Q4 Earnings Update Part IV: $NFE, $VET, $VET.TO, $PBI, $GT, $AAP

Jury duty is over, and words cannot express how frustrating it is to have my mobile phone locked away from 9am to 5pm to be in a courtroom while small cap stocks are melting down. This experience taught me that I use just a bit too much leverage.

The trial was basic, but at the same time wild. It was a bit like the trial of Al Capone for tax evasion. Only after the trial when we were no longer prevented from researching things on our own, I learned the defendant was a bit of a local gang celebrity. And even though the facts of the case were about as plain as they could be, the first round of voting was six to four with two undecided. Every once in a while I get a glimpse that civilization hangs on by a thread.

These past few weeks in the market, the unforgiving earnings season, the tariff whiplash, and huge moves day to day (or even intraday), has been nicknamed a Kangaroo Market. Memes abound:

But being fundamentally in an economic expansion, it would not be typical to see a 20% drawdown without some sort of financial crisis. And the credit spreads are still tight. There is almost no worry in the marketplace of junk bond defaults. This leads me to suspect that the worst of the selloff should be behind us. The Russell 2000 is down 17% from the peak, the RSI is oversold, and it is at about as strong of a resistance level as can be found, the 2021 support which became 2024 resistance, and is now hopefully 2025 support.

Whenever the market does decide to flip back into bullish momentum, it will have the benefit of a falling 10-year treasury rate, which is setting 2025 up for a very strong rest of the year, even if the first quarter feels a bit like the enhanced interrogation techniques from Guantanamo Bay.

New Fortress Energy (NFE):

New Fortress Energy posted $331 million of EBITDA for the quarter, bolstered by selling extra cargoes to Europe. They have expanded their offshore FLNG1 to beyond the nameplate capacity in order to increase volumes. While FLNG1 had some technical difficulties leading to a delayed inception, it is operating smoothly now. The election of Puerto Rico’s first Republican Governor ever has given NFE an enormous opportunity. While NFE currently has an 80Tbtu contract through March of 2026, of which about 50Tbtu are utilized, NFE sees an opportunity to expand the Puerto Rico market to 350Tbtu over time, mostly through power plant conversions, and hopefully to extend the length of the contracts. Puerto Rico has already taken the first steps toward creating a competitive submission process for a 10 or 15 year natural gas supply contract, but it is not obvious to what extent NFE’s infrastructure will allow them to protect margins while winning the contract.

NFE announced a restructuring of incentive payments to their subsidiary Genera, the nature of these payments were politically unpopular, and NFE walked away from about $1 billion over the next ten years. It isn’t entirely clear what NFE will receive in exchange for willingly altering their contract with Puerto Rico, but a 1 year extension of their power supply agreement was already announced. I believe abandoning incentive payments was done for more than just a 1 year extension, I believe between 1 and 4 power plant conversion contracts will be announced very shortly. The new governor is moving quickly to lower electricity costs for the island, and NFE did secure a 20 year contract to supply a Puerto Rican power plant under construction, it will go from 2028 to 2048, and deliver about $100 million of EBITDA a year during that time. Power plant conversions could come online much more quickly, and are likely to have a long term contract attached to them.

Management is guiding toward 2025 EBITDA of $1 billion, but true to form, NFE doesn’t give enough details to shareholders to piece together the path. In September of 2024, management guided for an additional $225 million EBITDA from Brazil and $175 million EBITDA from Nicaragua for 2025. This led to prior 2025 EBITDA projections of $1.3 billion. Since NFE plans asset sales to raise $2 billion during 2025 to retire debt, I believe the new $1 billion guidance for 2025 includes the consequences of asset sales. Management indicated that the Jamaica business is the first to be sold, as it is a mature business, the island nation has already switched over to natural gas, and the only growth opportunities are from the organic increase in electricity demand. How much is $125 million of annual EBITDA locked in for 20 years to a utility company? At an 11% discount rate, over $1.2 billion, at an 8% discount rate, over $1.7 billion. It’s possible that Jamaica will be the majority of the asset sales.

Taking away $2 billion of debt and looking at past Enterprise Value / EBITDA multiples, 2025 targets would give about a 9.0x, and the stock previously traded between 14x and 15x. A return to 15x EV / EBITDA, a $2 billion reduction in debt, and $1 billion of EBITDA would give an implied market cap of over $8 billion and a share price of around $30 as a near term price target due to deleveraging.

With falling interest rates, NFE is still interested in refinancing at least some of their high interest rate debt. The original plan was to use FLNG1 as collateral for an asset based loan. Management has the cash flow from their FEMA claim in the 2025 liquidity forecast, but not in the 2025 EBITDA. This would be over $500 million before taxes, and NFE estimates $425 million after taxes.

NFE has excess liquefaction capacity as FLNG1 is producing above nameplate capacity, and the import terminals are still under construction in Brazil. In the meanwhile, while Dutch TTF prices are high, NFE locked in some future profits with derivatives contracts. This is an excellent decision, and I wholeheartedly support it. NFE does not need exposure to natural gas price upside, their business model is to lock in 20 year contracts which are fixed at both ends, and using derivatives to lock in an extra few hundred million dollars to assist with deleveraging is a breath of fresh air.

The market is negative on NFE, and I don’t have a crystal ball to know when sentiment will shift. Management is now guiding for EBITDA to grow by 50% over the next two years, which would put a 2026 15.0x EV / EBITA price target of $58.54. And that would be without power plant conversion contracts in Puerto Rico which could come online at the drop of a hat.

Vermilion Energy (VET, VET.TO):

Vermilion CEO Dion Hatcher can’t stop, won’t stop drilling. Once again, growth capex has managed to push GAAP net income into the negatives. An astonishing accomplishment given the 1.2 billion CAD fund flows from operations for the $1.153 billion USD market capitalization company.

But that growth capex has resulted in an enormous natural gas discovery in Germany, a country which is sorely in need of hydrocarbons, and who just booted the Greens from the governing coalition. I wrote in my original summary of VET that drilling in Europe might become the contrarian energy story of the decade. The 68 billion cubic feet of natural gas that has just been proven in Germany has a current market value of over $1 billion.

After the recent Westbrick acquisition, management is already discussing how to pay down the debt quickly rather than returning the capital to shareholders. VET is looking to sell their Wyoming and Saskatchewan production. I don’t like VET divesting of their most liquids-rich assets to fund a gas-rich acquisition, but I am personally biased toward oil over natural gas. Also, the scattered nature of VET’s assets made them an unlikely takeover target, but with synergies from Westbrick, plus divesting of smaller assets to pay down debt, suddenly VET could be a viable acquisition target. I would hate to see VET acquired for $15, when I know their share price could easily rally to $40 with a bit of momentum.

The share buyback program has been slow to be rolled out, and while I don’t predict an increase, it is possible that management accelerates it. They describe the Westbrick acquisition as opportunistic, which is very possible as their acreage is contiguous and they had been working together. Will Vermilion find another “opportunistic” acquisition, or will they start returning more capital to shareholders? Management’s past actions aren’t a great indication, but there is a chance.

Pitney Bowes (PBI):

Unlike most stocks this February, PBI rallied on earnings. PBI announced earnings on February 11th, I still have a small position, although my primary logistics exposure is through Heartland Express (HTLD). PBI has this overhang of risk that their business is integrated with the post office, and we don’t know what Trump, Musk, et al. have in store for the USPS. Still, Hestia Capital’s activist crusade is bearing fruit at PBI. Management is guiding towards almost $500 million of EBITDA for 2025, double the 2024 figure.

There were a lot of one off expenses in 2024 from exiting the Global Ecommerce business. That resulted in $86 million of restructuring charges. Looking through that one off expense, free cash flow for 2024 would have been $290 million. Not too shabby for a $1.5 billion market cap company, although after earnings the price has jumped to $1.8 billion market cap. The board authorized a $150 million share repurchase program.

PBI remains an interesting little business controlled by an activist with aligned incentives and a good track record in the logistics sector which should be experiencing secular tailwinds soon. But the uncertainty surrounding deregulation and potential privatization of the post office hangs over PBI limiting the appropriate position size. A privatization of the USPS might actually benefit PBI, depending on how it would unfold, the devil is always in the details, and for now we have no details.

Goodyear Tire & Rubber (GT):

Of all the midcap stocks I follow, I like GT’s management and turnaround strategy the least, but they are also the most likely to benefit from secular tailwinds. GT’s stock rallied on earnings from $8.20 to $10.50 despite the unforgiving environment, although it has given back about half of the rally this past week and landed around $9.45.

Efficiency is GT’s major problem, in Q4 of 2024, they had almost $5 billion of revenue, not quite $500 million of EBITDA, and $72 million of GAAP net income. It would have been very underwhelming except for a receivables catchup and working capital release that led free cash flow for the quarter to be over $1 billion, which was immediately applied to long term debt. Looking farther back in time, most of this seems to be a part of GT’s seasonality, and is not an indication that management is really executing well on their turnaround strategy.

Management is still guiding toward most of their turnaround strategy efficiency gains to hit this year in 2025. And I am still underwhelmed by management, but they appear to not be running the business into the ground. It feels like the stock has been bouncing along the bottom of a channel for a long time, and GT has weekly options. So I have been using this to sell a few weekly puts on here and there for income. The yield isn’t great, but the situation seems stable and slowly improving.

Advance Auto Parts (AAP):

Advance Auto Parts is a company where I do like management and their turnaround strategy. The market doesn’t like this earnings announcement, the price fell from $46 to $37. Ouch!

It isn’t unusual for a new management team to “kitchen sink” a quarter. That is, they rip off the bandage, and take every action that will negatively affect metrics all at once. While AAP had announced over 500 store closures to take place across most of 2025, they executed them almost entirely within one quarter. This includes cash payments to buy out existing leases, and dramatic markdowns to liquidate inventory.

That is a lot of stores to close all at once, and this should dramatically improve margins in a quarter or two. Cutting off a huge number of barely profitable or even loss-making locations should improve profitability. Still I wonder if they couldn’t have gone to a franchise fair and used seller financing to pass those locations on to entrepreneurs instead? It’s amazing what a local businessman can do with their hustle and some Facebook events. Moving fast and breaking things is not usually a sign of good management, but without internal data, I have no idea how bad those locations really were.

I have to admit, the sight of a GAAP $820 million net loss for the quarter is a bit disconcerting. But maybe more importantly, the drastic changes from the quarter make predicting future quarters all the more difficult. My original understanding was that AAP had a primarily logistics efficiency problem, and by hiring the CEO of Home Depot Logistics, the problem would be solved over time. Now it appears that the prior management team really ran the business into the ground with empire building, making poor acquisitions, refusing to close loss-making locations, and not taking the time to actually focus on the operations of the business while their competitors modernized.

I think the big takeaway is that I had anticipated a slow but steady turnaround story. Instead I got a very fast one, but with increased uncertainty as to how the company will look when all is said and done. It is very hard to predict what AAP will look like, but I believe the original analysis is correct, auto parts have no moat, and customers are not likely to shift to online ordering as DIY auto repair typically needs the part immediately. The country is plenty big enough for an efficient AAP, and they are on the fast track to efficiency.