NJR - New Jersey Resources: Distribution Growth Creating Margin Expansion

2023-05-29 05:48:12 ET

Summary

• NJRC pays out a solid dividend, rewarding shareholders with consistent income while having ample FCF to expand.
• The company has outperformed the S&P 500 in the last 10 years when adjusting for dividends.
• NJRC's distribution expansion along with technological upgrades has reduced expenses and thus improved margins.
• Assuming my DCF figures, NJRC is currently overvalued, resulting in a hold rating.

New Jersey Resources Corporation (NJR) has demonstrated strong and consistent growth over the years. I believe that the company is a hold due to its solid dividend, distribution expansion, and overvaluation assuming my DCF figures.

Business Overview

New Jersey Resources Corporation is an energy services holding company that operates in four segments: Natural Gas Distribution, Clean Energy Ventures, Energy Services, and Storage and Transportation.

The Natural Gas Distribution segment serves regulated natural gas utility services to customers in various counties in New Jersey, while also providing capacity and storage management services.

The Clean Energy Ventures segment focuses on investing in and operating solar installations in multiple states. The Energy Services segment offers unregulated wholesale energy management services and maintains a portfolio of natural gas transportation and storage contracts.

The Storage and Transportation segment invests in natural gas transportation and storage facilities. In addition to these core operations, the company provides heating, ventilation, and cooling services, commercial real estate properties, solar equipment installation, plumbing repair and installation services, and water appliance sales and servicing.

With a market capitalization of $4.75 billion and a price of $48.96, New Jersey Resources is trading near its 200-day moving average of $48.31. The company has a price-to-earnings ratio of 16.17, which is higher than most of its peers, indicating a relatively higher valuation.

New Jersey Resources Corporation also offers a robust dividend yield of 3.19%, indicating a secure payout ratio of 50.69%. This allows the company to allocate sufficient free cash flow towards enhancing and expanding its core operations.

New Jersey Resources Corporation reported Q2 2023 results that fell short of expectations, with earnings per share at $1.16 and revenue at $644.02 million, missing estimates by $0.03 and $310.3 million, respectively. This represents a significant decrease of -29.4% in revenues compared to the same period last year. The underperformance reflects the challenging economic conditions the company is facing. It underscores the importance of implementing long-term strategic shifts to stabilize revenues and establish predictable cash flows. Despite the disappointing results, New Jersey Resources Corporation has re-affirmed its fiscal 2023 net financial earnings per share guidance range of $2.62 to $2.72. It is worth noting that this guidance was increased by $0.20 per share in the first quarter of fiscal 2023.

Outperforming the Broader Market

New Jersey Resources Corporation has demonstrated superior performance compared to the broader market over the past decade when considering dividend adjustments. This exceptional performance showcases the company's aptitude for capitalizing on long-term trends and expanding its core operations.

Distribution Expansion Fostering Growth

The effective distribution network plan of New Jersey Resources Corporation is aimed at assuring the timely and effective supply of natural gas to its clients. To fulfill the rising demand for natural gas and improve the overall customer experience, the company regularly makes investments in the enlargement, upkeep, and modernization of its distribution infrastructure.

The construction of the Adelphia Gateway project serves as a prime illustration of NJRC's distribution network approach. In southeast Pennsylvania, there is a network of natural gas pipelines called the Adelphia Gateway. NJRC purchased the pipeline network with the intention of switching it from carrying oil to carrying natural gas. NJRC lessens the need to construct fresh pipelines by reusing existing infrastructure, lowering costs and environmental effect.

The Adelphia Gateway project increases the region's access to affordable, clean natural gas while also expanding NJRC's distribution network. It establishes a crucial connection between the Marcellus Shale production area and the expanding demand hubs in southeast Pennsylvania and New Jersey. NJRC shortens project timeframes and costs while speeding the delivery of natural gas to customers by utilizing the existing pipeline system. Due to their ability to immediately receive continuous cash flows, NJRC will be able to capitalize on growth and/or reward shareholders.

In order to optimize its distribution network, NJRC uses cutting-edge technologies and analytics in addition to pipeline expansions and acquisitions. In order to increase system dependability, find leaks, and improve metering accuracy, smart meters and systems for remote monitoring are deployed. Utilizing analytics and data, NJRC is able to better accurately estimate demand and allocate resources by gaining useful insights into client usage trends.

I believe that this expansion will enable NJRC to outperform competitors while also expanding margins due to efficiently operating its network which reduces downtimes. This will enable NJRC to consistently utilize this network for cash flow generation which will enable them to upgrade further or expand its network.

Analyst Consensus

Analysts currently maintain a "hold" rating for NJRC, with mixed opinions on its 1-year share performance. The stock, which has an average price of $51.80, is projected to have a potential upside of 5.8%.

Valuation

Before making any assumptions or performing a DCF analysis, it is essential to calculate the Cost of Equity and WACC for NJRC using the Capital Asset Pricing Model. By considering a risk-free rate of 3.81% based on the yield of the 10-year treasury, it was determined that the Cost of Equity for NJRC is 7.34%, as indicated below.

After conducting an Equity Model DCF analysis using net income, it has been determined that NJRC is currently overvalued by 16% with a fair value estimate of approximately $40.99. This calculation involved applying a discount rate of 7.34% over a 5-year period. Additionally, it is anticipated that NJRC will focus on improving its core operations, specifically its distribution networks, leading to a modest expansion of margins.

Risks

Regulatory and policy changes: As part of a highly regulated business, NJRC's operations, expenses, and profitability may be impacted by changes to government policies or energy laws. NJRC's business model may be impacted by modifications to environmental laws, energy costs, or financial incentives for renewable energy sources.

Weather-related risks: As a distributor of natural gas, NJRC is subject to dangers associated with the weather. Extreme weather conditions, such as hurricanes, storms, or protracted hot or cold spells, can have an influence on infrastructure damage, energy consumption, supply interruptions, and income generation for NJRC.

Conclusion

In summary, I recommend a "hold" position on NJRC based on its attractive dividend, ongoing distribution expansion, and consideration of its current overvaluation according to my DCF analysis. While the company has a strong track record and promising expansion plans, it may be prudent to reassess the stock when its valuation improves slightly.

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