European stocks steady after big rally to start August


ZWICKAU, GERMANY – JULY 31: Workers assemble the powertrain with an electric motor and battery of a VW ID.3 electric cars at the Volkswagen factory on July 31, 2020 in Zwickau, Germany. Volkswagen has started taking orders for the car and is hoping the ID.3 will be an effective competitor to Tesla. (Photo by Jens Schlueter/Getty Images)


Jens Schlueter/Getty Images

European stocks were steady on Tuesday, after a wave of manufacturing reports suggested a stronger economic recovery across the globe.

After a 2% gain on Monday, the Stoxx Europe 600
SXXP,
-0.44%

was fractionally lower.

The French CAC 40
PX1,
+0.03%

added 0.6% while the German DAX DX:DAX, and U.K. FTSE 100
UKX,
-0.53%

hugged the flat line.

The moves came after the 29th record close for the Nasdaq Composite
COMP,
+1.46%

on Monday, as the S&P 500
SPX,
+0.71%

added 0.7%. Investors reacted to manufacturing surveys of purchasing managers which were stronger than forecast in the U.S., China and Europe.

“August is normally a difficult month for stocks but in the year of Covid no trends are sacred and equities are proving to be very resilient with the Nasdaq hitting an all-time high, whilst the S&P is knocking on the 3000 level,” said Rony Nehme, chief market analyst at Squared Financial.

Further adding to optimism was the declaration from U.S. Vice President Mike Pence, who told Fox News in an interview that a coronavirus vaccine could come in the fall.

BP
BP,
+6.08%

shares rose over 6% as investors looked past the $16.8 billion loss for the second quarter and the decision to cut its dividend in half. BP outlined a new plan to reduce oil and gas exploration by 40% over a decade while boosting spending on low-carbon activities. “We await more granular detail on the growth plans, but expect the market to react positively to the ambition and direction of travel,” said Henry Tarr, an analyst at Berenberg Bank.

EasyJet
EZJ,
+7.72%

shares surged 9% as the airline said it spent £774 million in the June-ending quarter when it barely flew, versus previous guidance of £1 billion in costs. EasyJet said its load factor in July, when it flew more than 2 million people, was 84%.

Diageo
DGE,
-6.66%

shares slumped 6% as the alcoholic beverage maker said sales during the fiscal year fell a worse-than-forecast 9% and it didn’t offer up sales guidance for the current year.



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American Clean Energy Is Heating Up, European Renewables Offer Fundamentally Sound Diversification Opportunities


So far in the pandemic, clean energy utilities have held up well providing returns averaging 21% year-do-date. Familiar US-listed names include the likes of Atlantica Sustainable Infrastructure (AY), Brookfield Renewable Partners (BEP), Azure Power Global (AZRE), TerraForm Power (TERP), Ormat Technologies (ORA) and NextEra Energy Partners (NEP).

Total Returns: US-Listed Clean Energy Stocks

AY

BEP

AZRE

TERP

ORA

NEP

Average

YTD Return

15.43%

22.31%

48.17%

43.90%

-17.23%

11.93%

20.75%

3 Year Return

73.08%

97.71%

12.90%

145.05%

7.55%

71.41%

67.95%

Source: Seeking Alpha

However, the overall momentum in the sector seems to be outweighing the fundamentals considering mean growth rates of the companies; so overvaluation is a possibility.

Growth Metrics: US-Listed Clean Energy Stocks

3 Year CAGR

AY

BEP

AZRE

TERP

ORA

NEP

Average

Revenue

2.29%

6.28%

45.78%

13.88%

1.79%

3.92%

12.32%

EBITDA

2.79%

10.17%

46.14%

13.20%

1.97%

3.13%

12.90%

Source: Seeking Alpha

We put forward for current investors in clean energy as well as new investors looking for an exposure that renewables in Europe are sensible diversification candidates that still allow one to ride a wave of positive expectations around the energy transition.

Comparative Analysis

In the high-level overview that follows, we compare three US-domiciled companies from the abovementioned stocks — AY and NEP that feature a bullish analyst rating, along with ORA whose price-to-earnings ratio is comparable — to three European utilities, namely Fortum (OTCPK:FOJCY), Verbund (OTCPK:OEZVY) and Iberdrola (OTCPK:IBDRY). (As a caveat, the latter three are not wholly renewable; similarly, US-based AY and NEP produce part of their energy from natural gas and operate natural gas pipelines.)

On the wording: For simplicity’s sake, we will be referring to the chosen US-based companies on aggregate as “US/American”, and to the European utilities under analysis as “European”.

Profile: US vs. European Clean Energy Stocks

US$

AY

ORA

NEP

FOJCY

IBDRY

OEZVY

Market Cap

3.04B

3.17B

3.79B

18.46B

83.60B

17.74B

Enterprise Value

8.35B

4.52B

13.62B

29.27B

135.06B

20.22B

Revenue

1.04B

739.12M

890.00M

5.73B

39.37B

4.36B

Operating income

419.48M

198.63M

248.00M

1.29B

6.38B

879.54M

Source: Seeking Alpha

Although much larger in terms of market cap and income figures, the European companies have been growing at a faster pace on the whole than the American counterparts. To a large extent, this may be explained by the growing region-wide emphasis on realizing a low-carbon economy.

The proliferation of programs with feed-in tariff (FIT) and feed-in premium (FIP) schemes have effectively enabled higher margins for producers of energy from renewable sources. FOJCY, for one, almost doubled its revenues from USD3.7 billion to USD6.1 billion between 2015 and 2019. This solid base of earnings, in turn, has made it easier for European utilities to approve further investments into renewable capacity in the way of business expansion.

Comparative Growth Rates

3 Year CAGR

AY

ORA

NEP

FOJCY

IBDRY

OEZVF

Revenue

2.29%

1.79%

3.92%

10.08%

7.48%

12.06%

EBITDA

2.79%

1.97%

3.13%

17.57%

8.14%

6.54%

Net Income

48.27%

-2.33%

NM

60.06%

11.57%

6.98%

Source: Seeking Alpha

European utilities also benefit from higher prices on residential electricity. Consumers can choose where they get their energy from, and utility bills are calculated in direct proportion with the final energy mix. This is currently only possible in 13 US states; across the country, electricity prices on average are more competitive than in European markets. Tariffs in the Midwest and Mideast, for example, can be twice as low as those in Germany, the UK and Spain, to name a few.

All companies in our analysis are multinationals with energy assets in both the US and Europe. However, companies domiciled in Europe tend to have more assets within the home region, which allows them to earn significantly higher revenues as opposed to the companies with a larger clean energy portfolio in the US.

In terms of profitability, the American companies are generating higher margins at top gross profit and EBITDA levels. At net income level, however, the European companies in some instances are 3x more profitable. There are two possible explanations.

Comparative Profit Margins

TTM

AY

ORA

NEP

FOJCY

IBDRY

OEZVF

Gross Profit Margin

100.00%

37.31%

60.45%

54.19%

46.14%

43.00%

EBITDA Margin

70.84%

47.39%

67.53%

33.78%

26.59%

28.64%

Net Income Margin

2.95%

11.93%

-30.90%

39.87%

10.36%

13.48%

Debt-to-Equity Ratio

381.56

93.43

86.10

62.72

85.97

23.88

Source: Seeking Alpha

First, the American companies are considerably more leveraged (with net interest cost constituting on average over 50% of operating income as of the latest fiscal year) than the European utilities (that had a lower net interest cost of not more than 21% of operating income). Although in most cases debt on the books of American companies is isolated to individual projects, it does seem to affect earnings adversely.

Second, European governments, among them France and Germany, have been offering zero or low-interest loans to incentivize the production of clean energy, helping utilities mitigate the cost effect of debt on income statements. It must also be noted that the federal funds rate in the US was higher than a comparative benchmark in the European Union (EU) between 2015 and 2019.

Better earnings have helped the European companies record higher average return ratios. Meanwhile, the American companies have been paying more dividends, some as much as 7%. While their high payout ratios may seem unsustainable in view of smallish net profits, they are not implausible given the add back of material depreciation expenses to operating cash flow that dividends come from. Still, it raises a question: Could the funds be put to better use by paring down debt or investing in new assets to reduce the reliance on project finance?

Comparative Return Ratios

TTM

AY

ORA

NEP

FOJCY

IBDRY

OEZVF

Return on Equity

2.48%

6.32%

-17.26%

14.43%

8.97%

9.40%

Return on Total Capital

3.41%

4.32%

1.50%

3.15%

4.20%

5.82%

Cash From Operations

352.38M

238.81M

426.00M

2.62B

8.06B

1.24B

Source: Seeking Alpha

The US renewable energy may take a major hit from the coronavirus pandemic as job losses in the industry are expected to reach 850,000, and no federal support has been granted in the way of lease or loan waivers. The government continues to charge solar and wind developers for land and water as usual. High debt they carry is an aggravating factor and a risk to their future financial standing.

Comparative Valuation

TTM

AY

ORA

NEP

FOJCY

IBDRY

OEZVF

Price/Earnings

99.18

36.40

7.95

20.33

25.95

Price/Sales

2.92

4.32

3.98

3.17

2.14

3.50

EV/Sales

8.04

6.14

15.31

5.11

3.43

4.64

YTD Price

13.34%

-15.94%

9.97%

-21.61%

25.49%

-9.62%

1 Year Price

29.99%

-0.81%

14.36%

-11.92%

35.53%

-9.62%

3 Year Price

43.73%

6.55%

50.98%

22.77%

63.07%

124.79%

5 Year Price

1.42%

59.07%

61.15%

19.10%

84.42%

137.04%

Source: Seeking Alpha

From a valuation standpoint, the American companies are trading at higher multiples than the European peers, so the latter may be undervalued on a relative basis. We think this is reason enough for American clean energy investors looking to strengthen their asset mix — and new clean energy investors alike — to consider buying into European companies. Specifically, the three companies under review in this analysis are growing earnings at higher rates, whilst being more mature and hence less exposed to risk.

Industry Tailwinds in Europe

Over the medium term, we expect the robust growth trend in renewable energy to continue across Europe for the following reasons:

Clear directive

The EU aims to transform itself to a zero emission zone by 2050. To adhere to this target, member states are required to set up and execute a number of support schemes over the next 10 years. This has led to a prioritization of clean energy in signing power purchase agreements as well as broader incentives. Although FITs and FIPs will be abolished in most of the EU by 2021, grid-prioritization schemes, significant energy quotas, low-interest financing and high capital commitments as part of the Renewable Energy Directive II 2018 guarantee the clean energy industry’s continued expansion in Europe.

Government mandated targets leave ample room for asset growth

Source: Various (see individual links above)

Government support

The centralized EU legislation encourages new green energy infrastructure and a staged phaseout of coal and oil from the power mix. What this essentially means is that within Europe it is by now more cost efficient to generate electricity from renewable sources than from fossil fuels. With most European countries dependent on energy imports to some degree, the shift toward clean energy is also seen as a major way to support the bloc’s pursuit of energy independence.

Although renewables have gained some traction over the past decade in the USA as well, they are still largely outshone by fossil fuels that continue to benefit from generous incentives. And since the election of the current administration, things took a turn for the worse for clean energy.

COVID-19 US energy supportSource: Center for American Progress

Furthermore, in the absence of a unified federal guidance, individual states set varying milestones and, consequently, vastly different intervention and support mechanisms; this introduces an additional layer of friction for clean energy utilities operating across territories. At least 13 states do not have formal renewable energy standards or targets altogether.

GlobalData forecasts for renewables to account for a hefty 30% share in total installed capacity in the US by 2030. For this to be possible, however, much greater political will is requisite.

Public support

Across most of Europe — in the UK, Germany, France, for example — the consumer push for green energy is more evident. In Germany, consumers are willing to accept possible surcharges associated with renewable energy. In France, more than 83% of citizens support the clean energy transition.

The sentiments are not as clear-cut in the US where opinions on energy appear to be roughly divided along party lines. This serves as an expedient justification for the government’s stubborn opposition to clean energy. As a result, in contrast to European power markets, the American story around renewables does not come through as patently.

Conclusion

Considering multiple supportive macro- and microeconomic environmental factors in addition to strong balance sheets at company level, European clean energy utilities may offer attractive diversification propositions for American investors looking to invest in renewables or to add to their current clean energy portfolio.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.





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Gold rallies to record and euro tops $1.17 while European travel stocks slump on Spain quarantine


Passengers wearing a face mask or covering due to the COVID-19 pandemic, arrive at Heathrow airport, west London, on July 10, 2020.


daniel leal-olivas/Agence France-Presse/Getty Images

Gold surged to a record and the dollar weakened Monday while European travel stocks slumped.

As U.S. lawmakers debate another round of stimulus and concerns mount about a stalling economic recovery, gold futures
GOLD
climbed over $32 an ounce. The euro
EURUSD
traded above $1.17, having been as low as $1.08 as recently as May, as traders react to the new stimulus plan from the European Union and better economic data than the U.S.

“Those seeking both safety and a decent yield, only have one real option at the moment – with Treasury yields rooted near zero, and negative in real terms, and cash earning nothing. The ‘TINA’ theory – there is no alternative – is the final factor propelling the precious metal skyward,” said Michael Brown, senior market analyst at Caxton.

The German DAX
DX:DAX
rose while the French CAC 40
FR:PX1
and U.K. FTSE 100
UK:UKX
saw small losses in early action.

Down 1.5% last week, the Stoxx Europe 600
XX:SXXP
weakened 0.2%.

Futures on the Dow Jones Industrial Average
DJIA FUTURES
rose 112 points.

Travel operator TUI
UK:TUI
fell nearly 9% and International Airlines Group
UK:IAG
and easyJet
UK:EZJ
each lost 8% as Britain over the weekend said it will quarantine visitors from popular holiday destination Spain due to rising coronavirus cases there.

Ryanair
IE:RY4C,
which separately reported a €185 million loss for the June-ending quarter that had 99% of its traffic grounded, fell 7%.

“Tourism and summer activities will certainly remain a risk to be considered for European investors if mild measures, such as social distancing and the obligation to wear masks, do not prevent cases from rising. Investors fear renewed lockdowns, although any confinement measures in the close future are expected to be selective rather than a general halt in economic activity,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

SAP
XE:SAP
SAP
rose 3.6% after saying it would seek an initial public offering for Qualtrics, the cloud software company it bought in 2018 for $8 billion, as it reported a rise in second-quarter profit.

AstraZeneca
UK:AZN
AZN
was steady after saying it will pay Daiichi Sankyo Co. up to $6 billion in a cancer drug deal.



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Escalating U.S.-China tensions weigh on European stocks By Reuters


© Reuters. People wearing face masks following the coronavirus disease (COVID-19) outbreak are seen at Beijing Daxing International Airport in Beijing

(Reuters) – European shares fell on Friday as global sentiment soured after Beijing ordered United States to close its consulate in a Chinese city in retaliation to similar action from Washington.

The pan-European STOXX 600 index () fell 1.5%, on track for its biggest one-day drop in a month, pushing it into losses for the week.

Technology stocks led losses following a sell-off in U.S. peers overnight, while the China-sensitive basic materials sector () lost 1.9%

Investors will be on the lookout for euro zone manufacturing and service PMIs due at 0800 GMT. After last month’s rise, the numbers are expected to cross above the 50 point mark which separates contraction and growth, as businesses reopened after closures to stem the spread of the coronavirus.

This comes after data on Thursday showed euro zone consumer confidence fell in July.

British Gas owner Centrica (L:) surged 30% to top the STOXX 600, despite posting lower first-half earnings as it announced plans to sell its North American business Direct Energy to NRG Energy (NYSE:) for $3.63 billion.

Norwegian energy company Equinor ASA (OL:) rose 0.5% after reporting an 89% drop in operating profit, while analysts had expected a loss.

The world’s biggest lighting maker, Signify NV (AS:) jumped 4.5% after a 62% jump in second-quarter net profit, and on plans to pay down 350 million euros ($406 million) in debt this year.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Uniper to work with GE to decarbonise European gas plants By Reuters


© Reuters. The logo of German energy utility company Uniper SE is pictured in the company’s headquarters in Duesseldorf

FRANKFURT (Reuters) – German utility Uniper (DE:) will work out a plan to decarbonise its European gas-fired power plants by early 2021 in a cooperation with General Electric (N:), it said on Tuesday.

“In a few years, Uniper’s European fleet will consist mainly of climate-friendly gas-fired power plants and CO2-free hydropower,” Uniper Chief Executive Andreas Schierenbeck said in a statement.

The agreement, which was signed last month, follows a cooperation deal with Siemens (DE:) to look at using hydrogen at Uniper’s gas-fired power plants and producing the carbon-free gas with power from its wind turbines.

Across Europe, Uniper, which is majority-owned by Finland’s Fortum (HE:), operates gas-fired power plants of around 9 gigawatts, which is more than a quarter of its total generation capacity.

As part of its efforts to cut its emissions, Uniper aims to close three German hard coal-fired power plants, half its European coal-fired capacity, over the next five years.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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