FAST Graphs At-A-Glance

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Five Conservative Utilities From The Wild And Wooly West

FAST Graphs - Thursday, May 17, 2012

In today’s low interest rate environment, utility stocks offer investors a reasonable alternative to bonds.  Utility stocks tend to be low growth, but stable equities that attract investors primarily looking for above-average dividend income.  However, like all low growth vehicles, it is especially important to focus on valuation when looking at utilities as an investment option.  Of the five western utility stocks covered in this article, only Hawaiian Electric (HE) appears to be valued at the high end of its historical valuation, but not excessively.  Sempra Energy (SRE) is an example of a high historical valuation, but compensates potential investors based on expectations by offering faster growth than the other four.   The remaining three look attractive based on earnings expectations. 

Five Reasonably Valued Western Utility Stocks

The following table summarizes five western utility companies that appear to be reasonably valued, and lists them in order of dividend yield highest to lowest. From left to right, the table shows the company’s stock symbol and name. Next, two valuation metrics are listed side-by-side, the current PE ratio followed by the historical normal PE ratio for perspective. Then the five-year estimated earnings per share growth is shown next to each company’s historical EPS growth providing a perspective of the past versus the future growth potential of each company.  Next the estimated annual total return.  The final three columns show the current dividend yield, the company sector and its market cap.

A Closer Look at the Past and the Future Potential

Since a picture is worth 1,000 words, we’ll take a closer look at the past performance and future potential of each of our five candidates through the lens of F.A.S.T. Graphs™.

Earnings Determine Market Price: The following earnings and price correlated historical graphs clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings. The historical normal PE ratio line (dark blue line with*) depicts a PE ratio that the market has historically applied.

The orange True Worth™ line and the blue normal PE ratio line provide perspectives on valuation.  The orange line reflects the fair value of each company’s earnings relative to its growth rate achievement, and the blue line reflects how the market has traditionally valued the company’s stock relative to its fair value. The blue line represents a trimmed historical normal PE ratio (the highest and lowest PEs are trimmed).  These lines should be viewed as barometers or aids for ascertaining sound buy, sell or hold decisions. Rather than seen as absolutes, they should be seen as guides to better thinking.

About Hawaiian Electric Industries, Inc (HE):  Directly from their website

“For more than 100 years, Hawaiian Electric Company has provided the energy that has fueled the islands' development from a Hawaiian kingdom to a modern state. Hawaiian Electric Company, Inc. (HECO), and its subsidiaries, Maui Electric Company, Ltd. (MECO), and Hawaii Electric Light Company, Inc. (HELCO), serves 95% of the state’s 1.2 million residents on the islands of O`ahu, Maui, Hawai`i Island, Lana`i and Moloka`i.The energy we use is an essential but limited resource necessary to maintaining our quality of life. In a changing world, Hawaiian Electric has evolved to offer more than electricity.Today, the company also provides energy solutions to help customers save money and use energy more efficiently. Hawaiian Electric also continues to pursue the use of more renewable energy alternatives to help ensure a sustainable future for our islands.”

 

The consensus of 6 leading analysts reporting to Capital IQ forecast Hawaiian Electric Industries, Inc’s long-term earnings growth at 6%.  Hawaiian Electric Industries, Inc has medium long-term debt at 50% of capital. Hawaiian Electric Industries, Inc is currently trading at a P/E of 17.7, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Hawaiian Electric Industries, Inc’s True Worth™ valuation would be $33.14 at the end of 2017, which would be a 8.3% annual rate of return from the current price.

 

About Avista Corp (AVA):  Directly from their website

“Avista Utilities is involved in the production, transmission and distribution of energy. We provide energy services and electricity to 360,000 customers and natural gas to 321,000 customers in a service territory that covers 30,000 square miles in eastern Washington, northern Idaho and parts of southern and eastern Oregon, with a population of 1.5 million.”  

The consensus of 5 leading analysts reporting to Capital IQ forecast Avista Corp’s long-term earnings growth at 5%.  Avista Corp has medium long-term debt at 50% of capital. Avista Corp is currently trading at a P/E of 14.8, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Avista Corp’s True Worth™ valuation would be $33.73 at the end of 2017, which would be a 8.9% annual rate of return from the current price.

 

About Pinnacle West Capital Corp (PNW):  Directly from their website

“Pinnacle West Capital, an energy holding company based in Phoenix, has consolidated assets of about $13.2 billion, more than 6,300 megawatts of generating capacity and about 6,700 employees in Arizona and New Mexico. Through its principal subsidiary, Arizona Public Service, the Company provides retail electricity service to more than 1.1 million Arizona homes and businesses.”

 

The consensus of 16 leading analysts reporting to Capital IQ forecast Pinnacle West Capital Corp’s long-term earnings growth at 5.2%.  Pinnacle West Capital Corp has medium long-term debt at 43% of capital. Pinnacle West Capital Corp is currently trading at a P/E of 15.4, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Pinnacle West Capital Corp’s True Worth™ valuation would be $65.07 at the end of 2017, which would be a 9.2% annual rate of return from the current price.

 

About PG&E Corp (PCG):  Directly from their website

“Pacific Gas and Electric Company, a subsidiary of PG&E Corporation(NYSE:PCG), is one of the largest combined natural gas and electric utilities in the United States. Based in San Francisco, with 20,000 employees, the company delivers some of the nation's cleanest energy to 15 million people in Northern and Central California.”

 

The consensus of 17 leading analysts reporting to Capital IQ forecast PG&E Corp’s long-term earnings growth at 3%.  PG&E Corp has medium long-term debt at 49% of capital. PG&E Corp is currently trading at a P/E of 12.8, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, PG&E Corp’s True Worth™ valuation would be $52.84 at the end of 2017, which would be a 7.1% annual rate of return from the current price.

 

About Sempra Energy (SRE):  Directly from their website

“With 17,500 employees, the Sempra Energy companies develop energy infrastructure, operate utilities, and provide related products and services to more than 31 million consumers worldwide.

Sempra Energy’s California utilities, San Diego Gas & Electric Co. and Southern California Gas Co., serve more than 20 million consumers. And its other businesses – Sempra U.S. Gas & Power and Sempra International – develop and operate critical energy infrastructure and provide gas and electricity services in North America and South America.”

 

 

The consensus of 9 leading analysts reporting to Capital IQ forecast Sempra Energy’s long-term earnings growth at 7%.  Sempra Energy has medium long-term debt at 49% of capital. Sempra Energy is currently trading at a P/E of 14.6, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Sempra Energy’s True Worth™ valuation would be $84.55 at the end of 2017, which would be a 8.6% annual rate of return from the current price.

 

Summary and Conclusions

Utility stocks have historically been known as conservative investments with above-average dividend yields.  Therefore, investors seeking income from equities within a reasonable level of risk may find opportunities within the utility sector.  Each of the five companies highlighted in this article offer yields that are greater than can be had from a 30-year Treasury bond.  However, the reader should note that the dividend records from utility stocks can be somewhat spotty and therefore, moderately unpredictable.  Consequently investors seeking a growing dividend income stream may want to look elsewhere in spite of the above-average yield these companies offer.  As always, we recommend you do your own due diligence.

Disclosure:  No positions at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

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“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


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    Testimonials


    “I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


    “When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

    (Wish I could be) Long FAST Graphs!!!”


    “One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


    “I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


    “Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


    “Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


    “About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    "Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


    “If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


    “I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


    "Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


    "Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


    “Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


    “I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


    “I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


    “I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


    “Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


    “Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


    “Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


    ”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


    “Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


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