Sunday, October 15, 2017

A current AIM International Fund Holding: National Grid PLC (NGG) by Thomas Dietz "It's time for AIM to get off the grid"

National Grid PLC (NGG, $62.71): “Get Rid of the Grid”
By: Thomas Dietz, AIM Student at Marquette University



Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

National Grid PLC (NYSE:NGG) provides gas and electricity transmission in the United Kingdom and electricity transmission in the Northeastern United States.  NGG is headquartered in Warwick, UK.

• NGG is emerging from the sale of a 61% stake in their UK gas segment. 

• This has transitioned NGG from a roughly 50/50 revenue distribution between the UK and US to 33% British and 67% American.

• The rationale is to shift more attention and resources to the higher growth US segment of the business.

• This is a potentially risky play, as the US segment sees significantly lower ROE of 8.2% vs 13.1% in the UK.

Key points

Utilities in both the UK and the US are subject to heavy regulation and government oversight.  Both governments dictate how much the company can spend on capital expenditures each year and how profitable they can be in terms of ROE.  The decision for the UK based company to move most of its focus across the Atlantic was not made lightly, but it has already seen issues arise.  NGG must regularly negotiate what its profitability levels can be with New York's Public Service Commision, and it has underperformed other Northeastern US competitors.  ConEd and KEDNY both negotiated for a 9.0% ROE while NGG was only able to procure a rate of 8.25%. 

Utilities as sector can be used as a bond proxy (in some situations) during times when yields are especially low.  This has worked in NGG's favor over the past few years as yield hunters have been forced to broaden their scope to find returns.  However, there is trouble on both the sector front and the bond front.  In the past twelve months, NGG has fallen 11.9% compared to the utility sector as a whole, likely from the outcome of the UK/US rearrangement.  This had made NGG less appealing to utility investors. Additionally, the 10bp sell off in the bond market was correlated to utilities slightly underperforming the S&P as a whole.  The underperformance of utilities was at least partially influenced by the outflow of investment from utilities back into fixed income.


What has the stock done lately?

It has been a tumultuous summer for NGG.  2017 started off as one of the best years in NGG's history, but from May to July, the stock fell a massive 18.1%.  The stock started to slowly make back its losses, but the past week erased most of those gains, and it is now only 5% above its 6 month historic low. 

Past Year Performance: YoY the stock has only increased 0.1%.  The 52 week high-low is $73.24 to $55.20.  On price performance alone, the past year has been the most volatile of the last five years. 

1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet

My Takeaway


The factors that made NGG attractive over the past five years have waned.  Over half a decade of low rates has made NGG and their ~5% annual dividend appealing, but the tide seems to be finally turning.  Sale of the high ROE British gas segment, failure to negotiate better contracts in with the state of NY, and a rising rate environment together have soured what used to be a strong performer.  Furthermore, the high volatility is unappealing in a sector that is renowned for low, slow growth and high dividends in developed countries.  I therefore believe it is time for the AIM international fund to part ways with NGG.


Members of Marquette's CFA Investment Research Challenge 2017-2018 Teams Announced

Marquette will again be sponsoring two teams from the AIM program in the 2017-2018 CFA Institute Research Challenge

Image result for cfa institute research challenge
Dr. David Krause, AIM program director announced that Marquette will again be sponsoring two team in the CFA Investment Research Challenge. The kickoff meeting for the CFA Challenge is scheduled for November 1st.  The Milwaukee and Madison CFA Societies again will be hosting the CFA Investment Research Challenge. 

According to Dr. Krause, “This marks the 10th year of AIM’s participation in the CFA Investment Research Challenge. Our past teams have enjoyed great success, and each former team member echoes the value of the experience. We are pleased to be hosting two teams again and are thankful for the Madison and Milwaukee CFA Societies for organizing the event.” More information about the CFA Challenge can be found at this web site: http://www.cfainstitute.org/community/challenge/.

The members of the two teams are: 
  • Andrew Crossman
  • Brooke Porath
  • Charles Muth
  • Connor Konicke
  • Stephen Arcuri 


  • Adam Hamilton
  • Grant Runnoe
  • Holly Kuffel
  • Jordan Luczaj
  • Michael Dennison


Objective of the Challenge: Provide a solid learning experience and exposure to the real world of investments through an investment research “competition” managed by investment professionals (Milwaukee and Madison CFA Societies). Preparation for this competition will introduce the students to the multiple steps that comprise the investment process, such as investment thesis development, company valuation, competitive analysis, and “selling” of investment thesis to a demanding audience.

Image result for cfa institute research challenge
Previous winners jumping for joy
Structure/Timeframe: The structure of the competition will be similar to that used by the New York Society of Financial Analysts in their competitions. Teams at the local competitions will evaluate a company selected by the local CFA society; meet with management of that company for questions and discussion; and prepare a written analysis (initiation report) of 10 pages maximum plus exhibits and appendix. The papers will be evaluated and scored by a group of investment professionals as judges. The teams will then present their analysis to another panel of judges, who will then select the winning team at the local level. The proposed time line is as follows:
a.       October 15, 2017: Two teams of 5 students are selected. Dr. Krause is the faculty adviser and Dr. Joe Wall will serve as the teams' mentor.
b.      November 1, 2017: Kickoff meeting when the teams meet with the company’s executives. In mid-November the students visit the company where management makes a presentation similar to a typical “road show” for its investors.
c.       December 2017: Teams submit a first draft of their paper to their mentor and faculty advisor for critique.
d.      January 2018: Teams incorporate end of year data into their analysis, continue their financial modeling and write their final paper. Each team submits their final research paper to the local CFA society for judging.
Research Challenge Progressione.       February 15, 2018: Local competitions are held with each team making a 10 minute oral presentation to a panel of judges followed by 10 minutes of Q&A. The panel selects the winning team, who represents the local CFA society at the next level of competition.
f.       March: The winning local teams compete at the Americas (North and South American teams) competition in Boston. (Expenses covered).
g.       April 20: Global Finals will be held in Hong Kong (Expenses covered). The Global Finals consist of the winners of the three regional finals - Asia-Pacific, EMEA, and the Americas.

 The CFA Institute Research Challenge offers students the unique opportunity to learn from leading industry experts and compete with peers from the world’s top finance programs.  This annual educational initiative promotes best practices in equity research among the next generation of analysts through hands-on mentoring and intensive training in company analysis and presentation skills. 

Group photo of the 2016 Global Champions from Waterloo University, Canada
The first ever CFA Institute Research Challenge competition was hosted by the New York Society of Security Analysts in 2002 and involved just five teams from the New York area. Since then, the competition has grown to involve thousands of students from over 800 universities in more than 55 countries.

The Challenge gathers students, investment industry professionals, executives from publicly traded companies, and corporate sponsors together locally, regionally, and globally for a real world competition.  Participation in the Challenge promotes best practices in equity research and company analysis, as students research, analyze, and report on a company as if they are practicing analysts.  Additionally, all participants are introduced to and held to the standard of the CFA Institute Code of Ethics and Standards of Professional Conduct.

How the Challenge Works:  Local CFA Societies, CFA Institute, and other organizations host and launch a local Research Challenge in conjunction with their participating universities.  The universities assemble teams of 3-5 business and finance students who work directly with a company in researching and preparing a company analysis.  The team’s final presentations are locally evaluated by high-profile panels of heads of research, portfolio managers, and chief investment officers from the world’s top firms.  The local champions advance to regional competitions in the Americas, Asia, and Europe and then to the Global Finale.

Dr. David Krause, who serves as the faculty advisor of the two Marquette CFA teams stated, "I'm very proud of the students who are participating in the Challenge. Like past teams, I know they will work hard and deliver a quality product. This experience and the friendships established will stay with them throughout their careers. I can't say enough good things about the CFA Challenge - it is one of the very best experiential programs in academia. Best of luck to all of the teams in the Challenge."  


Saturday, October 14, 2017

The 6th set of stock recommendations this semester were presented by students in the AIM Class of 2018 this past Friday.

The 6th Set of Marquette AIM Equity Fund pitches for the Class of 2018 were presented on Friday, October 13th, 2017 in the AIM Room 

This past week, the 6th set of stock recommendations were presented by students in the AIM Class of 2018 this past Friday.  The pitches were presented in the College of Business Administration's AIM Room and over 30 students were in attendance.

Adam Hamilton preparing to pitch
Bank of N.T. Butterfield

In addition to the seniors and juniors regularly in attendance for the Friday afternoon pitches, 10 people viewed the AIM presentations via webcast throughout the afternoon. Mr. Bill Walker and students in the AIM Classes of 2018 and 2019 asked excellent questions of the student-presenters and offered many useful observations and comments. 


Joe Amoroso presented New Relic, Inc



Students in the AIM program manage over $2,600,000 of the University's endowment. Balloting will take place over the weekend to determine which of the stocks listed above will be added to the AIM Funds.

Adam Hamilton, Matthew Holland, Joe Flynn, Joseph Amoroso, and Brian Holland were the presenters this week. Following their final buy/sell recommendations, ballots will be sent to students in the AIM Class of 2018 to determine which stocks are added to the funds. A 2/3rd affirmative vote is required for a new security to be added to either the AIM Small Cap or International Fund.

The AIM student equity pitches take place each Friday afternoon during the semester – either in the AIM Room or at a local investment company. The students prepare and distribute a professional equity write-up (note: every AIM write-up since the inception of the program in 2005 is archived here). 






Friday, October 13, 2017

A Current AIM International Fund Holding: MercadoLibre Inc. (MELI) by Tim Milani "Still Room to Grow"


MercadoLibre Inc. (NASDAQ: MELI, $279.46): “Mantener MercadoLibre Acción”

By: Tim Milani, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

MercadoLibre Inc. (NASDAQ: MELI) is an e-commerce company in Latin America that provides its users with a variety of services across several platforms including the MercadoLibre marketplace, the Mercadolibre Classified Service and the MercadoPago payments solution.  The company is headquartered in Buenos Aires Argentina and was founded in 1999.

• MELI recently had another quarter of impressive gross merchandise volume (GMV) growth (up 36% on a reported basis, 56% on an FX neutral basis) and customer engagement growth with unique buyers and sellers up by 22.7% and 13.5%, respectively.

• Items sold during the quarter reached an all-time high of 61.5 million units representing an increase of 41.0% YoY. Mexico had the fastest regional growth YoY at 95.4%.

• Using data generated from MercadoPago and MercadoLibre's marketplace, the company announced the launch of MercadoCrédito, an online platform for lending and advancing cash to its merchants in Brazil and Argentina that will score their merchant base´s creditworthiness.

• MELI is a strong candidate for a potential takeover from a global e-commerce company such as Amazon or Alibaba due to its position as the leader of online commerce in Latin America which is posed to have a substantial increase in internet users over the coming years.

Key points: MELI is extremely well positioned in its industry and region as it is the leading provider of ecommerce services for Latin America where it has an impressive amount of users at 191 million total.  As there are 390 million Internet Users across Latin America MELI has a high penetration rate of ~49%.

The total number of internet users in the region is also projected to continue its growth by adding another 100 million by 2021 which MELI will undoubtedly benefit from.  This also presents several new opportunities for increasing monetization across multiple areas including mobile payments through their MercadoPago platform.

The company also has dedicated management that are committed to continuing their aggressive growth and delivering the highest value to end users.  Marcos Galperin, current CEO, chairman and co-founder of the company has successfully guided MELI through every stage of its life cycle thus far and with 10% share ownership he has sufficient reason to continue to align his interests with shareholders.

Finally the company is highly regarded both at home and internationally with Morningstar stating that it has the potential to be the next “Amazon or Alibaba” for it region.  They also project the user growth to continue at its previous 3 year rate of 20% through 2021.

What has the stock done lately?

MercadoLibre has had a substantial increase in its share price over the course of the past year and is currently trading at $279.46 with it 52 week low and high being $148.98 and $297.05 respectively.  Overall the stock has a 52 week total return of 45.4%.  As the stock was pitched to the AIM fund on 03/31/2017 when its price was at $214.22 with a price target of $262.88 a substantial 30.45% return has been captured.  The reasons for the excellent performance include; the increase in online and mobile adoption in Latin America and MercadoLibre’s dominance of the market of online commerce which as an industry is  projected to grow at a CAGR of 16% YoY in the region.

Past Year Performance: MELI has had a fantastic increase in revenues and customers across numerous areas of its business in the past year with consolidated net revenue growing by 29.6% YoY to $844.4 million USD. MercadoPago ended 2016 with 138.7 million total payment transactions representing an increase of 72.6% YoY with their most recent quarter, Q2 2017, continuing this trend up 63.3% YoY.  Additionally MercadoLibre marketplace revenue grew by 73.7% YoY in USD, and 85.2% YoY on an FX neutral basis in Q2 2017.

However, MELI did have a contraction of its margins due to an increased emphasis on increasing free shipping in Brazil which generates (53.9%) of the company’s revenues.  The current EBITDA margin for the company is 13.6% after previously being ~26% prior to the change in shipping policy.



Source: FactSet

My Takeaway

MELI has had a tremendous increase in both revenue and customers over the past several years with continued potential for growth. Projections of a top-line revenue increase are at 50% for 2017 and average 28% through 2021 indicating that the company will continue to grow with its customer base that will be close to 325 million (191 million currently) by the end of that period. Additionally as the company remains a strong candidate for a potential takeover from a larger global e-commerce company shares would likely be purchased at a substantial premium ensuring potential for future return. 

Although the margin contraction is of some concern it is standard for ecommerce companies to take losses in this area initially with the goal of continuing their diversification of business and expanding their customer base. Therefore it is recommended that MELI remain in the AIM International Equity Fund due to its high likelihood for further return.

Source: FactSet