Energy reseller (or fake utility as Gridbird would call them) Spark Energy (NASDAQ:SPKE) announced earnings last night after market close and all in all the numbers were relatively good.
The company had already declared dividends on their common and preferred shares on October 18th at levels unchanged from last quarter so we suspected there wouldn’t be a disaster in the financials.
We are looking to add some preferred shares this morning if the price is right. We have to be out of the office when the market opens, but will be back an hour after opening. Our price to buy is in the $21-$22 area (it closed at $21.08 yesterday). This is not a recommendation for anyone else to buy.
Spark Energy fixed-to-floating rate preferred shares (NASDAQ:SPKEP), which carries a current coupon of 8.75%, has been the worst pick of mine for many, many years (see the chart below) .
This issue had been trading around $27 earlier in 2018 until the company issued 2 million more shares in late January. This set off a tumble in the share price to the $23 area where we began buying. We kept buying until we had near 1000 shares which is a overweight position for us. Fortunately we had a chance to unload some shares at prices that allowed a tiny profit with dividends included, but we kept part of our shares as we did (and do) believe that the risk/reward is pretty decent for the shares. Unfortunately other investors have not agreed with us.
Taking a quick look at the earnings report last night we see that revenue was up sharply-way above estimates. They report revenue of $245 million which was 20% higher than a year ago. Additionally net income was $18.5 million which was 50% above a year ago–but was mainly caused by gains on derivatives used for hedges for power purchases.
Margins on the reselling of electricity and natural gas are tighter than a year ago, but the company started a cost reduction programs 2 quarters ago after a poor quarterly report and this has allowed them to operate successfully with these tight margins. Additionally we believe they are starting to address customer service issues by concentrating on ‘organic’ growth of the customer base instead of just continually purchasing customers through acquisition. It really should be common sense that it cost less to keep customers than to have to find new ones—but this company and others like it (Just Energy) seem to think it makes sense to buy versus keep—it has taken them 20 years to figure this out.
Additionally the company has started to back away from some commercial accounts which provided little to no margin and in fact caused large losses in the past when power costs to the company spiked and they were unable to hedge their costs appropriately.
All in all we think the company is doing ok—recovered nicely from earlier in the year and they seem to have the right leadership in place to drive the business in the right direction.
They will have an earnings conference call this morning at 10 a.m. central time and we plan to listen in, although likely they will say little that is noteworthy.