Trading Portuguese default fears starts with EDPFY’s massive yields

As the euro zone continues to scrabble to fix the Greek debt crisis, analysts have started fretting over whether Portugal may fail to manage its own cripplingly high borrowing rates. But there are great babies being thrown out with the bathwater.

As I try to personally try to wrap my head around Europe’s crisis, I can only think back to what I’ve learned and know works: the numbers do not lie.  What I found was shocking — at least to me. 

Take a look at the euro markets for the year to date:

Market                 This Year Gain/Loss
Greece                 +17.0%
Germany              +9.6%
Italy                     +5.2%
France                 +4.4%
UK                       +2.1%

Compare those numbers to the Dow industrials at 2.9% and the situation does not look so bad in Europe after all. If anything, those with strong stomachs and nerves of steel may want to keep an eye on Portugal as it gets kicked around.

With that said we sent our screens to look for yield in areas that service or products could not be done without.  What we found appears to be an essential player in the utilities industry paying a current yield of more than 8%: EDP Energias de Portugal (EDPFY, quote).

EPD

Executive Summary:

EDP Energias de Portugal is a Portugal-based company engaged in the electric utilities and gas sector. EPD operations are divided into several business segments.

The Iberian Generation business segment comprises electricity generation in Portugal and Spain.

The Iberian Distribution business segment comprises electricity distribution in Portugal and Spain, as well as last resort supply.

The Iberian Supply business segment comprises unregulated electricity supply in Portugal and Spain. The EDP Renovaveis business segment comprises power generation through renewable energy resources.

The gas business includes the gas distribution and supply activities in Portugal and Spain.

Beyond Europe, EDPFY is very active in Latin America. The EDP Energias do Brasil business segment includes the company’s activities of electricity generation, distribution and supply in Brazil. 

Overall Valuation: EDPFY is in the electric utilities industry and has positive earnings, the PE and price-to-book ratios are the most appropriate valuation measures. EDPFY seems to appear to be valued at a discount with a PE value of 5.8257, one of the lowest in the electric utilities industry.

Profitability: EDPFY appears to be a very efficient company. Although its profitability is only in line with the industry median on an operating and gross margin basis, its bottom line — the net margin — is among the highest in the electric utilities industry at 13.65.

Yield/Dividend: EDPFY pays an annual dividend of $2.42, which, at its current stock price of $29.28, yields 8.35%, well above both the already-attractive electric utilities industry average of 6.94% and the average stock in the S&P 500 Index which yields 2.10%.

Financial Strength: EDPFY has a debt to total capital ratio of 60.84%, which is inline with the electric utilities industry’s average. The company’s balance sheet shows that liquid assets are plentiful enough to service current liabilities in the event that operating earnings are unable to.

 Quick run down on the technicals

It is no surprise that EDPFY has been beaten up and spit out but it looks like price wants to hold ground here at the bottom range of its recent  channel.

With support beneath it, this stock actually looks to be attempting to break above the innermost trendline. 

Traders might consider taking a position on any bullish reversal sign and place protective stops below the 52 week low. 

After all, EDPFY will pay traders to wait at rate of 8.35% — not a bad built-in payday if the stock does nothing during the crisis.

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