Northwestern Energy: Doing Better Than The Stock Price Performance Suggests

seekingalpha2024-09-13

NorthWestern Energy Group, Inc., a utility serving rural areas, offers stable, recession-resistant cash flows and a 4.76% yield, appealing amid economic uncertainty.Northwestern Energy Group's stock ...

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Suggests\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-13 02:05 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4720776-northwestern-energy-doing-better-than-the-stock-price-performance-suggests><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>NorthWestern Energy Group, Inc., a utility serving rural areas, offers stable, recession-resistant cash flows and a 4.76% yield, appealing amid economic uncertainty.Northwestern Energy Group's stock ...</p>\n\n<a href=\"https://seekingalpha.com/article/4720776-northwestern-energy-doing-better-than-the-stock-price-performance-suggests\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0943347566.SGD","symbol_name":"安联收益及增长平衡基金AM 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pressure. This company should not be affected much by this.   Sean Anthony Eddy NorthWestern Energy Group, Inc. (NASDAQ:NWE) is a regulated electric and natural gas utility that operates primarily in the U.S. states of Montana, South Dakota, and Nebraska. The company also provides utility services to Yellowstone National Park in Wyoming:   Northwestern Energy These are, almost certainly, not the areas that immediately come to mind for many people when they are thinking about a utility investment. After all, Montana and South Dakota are some of the most rural areas in the country, and even Nebraska has a very low population density due to much of the state consisting of farmland. We can see this reflected in the map above, as Northwestern Energy Group has a very low customer count compared to many of its peers that have a much smaller service territory. However, Northwestern Energy Group does still have many of the characteristics that we tend to like about utility companies such as stable cash flows that are highly recession-resistant. When we consider that some of the weak market performance last week was due to several market participants worrying about the United States falling into a recession (if it is not already in one), then we can quickly see the appeal of a company such as Northwestern Energy. In addition, Northwestern Energy Group currently boasts a 4.76% yield that becomes relatively more attractive as the Federal Reserve starts to cut interest rates. In fact, if the central bank cuts by 100 basis points over the remainder of this year, as the market is currently predicting, then this company’s yield will be substantially above that of a money market fund. Thus, investors who are seeking both safety and income might find a lot to like here. As regular readers might remember, we previously discussed Northwestern Energy Group in late May 2023. The utility sector generally delivered a wild ride from that time, as the sector declined over most of the summer of that year due to investors beginning to expect that interest rates would remain high for a very long time. The market frequently trades utilities similarly to bonds due to their stable cash flows, limited growth, and high yields. The utility sector was the worst-performing market sector in 2023 due to this. However, it has been one of the better sectors year-to-date due to its bond proxy status. As such, we can probably expect that Northwestern Energy Group has delivered a mixed performance since our last discussion. In fact, though, the company’s stock has done more poorly than we would have expected. Shares of Northwestern Energy Group are down 5.36% since our last discussion, which substantially underperformed both the S&P 500 Index (SP500) and the U.S. Utility Index (IDU):   Seeking Alpha We can immediately see that the biggest reason for this underperformance is that the stock declined much more than the utility index in 2023 and did not participate in this year’s rally to the same extent. This might be because the company has a higher dividend yield than the utility index, as the index only yields 2.22% right now. The fact that Northwestern Energy Group boasts a much higher yield suggests that it has somewhat more limited growth prospects than the average utility. After all, if the company is priced to deliver a similar total return as other utilities, then a higher yield means that the market expects lower capital appreciation. Indeed, the company’s market performance since our last discussion was certainly better when we include the dividends in the chart:   Seeking Alpha However, we still see that shareholders of Northwestern Energy Group have been greatly disappointed by the performance of their company since our last discussion in May. This does not necessarily mean that investors will be disappointed by this company going forward. About sixteen months have passed since our last discussion, so it seems obvious that a great many things have changed on both a company level and in the company’s macroeconomic environment. This article will focus on these changes and adjust our thesis as appropriate. About Northwestern Energy Group As stated in the introduction, Northwestern Energy Group is an electric and natural gas utility that serves the U.S. states of Montana, South Dakota, and Nebraska. The company also provides electric service to Yellowstone National Park, which is in Wyoming. This is an interesting part of the country due to its extremely rural nature. As anyone who has driven through some of these states can attest, it is easily possible to travel miles without seeing another vehicle or human being. As such, Northwestern Energy Group has a relatively low customer count for its size. The state of Montana is by far the largest operating location in the company’s portfolio. Northwestern Energy Group owns approximately 25,274 miles (ca. 40,675 km) of electric transmission and distribution lines covering the western two-thirds of the state, yet it only has 405,500 customers in that area. Any utility serving a medium-sized city can boast a similar customer count with a far smaller geographic area. The company’s natural gas utility operation in the state has similar characteristics, as it serves 212,100 customers with 7,390 miles (ca. 11,893 km) of transmission and distribution pipelines. The company’s operations in South Dakota and Nebraska are much smaller. In South Dakota, the company has 64,800 electric and 49,800 natural gas customers. In Nebraska, the company only provides natural utility service, and it has 43,100 customers. Northwestern Energy Group thus has approximately 470,300 electric and 326,700 natural gas customers throughout its service area. This is a reasonable split between the electric and natural gas utility businesses, and it is pretty nice for investors. The fact that Northwestern Energy Group’s operations are split roughly 60-40 in terms of customer count could offer it a few advantages over pure electric or pure natural gas utilities. This is due to the somewhat seasonal nature of utility services. In the summer months, customers typically use more electricity than they do during the winter months due to the use of air conditioning systems to cool their homes and businesses. The opposite is true during the winter months, as natural gas consumption spikes due to customers needing to heat their homes and keep themselves warm. As we all know, utilities bill their customers based on the amount of electricity or natural gas that they use during a given period. Thus, having similarly sized electric and natural gas businesses should remove some of the seasonality that we might otherwise see in the company’s revenue and cash flow. It should, therefore, have a more stable cash flow from quarter to quarter than some other utilities. We do see this in the company’s revenues to a limited extent. Here they are for the past eleven quarters:   Seeking Alpha (All figures in millions of U.S. dollars.) We do note, however, that the company’s revenues appear to be weakest during the second quarter of this year. This is probably due to the Spring weather in Montana. As Weather Atlas describes: Spring in Montana is marked by cold weather. The transition from winter brings gradual warming, but temperatures remain relatively low. Rain is common, and occasional thunderstorms can occur, particularly in early summer. In the mountainous regions, melting snow can lead to wet conditions. While spring sees an increase in daylight and the revival of flora, the weather stays mostly brisk, and visitors should prepare for varying conditions ranging from 40F to 60F. Montana is by far Northwestern Energy Group’s largest market, so it is the most important. As we can see from those conditions, the Spring months in that state are generally going to be too cold to make much use of air conditioning units. Indeed, natural gas heating systems might still be running during the early weeks of the season. However, it is still warmer than in the winter, so most people will probably be using less natural gas for heating than they would in the winter. Thus, it makes sense that the second quarter, which would correspond to the Spring months, will normally be the weakest for this company. The company’s operating cash flow has more seasonal fluctuations than its revenue. Here are the figures for the same periods:   Seeking Alpha (All figures in millions of U.S. dollars.) Here we can see that the first and the third quarters are typically the strongest for the company. That makes a certain amount of sense because these are the quarters in which heating and cooling systems are most heavily utilized. However, there is still less seasonality here than we might expect from a pure-play natural gas utility that sees the usage of its products decline heavily in the summer months. We do see much more cash flow stability when we look at Northwestern Energy Group’s operating cash flow over a given twelve-month period. This chart shows the company’s operating cash flows over the same period as above, but in this case, the figures are for a trailing twelve-month period rather than a trailing three-month period:   Seeking Alpha (All figures in millions of U.S. dollars.) As we can see, the company continues to exhibit very little fluctuation in its cash flows from period to period. We saw this the last time that we looked at this company as well, and I explained the reason for it at that time:  As we can clearly see, the company’s operating cash flows do not typically exhibit huge swings as we might see with companies in other sectors. The biggest reason for this is that Northwestern Energy Group’s products are generally considered to be necessities for our modern way of life. After all, there are not very many people in the United States who do not have electric and natural gas services to their homes and businesses. This is even more true in this company’s service territory, which includes some of the coldest regions of the nation. As such, most people will prioritize paying their utility bills ahead of making discretionary expenses during times when money gets tight.  This description also explains why the company’s business is generally considered to be quite resistant to recessions, especially when compared to things such as tourist-oriented businesses and consumer discretionary companies that are dependent on consumers having money to spend. This recession resistance is something that could be significant today. Recession Fears Last week, the S&P 500 Index dropped 2.18% due at least partly to fears that the United States might be about to enter into a recession:   Seeking Alpha September is historically the worst month for the S&P 500 Index, and this week has seen a somewhat better performance, so some people might be willing to simply dismiss this as a blip. However, it is worth noting that for a while, the market was expecting the Federal Reserve to cut interest rates by 50 basis points later this month. The market is also expecting 100 basis points of cuts by the end of this year. There is no justification for that unless the economy really does plunge into a recession, so the market seems to at least be predicting one in the very near future. Last month, additional recession fears were triggered by the release of the July jobs report. From an article on MarketWatch: So, first, the data: with the unemployment rate reaching 4.3% in July, the three-month moving average of the unemployment rate is at least 0.5 percentage points above the minimum of the three-month averages from the previous twelve months. The Sahm rule states that reaching the 0.5% level means there’s a recession. The Sahm rule is historically a pretty reliable recession indicator, which is why it is watched by many on Wall Street. However, it is worth noting that the job reports have been very intriguing over the past few years and some commentators have questioned their accuracy. After all, last month the Bureau of Labor Statistics stated that it overstated the number of job creations over the last year by 818,000. That revision essentially meant that, on average, the number of job creations was overstated by 68,000 every single month from March 2023 to March 2024. In addition, most market watchers by this point understand nearly every job report released over the past two years has been revised down the following month. Thus, the economy might never have been as strong as was assumed. The jobs number is most important for our purposes today, as it directly impacts the ability of Northwestern Energy Group’s customers to cover their expenses. After all, people who do not have jobs have difficulty maintaining the spending patterns that they may have enjoyed during periods of employment. If the employment situation is weakening, this would pressure consumer-facing businesses, such as any luxury retailer or other company that is selling products that are not strictly necessary for daily life. Those companies could see weakening revenues during a weak employment environment as consumers cut back on spending so that they can ensure that they can afford the necessities of life. Northwestern Energy Group’s products are generally considered by most people to be necessities of life, however. It is unlikely that people will allow themselves to freeze in a Montana winter just so that they can save money for a vacation, after all. As such, the company should not be affected very much by any possible economic weakness. This could improve the company’s appeal right now for anyone who is seeking a safe haven. Growth Prospects In my previous article on Northwestern Energy Group, I showed that Northwestern Energy Group is benefiting from favorable demographic trends. In particular, the company could benefit from a growing population in Montana. From the previous article: Fortunately for Northwestern Energy Group, Montana is one of the most rapidly growing states in the nation. According to the U.S. Census Bureau, Montana’s population is growing at a 1.5% annual rate, which is sixth in the nation. This is being driven by people trying to leave crowded and expensive states such as California. Montana’s neighbor Idaho has also benefited from this trend, although Northwestern Energy Group does not serve that state. In the case of Montana though, we can see that the company’s service territory includes most of the state, including the major cities. We can actually see the population growth reflected in Northwestern Energy Group’s customer figures. As we can see here, the company’s most recent customer counts all come in larger than what it had previously:   State/Utility Business Current Customer Base Previous Customer Base   Montana – Electric 405,500 398,200   Montana – Natural Gas 212,100 209,100   South Dakota – Electric 64,800 64,700   South Dakota – Natural Gas 49,800 49,200   Nebraska – Natural Gas 43,100 43,000   Click to enlarge As we can clearly see, all the company’s businesses currently have more customers than they did a year ago. This is particularly notable in Montana, which saw much stronger growth than the other businesses. That is about what we expected based on the population growth rates in the states. According to the U.S. Census Bureau, these rates are currently:   State Population Growth Rate   Montana 0.88%   South Dakota 1.03%   Nebraska 0.52%   Click to enlarge Interestingly, this time, it is South Dakota that is experiencing somewhat higher population growth. Unfortunately, Northwestern Energy Group’s service territory does not cover the entire state of South Dakota, so it might not be able to take advantage of this situation as well as it can in Montana. We still see that the company’s customer base in all areas is increasing, though, so it should be able to enjoy some small benefits. This could be one factor (in addition to the company’s rate base growth) that is behind the operating cash flow growth that the company has experienced in recent quarters. As we saw earlier, Northwestern Energy Group had an operating cash flow of $419.1 million for the twelve-month period that ended on June 30, 2024. The company’s operating cash flow for the twelve-month period that ended on June 30, 2023, was only $368.4 million. It was consistently under $400 million during any given twelve-month period before that. Thus, the company is experiencing cash flow growth, and it appears that it continues to have a tailwind in terms of demographics. In addition to population growth in its service territory, Northwestern Energy Growth is likely to deliver growth through rate base increases. I explained how this works in my previous article on this company: The rate base is the value of the company’s assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase to the rate base allows the company to increase the price that it charges its customers in order to earn that specified rate of return. The usual way in which a company grows its rate base is by investing money into upgrading, modernizing, or even expanding its utility-grade infrastructure. In the previous article, we saw that Northwestern Energy Group was planning to invest approximately $2.4 billion into its infrastructure over the 2023 to 2027 period. The company has increased that number to $2.5 billion for the 2024 to 2028 period:   Northwestern Energy The expectation is that this larger plan allows the company to grow its rate base and earnings per share at a 4% to 6% compound annual growth rate through 2028. When we combine this with the company’s current 4.76% dividend yield, investors are likely looking at a 9% to 11% total return. That is a very reasonable total return that is in line with the company’s peers. However, it is worth noting that the stock price might not actually match this projection. The company’s net income over the trailing twelve-month period was $209.2 million, which represents an 19% increase over the $175.8 million that the company had during the twelve-month period that ended on June 30, 2023. The company has consistently grown its trailing twelve-month net income over the past year:   Seeking Alpha (All figures in millions of U.S. dollars.) The company’s diluted earnings per share have also increased from $2.99 in the twelve-month period ending on June 30, 2023, to $3.42 for the twelve-month period that ended on June 30, 2024. That is a 14.38% increase over the same period. The company’s share price has certainly not delivered a total return that is anywhere close to that level over the same period. Thus, earnings growth does not necessarily correspond to share price appreciation. However, in the long term, the company’s share price should increase as its growth story continues to play out. Valuation According to Zacks Investment Research, Northwestern Energy Group currently has a forward price-to-earnings ratio of 15.48. Here is how that compares to the company’s peers:   Company Name Forward P/E Ratio   Northwestern Energy Group 15.48   DTE Energy (DTE) 18.57   Eversource Energy (ES) 14.87   Exelon Corporation (EXC) 16.08   CMS Energy (CMS) 20.82   FirstEnergy Corp. (FE) 16.35   Click to enlarge As we can see, Northwestern Energy Group appears to be slightly undervalued relative to its peers. This is something that should be at least somewhat attractive to potential investors today. Conclusion  In conclusion, Northwestern Energy Group is a somewhat under-followed electric and natural gas utility serving one of the most rural areas in the United States. The company’s infrastructure covers a considerable geographic area, but it has fewer customers than many smaller companies serving more dense regions. The company still possesses many of the characteristics that we like to see with a utility, though, including relatively stable cash flows and growth potential. Indeed, NorthWestern Energy Group, Inc. has delivered fairly strong earnings growth over the past year despite its disappointing stock price performance. 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