Tuesday, October 30, 2012

Why AT&T and Verizon Fear Softbank

As discussed previously, there is a shake-up underway in the U.S. mobile provider market. Japan's Softbank taking a 70% majority position in Sprint Nextel (NYSE: S) is just step one in its plan to shake the complacency out of the two leaders in the industry domestically, Verizon Communications (NYSE: VZ) and AT&T (NYSE: T).

Another part of Softbank's plan was revealed recently when Sprint resumed majority control of Clearwire (Nasdaq: CLWR). It bought a 4.5% stake in Clearwire from Eagle River Holdings LLC, the investment vehicle of Clearwire founder, Craig McCaw. This additional stake gave Sprint a 50.8% controlling interest in Clearwire.

With Clearwire's stock falling upon announcement of this transaction, it was clear that its shareholders were disappointed that Sprint did not launch a full takeover offer for the company. At the moment, Sprint with its own heavy debt burden - $4 billion due next year – does not want to consolidate Clearwire onto its balance sheet with Clearwire's $2.9 billion of debt due in 2015.

But shareholders should be patient. It is highly likely that once the Softbank–Sprint deal is finalized, a full takeover of Clearwire will be at the top of the agenda. Sprint's current arrangements give it full access to Clearwire's wireless spectrum through only 2014.

Softbank's Agenda

Why will Clearwire be at the top of Softbank's agenda? Because without it, Sprint will always be a very distant third in terms of spectrum behind both Verizon and AT&T. With it, according to the Financial Times, Sprint will control more spectrum in the 100 largest U.S. wireless markets than Verizon and AT&T combined! With the advent of data-eating smartphones and tablets, spectrum is needed in order to build networks that are both fast and reliable.

In addition, Clearwire uses a form of 4G LTE technology, TDD-LTE, which is different than Sprint's version. However, it is the same technology that Softbank has used very successfully in Japan for years. Sprint does say phones which work on its network will also work on Clearwire's planned 4G network.

Both Verizon and AT&T are well aware of the potential that a Sprint-Clearwire combination, backed by Softbank's financial muscle and acumen, has. They do not favor having a strong new competitor in the market they now control. That is why AT&T already is raising objections to the deal. It has called on regulators to scrutinize Softbank's plan for the U.S. mobile market very closely.

There is one possible hiccup, from a technology standpoint, to Softbank's plan. Clearwire's spectrum is in a higher frequency range than the more desired lower frequency ranges owned by Verizon and AT&T. Higher frequencies do not penetrate obstacles such as buildings as well or travel as far. This means that in urban settings more cell towers may have to be built. Softbank can finance such an undertaking. . .but it may actually be harder getting local approvals to build additional towers in certain locations across the country.

The Future

What's next in this telecoms soap opera? AT&T and Verizon know how Softbank came from a very distant third in the Japanese market to today rival the big two players in that market. They see that Softbank has a bold vision for the U.S. market as well. Look for both to push U.S. regulators very hard to block the deal. In the spirit of competition and for the benefit of consumers, hopefully that does not happen and a strong, viable third mobile provider is allowed to happen.   This article originally appeared on the Motley Fool Blog Network. Please read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

Tuesday, October 23, 2012

Steel Industry Slowdown to Persist

The global steel market is huge, valued at about $850 billion by analysts. That is not surprising considering that steel is one of the world's most widely traded commodities, with a myriad of uses. But right now, the industry is going through a rough patch. Unfortunately for investors in steel and iron ore stocks, it looks like the tough times will extend for another few years.

For investors interested in the industry, they can easily track the steel and iron ore industries through an exchange traded fund, the Market Vectors Steel ETF (NYSEMKT: SLX). Its portfolio consists entirely of steel and iron ore producing companies. Fully 60% of the fund's holdings are international stocks. The ETF is down about a third in value in the past two years.

Just several days ago, the World Steel Association (the industry's main body) lowered its forecast for global steel consumption growth this year to 2.1%, from its previous estimate of 3.6%. Last year, global steel demand was rather decent, growing at a 6.2% rate. The Association pointed to several reasons for the slowdown. These factors include slower economic growth in emerging markets, especially China, and the debt crisis in Europe.

Chinese Steel Industry Slowing

China is a huge player in the global steel market as it is both the world's biggest consumer of steel, as well as its largest producer. Many prominent international bodies including the Asian Development Bank and the World Bank have lowered their outlook for economic growth in China over the past few weeks. Even China bulls agree that Chinese economic growth is slowing the torrid double-digit pace of years past to the 6%-7% range.

The World Steel Association trimmed its forecast of Chinese steel demand this year from 4% to only 2.5%. In 2011, demand grew at a 6.4% rate. Data from China backs up the Association's forecast. Chinese steel industry profits have collapsed by 96% in the first half of 2012 compared to a year ago, according to the China Iron and Steel Association. CISA went on to describe the industry's current state as a “disaster zone”.

Weak conditions in China led the World Steel Association to predict that steel demand for all the emerging markets would only grow by 3% in 2013. Quite a slowdown from the 10% annual rate experienced over the last decade.

The news from China and elsewhere in Asia cannot be good news for a company like South Korea's POSCO ADR (NYSE: PKX). It is the world's third largest steelmaker and has a large presence throughout Asia. It is still expanding rapidly in emerging markets such as China, where the industry is in that 'disaster zone'. The company just opened an auto steel processing plant in northeastern China, for example. Its stock is down about a third in the past two years.

Eurozone Woes

At least steel demand is still growing in the developing world. Quite another story in Europe where many of the economies are expected to contract this year.

The World Steel Association now expects steel demand in Europe this year to fall by 6%. This is a sharp downward revision from its previous forecast of only a 1.2% decline. The drop-off in demand can only hurt further the European steelmakers. Many of them have already cut production and closed some facilities to reduce the chronic overcapacity in Europe's steel industry.

When one thinks of the European steel industry, one name should pop up immediately – the world's largest steelmaker, ArcelorMittal ADR (NYSE: MT). The woes of the steel industry, particularly in Europe, have pushed this once $100 a share stock down to where it is today, about $15 a share. A potential credit downgrade by Moody's and others hover over this company.

Further Fallout

In addition to the steelmakers themselves, another group will also be impacted negatively by the global steel industry's problems. That group is the companies which produce iron ore, a key component in steel making.

Prominent among the iron ore producers (and the two largest positions in SLX) are Rio Tinto PLC ADR (NYSE: RIO) and Vale S.A. ADR (NYSE: VALE), the world's biggest producer and exporter of iron ore. The problem for these firms is that their management is acting as if the economies in China, Europe and elsewhere are not slowing. The four major global iron ore producers, as projected by JPMorgan, will conservatively have 8% annual growth in iron ore production capacity. So it looks like there will be increasing supply and decreasing demand for iron ore – not good for prices and profits.

The bottom line for investors? Avoid the entire steel and iron ore sectors completely. Only re-enter them if and when global economic growth picks up steam. Look to China and other emerging economies for a clue as to when that will happen.   This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

Thursday, October 18, 2012

Uranium Bulls May Have to Wait a Few Years

One industry which has certainly seen better days is the uranium mining industry. Not long ago – 2007 to be exact – the price of uranium soared to a record high at $136 a pound. Sky-high oil prices had many in the market convinced at the time that oil-generated power would likely be replaced by nuclear power globally.

But just several years later, uranium today is trading at a 2-year low of $45.75 a pound. Sentiment continues to be extremely negative toward uranium and nuclear power in general following the Fukushima disaster in Japan in 2011.

Fukushima has been a disaster for shareholders in both individual uranium stocks and ETFs focused on uranium mining companies too. One hard hit uranium firm is the world's largest producer of uranium, Canada's Cameco Corporation (NYSE: CCJ). The company accounts for 16 percent of the world's uranium production and is backed by about 435 million pounds of proven and probable uranium reserves. Its stock is down to less than a third of its value at the peak in 2007.

One ETF affected by uranium's woes is the Global X Uranium ETF (NYSEMKT: URA). Its portfolio is devoted entirely to uranium mining stocks. Its price is down about two-thirds from early 2011 levels. A second ETF greatly affected by the decline in uranium prices is the Market Vectors Uranium + Nuclear Energy ETF (NYSEMKT: NLR). Its portfolio has about 30% invested into uranium miners with another roughly 42% invested into industrial firms involved in the nuclear industry. Its price is also down by about two-thirds, over the past five years.

Is there any hope for the uranium industry? Industry executives do believe that several years down the road will be a better time for the companies involved in uranium mining as supplies are squeezed while demand picks up.

One hoped for source of demand is not surprising at all – China. The country is expected to announce an end to its 1-year moratorium on new reactor approvals. But it remains to be seen whether China, with its new leadership team coming in, will want to make such a decision so soon. The Chinese government has stated previously that it wants to boost its share of nuclear power generation from the present 2% to 5% by 2020.

Other emerging countries including South Korea, Russia and India will also have new nuclear reactors come online by 2020. Overall, the industry expects 95 net new nuclear reactors to be operational by 2021, with 60 of these currently bring constructed.

The most interesting aspect of the years ahead for the uranium industry, however, comes from the supply side. There are a number of factors which may serve to support prices in the long run. One such factor is the expiration of long-term contracts in 2016-17. These agreements account for the majority of sales agreements between the uranium miners and utility companies.

A very big factor will be the expiration in 2013 of a treaty between Russia and the U.S. that supplies uranium from decommissioned nuclear weapons. This uranium from Russia currently accounts for approximately 16% of total demand and supplies half of utilities' needs for uranium in the U.S.

Another big factor in the coming years will be diminished supplies due to cutbacks in mining activities. The cutbacks are thanks to current low prices for uranium. Cameco, for example, noted recently it needed a uranium price of $62 a pound in order to proceed with development of one of its new uranium assets. BHP Billiton Limited ADR (NYSE: BHP) said in August that it would halt its $20 billion Olympic Dam copper-uranium project in South Australia. The company also recently sold another of its uranium mines, Yeelirrie, in western Australia.

All of these factors on the supply demand do point to perhaps a brighter future in the years ahead for the uranium industry. It may not be time yet to turn out the lights on the uranium miners as a long-term investment.

This article originally appeared on the Motley Fool Blog Network. Please be sure to read all my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

Monday, October 15, 2012

General Electric to Benefit From Gas Turbine Boom

Its always good when a company raises its revenue growth forecast. This is especially true when the company is one of the world's largest. General Electric (NYSE: GE) recently raised its 2012 industrial revenue growth forecast to 10%, the high end of the previous 5-10% forecast. This news sent its stock price to levels not seen the autumn of 2008. Much of what powered that increased revenue forecast was GE's forecast of a boom in demand by power companies globally for natural gas-fired turbines as they increasingly turn to gas to provide baseload electricity.

In the past few days, the company announced $1.2 billion in new orders for 19 of its recently-developed, heavy-duty gas turbines from Saudi Arabia, Japan and the United States. General Electric has been investing heavily into its “flexefficiency” turbines and technology designed to allow rapid ramp up and ramp down in power output while using gas efficiently. GE has developed technology for both 50 hertz and 60 hertz, the two main frequencies for power grids around the globe. It has placed a big bet on natural gas and its future in the past few years, including acquisitions worth $11 billion in 2010-11. Now it looks as if that bet is just beginning to pay off.

Among the clients buying the GE turbines here in the United States are Hess Corporation, Xcel Energy (NYSE: XEL) and an unnamed industrial client. General Electric is supplying two gas turbines to the Cherokee Clean Air Clean Jobs Project in Denver, Colorado which will convert an existing coal power plant into a cleaner burning natural gas combined-cycle facility. Carbon dioxide emissions are expected to be lowered by half. The new plant will be owned and operated by Public Service Company of Colorado, a subsidiary of Xcel Energy.

General Electric is not alone in its belief in the bright future for gas turbine power. Its major competitor in the sector, Germany's Siemens AG ADR (NYSE: SI), also thinks along the same lines. Earlier this year, Siemens announced it had earmarked more than $1.3 billion to expand production of gas turbines and hopefully fend off GE as they jostle for top spot in the sector. This division is the largest of the German company's 10 main divisions, accounting for about 14 percent of the company's revenues last year.

In recent years, Siemens has almost doubled its market share to 40% in the large turbine segment for power exceeding 100 megawatts. It also currently has the at least 10-unit-a-year market to itself as GE and Japan's Mitsuibishi Heavy Industries (NASDAQOTH: MHVYF.PK) are still developing their offerings for that segment of the market.

Another competitor of GE and Siemens in the turbine market is France's Alstom SA ADR (NASDAQOTH: ALSMY.PK), but it is more focused on the steam turbine market. However, even Alstom has launched its upgraded GT24 gas turbine and KA24 combined-cycle power plant which the firm says is a response to the increasing demand for gas-fired power generation around the world.

The upturn in gas turbine business for GE, Siemens and the rest is being driven by four factors: the global shale boom which is making natural gas cheap and plentiful, fast-growing power needs in the emerging economies, concerns about nuclear energy in the wake of the Fukushima disaster and stricter emissions rules in the United States.

Environmental regulations alone will lead to roughly half of all U.S. coal power plants being upgraded or replaced in the next decade. General Electric itself forecasts that more U.S. power plants will be fueled with natural gas rather than with coal by 2017. As for the emerging world, as shale gas deposits are developed in China and elsewhere, the markets for gas turbines will expand even further. This bodes well for Siemens and GE, as it moves back toward to its industrial roots and away from financial services in the years ahead.

This article originally appeared on the Motley Fool Blog Network. Make sure to read all my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

Wednesday, October 10, 2012

US Consumers Shifting to Smaller Cars

The preliminary figures for vehicle sales in September are out and they were not as good as the August numbers. Sales were flat for Ford Motor (NYSE: F) and sales at General Motors (NYSE: GM) were only up 1.5%. Sales at Chrysler, majority-owned by Italy's Fiat S.p.A. ADR (NASDAQOTH: FIATY.PK), motored ahead in September at a 12% rate.

The most interesting aspect of the sales figures for Detroit's Big 3 is the fact that all three companies boasted about their fast-growing sales of smaller models of passenger cars. This is almost unheard of in the United States, famous for its gas-guzzling SUVs and pickups.

General Motors said its sales of mini, small and compact cars were up 97% from the year ago period. Ford reported small car sales jumped 73% from a year ago, to a record for the past 10 years. Meanwhile, Chrysler's Dodge Dart sales rose 72% from August and sales of the Fiat 500 subcompact climbed 51% year-on-year.

These sales reports are outstanding. But does it represent the beginning of a long-term trend? Thanks to high fuel prices, is America finally moving away from driving gas guzzlers?

If so, the Big 3 automakers will have to learn to adjust. After all, with smaller cars you have smaller profit margins. That is why they largely abandoned the field to foreign competitors, concentrating instead of high-margin larger vehicles.

One way the automakers are coping with possible tighter profit margins on small cars will not make most Americans happy. They are shifting production to places like Mexico. Ford makes it Fiesta model in Mexico. Fiat manufactures its Fiat 500 for the U.S. market also in Mexico. GM should be commended though. It does manufacture the Chevrolet Sonic, the smallest passenger car mass produced in the U.S., at its plant in Lake Orion, Michigan. It copes with small profit margins by trying to shorten the supply chain by moving actually moving suppliers in-plant.

Of course, one big plus that U.S. automakers have in their corner is that they have moved toward using global platforms for the production of many of their vehicles. That is, auto manufacturers build many vehicle models atop the same architecture. So Chevy's Sonic is built on the same platform as Opel in Europe and Ford's Fiesta is built on the same platform as vehicles in Europe. This is a real cost saver in the long run for automakers.

But the question still remains whether U.S. consumers are ready to switch to smaller vehicles permanently. The answer is probably as it has always been in the past . . . no. As soon as the price of fuel starts falling again (if it ever does), Americans will rush back into driving their favorite gas guzzlers.

Right now, according to Edmonds.com, compact and subcompact cars account for 21.5% of the U.S. car market versus 24.6% for SUVs. The two numbers will likely only reverse if gasoline climbs to over $4 a gallon and stays there.

This article originally appeared on the Motley Fool Blog Network. Be sure read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/.

Wednesday, October 3, 2012

US Railroads: Great Plays on Shale

The boom in US shale gas and oil is now a fact of life for investors. But the best way to play that boom is not directly through oil and gas companies. Look at how many of them have suffered thanks to an excess of supply and the resulting plunging prices for both natural gas and natural gas liquids (NGLs).

The best way to play shale is from owning the beneficiaries of low gas prices – petrochemical companies – and the beneficiaries of transporting shale oil across North America – the railroad industry.

The fact is that increased oil production, from both Canada and North Dakota, have nearly overwhelmed the existing transportation system in that part of North America. Drilling techniques such as hydraulic fracturing have increased oil production in North Dakota sevenfold to more than 600,000 barrels a day, moving the state to second behind only Texas in U.S. oil production. The U.S. Energy Information Administration forecasts production there will surpass 1 one million barrels a day next year. Even in Canada, oil production is expected to top 4.1 million barrels of oil a day next year, up from just 3 million barrels a day in 2005.

The drilling in areas like North Dakota is occurring in a region with few refineries and a limited pipeline network. So that leaves one alternative to transporting the oil taken out of the ground in North Dakota – railroads. According to the Association of American Railroads, overall U.S. rail shipments of oil have almost quadrupled to 88,026 rail car loads in the first half of 2012 from only 22,714 in the first half of last year. In 2008, there were less than 10,000 carloads annually.

The key here for investors is that this is not a blip, but part of a long-term trend. Just take a look at what two of the country's major refining companies – Tesoro (NYSE: TSO) and Phillips 66 (NYSE: PSX) have done in recent months. Tesoro this month will complete a rail facility at its west coast refinery in Washington to receive Bakken crude from North Dakota from 800 rail cars it had ordered previously. In June, Phillips 66 ordered 2,000 rail cars at a cost of $200 million to transport shale oil from North Dakota fields to its refineries.

All of this is great news for the railroads and should bring smiles to the faces of shareholders in railroads including CSX (NYSE: CSX), Canadian Pacific (NYSE: CP) and BNSF, which is now owned by Warren Buffett's Berkhsire Hathaway (NYSE: BRK-B). Canadian Pacific, for example, recently told attendees at an investor conference that the company expected oil shipments it carries to rise from 13,000 carloads last year to leap to at least 70,000 carloads sometime in 2013.

Burlington Northern SantaFe (BNSF) is a particular beneficiary of the Bakken shale oil boom since it carries 44 percent of the region's oil exports. It has built terminals along its routes throughout the region which are capable of handling 1 million barrels of oil a day, well above the current 290,000 barrels a day it handles. The company expects that, even after planned pipelines are built, that it will still handle between 25 and 37 percent of the Bakken's oil exports.

Of course, it's not all gravy for the railroad companies. Take CSX, for instance. The shale boom has hit the coal industry hard and therefore coal shipments are down sharply. CSX coal shipments were down 28 percent in the first quarter of 2012, though earnings were up marginally. Coal has traditionally accounted for 20-25 percent of of traffic for big rail companies like CSX.

So the question remains whether transporting oil from the Bakken and elsewhere – after a large investment into tank cars which CSX CFO Frederik Eliasson calls a “risk” - will offset the decline in railroads' coal business. For now, the railroads think the answer is yes. They are planning to at least triple capacity to move oil in the months and years ahead. With cheaper domestic crude oil from the Bakken luring the refineries to use cheaper domestic oil instead of expensive imported crude oil, the railroads seem to be sitting in the perfect spot as the transporter of that oil.

This article originally appeared on the Motley Fool Blog Network. Make sure to read all of my articles for the Motley Fool at http://beta.fool.com/tdalmoe/