OGS - New Jersey Resources: A Bright Future Unveiled Through Stock Valuation And Financial Analysis

2023-05-30 08:24:13 ET

Summary

• New Jersey Resources has a healthy capital structure and leverage condition compared to its peers in the natural gas utilities sector.
• The stock valuation indicates a fair value of approximately $56 per share, making it an attractive investment opportunity.
• Potential risks include reliance on regulatory incentives for solar energy projects and fluctuations in natural gas pricing affecting the Energy Services segment.

Introduction

New Jersey Resources ( NJR ) is a Fortune 1000 holding company that offers secure natural gas and eco-friendly energy services. The company operates in four primary segments, including natural gas distribution, which serves around 1.5 million individuals, clean energy ventures, energy services, and storage and transportation. In the fiscal year of 2022, the natural gas distribution segment contributed over $140 million to the company's net income, accounting for approximately 51% of their total net income of $275 million.

NJR financial results

In Q2 2023 , NJR reported impressive year-over-year results compared to Q2 2022. The CEO attributed this success to the company's consistent and predictable growth, which allowed them to raise their 2023 net financial earning per share (NFEPS) guidance to $2.62-$2.72 per share, an increase of $0.20 per share. NJR also saw significant customer growth in their natural gas services, adding 4064 new customers in the first six months of fiscal 2023, which is expected to generate approximately $3.4 million in incremental utility gross margin annually. As shown in Figure 1, the natural gas segment is projected to drive 48%-53% of NJR's NFEPS in 2023. To mitigate the impact of volatile wholesale natural gas prices on customers, NJR uses financial derivative instruments and optimizes their portfolio of contractually-based natural gas storage and pipeline assets by leveraging differences in natural gas prices between geographic locations through their Energy Services segment.

In the second quarter of 2023, the Energy Services segment saw a decrease in natural gas volatility due to warmer weather conditions. As a result, their net financial earnings were lower compared to the same period in 2022. Additionally, regarding the following year's weather conditions, the EIA predicts that the United States will experience warmer weather during both winter and summer this year, which could potentially impact our profitability.

Figure 1 – NJR’s guidance for 2023

In the second quarter of 2023, NJR reported a net income of $110.2 million, an increase from $96 million in the same period of 2022. Furthermore, the company reduced its debt levels by 7% to $3.1 billion compared to $3.3 billion in Q1 2022. On a positive note, NJR's equity level grew by 12% year over year, reaching approximately $2 billion in Q2 2023 compared to $1.78 billion in Q2 2022. Overall, NJR's capital structure appears healthy and there are no major concerns regarding the company's ability to meet its obligations (see Figure 2).

Figure 2 – NJR’s capital structure (in millions)

To be more accurate, I analyzed NJR’s leverage condition and compared with some of its peers including:

Chesapeake Utilities ( CPK )

New Fortress Energy ( NFE )

NiSource ( NI )

ONE Gas ( OGS )

RGC Resources ( RGCO )

Southwest Gas Holdings ( SWX )

Spire Inc. ( SR )

New Jersey Resources' leverage condition indicates a healthy position across the debt-to-asset and debt-to-equity ratios. Over the last year, their leverage ratios have remained stable and almost unchanged. In 2Q 2023, NJR's debt-to-asset ratio decreased by approximately 2% to 0.496x compared to 0.511x in Q1 2023. Similarly, after a slight increase in the debt-to-equity level during previous quarters, the ratio declined and remained at 1.56x in 2Q 2023, which is consistent with the same period in 2022 (see Figure 3). Furthermore, when compared to its peers, NJR's leverage condition is slightly better with a debt-to-equity ratio lower than the peer group's average of 1.67x. As a result, NJR's balance sheet is in good condition during these uncertain economic times caused by the COVID-19 pandemic and rising interest rates to combat inflation. It is crucial to consider companies with strong financial standings and leverage conditions (see Figure 4).

Figure 3 – NJR’s leverage ratios

Figure 4 – The Peers’ leverage ratios

NJR stock valuation

To conduct a more precise analysis, I employed the Comparable Companies Analysis ((CCA)) valuation method. The CCA approach reveals that NJR stock is appealing when compared to other gas utility companies in its peer group. After comparing NJR with its peers, it is evident that the stock's fair value is around $56. This methodology is based on actual market data and is an appropriate way to evaluate NJR due to its stability. To select comparable peers, I considered natural gas utility firms with comparable size and profitability metrics. The most recent quarterly and TTM data were used to gather information. (see Table 1).

Table 1 – NJR’s financial data vs. peers

After analyzing NJR's valuation ratios and comparing them to its peers, it appears that the company is an attractive investment opportunity. Specifically, NJR's EV/EBIT ratio is 17.49x, which is 3% lower than the peers average of 18.3x. This suggests that the stock price may be undervalued and has room for growth. Additionally, NJR's EV/sales and P/E ratios are 12% and 35% lower than its peers' averages, respectively. While NJR's EV/EBITDA ratio is higher than the peer average at 13.23x compared to 11.4x, I still believe that there is potential for the stock to reach a fair value of around $56. Overall, based on these valuation metrics, I would recommend investing in NJR as it appears to be a promising opportunity with upside potential (see Table 2).

Table 2 - NJR stock valuation

Risks

New Jersey Resources, like other companies in the industry, faces potential risks that could impact its operations and profitability. One such risk is the company's significant investments in solar energy projects, which rely on current regulatory incentives and federal tax credits. If these incentives and laws expire, it could negatively affect the company's performance. Additionally, Energy Services' earnings and cash flows are tied to its ability to optimize its portfolio of natural gas storage and pipelines based on pricing differences. Unfavorable changes in pricing across different locations or time periods could have a negative impact on Energy Services' cash flows. Furthermore, if natural gas supply increases significantly in Energy Services' market areas, the company's ability to benefit from pricing fluctuations may be limited. Additionally, Energy Services is bound by government regulations, which may require the company to obtain permits and certificates at a significant cost to comply with regulatory requirements. Investors should consider the impact of these new regulations as they may affect the rates charged by the company.

Conclusion

In this article, I thoroughly examined the financial structures and leverage condition of New Jersey Resources. Through my analysis, it became evident that the company's capital structure is in a healthy state. Furthermore, when compared to its peers in the natural gas utilities sector, NJR has a well-positioned leverage condition. Based on my findings, I have determined that the stock valuation indicates a fair value of approximately $56 per share. Therefore, I recommend a buy rating for NJR's stock.

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