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I Feel Bullish on the Third Largest U.S. Gas Distribution Utility and the Fourth Largest Gas Pipeline Company
Posted by: Victor Selva (IP Logged)
Date: April 16, 2014 05:11PM
NiSource Inc. (NI) is an energy holding company that engages in three business segments: Gas Distribution Operations (39% of 2013 segment operating income), Gas Transmission and Storage Operations (39%) and Electric Operations (23%). At Dec. 31, 2012, the company served more than 3.3 million natural gas customers and approximately 458,000 electric customers.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
NiSource's natural gas distribution subsidiaries are regulated in various jurisdictions, focusing on core, rate-regulated asset-based businesses with almost all of its operating income being generated by rate-regulated businesses, which we believe will continue to see mid-single digit earnings growth. Furthermore, the company plans to invest $10 billion infrastructure replacement and enhancement programs, complemented by a variety of customer programs and regulatory initiatives.
A 7-Year Plan
With the aim to upgrade and expand its core natural gas systems, the Indiana gas and electric utility, Northern Indiana Public Service Company (NIPSCO) projects an investment of approximately $700 million to be in service by the end of 2018.
Other unit of NiSource, Columbia Pipeline Group (CPG) will invest approximately $60 million at a Natural Gas Liquids pipeline project. The line will connect the Hickory Bend Cryogenic Processing Plant in New Middletown, Ohio, to the UEO Kensington facility near Kensington, Columbiana County and will have the capacity to initially deliver approximately 90,000 barrels a day. Moreover, NiSource is on track at its new Hancock Compressor station to help move natural gas and plans to complete the project by April 2014. Finally, the approximately $250 million flue gas desulfurization (FGD) project has begun at the company's Michigan City Generating Station. This is in addition to the company's more than $500 million FGD project at its Schahfer generating station, which remains on budget.
Dividend & Share Repurchases
Looking at the financials, the company has a strong balance sheet: good cash that allowed the company to pay $0.23 billion as dividend in the first nine months of 2013. The firm plans to increase its dividends at a 3% to 5% growth, as well as retain its dividend yield of 2.9%.
The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” A Buy rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 19.04%, which we think is very attractive. For investors looking for a Zacks Rank# 1–Strong Buy, Avista Corp. (AVA), NRG Energy Inc. (NRG), NRG Yield Inc. (NYLD) and Public Service Enterprise Group Inc. (PEG) could be the better options.
Relative Valuation, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 20.9x, trading at a premium compared to the industry mean. Earnings per share (EPS) has increased by 16.7% in the most recent quarter compared to the same quarter a year ago, $0.49 per share for the fourth quarter. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance as well as EPS had an upward trend over the last five years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.
Let´s compare the current ratio with the peer group in the next table:
The company has a ratio of 9.04% which is higher than the ones registered by Avista Corp., NRG Energy, NRG Yield, Ameren Corporation (AEE), Atlantic Power Corporation (AT) and Brookfield Infrastructure Partners LP (BIP). For investors looking for a higher ROE, Public Service Enterprise Group (PEG), American Electric Power Co. Inc. (AEP) and Energy Company of Minas Gerais (CIG) are good options.
NiSource aims to achieve more consistent earnings growth by improving its investments opportunities, trying to reach progress on modernization and value-added. Additionally, the company has a good plan of raising dividends. For these reasons, I feel bullish on this stock.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Stocks Discussed: NI, AVA, NRG, NYLD, PEG, AEP, AEE, AT, BIP, CIG,