In this article, let's take a look at Dominion Resources, Inc. (D, Financial), a $42.03 billion market cap company, which is one of the largest producers and transporters of energy in the U.S., Further, it operates the largest natural gas storage system and serves retail energy customers in 15 states.
Virginia´s Threat
Utility regulation in Virginia is a primary risk for Dominion, because it has reached its goal for domestic energy production. As a matter of fact, regulators have cut incentives on new investments.
Further, low power prices remain a threat in this business. A recovery in power prices are expected in order to increase the annual growth rate. So far, we see few near-term opportunities for increasing its EPS growth rate. The firm focuses on the Northeast, Mid-Atlantic and Midwest regions of the U.S. searching to grow EPS at rates above 6% annually.
Moreover, we see as positive it´s risk management unit, in order to reduce volatility the company entered into commodity derivatives in a clear way to hedge against commodity price risks.
Revenues
Looking at profitability, revenues declined by 11.14% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.02 vs $0.90). During the past fiscal year, the company increased its bottom line. It earned $3.09 versus $2.49 in the previous year. This year, Wall Street expects an improvement in earnings ($3.45 versus $3.09).
Margins
The gross profit margin is considered rather high, at 43.21%. It has increased from the same quarter the previous year. The net margin is 11.82% which is ranked higher than 86% of the 934 Companies in the Utilities - Diversified industry.
Return on Equity
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 (%) |
| D | Dominion Resources | 12.98 |
| PEG | Public Service Enterprise Group Inc | 10.58 |
| SRE | Sempra Energy | 10.34 |
| NI | NiSource Inc | 8.9 |
| WEC | Wisconsin Energy Corp | 14.10 |
| Industry Median | 8.72 |
The company has a current ROE of 12.98% which is higher than the industry median and the ones exhibit by Public Service Enterprise Group (PEG, Financial), Sempra Energy (SRE, Financial) and NiSource Inc (NI, 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, Wisconsin Energy Corp (WEC, Financial) is closer to that level. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Return on Capital
Joel Greenblatt (Trades, Portfolio) defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital. The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash). Dominion's 3-Year average Growth Rate of Return on Capital (Joel Greenblatt (Trades, Portfolio)) was -9.20% per year. Let´s see the trend in ROC over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 28.1x, trading at a premium compared to an average of 20.5x for the industry. To use another metric, its price-to-book ratio of 3.63x indicates a premium versus the industry average of 1.61x while the price-to-sales ratio of 3.31x is below the industry average of 1.60x.
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 $23.332, which represents a 18.5% compound annual growth rate (CAGR).
Final Comment
Despite weak results, the stock is trading at a higher level. It is a fact that low natural gas prices make pressure to earnings. So in this opportunity I feel bearish on this stock.
Pioneer Investments (Trades, Portfolio) sold out the stock, while hedge fund gurus like Mario Gabelli (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) reduced their positions, as well as Dodge & Cox. On the other hand, Jim Simons (Trades, Portfolio) added this stock to his portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
