It isn’t much of a stretch to call Spark Energy (NASDAQ:SPKE) a hated security to hold right now (both the common and the preferred). Of course I hate it more because I have an overweight position in the shares and after a small purchase on Wednesday I am down about 90 cents per share (factoring in 1 dividend received thus far). Below is a chart of the common shares which are trading down from a high near $27 1 year ago.
Of course the preferred and common shares are not really ‘hated’. With a damned lousy 1st quarter being reported on 5/9/2018 investors appear to have simply ‘reassigned’ the current level of pricing ($22.50-$23) to the shares and are saying ‘prove your worth’. This is what the markets are all about.
The preferred shares which carry a coupon of 8.75% and are floating rate starting in 2022 (NASDAQ:SPKEP) are shown in the chart below. The company originally had 1.4 million of these shares outstanding before ‘reopening’ the issue in January and selling 2 million more shares. These preferred shares had been trading over $27 early in 2018.
So let us look at a bit of history from the last 3 years (they were formed in 1999).
Starting in 2015 Spark generated $358 million in sales with net income of $26 million and they had depreciation of $25 million leaving free cash of $51 million. In 2016 they had $547 million in revenue with $66 million in net income and $33 million in depreciation for total free cash of $99 million. In the year just ended they had sales of $798 million, net income of $76 million and depreciation of $42 million for a total of $118 million in free cash.
The rising sales noted above was virtually all from acquisitions–companies that retail energy have a substantial ‘churn’ of customers and as such they are always on the hunt to ‘buy’ new customers.
The company announced revenue for the 1st quarter ending 3/31/2018 with a blowout number of $287 million which unfortunately was primarily caused by extreme cold in the companies service areas. A retailer of energy has to buy power from the generating utility prior to adding their own margin to the sale price. In the case of Spark they hedge potential pops in energy prices when they can be reasonably forecast. Unfortunately for Spark they were unable to forecast the long period of frigid temps and because of this the company took a rather large hit to earnings as they were unable to pass along the cost of power to the end user.
For the quarter ending 3/31/2018 on $287 million in revenue the company lost $41 million, but had depreciation of $13 million so they had negative cash flow of $28 million. This is meaningful for a company like Spark, but IF it is a one time event it really isn’t critical.
So what does the company have to say about the future. Below is a clip from the CEO’s statement from the earnings announcement.
So the company is expecting some big things throughout the balance of 2018. We say ‘prove it’–and investors as a whole are saying the same.
Of course SPKE is somewhat of a strange duck in terms of ownership of shares and it is not helpful that 1 person controls 2/3rds of the shares and is paid a huge chunk of money every quarter and year in the form of a distribution. The common shares of the company are now paying a dividend of .18125/share quarterly for a current yield of 7.2%. Anytime that a single owner controls every move the company makes investors will be skeptical of the game plan when things don’t go right.
In addition to the ownership issue the company is ripe for lawsuits–all retail energy companies employ all kinds of methods to find new customers–many times employing outsiders to solicit potential customers. This is likely simply a ‘cost of doing business’. If one reviews the companies annual reports you will find bunches of lawsuits in process. Our own research shows that while SPKE has plenty of lawsuits and no doubt plenty of unhappy customers, they are probably no worse than the other energy retailers in the market.
So what is an investor to do? We don’t ever make recommendations, but we can convey our plan.
We have written that we have an overweight position in the SKPEP preferred shares and currently stand with a modest loss of around 90 cents/share when factoring in the 1 dividend we have received this far.
The preferred shares will go ex-dividend on 6/29/2018 meaning another dividend of about 55 cents. The common and preferred dividends for the 2nd quarter have already been announced.
2nd quarter earnings should be announced sometime around 8/6/2018. We anticipate that based upon statements from the company that earnings will be reasonably ‘normal’ meaning equal to the year ago quarter in which they generated $34 million in cash flow.
With the above information we expect that we will determine that the investment is worth continuing to hold. We would expect that if the earnings return to ‘normalized’ levels the common and preferred shares should move somewhat higher. If shares move higher we will let some shares go–sell some, just to get to a normalized position size.
So with that we are going to give management approximately 10 weeks to ‘prove it’. Prove to us we should hold the shares.