Iberdrola and Orsted - The Global Renewable Energy Giants

      This was the headline from the Financial Times that caught my eye:

(Source: FT.com)

    The article talked about how the US spending on wind power is set to go from zero 10-years ago to $78 billion in the 2020 decade. That is a truly astounding turnaround in the fortunes of the renewable energy sector. A couple of years ago I had heard of this renewable energy company called Iberdrola from Spain. At that time I briefly read about it in the financial news and did not do an in-depth research into that company. This headline spurred me to action. We are in the midst of a far-reaching energy transformation that could transform every aspect of life by the year 2035. I wanted to learn more about not just Iberdrola but also Orsted - which is another renewable energy giant from Denmark. I don't remember hearing about Orsted until it was mentioned in this Financial Times article.

    Iberdrola comes from a very long history that dates back to the 20th century. The Wikipedia entry for the company makes for a fascinating read. Today it is one of the largest energy companies in the world with subsidiaries in multiple nations across the globe. Its subsidiary in the U.S. is called Avangrid. Avangrid has about 7,000 employees in the U.S and is headquartered in Orange, Connecticut. Iberdrola had revenues of € 36,437 million in 2019. In 2018 its revenues were € 35,075. Its EBITDA exceeded € 10 billion for the first time in 2019. Avangrid is traded in the U.S stock markets in the NYSE under the symbol AGR. 

    Orsted on the other hand had total revenue of DKK 67,842 million in 2019 (€ 9,113 million Exchange rate as of July 18, 2020: 1 Danish Krone = € 0.13). In 2018 the company had revenues of DKK 76,946 million (€ 10,336 million). Orsted had EBITDA of DKK 17.5 billion (€ 2.35 billion) in 2019.             

            

Warren Buffett Bought a Gas Pipeline and an U.S. Judge may have made it a Winning Investment

    Since March, 2020 when the COVID-19 pandemic drove the U.S. and the globe into a recession and tanked markets worldwide, there has been speculation about what Warren Buffet would be buying given the bargains. In March the Dow Jones Industrial Average (DJIA) dropped from an all-time high of 29,551 to 18,591. Many stock watchers and TV pundits speculated that this is the time when Warren Buffett would see value in stocks and put his company's sizeable cash to work.

Exhibit: Dow Jones Industrial Average (DJIA) One-Year Performance

(Source: Google Finance)

    It has now become clear that Warren Buffett and his partner Charlie Munger were looking to strike a few deals at bargain prices, but the intervention by the U.S. Federal Reserve in March made it very easy for companies in all sorts of fiscal shape could easily raise billions of dollars.

    Finally in July 2020 Warren and Charlie did strike a deal. They invested $10 billion in buying the natural gas pipeline assets of Dominion Energy. When almost every investor is shying away from investing in fossil fuel assets, Berkshire Hathaway sees value in it. It's going to take a long time for the world to move away from fossil fuels.

    The past week has produced some stark headlines about the energy business. The Financial Times reported that BP was marking down the value of its oil and natural gas assets by $17.5 billion. Under the shadows of the stress that the oil business is in, Berkshire Hathaway makes a contrarian bet. Then came another headline, this time from a Federal District court. The court ruled that work on the Dakota Access Pipeline will have to stop until a comprehensive environmental review is completed.

    Even before this decision, building anything related to the oil and gas industry in the U.S was an herculean task. This decision makes it harder. It is now assured that the work on this pipeline will not proceed until after the U.S. election. If Joe Biden is elected president then this pipeline may never get built.  So, any oil and gas asset already in existence in the U.S. have just been elevated in value. This deal by Berkshire Hathaway has the potential to offer profitable returns for the company. 

Disclosure: I own shares in Berkshire Hathaway and BP.       

                   

            

How McCormick Rules the Spice Market?

    If there was any year in which companies could get a pass for booking a loss or for poor sales, 2020 would be it. There are very few companies that have gone unscathed by the economic turmoil unleashed by the COVID-19 pandemic. McCormick (MKC) has not only gone unscathed but is thriving in the midst of this crisis. 

Exhibit: McCormick - The Global Leader in Spices

(Source: McCormick Website)

Exhibit: McCormick YTD Stock Chart Shows The Company Is Thriving

(Source: Google Finance)

    The company saw sales increase dramatically for the quarter ending May 31, 2020. It registered sales of $1.4 billion in this quarter compared to $1.3 billion in 2019. Its consumer business saw robust growth while its restaurant business suffered. The consumer business saw a net sales increase of 26% while its Flavor Solutions division, that serves its commercial customers, saw a revenue decline of 18%.

Exhibit: McCormick's Q2, 2020 Sales Results

(Source: SeekingAlpha.com - McCormick Investor Presentation)

    The Americas region performed exceedingly well with a 35.8% growth in net sales for its consumer business. The EMEA region had good performance too with a 22% increase in sales for its consumer business. But the Asia region saw a decline in sales of -17.9% in its consumer business.

    The company also expanded both its gross margins and operating margins by 230 bps and 240 bps respectively. This may be a sign that the company has good pricing power in the market and does not have to resort to discounting to move its products.   

    The company could be gaining competitive strengths from its powerful brand name. Especially in the U.S., McCormick brand is associated with spices and flavorings. That is translating to strong growth especially during this pandemic when people are avoiding restaurants and cooking more at home. Its wide array of spices and flavoring may be adding to its domination. Its wide product offerings helps the company to garner vast square footage in the spice aisle in supermarkets and grocery stores.

    Spices are usually packaged in small sizes for the consumer market, this could be a competitive advantage in itself. When the consumer sees these small packages they know they will get a lot of use and value out of it. The small bottles of McCormick last a very long time. This could be allowing the company to put a premium price on their product without seeing a consumer revolt. It would be interesting to see how store branded spices capture market share from McCormick. But for now McCormick still rules the spice market.

    Currently, the company's stock has had a huge run. It's trading at near all-time highs with an earnings multiple of over 30. This volatile stock market may present better and cheaper entry points for this stock.

Disclosure: At the time of this publication, I do not own McCormick.