D - Dominion Energy: Solid Q1 Results With A Cautious Guide Buy On Valuation

2023-05-05 12:12:30 ET

Summary

• The Utilities sector trades with an expensive earnings multiple in the high teens.
• Dominion Energy reported strong first-quarter numbers but issued a weak Q2 guidance range.
• With the stock trading at 15 times earnings and a nearly 5% yield, I see the stock as a buy. The technicals are also modestly supportive.

Much ink has been spilled regarding the market's P/E ratio. On a forward basis, many stocks trade north of 20x earnings. Within Utilities, you'll find similarly lofty valuations.

Dominion Energy ( D ), however, trades at a discount, and solid Q1 results this morning are encouraging. The dark spot, helping to send the stock lower today, was a weak outlook. Still, I have a buy rating on the stock considering the depressed price versus fair value.

Utilities Valuation Elevated, But D Cheap

Dominion Energy is a predominately regulated utility holding company with 7Mn+ customers across 16 states. Core operations are in Virginia, South Carolina, North Carolina, Utah, Wyoming, and Ohio. 10-15% of operating earnings are from the "contracted assets" which include the unregulated Millstone nuclear plant, Cove Point LNG export facility, and other renewable assets.

The Virginia-based $47.3 billion market cap Multi-Utilities industry company within the Utilities sector trades at a high 52.7 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.7% dividend yield, according to The Wall Street Journal.

D trades 1% lower today within a strong stock market tape. The culprit is likely that the firm initiated Q2 operating earnings guidance of $0.58 to $0.68 compared to the consensus estimate of $0.79.

A Strong Q1, Soft Q2 Outlook

But with the stock sporting a mid-teens forward P/E and having a high yield, I see the stock as a value buy today. The firm has ongoing offshore wind projects that are on target and on budget, per Dominion, that could help stem declining earnings in the coming quarters. Still, regulatory issues continue to plague the firm and will pressure EPS growth through next year. An upside catalyst could come if the firm divests its natural gas pipeline - that move could lead to less reliance on costly debt.

On valuation , analysts at BofA see earnings falling nearly 3% this year before a steeper profit drop in 2024. The Bloomberg consensus forecast is near what BofA projects. Dividends, meanwhile, are seen as rising over the coming quarters. Following transactions in recent years, both the stock's operating and GAAP earnings multiples are back to attractive levels using 2023 estimates, though D's EV/EBITDA ratio is at a slight premium to the broad market.

Dominion: Earnings, Valuation, Dividend Forecasts

Many Utilities-sector stocks feature negative free cash flow due to high capex, so I'm not worried about that. Shares now trade with a forward non-GAAP P/E of 14.5 - that's a 22% discount to its 5-year average while the dividend yield is more than 4% above the long-term average. If we assume $3.70 of per-share profits with an 18 multiple, then I value the stock at $67; $11 above the current price. Thus, I am a buy on valuation.

D: Attractive P/E and Dividend Yield Metrics

Looking ahead, corporate event data provided by Wall Street Horizon show an upcoming shareholder meeting on Wednesday, May 10. Beyond that, D is projected to report Q2 earnings on Monday, August 7.

Corporate Event Risk Calendar

The Options Angle

According to Option Research & Technology Services (ORATS), the implied move on Dominion shares was 4.2% up or down, so today's less than 1% change suggests the report is uneventful. But the big revenue beat and small EPS beat should make investors feel good about future prospects, despite the lackluster Q2 outlook. It was the fifth consecutive bottom-line beat.

D: Lower YoY Earnings, But a String of Beats Continues

The Technical Take

I was bearish on Dominion during the middle of last year, but as so much negativity has gotten priced into the utility, I see it as a value now. Does the chart agree with that value-based outlook? Well, notice in the chart below that shares are near trendline support that dates back to early 2015. There's resistance, however, in the $67 to $71 range.

That is also where the falling 50-week moving average comes into play. What's more, the 200-week moving average is also negatively sloped. Finally, there is a massive amount of shares traded in the $67 to $78 zone - so any penetration to the high $60s should be met with longs looking to unload at breakeven. Still, buying here with a trailing stop could work, targeting the mid-$60s technically. That would generally align with my valuation, too.

D: Downtrend Support in Play, Upper $60s Resistance

The Bottom Line

I have a buy rating on Dominion following this morning's earnings beat. While the soft outlook is concerning, I see the bad news as overly discounted into the stock price. The chart also suggests a bounce may be in the cards.

For further details see: