Report

Systematic Idea - Long E.On (EOAN GY) & August long only picks - 4 Aug

Long E.ON (EOAN GY)

E.On’s restructuring is well underway as it positions itself as a renewable energy company. Its strong record of generating free cash flows and the refund of €2.4 billion in nuclear taxes has bolstered their deleveraging plans and strengthened their balance sheet.

Net margins have been improving over the last few years & the stronger balance sheet provides E.On more flexibility. The company is fairly insulated from commodity price swings while the externalization of nuclear-waste liabilities improves both E.On’s risk profile and net income. An increased dividend payout ratio perhaps beckons.

Its 5yr CDS price has dropped to 10 years lows suggesting the stock is entering a period of benign growth. E.On has also started outperforming the broader market as well as the sector and looks like the management’s restructuring plan is starting to bear fruit. So we go long here.

S&P 500 Market-implied Price Path chart

Fig.3 across shows a visual summary of what the market is pricing in for the S&P using Bloomberg ‘index earnings’ estimates. These are sourced from global investment banks’ strategy teams and are typically robustly constructed from bottom up data. The methodologies can however use alternative approaches (e.g. top down using derivatives etc).

The solid lines and the blue line are historic PE multiples (i.e. a PE band) and the SPX itself. The dashed lines are projections. The current PE of the S&P 500 is 19.5 while the SPX projection at the current PE implies a price of 2711 in 12 months, an upside of 9.5% from the 2472 now. Put another way, if we stayed where we are now, the 19.5x would compress to 17.8. Upshot #1: the Street is saying that the SPX is headed to c. 2700. A tall order given Shiller PE history perhaps, but what about real data?

Taking the median estimate of the spread of index EPS estimates we arrive at a Base case forecast. This is the gold coloured data in Fig.2 and suggests 2695 for the SPX over the projection period. It’s above our pay grade to make 12 month views on the S&P 500 but one of the macro charts we use that supports this sanguine outlook is a GDP projection model (latter has 24 month lead). Fig.3 shows that there is little recession risk in the near term (red arrow). Upshot #2: The ‘Buy-the-Dip’ state of the market continues for more patient capital. The first sign of a 3%, to say 8% dip will likely come from a basing of the US Dollar and a steady rise in US 10 year bond yields. The worsening SPX breadth and weakening volume picture in the past fortnight may foment in such a ‘buyable dip’ soon. We remain ‘petrified bulls’ for now.

Underlying
E.ON SE

E.ON is an investor-owned energy company. The Generation global unit consists of all Co.'s existing (fossil and nuclear) generation assets in Europe. The Renewables unit is engaged in managing Co.'s carbonsourcing and renewables businesses. The Global Commodities unit buys and sells electricity, natural gas, liquefied natural gas, oil, coal, freight, biomass, and carbon allowances. The Exploration & Production unit is a active in the focus regions of the North Sea (U.K., Norway), Russia and North Africa. The New Build & Technology unit include Co.'s project-management and engineering operations to support the construction of new power plants and the operation of existing plants.

Provider
Deydun
Deydun

Deydun Markets

 Deydun Markets, founded in 2010 and based in London, is a specialist quantamental research boutique. The client base includes institutional equity investors across the spectrum audience primarily from fundamentally driven long term investors to long / short high turnover hedge funds. Deydun covers all global markets through a macro lens as well as bottom up stock picking with the major overlay being the proprietary quantitative models that we have built over the years. The models are rebalanced to suit clients specific needs including quarterly, semi-annual and up to annual rebalance.

 Deydun specialises in providing real-time securities recommendations including providing market timing advice and actionable short-only strategies. They use robust quantitative approaches to help isolate alpha for their clients. The systematic models attempt to be:

 Right at the right time

  • Avoid drawdowns
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 The differentiated suite of empirical models that Deydun has developed adapt dynamically to mean reversion and momentum states.

 The Deydun service is delivered through notes, “Key Thoughts”, that highlight new stock ideas and track the real-time performance of all the Live Book as well as those in the (unique) Flip Book when they have changed the side of the recommendation. These prove outstanding records of divining alpha in very liquid global equities. The models typically achieve 15% to 35% CAGRs in blind forward and real time proofing over one to two business cycles.

 Deydun endeavours to provide each client with independent and relevant ideas and transparently track all their calls. Tier one clients receive a bespoke portfolio service and often share their positions to enhance the impact of the Deydun service.

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