Inergy: Compelling Story for Investors Seeking Growth

Includes: CMLP, EWG, EWI, EWP
by: James Byrne

The economic and business recovery is clearly underway. That is ex-jobs, but let’s not split hairs. On another front we’ve navigated our way through earnings season virtually unscathed by major disappointments. Quite the opposite. Thus far, S&P 500 reporting companies have beaten earnings and revenue estimates 70% of the time. Accompanying this stellar performance is a raising of the bar for future earnings and revenues guidance and an upbeat outlook on end user demand from CEOs.

In the current low interest rate, benign inflation environment coupled with rising corporate revenues and profits, we should be popping champagne corks right? So, why are we not bathing in the Dom Perignon? There’s an old saying on Wall Street, “The bulls and the bears make money, but the PIGS get slaughtered”. Well this PIG must have swine flu because it has single handedly derailed a perfectly good bull market rally. The infected PIGS are not of the Wall Street brethrens. These PIGS are Portugal, Italy, Greece and Spain. The all too familiar symptoms have been identified, over leverage and too much debt. Sound familiar? Think Bear Stearns and Lehman Brothers for starters.

The first of the PIGS to hit the skids has been Greece. Greece like many, borrowed heavily and the global recession has taken its toll. The time for belt tightening and fiscal discipline is upon them. The response has been less than inspiring to say the least. Once again, Jean Claude Trichet, awakened from his slumber by German Chancellor Merkel has finally stepped forward with some reassuring words to soothe the market's panic. Any type of bailout, should one be necessary, must be flexible enough should the remaining piggy’s hostels begin to tremble. Greece in of itself is not that significant, the California economy dwarfs the country’s GDP, even the event of a default would not cause the global economy to seize up. But, the pervasive fear had/has been similar to the Investment Banking crisis here in the U.S. If Bear Stearns than Lehman Brothers (OTC:LEHMQ). If Lehman Brothers than Merrill Lynch. If Merrill Lynch than Morgan Stanley (NYSE:MS) and so on right up to the Goldman Sachs (NYSE:GS) frat house.

In Europe the fear is if Greece fails then Portugal. If Portugal than Italy. If Italy than (and this is the more significant one) Spain and the death spiral gathers enough momentum to toss the global economy into free fall again. So, the need to draw the line in the sand and prevent the short sellers and a bear raid on these countries sovereign debt and currencies was imperative. Bully for Chancellor Merkel. Strike 2 for Trichet.

The good news in the announcement of the possible rescue should allow investors to reflect back on the fundamentals which appear to be firming up quite a bit from depressed levels. Investors now need some clarity around the regulatory risks injected into the market by our elected officials. Healthcare reform. Financial regulatory overhaul. Higher taxes. Investment professionals and corporations need to clearly understand the rules before they can make long term capital commitments. How can the Jayhawks, Tigers or Wildcats run an offensive scheme if the refs keep moving the 3 point line? All players have identified what the issues are. Now elected officials and lobbyists are currently walking these through to resolution or stalemate. Either works as even a stalemate reverts back to the status quo and removes an unknown from investment variables to consider before deploying capital.

In our opinion the current gyrations of the market are reflective of the market being fairly valued. Market participants are waiting for the holy grail of the recovery Job Creation. While unemployment claims remain stubbornly elevated, we may see positive job growth reflected in the non farm payroll numbers this coming Friday due to a slight recovery in government payrolls. We continue to see a strong pick up in manufacturing activity while a lag persists in the service sector. Housing continues to be the Achilles heal, but should, in my opinion be viewed positively.

Housing starts continue to drag along at deeply depressed levels, suggesting a weak housing sector. I would argue for the necessity of these low levels of new construction in order for the market to absorb the excess supply currently available due to a decade of overbuilding. Fourth quarter GDP surged +5.7%. While this pace will not carry over to the first quarter 2010 the positive growth should continue and post a more modest 2.5-2.6% rate of expansion. This drop off may be explained by the building and/or depletion rate of inventories. Even so, the consumer has held up better than almost anyone would have expected or could have explained. We are seeing a leveling off of credit card delinquencies and charge-offs. While still at elevated levels, much progress has been made.

While we remain cautiously upbeat and view the current market churning nothing more than a healthy bout of profit taking, should any further deterioration materialize, we would take a more defensive posture and raise our cash positions. For now, we continue our research and look for the signs that the time to deploy our cash is upon us. When those signals come we’ll be in touch immediately.

Kansas City based Inergy LP (NRGY) continues to offer a compelling story for investors seeking growth with an attractive dividend. At current levels Inergy yields 7.6%. Inergy operates in the fragmented Propane gas market. It is one of the most active consolidators in the industry. However, this is no one trick pony. Seeing the shift towards clean energy and the necessity for the infrastructure build out, Inergy has entered into the Nat gas pipeline and storage facility arenas. The US is moving aggressively, finally, to tap into the enormous domestic natural gas deposits. New technology has made accessible and economically viable gas deposits in the Marcellus Shale deposit. Located in New York, Pennsylvania, and Virginia, exploiting these wells should lead the US down the correct path towards energy independence. In order to transport the gas, significant private investment has to be made to build out the pipeline and storage facilities.

Here’s where Inergy staked it bets. The company has continued to expand on both fronts. New pipeline and storage facilities should come online in the near future adding to earnings, cash flows and lead to yet another hike in the dividend payout. Since inception, 2001, this local star has rewarded investors each and every year by doing just that. Another bonus, since this is an energy Limited Partnership structure, the dividends are considered tax advantaged in most cases. ,

In a note of full disclosure, I may own for myself or my clients shares of Inergy LP-NRGY. Before making any investment decision, please do your own due diligence and consult your investment professional to identify whether Inergy would be an appropriate investment candidate.

Disclosure: Long Inergy LP