging nation through government incentives (tax breaks and red tape slashing) and by the availability of cheap labor, good roads and ports and sufficient electric power/clean water.  Underlying all this is a national consensus to make the sacrifices needed to foster economic development.

India doesn’t fit

India doesn’t fit this model.   In fact, according to the World Bank, India has recently been losing ground in important areas of infrastructure.  In its 2012 Logistics Performance Index, the Bank rates the second-largest country in the world by population as #46 in the quality of its logistics.  That’s just below Brazil, and slightly higher than Mexico and Argentina.  It’s also an improvement of one position since the 2010 report.

If we look a little deeper, however, India has fallen to #65 from #47 in the quality of its infrastructure, to #54 from #46 in international shipping and to #56 from #52 in its ability to track and trace shipments.

Its boost in the ratings comes from the timeliness of the shipments it does make (#44, up from #56) and its skill in using the logistics apparatus it has (#38, up from #40).  In other words, the ratings improvement comes from more efficient use of what little there is, rather than having an expanding logistics infrastructure.

The country hasn’t helped its reputation either with the Vodafone cellphone network affair, where it decided to retroactively change its tax laws to subject the UK firm to a multi-billion dollar levy on profits from a sale.  True, Vodafone may have exploited a loophole in the existing laws.  That’s irksome.  But changing the rules after the fact, rather than just closing the loophole, must give potential foreign investors pause.

By the way, India does have a program that allows private companies to build their own power plants.  In theory, they could use the electricity to drive their own operations and sell the remainder to the public grid.  But the latter prices are controlled by law, and set at a level that forces private power companies to lose money.  …oh, well.

 

Verizon (VZ) outperforming Apple (AAPL)? …what’s going on?

June 19, 2012 By in Industry Analysis, Stock ideas, Technology, Utilities, Wireless Tags: , , , , , , , , Leave a comment

VZ vs. AAPL

Yes, it’s true.  Over the past three months, VZ is up 10.7% while AAPL is flat and the S&P 500 is down 4.2%.  We should toss in another 50bp to VZ’s outperformance because it has a high dividend.

Maybe there’s nothing to this.  After all, the stock market is, even at its best, a two-steps-forward, one-step-back affair.  So VZ could be having one of its forward steps while AAPL is temporarily in reverse.  The period in question is very short.  The overall market is also down over the past quarter, the kind of environment that favors more defensive stocks.  And, of course, VZ and AAPL were neck and neck through the first half of last year before AAPL rocketed ahead and left VZ in the dust.

Still, there may be something a little more substantial going on.  I don;t mean to argue that AAPL will be an underperformer.  The surprise may be that VZ continues to be an outperformer.  I may be biased here, too.  I haven’t finished my research yet, but I have recently bought some VZ.

the argument for VZ

the US cellphone market is maturing

According to Nielson, 69% of current cellphone purchasers in the US are buying smartphones.  If we break that out by age, close to 80% of new phone purchases by Americans under 55 years of age are smartphones.  About half of those 55 or older are choosing smartphones, too.

Given that there will be some–mostly 65+–users who will never adopt new technology, can it get much better than this?  I don’t think so.

strategy shift in maturing markets

In a recurring subscription business, the winning tactic in any new market is usually to stake out as much territory for yourself as possible, without much regard for profitability.   You don’t care what anyone else is doing.  You just want to get as many clients in the door as you can.

As the market matures, however, two changes occur:

–growth comes from taking customers away from competitors, not from finding people who have never used the service before.  This is typically harder work and more expensive, so firms with scale end to have an advantage.

–profitability becomes more important.  Firms try to raise prices and to cut operating costs.

I think this is where we are in the US cellphone market.

sources of profit growth for VZ

1.  lowering phone subsidies.  To use round numbers, let’s say VZ pays AAPL $600 for an iPhone 4s.  It resells the phone, linked to a two-year contract, to a customer for $200.  VZ loses $400 on the transaction.

If the company can persuade that customer to choose an Android phone that it pays, say, $450 for, it loses $250 instead.  So it’s $150 better off.  That’s all incremental profit.

Better (for VZ) still, if the customer chooses a Nokia Lumia phone, the loss may be only  $200.

In Europe, phone companies are experimenting with using INTC reference designs to make house-branded phones.  Why bother?  INTC is only interested in selling chips, so it is ceding the entire wholesale markup to the carrier.  So it may cost the carrier $350 for a phone it can resell for $200–meaning a loss of $150.

Make this sort of marketing shift for enough customers and the savings become significant, even for a company of VZ’s large isze.

2.  raising prices.  In a sign that VZ thinks its market is maturing, it is fundamentally reworking its pricing.  Starting late this month, customers will get voice for free but begin to pay for data.  No more all-the-data-you-can-use plans, either.  Interestingly, VZ is going to eliminate a $20 per month charge for the ability to make your phone a mobile “hot spot” for internet access.  So you can tether your laptop or tablet to your phone for free, just by asking VZ politely.  Why?  Videos look a lot better on a tablet.  And they’re very data intensive.

all good things end, someday

At some point, possible profit-enhancing measures will run their course.  But that’s probably several years down the road.  In the meantime, VZ’s profit performance vs.Wall Street expectations may be surprisingly good.

In a perfect world (for the holder of VZ shares), the company would be able to spin off or otherwise shed its fixed line and FIOS money pits.  For stockholders, that would be like hitting the lottery.  It’s very highly unlikely to happen, in my opinion.  But, on the other hand, there’s nothing in the stock price for the possibility.


searching for yield in a zero Fed funds rate world

February 13, 2012 By in Constructing a Portfolio, Current Market Thoughts, Dividends, Strategy, Utilities, Wireless Tags: , , , , , , , , Leave a comment

conventional wisdom

Two traditional general rules about the appropriate allocation between equity and fixed income are:

1.  Take your age in years.  That percentage of your assets should be in fixed income; the rest can be in equities.  A thirty-year old, for example, should keep 30% of his assets in bonds and 70% in stocks.  A seventy-year old should have the reverse proportions.

2.  For a retiree, figure what your yearly expenses are.  Keep enough fixed income so that the interest earned will cover these expenses; the rest can go into riskier assets like stocks.

Neither rule applies in today’s world, however, at least in my view.

Only a lottery winner has the luxury of using #2.  Fifteen years ago, when the 10-year Treasury was yielding 8%, $1.25 million worth of them would generate $100,000 in interest income.  Nowadays, you’d need a $5 million investment to earn the same.

Both rules subject the follower to considerable risk as/when interest rates begin to rise.  My friend Denis Jamison deals with this subject in detail in his recent posts on PSI.    …his conclusions.

my quandary

One of my former employers notified me recently that I’m being removed from participation in its fixed income pension plan.  I can either take lump sum distribution or buy an annuity.  I’ve chosen the former, which I’m rolling over into an IRA.

I want to keep the IRA money in income-generating assets, to counterbalance to some degree my growth investor desire to own stocks.

Believe it or not, it takes a month for my old company to process my request.  Also, quaintly enough, it will issue a physical check and send it in the mail to my IRA account.  Looking on the bright side, this gives me some time to figure out what to do.

So I’m looking for dividend-paying stocks.  I’m not the only one, of course.  And with this account I’m starting at a time when the search for such equities by individual investors is close to entering its third year.  Has everything been picked over already?

first thoughts

My preliminary look around for information has turned up two interesting articles:

-the first comes from BCA Research, an independent organization headquartered in Canada (BCA stands for Bank Credit Analyst, its best-known publication).  BCA continues to be very fundamentally sound.  At one time it served primarily individuals and was somewhat technically-oriented and decidedly bearish in tone.  Not so much any more.  Today’s clients are mostly institutions.

In a February 2nd article titled US Equities:  The Total Return Trap,  BCA opines that traditional high income stock groups–utilities, telecom and REITS–are currently overvalued.  It recommends looking for yield among pharmaceuticals, integrated oils and hypermarkets.

–A February 5th piece in the Financial Times points out that significant dividend yields are available among stocks in the EU and in the Pacific.  The article lists the following current yields on various FT regional indices:

Europe (ex the UK)     3.80%

UK          3.40%

Asia Pacific (ex Japan)          3.16%

Global          2.70%

Japan          2.51%

US          1.96%.

my first stops

My order of preference is:  US, UK, Asia ex Japan, Europe.

I’m not so keen on Japan.  I think companies there prefer to pile up cash rather than pay dividends.  The high yield is more a function of wretched stock market performance than rising payouts.

I don’t have strong thoughts on the relative strength of the € vs. the $.  My hunch is that the € is going to be relatively weak, though, undermining the attractiveness of any dividend payment to a dollar-oriented recipient.  If we’re going to enter an extended period of economic stagnation in Euroland, much like the “lost decade(s)” in Japan, however–and I think that’s the most likely scenario–one can reasonably make the argument that, like the ¥, the € could show surprising strength.   I just don’t know.  Until I have more conviction, why take the chance?

The UK is a very income-oriented market and doesn’t carry the same degree of currency uncertainty as the Eurozone, in my opinion.

I’ve got a couple of weeks to do some research.  I’ll write more as I make progress.

a look at Tokyo Electric Power (TEPCO), JP: 9501

March 31, 2011 By in Asian economic development, economics, Industry Analysis, Japanese development, Utilities Tags: , , , , , , 2 Comments

“9501” says a lot

Unlike systems using letters to form ticker symbols for stocks employed in many Western markets, Japan has four-digit numbers that identify the stocks traded in that country.

The initial number indicates a company’s sector.  The 9000 companies are in the Service sector.

The second number is the firm’s subsector or industry.  The 9500 companies are Utilities.

The third and fourth numbers form a pair.  Firms are ranked in order of their importance in the industry (or at least their importance when the code numbers were initially given out), with “01” at the top.

So 9501 is the designator for the biggest and most important utility in Japan.  That’s TEPCO.

Foreign investors coming to Tokyo (other than those from Korea or Taiwan, which have similar number codes) might scratch their heads at Japanese ticker symbols.  But does a system where stocks can be designated “HOG” or “LUV” have a right to criticize?

As recently as the 1980s, the power of the “01” was immense.  Industry leading firms were magnets for the most talented university graduates.   The stock market invariably awarded the industry “01” the highest price-earnings multiple, regardless of relative growth rate or asset value, making it easier for these companies to raise equity capital if need be.

post-earthquake

I can’t imagine ever buying TEPCO again (I held tons of Japanese utility stocks in the late 1980s—that’s another story, though, having to do with a since changed electricity price setting mechanism).  So I haven’t done–and have no intention to do–the work I’d need to give an investment opinion.  What follows are observations rather than analysis:

1.  Japanese stocks are subject to maximum daily fluctuation limits, both up and down (don’t ask what the rules are).  The idea is that this gives panicky investors time to get their emotions under control so they don’t sell at crazy-low prices.  In my experience, however, wherever they’re in force the limits have the opposite effect.  There’s nothing like a day or two where your stock goes limit down with no trade–and all you can do is watch–to bring panic to never before experienced heights.  TEPCO had three such days in a row.  So the stock lost two-thirds of its value before anyone had a chance to get out.

2.  It’s not clear to me that TEPCO would be able to raise new capital from non-government sources if it operated in a market like the US.  But it doesn’t.  It’s possible that the Japanese government will pressure banks and insurance companies to provide funds.

3.  TEPCO is part of the industrial grouping (or keiretsu–another long story) led by the Mizuho Bank.  Group companies may feel a special obligation to lend support.

4.  There have been rumors that the Japanese government itself will make a large capital injection.  Since regulatory negligence seems to have been a contributing factor to the nuclear reactor disaster, this makes sense to me.  Certainly, the country has to replace the lost electric power somehow.

5.  The CEO of TEPCO has reportedly been hospitalized, suffering from a number of maladies.  It’s possible that Mr. Shimizu actually is sick.  But a company-announced hospital stay is also a ritual Japanese way for firms to sack unwanted executives.  The disappearance in January 2010 of Hirohisa Fujii as finance minister in the current administration after losing a power struggle to Ichiro Ozawa is a very recent example.

I think we’ll find that this “hospitalization” is the first step in a reorganization of TEPCO’s operations.  Interested investors should watch to see who’s appointed.

4Q10 TV numbers from SNL Kagan: better than 3Q10, but not good

March 29, 2011 By in Current Market Thoughts, Entertainment, Industry Analysis, internet, Technology, Utilities Tags: , , , , , , , Leave a comment

4Q10 TV subscriber numbers

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have a social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.