Monday, November 18, 2013

Disaster Capitalism


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Disaster Capitalism

John Persinos Horrific images of human misery continue to emerge from the storm-ravaged Philippines. Earlier this month, Super Typhoon Haiyan slammed into this archipelago nation with winds of up to 150 miles per hour and gusts that were far stronger, flattening almost everything in its path.

The typhoon killed an estimated 10,000 people and displaced more than 650,000, with winds and sea surges that demolished countless buildings, roads, airports, and bridges.

Meanwhile, this week in the United States, recovery operations are underway after severe storms and tornadoes wreaked devastation on the Midwest.

Enter Tetra Tech (NASDAQ: TTEK), a leader in helping public and private sector organizations cope with various types of environmental challenges.

With 14,000 full-time employees in 350 offices worldwide, Tetra Tech provides engineering and technical services for the water, energy, infrastructure, and natural resources sectors. The company specializes in risk mitigation and damage control related to climate change.

Since I recommended the company in an Investing Daily article on June 17, the stock has generated a total return of 9.4 percent.

Headquartered in Pasadena, California, Tetra Tech's services are sought after by commercial and governmental decision-makers who find themselves on the frontlines of crisis. The environmental and humanitarian catastrophe now unfolding in the Philippines is a vivid case in point.

A collection of more than 7,000 islands in Southeast Asia, the Philippines is especially vulnerable to the growing incidence of severe storms, a trend that many scientists blame on global warming. Home to nearly 100 million people, the Philippines is the 12th most populated country in the world.

Regarded by meteorologists as one of the worst storms in recorded history, Super Typhoon Haiyan left many of the country's coastal cities looking like war zones.

Hurricanes, cyclones, and typhoons are all the same violent storms, but with a different name depending on the region. They're called hurricanes in the Atlantic and Northeast Pacific; cyclones in the South Pacific and Indian Ocean; and typhoons in the Northwest Pacific.

According to Philippine government estimates, every typhoon season costs the country an estimated 2 percent of its gross domestic product from lost economic activity and crops. An additional 2 percent is incurred in reconstruction costs.

A Philippine Footprint


Before Typhoon Haiyan hit, Tetra Tech was already expanding its footprint in the Philippines, undertaking multimillion dollar projects to help local officials cope with threats to coastal zones posed by population growth, overfishing and global climate change.

For several years, the company has been working in the country to evaluate and repair several hundred miles of coastal roads and mountain passes, as well as bridges, water systems and vertical structures.

Tetra Tech also has been providing technical assistance and training to more than 300 communities over 2,000 miles of Philippine coastline to implement habitat management strategies that protect natural resources, such as agriculture, water and fisheries.

So far, Tetra Tech has established in the Philippines 70 new marine sanctuaries covering 1,500 hectares of coral reef and sea grass habitat. The company is now positioned to reap significant new contracts, as this island nation painstakingly rebuilds from its nightmarish devastation. Potential new work could run into the billions of dollars, much of it subsidized by international agencies.

According to the National Oceanic and Atmospheric Administration, up to $188 billion in damage was caused in the US alone by severe weather events in 2011 and 2012, with 2013 shaping up to be a record year for violent weather and related damages. This week's outbreak of destructive storms in Wisconsin, Indiana, Michigan, Ohio, and Kentucky underscores the trend.

Whether the culprit for the rising incidence of "super storms" is man-made climate change or natural cycles, severe and unpredictable weather is a new global reality that governments appear helpless to prevent. That makes Tetra Tech the beneficiary of a secular trend.

The Era of Water Scarcity


Tetra Tech makes up 4.2 percent of the PowerShares Water Resources Exchange-Traded Fund (PHO) and is a play on the coming global water crisis, as pollution, overcrowding, urbanization, and the heightened frequency of droughts make potable water an increasingly scarce and valuable commodity.

According to the consultancy American Water Intelligence, there's a huge gap in the US between expected expenditures and actual needs for water infrastructure (see chart below).


The American Society for Civil Engineers estimates that the US will need to spend $1.6 trillion to modernize all types of existing infrastructure, including roads, dams, bridges, sewage treatment plants, and levees.

It all adds up to huge, long-term demand for Tetra Tech's highly specialized services.

In the meantime, Tetra Tech in recent months has been defying budgetary austerity in Washington, DC to pick up several new and lucrative contracts for environmental remediation.

In August, the company was one of three firms awarded a $75 million contract by the US Navy to provide natural resources monitoring and maintenance. Also in August, the company was awarded a $20 million contract to perform environmental and construction oversight as part of the Miami Harbor Construction Dredging Project.

Under the Florida contract, Tetra Tech's scientists are overseeing the transplantation of seagrasses, relocation of corals, and monitoring of existing seagrass beds, coral reefs and sediment during dredging activities.

In September, the company was awarded a new contract to provide technical and advisory services to the US Environmental Protection Agency's regional Superfund Program throughout a six-state region that includes Illinois, Indiana, Wisconsin, Minnesota, Michigan, and Ohio.

The $48 million, single-award contract is scheduled to last five years. The company had been awarded a similar and separate Super Fund contract in July for $50 million.

This flurry of contract awards since August has boosted the company's stock price:



On November 13, Tetra Tech reported strong operating results for the fourth-quarter of fiscal 2013. Revenue was $536.3 million, up 12.7 percent compared to $475.9 million in the same quarter last year. Earnings per share (EPS) were $0.47, up 11.9 percent compared to $0.42 in the same year-ago quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) were $62.9 million, up 11.5 percent compared to $56.4 million in the same year-ago quarter.

Fourth-quarter backlog was a record high $2.14 billion, up 9.7 percent compared to $1.95 billion at the end of the fourth quarter last year.

Revenue for fiscal 2012 was $2.02 billion, up 12.8 percent compared to $1.79 billion in fiscal 2011. EPS was $1.63, up 14 percent compared to $1.43 in fiscal 2011. EBITDA were $222.3 million, up 11.9 percent compared to $198.6 million in fiscal 2011.

With a market cap of $1.7 billion and several quarters of robust operating results under its belt, Tetra Tech possesses the financial wherewithal to aggressively compete in the construction bidding wars that typically emerge in the wake of natural disasters.

However, unlike its larger peers, Tetra Tech's core competency is remediation and risk management, making it a purer play on these incidents as well as a company with more room for growth. By way of contrast, major competitor Fluor (NYSE: FLR), with a market cap of $12.7 billion, is a behemoth with fingers in many different types of construction projects.

What's more, the world of environmental construction is governed by longstanding relationships. Through its already established presence in the corridors of Capitol Hill and various overseas outposts, Tetra Tech can leverage its proven track record to scoop up its share of contract spoils.

Tetra Tech's forward price-to-earnings (P/E) ratio of 14.3 is below the P/E of 16 for its industry of technical services. This remedial specialist is a good investment value, as it's increasingly called upon to deal with pollution, severe storm destruction and—in the case of the Philippines—a literal sea of woes.

John Persinos is editorial director of Personal Finance and its parent website, Investing Daily.


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Europe: Weaker Economy But Stocks Look Okay

Philip Springer European stocks surged during the summer, narrowing their wide gap with US equities after years of underperformance. But since autumn began, US stocks have retaken the lead.

This could be because the glimmers of hope that accompanied the euro zone's economic improvement in the second quarter were dissipating with the renewed weakness in the third quarter.

But don't count Europe's stocks out, despite the feeble economy.

The overall economy of the 17-nation euro-currency bloc grew just 0.1 percent in the third quarter, or a 0.4 percent annual rate, from the second quarter, said Eurostat, the European Union's statistical agency this week.

After the second-quarter results, there was some optimism that a sustainable recovery was starting after six straight quarters of contraction and five years of stagnation.

The overall European Union, made up of 28 countries, grew 0.2 percent from the second quarter (1 percent annualized) to the third, Eurostat said.

Other leading economies are doing considerably better. The US grew at an annualized 2.8 percent rate in the third quarter, although that number seems to have been boosted artificially by inventory buildups. Japan has reported 1.9 percent growth. China, the world's fastest-growing major economy, said it expanded at a robust 7.8 percent rate in the third quarter.

In Germany, Europe's biggest economy by far, quarterly growth slowed to 0.3 percent (1.2 percent annualized) from Q2's 0.7 percent (2.8 percent), primarily because of flat growth of exports. Increased consumer spending was the major plus.

France's economy, the region's second largest, contracted 0.1 percent in the third quarter, down from 0.5 percent growth for the previous three months. Italy's economy also shrank 0.1 percent, its ninth consecutive quarterly contraction. Germany, France and Italy together account for two-thirds of euro zone gross domestic product.

There was some good news. The economies of Spain and the Netherlands, the fourth and fifth-largest euro zone economies, inched ahead 0.1 percent, at least temporarily breaking their losing streak. And EU member Great Britain saw robust 0.8 percent quarterly growth.

As we advised in September, Europe's "very gradual economic improvement would still be inadequate to reduce the euro zone's main  problems, led by a record-high unemployment rate of 12.1 percent, hefty government debt, and uncompetitive labor costs, benefits and taxes."

While the euro zone is growing slightly, unemployment, wages and inflation are all under significant pressure. The jobless rate now is at a peak of 12.2 percent. Annual inflation dropped to 0.7 percent in October, far below the European Central Bank's target of almost 2 percent. In Ireland, Greece and Spain, inflation rates are at zero or lower.

No wonder the ECB last week made a surprise interest-rate cut, reducing its key lending rate to 0.25 percent, a record low. The ECB could take additional stimulus steps if  necessary, including private-sector asset purchases and even negative interest rates.

This ongoing willingness to provide monetary-policy support is a significant plus for European stocks in general, just as it has been here in the US.

Yet another reminder of that fact came this week with the testimony of Janet Yellen before the Senate Banking Committee on her nomination to succeed Chairman Ben Bernanke, whose term ends in January.

She indicated that she would stick to plans to wind down the central bank's $85 billion-a-month bond-buying program in coming months if the economy picks up. But that's a big if, as we've often advised. And she offered no timetable for when and how any tapering will occur.

"There is no set time," said Yellen, who is currently the Fed vice chairwoman. "We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession."

As Yellen noted, the Fed still has a way to go in pursuit of its "dual mandate" for maximum employment and stable prices. Unemployment, currently at 7.3 percent, "is still too high, reflecting a labor market and economy performing far short of their potential," she said. And inflation is below the central bank's 2 percent target and will likely remain low for some time, she added.

What's more, the Fed has continued to emphasize that short-term interest rates will remain low for a long time to come. And that may be even longer than generally expected now. The current position is that the Fed won't raise rates until the unemployment rate drops below 6.5 percent. But an even lower threshold is being considered.

It's no wonder that US stocks hit new all-time highs this week. Europe and the rest of the world also climbed.

This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email.


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An Energy Boost for Canada's Exports

Ari Charney

Canada's latest trade data show the country's exports sustained strong growth during September, which more than halved the country's trade deficit from the prior month. According to Statistics Canada, seasonally adjusted exports rose 1.8 percent in September, to CAD40.6 billion, the highest level since late 2011.

And because imports increased just 0.2 percent, to CAD41.1 billion, that was good enough to pare the country's trade deficit to CAD435 million from a revised CAD1.1 billion in August. This performance blew past expectations, with the consensus forecast having been for a trade deficit of CAD1 billion, according to a Bloomberg survey of 19 institutional economists.

So does that mean the Bank of Canada's (BoC) hope for the economy to shift from its dependence on weakening domestic demand has finally been realized? It's entirely possible, but economists remain skeptical.

For one, the balance of payments can vary widely from month to month. June's trade deficit was just CAD141 million, while March had a shortfall of CAD278 million. But these promising showings were each followed by months in which the trade deficit exceeded CAD1 billion.

Moreover, when viewed from this perspective, Canada still seems to be struggling to establish a firmly positive trend in international trade. Over the past five years, the country's monthly trade deficit has averaged CAD613 million, while over the past year it's averaged CAD824 million.

However, when we examine just export data, the trend appears a bit friendlier. Canada's monthly exports have averaged CAD35.9 billion over the past five years, while over the trailing year they've averaged around CAD39.4 billion. So something's happening, even if, as BoC Deputy Governor Tiff Macklem recently noted, exports still have significant lost ground to make up to return to pre-recession levels.

Further complicating the interpretation of recent trade data is the fact that the industries that have been driving recent results tend to be volatile in the short term. Canada's resource riches mean energy products accounted for nearly a quarter of total exports in September. And according to economists with CIBC World Markets, energy products drove 60 percent of the third quarter's CAD714 billion increase in exports.

While energy exports have jumped almost 23 percent year over year, the prices that energy commodities fetch are notoriously volatile. For instance, Western Canada Select (WCS), a benchmark for the heavier crude produced from the country's oil sands, has seen its usual discount to the benchmark West Texas Intermediate (WTI) widen significantly since June. WCS recently traded at a USD36.25 discount to WTI, a stark contrast to a discount of just USD9.26 in June, or even its five-year average discount of USD17.20.

Canadian crude shipments have been crowded out from pipelines leading to key US refineries by competition from the prolific US shale plays. And even when pipelines have been more accommodative, some refineries have been down for maintenance, adding to Alberta's glut of supply, which itself has been increasing thanks to new production from the Kearl project. That means higher volumes, not prices, have been key to the energy sector's performance.

The aircraft industry has also posted strong export growth, up 11.6 percent over the past year. But with a CAD1.2 billion contribution to total exports, it's more of a marginal player whose monthly gains can prove evanescent over longer-term periods.

Overall, we're heartened to see the energy sector drive Canada's export growth, since resource plays are a strong component of our Portfolios. But it still remains to be seen when total exports will start growing at the pace necessary to drive the country's economy.

This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email.


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