Why Don´t You Provide Energy to your Portfolio

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Oct 04, 2014

In this article, let's take a look at Xcel Energy Inc. (XEL, Financial), a $15.47 billion market cap company, which is a company that offers energy-related products and services to 3.4 million electricity customers and 1.9 million natural gas customers in eight western and midwestern states.

Business Model

Xcel Energy has an incredible investment plan, and it is true that regulators cooperate with rate increases, principally in Minnesota and Colorado jurisdictions. There, it will concentrate efforts to invest most of its capital budget.

The company plans to continue investing in the core utility business while earning the authorized returns. With a great emphasis on system reliability, it will continue investing in transmission and distribution systems. The investment plan aims to replace and build renewable energy projects, electric transmission, and supporting infrastructure.

Management has done a great job achieving regulated rates that adjust with costs. In order to minimize the delay caused by the filing of rate cases, the firm obtains regulatory approval for rate riders.

When referring to intelligence technology to its electric grid, it plans to create a "smart grid", providing customers with reliability and control on the energy they use.

Attractive Dividend Yield

The firm has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 3.8%, which is quite good to protect the purchasing power, especially considering the consistency of track-record dividends payments; and is ahead of the industry average of 3.25%. Dividends have been paid since 1910.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 4.11% but earnings per share remained flat in the most recent quarter compared to the same quarter a year ago ($0.39 vs $0.40). During the past fiscal year, the company increased its bottom line. It earned $1.91 versus $1.86 in the prior year. This year, Wall Street expects an improvement in earnings ($2.00 versus $1.91).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
XEL Xcel Energy 10.10
CPL CPFL Energy SA 14.40
OGE OGE Energy Corp. 14.11
AEP American Electric Power Co Inc. 10.76
PPL PPL Corp. 6.89
Industry Median 8.41

The company has a current ROE of 10.10% which is higher than the industry median and the one exhibit by PPL Corp. (PPL, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, CPFL Energy (CPL, Financial), OGE Energy (OGE, Financial) could be the options. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.7x, trading at a discount compared to an average of 20.1x for the industry. To use another metric, its price-to-book ratio of 1.54x indicates a premium versus the industry average of 1.52x while the price-to-sales ratio of 1.34x is below the industry average of 1.54x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $19.362, which represents a 14.1% compound annual growth rate (CAGR).

03May20171351041493837464.png

Final Comment

So far, the company achieved regulatory success, and it is crucial to maintain this, in order to gain long-term returns over other utilities. Also, the firm remains committed to maintain a strong balance sheet with a good financial flexibility as well as continuing rewarding shareholders. Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), James Barrow (Trades, Portfolio) and Bill Frels (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned