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Pierce Crosby
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Market-driven reporter and analyst. Following VC, nuances in HFT, as well as select baskets of "non-blue chip" companies. Find me on StockTwits and Twitter - @CrosbyVenture for the #FSOL (Financial Side of Life) morning reports as well as daily insights to the latest trends I am... More
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  • Active Discussions: Preparation, Warning, And Tool Kit

    There is no doubt activism will play a bigger role in public markets in 2014. As low leveraged companies now flaunt lofty valuations relative to even two years time, bigger players will be seeking to unlock greater value and further share appreciation through spin-offs, real estate plays, and capital structure consolidations.

    There were 176 spin-offs announced in 2012, with an aggregate value of $41 billion. In comparison, there were 201 spin-offs in 2013, with an aggregate value of $33 billion.

    That said, there's more to be done. Many businesses, particularly in the industrial conglomerate space are seeking to quiet the building investor pressure to slice and dice some of the more fatty portions of the business. In recent discussions, the arguments have varied from the fluffy "it's a good cultural fit" to more fundamental complaints about synergy damage, and future performance losses if there was a break up. Still, with current valuation roofs being hit by many, rhetoric isn't going to work forever.

    Last December we looked at energy conglomerate performance compared to peers, we found some weakness. There are a lot of US laggards that might seem a tasty treat to an activist. Now, two weeks ago general news outlets reported that Nelson Peltz was called upon to provide advice to General Electric, in August. I suppose you could call that... intuition.

    There is a lot to be said for other conglomerates as well, striping out some operations, PG&E could also yield a much higher return for investors, breaking the utility off from the consumer business into a non-growth vehicle. Likewise, Emerson Electric has stood, untampered for a number of years. Emerson doesn't have nearly as many parts to consider as General Electric, but it might garner some sniffing.

    Without current counter arguments, the fact that conversations are ongoing makes a lot of these bigger energy companies look weak. The same story has already significantly played out in the Oil & Gas sector, where many have separated growth properties from cyclical performers, and yes indeed shareholders have reaped the fruits of active labour. Look no further than the story of ConocoPhillips and Phillips 66, a great tale of active investor return. Just this morning we've also had the announcement that Enable Midstream Partners was being pushed into an IPO, asset spin-offs abound.

    Logically, there has to be some defensive plays for the home team. And who better to help head up the defensive strategy than Wachtell, Lipton, Rosen & Katz.

    They've just made public a previously proprietary report which outlines the basic strategy for how conglomerates should be looking at spin-offs and how an activist might approach such options. This type of research isn't just for the average fearful conglomerate though, activists are reaping the benefits of such research as well. Work like this is a double edged sword; it gives talking points to the companies just as much as those that are trying to break them up. Analyzing the options of divestitures, REITs, spin-off options and negotiations with private equity partners.

    Despite who's side you're on, WLRK's report is valued here for one reason. They're making the conversation present, working to eliminate the taboo surrounding discussions with active investors. In the past, corporate talk of breakups have been under soft breath behind closed doors. With more dealmakers looking to advise on such opportunities - for lower fees - maybe the time has come for corporates to take the offensive.

    The free flow of capital and ideas are healthy, even if a company is not.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 04 12:00 PM | Link | Comment!
  • Jinko Exposes Pivotal Moment In Chinese Solar Co.'S Financing

    By Pierce Crosby Updated March 12, 2012

    JinkoSolar Holding Co., LTD. (JKS:NYSE) is a poly silicon and solar wafer manufacturer located in Jiangxi and Zhejian Province, China. On November 20, the company released its third quarter earnings, the results beat the average of 12 analysts expectations, but that average still predicted a continuation of downward move of the company's profitability.

    Since then, year to date (Jan. 1st to present), the company's share price has deteriorated 28%. But could the downward trend prove the nearing time to enter positions on the stock? Chances are, we haven't seen a bottom yet, and we might not for some time according to Bloomberg.

    So what is squashing the companies expectations? It's not crystal clear, but the companies third quarter results on November 20, depict a particularly interesting snapshot of the outlook for the near-and-far of the solar panel manufacturer. Much like their fellow second-tier cohort Suntech Power Holdings Co. Ltd. (NYSE:STP), Jinko shows us the same consistent trend towards a default or Chapter 7 filing. However, with new sales offices opening in the US, India and Japan, and new Capital Expenditures projects in Latin America, current executives like CFO Longgen Zhang are convinced that the company seen its darkest days already and will soon rebound by diversifying its offerings.

    Said Zhang in the latest earnings call, "Jinko is one of the most vertically integrated [companies]. I think we buy silicon poly in the front market, major. And our costs, you know, we from time-to-time, we also contract some polysilicon for short-term. So basically, as you know that today, the situation is oversupply. I think cost ASP of modules continued to go down. So that's why in talking about gross margin will also help to connect those two prices."

    Zhang's estimations are right here, which many forecasters agree upon, too many solar companies are flooding the market that has yet to really rise in demand since the late 2000's. His report was essentially in line with the rest of the Solar Energy Sector which has eroded at large an average of 17% since January.

    But why is the lack of demand coming to light for these Chinese manufacturers bottom line now?

    For Jinko in particular - and STP as well - the three key problems are 1. short term debt obligations, 2. the rise of competitors in the marketplace, and 3. an abundance of both solar products and non-alternative energy products being brought to market, such as US hydro fractured gas and South American crude.

    Most prominent though, these short term debt obligations are catching up with the Co. What has changed over the past two years is both the production subsidies and bond issuances. Their their debt to earnings ratio is tightening, showing the need of the company to release more bonds into the market, but the Industrial and Commercial Bank of China has not allowed further underwriting to occur on their books - being the historic partner to turn to. This pivoting of the bank's policy is creating concerns for short term debt holders and in correlation, a depreciation of price. According to third quarter results, half of the Co.'s financing has been made possible through new debt offerings. If they can't keep offering debt bonds, they can't fund operations.

    The moment is key for the solar industry and China. Not only might it expose a moment of questioning, but it shows the movement of the commercial banks out of non-returnable investments, into other ventures that might actually prove profitable. After dominating the American marketplace, as well as much of Europe and the Middle East, Chinese banks may have very well decided to let the unprofitable, subsidized manufacturers dry up.

    Yet some still expect growth in the near future, which will limit the impact of the companies inability to gain new capital infusions or subsidies. Research Analyst Brandon Heiken from Credit Suisse has remained firm on Jinko's value in particular.

    "In general the industry over the past couple of years has suffered because of the supply of both module [solar panel], and wafer [polysilicon] production," said Heiken. "Jinko is using vertical integration to get more into building systems rather than just manufacturing and production. The margins on installation projects average around 10% instead of the production which makes roughly 2% gains."

    Credit Suisse's Equity Investment Branch still holds $3.5 million USD in Jinko. Its company profile rating remains neutral.

    In contrast, GlobalData, a US-based analysis firm has assigned an "overweight" rating to Jinko due to its extremely low net income of $273M in 2011. While the company is still turning an on-book profit, and net revenue has almost doubled from $4.25B in 2010 to $7.39B in 2011, showing the company's inability to keep costs low and maintain a higher profitable margin.

    But can the company turn around its net income? According to Reuters One, revenue is increasing consistently since 2009, but because of lower returns and CapEx increases the company is getting spread thinner and thinner.

    Additionally to the tightening of Jinko's capital pocketbook, investment losses are piling up. Not financially realized until late December of last year, in the earnings call Longgen Zhang explained how a short term currency investment had created another large write down on the books.

    "We recorded a foreign currency exchange loss of $4.5 million in the fourth quarter of 2011, primarily due to the loss of $9.7 million in foreign currency exchange which was partially offset by a gain in the change in fair value of forward contracts of US$5.2 million, both of which were due to the depreciation of the euro and the U.S. dollar against the Renminbi currency," said Zhang.

    According to Heiken, the analyst at Credit Suisse, first-tier (larger) Chinese solar competitors like TrinaSolar (NYSE:TSL), YingLi (NYSE:YGE) Solar, as well as North American Canadian Solar are taking over the market share of available contracts being issued. So even if Jinko can soon diversify its offerings by becoming both a producer and installer, they may be offering their services to only a few new contracts gained.

    Amidst company concerns, the market is still booming. On Thursday, the S&P 500 Index (SPX)closed at 1,569, its highest close since Oct. 2007. Additionally, the Dow Jones Industrial Average (DJIA) topped its previous record in Oct. 2007, breaking into a territory of 14,578.

    Whether Chinese Solar companies like Jinko will benefit from this larger market liquidity it is difficult to say, but with larger construction projects taking place in the US especially, and new summer installation contracts flowing into the market over the next two months, there might be light at the end of the tunnel for the new manufacturers. If however, Jinko doesn't win new contracts in the diversified marketplace soon, it will lose its ability to pay off the short term loan obligations as a externality of not receiving further debt loan originations.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Apr 03 1:47 AM | Link | Comment!
  • New Wealth Tax Spurs Infrastructure Spending - See Railroad Stocks

    Updated March 11, 2013

    With the passage of Proposition 30 in November, California seems to be on the rebound. That's not to say that the 9th biggest economy in the world (at approx. $2 trillion GDP) has returned to its pre-recession glory. However, the current California administration, led by Governor Jerry Brown has begun to make serious reforms that will work to return the state to its 7.8% unemployment rate. The current preliminary rate as of January 2012 still stands at 9.8%, unchanged over the last three months.

    So what is expected to be driving this economic recovery mode?

    As of the numbers released in September 2012, California has recovered about a half million jobs, offsetting the 1.4 million lost between July 2007 and February 2010 according to the California Legislative Analyst's Office. But the return in private sector employment numbers are not coming from where you might expect. In fact, since 2009, construction and manufacturing, a primary driver of California labor, has remained flat, with barely any increases, suggesting a serious lack of momentum for infrastructural development. Instead, the largest sectors moving higher today in the golden state are through business services as well as leisure and hospitality.

    Driven by the tech boom, California's state officials are looking to diversify their rather radical growth patterns, and they've taken a very bold stance to do just that.

    In the Bay Area in January, the Federal Railroad Administration authorized the beginning of construction for California's first High Speed Rail (HSR) System. The project, with a total budget of $68 billion is expected to begin formal construction in the Central Valley as soon as April, and will eventually connect the North Bay to the Los Angeles area.

    The project, which expects to produce The initial leg of the project, stretching 130 miles south will face serious scrutiny said Chief Executive Officer of (CHSRA) California High-Speed Rail Authority's Jeff Morales, but his confidence at a press conference in December indicated a positive outlook on the projects future.

    "This is now a statewide rail modernization plan that will not only deliver high-speed rail transportation, but also will invest billions of dollars of improvements to local and regional rail systems around the state immediately," said Morales in a December press conference. As of January 12th, only $12.3 billion in funding has been formally identified for the project.

    Estimated by CHSRA in the formal 2012 business plan "Construction of the rail is expected to generate up to 100,000 construction-related jobs every year the system is under construction, and as many as 450,000 permanent jobs once the rail is completed," noted the proposal.

    If those 450K were added today, the current unemployment level would drop from 9.8% to 9.1%.

    Funding Hurdles

    Granted approval by the Federal Railroad Administration, the project will look to borrow a $3.2 billion dollar loan from the Federal Reserve Development Fund. These initial loans will cover some of the costs to buy out local farmers who's land the rail will pass through, but it will do little to cover the expenses of the entire project.

    To create further funding, Prop 30, proposed by the Governor's Office and passing with a 60.1% margin, is aimed directly at raising tax rates on the high income individuals and multi-state businesses to close existing loopholes. The additional revenue stream by the PIT (Personal Income Tax) and the CGT (Capital Gain Tax) will in provide much needed liquidity for the state's General Fund ($18.6 billion for 2010-2011) which many help pay for the HSR.

    "The thing is, there is barely enough money to go around as it is," said Sheila Kuehl, the Director of the Public Policy Institute at Santa Monica College and the author of the weekly CPR (California Progress Report). "I've been working with state legislature since the early 2000's and we've always been on a windy road about the budget," said Kuehl. "The recession hit California hard, and we've haven't come back from that, so I don't see how Jerry [Brown] expects a rail system to be built by 2018 or '19."

    In total, Proposition 30 will raise $6 billion annually according to the Department of Finance, and while it seems to be a significant number for the state, a lot of the money will go towards reforming an underfunded educational system, not paying for the HSR system.

    Said Kuehl, "It just comes down to knowing the place well enough to know that they're not going to spend the first rounds of taxpayer money on a whim like the HSR. The idea is sound, there is a need for modernizing transportation, but the timing is wrong."

    To help cope with the lack of funds the HSR Authority will also issue $2.6 billion in bonds to investors to raise capital for the first section of the rail.

    Even so, the project's total budget remain somewhat of a mystery to many Californians. Lawsuits with farmers continue to pile up amidst property purchases, but over the next two months the land acquisitions will be theoretically finalized and construction will begin.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: All Steel Sectors should watch for structured agreements by the High Speed Rail Authority with select Steel Corps to develop the tracks. Will quantify long-term position.

    Mar 12 6:27 AM | Link | Comment!
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