Marcellus And Utica Shale Plays Analyzed By The Co-founders And Principals Of Schnieders Capital Management; An Exclusive Wall Street Transcript Interview
December 16, 2011 - The Wall Street Transcript has just published Best of 2011: Money Manager Interviews offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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James F. Schnieders, CFA, is a Co-Founder and Principal at Schnieders Capital Management, LLC. Before helping to launch the firm with his father, he worked for nine years at William O'Neil + Co Incorporated. While at William O'Neil, he specialized in providing investment research, ideas and advice to financial institutions in the U.S. and Asia. Mr. Schnieders graduated with honors from the University of California, Los Angeles. He is a Member of the Association for Investment Management and Research as well as a Member of the Los Angeles Society of Financial Analysts.
John C. Schnieders, CFA, CFP, joined Schnieders Capital Management, LLC, in a Principal capacity in 2006. He has been an Adviser to the firm as a William O'Neil + Co Incorporated Representative since Schnieders Capital's founding. Before joining the firm, Mr. Schnieders worked for 12 years at William O'Neil, which is an institutional investment adviser, as well as the parent company of the Investor's Business Daily newspaper. He completed his undergraduate course work at the University of California, Los Angeles.
William H. Schnieders is a Co-Founder and Principal of Schnieders Capital Management, LLC. He has spent 40 years in the investment industry as a Broker, Analyst and a Portfolio Manager. He is a graduate of the University of California, Berkeley, where he majored in finance. Mr. Schnieders received his MBA from New York University's graduate school after two years of service in the military. He began his investment career with Dean Witter in New York, and later became a Partner with BWA Associates in Los Angeles.
TWST: Would you tell us how you find ideas for the portfolios, and then determine which stocks to include in your clients' portfolios?
Mr. James F. Schnieders: Why don't we start off with the consumer staples? We use a screening process to come up with a select number of names, then we dig down into the fundamentals and to find the companies that we like. An example of a company that we like right now on the consumer staples side is Wal-Mart (WMT). We like Wal-Mart because we believe that given the headwinds we just talked about, the discount retailers will continue to pick up market share as consumers stretch their discretionary dollars. Wal-Mart trades only 13 times forward earnings, and they've enjoyed 19 years of both top- and bottom-line revenue and earnings growth even during the financial crisis. Wal-Mart's sales to market-cap ratio is 2:1, and the company has done a very good job of returning cash to investors through large-scale stock repurchases. They've actually purchased over 700 million shares in the last five years, and their 2.6% dividend has been growing at over 10% per year.
At the turn of the last decade, Wal-Mart traded at $70 a share. At that time, the company earned $1.25 per share on sales of $166 billion. Today, the company earns over $4 a share on sales of $421 billion. Earnings should increase about to high single digit to low double digits over the next several years with international sales being the biggest growth driver. International sales are now 26% of the total. Internationally, Wal-Mart is the number two retailer in Brazil. They are still growing in Europe, which we think will continue to expand given the problems over there. They're now number one in South Africa, and they're expanding rapidly in China. In the U.S., which has been a slower growth market, they're now picking up steam again. Groceries now account for 50% of their sales in the U.S. We like this because it creates a reoccurring revenue stream.
Mr. James F. Schnieders: Another area that we've been strongly overweight in is energy. We think energy will continue to be a strong investment going forward. The major integrators continue to be attractively priced and throw off a lot of cash.
Mr. Bill Schnieders: Within that sector, Chevron (CVX) is our largest energy position, and it's the fourth-largest oil company in the world. They just reported third-quarter earnings of $3.92 a share, which was well above Analyst estimates, and that's up significantly from 2010. Earnings estimates for this year are $13.75, and that's based on current oil prices near $100 a barrel. As of the end of last year, proven reserves stood at 6.5 billion barrels of oil and natural gas liquids, and 24.3 trillion cubic feet of gas. With the slowdown expected in Europe and with the flat economy here in the U.S., consensus earnings through 2012 should still be in the range of $13 to $13.75, or maybe a little bit higher depending on the oil prices. Let me comment briefly on Marcellus Shale. This is one of the largest natural gas formations in the world, stretching across 95,000 square miles and several states including New York, Pennsylvania, West Virginia, Ohio and Maryland. Marcellus Shale is estimated to contain over 400 trillion cubic feet of natural gas. Chevron is a major player in the Marcellus with over 700,000 net acres of leases and another 600,000 net acres more than the Utica Shale, which lies right below the Marcellus.
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