XLU - NorthWestern: Upgrading The Stock Following An Upbeat Outlook But The Chart Is A Concern

Summary

• Utilities continue to trade at a lofty P/E compared to the broad market.
• One domestic name reported a mixed Q3, but the CEO's outlook assuaged investors' fears.
• NorthWestern Energy remains in a technical downtrend but with a below-sector earnings multiple and high yield.

The utilities sector continues to trade at a premium to the market. According to Goldman Sachs Investment Research, the defensive niche has a forward P/E near 19 compared to a 17 earnings multiple on the S&P 500. Utilities continue to be a flight-to-safety trade despite steep declines seen at times last quarter. The latest bout of volatility has led to relative strength in many of the sector’s industries.

One Multi-Utilities name was a lousy stock through September but has since recovered following a mixed Q3 report. Is there more upside left in NorthWestern? Let’s take a look.

Utilities A Bit Pricey

According to Bank of America Global Research, NorthWestern Corporation (NWE) is a public regulated utility that provides electricity and natural gas services throughout Montana, South Dakota, and Nebraska. The company generates and distributes electricity as NorthWestern Energy, with its main businesses segmented between electric operations and natural gas operations. The company's electric business represents 80% of total gross margin, with the remainder coming from gas operations.

The South Dakota-based $3.3 billion market cap Multi-Utilities industry company within the Utilities sector trades at a near-market 18.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.4% dividend yield, according to the Wall Street Journal.

Back in October , the firm reported a mixed Q3 that featured a bottom-line miss and top-line beat. Giving investors confidence was a narrowing of its 2022 operating earnings range and very upbeat Q4 guidance relative to analysts' expectations. Before that report, the stock was upgraded by BofA as the bank saw an opportunity in the pullback and possible inflection regarding NorthWestern’s key MT rate case. Upside risks stem from further positive regulatory changes and lower interest rates. Risks include uncertainty from legislative changes and volatility in commodities along with natural-disaster risk.

On valuation, analysts at BofA see earnings having fallen by more than 6% this year but a recovery is seen next year with just tepid EPS growth in 2024. The Bloomberg consensus forecast is about in line with what BofA expects. Dividends should grow with per-share profits after 2023. With a near-market earnings multiple and high yield, I’m giving the stock a re-look here despite a soft longer-term growth outlook. The forward operating and GAAP earnings multiples look fine in the mid-teens, which is actually below those of its peers.

NorthWestern: Earnings, Valuation, Dividend Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2022 earnings date of Thursday, February 9 AMC. There’s a dividend pay date before that, but the calendar is light on volatility catalysts otherwise.

Corporate Event Calendar

The Technical Take

While being one of the worst sector performers through Q3, shares are sporting better relative strength. I should have paid more attention to support on the chart of NWE back in my early October article. The stock indeed held key support in the $45 to $48 zone - the early 2020 low with a successful retest in the months thereafter. Notice in the chart below that the stock remains mired in a prolonged downtrend despite a small RSI breakout.

If shares can climb above about $60 on a closing basis, that could help bolster the bullish breakout argument. For now, the technicals suggest caution.

NWE: A Persistent Downtrend With Mid-$40s Support

The Bottom Line

I was wrong about my sell recommendation earlier in the year. While there remains soft growth looking several quarters out, the stock has a decent relative valuation, but shares are still stuck in a downtrend. The stock looks like a hold here but could warrant a buy on a breakout and if it reports another good quarterly outlook.

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