NWE - NorthWestern: Upgrading To Buy On Earnings Clarity And A High Yield

2023-12-05 09:30:29 ET

Summary

• Utilities sector has rebounded in the past seven weeks but remains down 8% in 2023.
• NorthWestern Energy Group upgraded to a buy based on positive rate decision and high dividend yield.
• NWE's management team sees long-term EPS growth and de-risked future following rate case approval.
• I outline key price levels to monitor on the chart with Q4 earnings due out in mid-February.

The Utilities sector has followed US Treasury prices in lockstep in 2023. As the 10-year Treasury yield rose earlier this year, the rate-sensitive sector suffered big. But a nadir on the bond market was hit in mid-October, and the Utilities Select Sector SPDR ETF (XLU) has rebounded in the past seven weeks but remains down 8% on a total return basis in 2023.

I am upgrading NorthWestern Energy Group (NWE) from a hold to a buy based on a positive rate decision earlier in 2023 while the technical outlook remains a concern. NWE's 5% dividend yield is also above most of its small-cap Utility peers.

Utilities Following Treasuries in 2023

According to Bank of America Global Research, NorthWestern Energy Group 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 firm's electric business represents 80% of total gross margin, with the remainder coming from gas operations.

The South Dakota-based $3.1 billion market cap Multi-Utilities industry company within the Utilities sector trades at a somewhat low 16.0 forward non-GAAP price-to-earnings multiple, and it pays a high 5.0% forward dividend yield. With earnings not due out until mid-February, shares trade with a modest 24% implied volatility percentage and short interest on the stock is low, but material, at 3.3% as of December 4, 2023.

Back in October, NorthWestern issued a disappointing Q3 earnings report. Non-GAAP EPS verified at $0.49, missing consensus estimates by a nickel, while $321 of quarterly revenue fell shy of analysts' expectations, too. It was NWE's fifth consecutive bottom-line miss, and the stock traded lower the following session by 2.3%. What's more, there have been a high number of negative EPS revisions in recent months. NWE stock rose into the month's end, though.

Still, the forecast was encouraging in that the management team sees long-term EPS growth in the 4% to 6% range, an increase from the previous outlook. The more sanguine outlook is premised on the reality that the utility has de-risked itself following the approval of a rate case in Montana. The settlement allows for clarity on the future and helps the firm's valuation. I do not expect NWE to need to tap the equity markets for new capital given the regulatory decision, and if anything, a valuation premium is warranted given the brighter future.

Key risks for the utility include unfavorable regulatory changes, poor cost recovery on capex projects, unexpected capital needs given a higher cost of equity environment and higher interest rates today, adverse commodity price changes, and natural disasters in its operating footprint.

On valuation , analysts at BofA see earnings falling slightly this year but EPS growth is expected to rise in 2024 with continued advancement in 2025. Consensus EPS estimates, per Seeking Alpha, show $3.54 in the out year and $3.73 of non-GAAP per-share profits by 2025 while sales growth is merely in the low- to mid-single digit. Still, NWE's dividend is forecast to rise steadily over the next handful of quarters and its P/E ratio should then retreat if the stock price holds steady.

NorthWestern: Earnings, Valuation, Dividend Yield Forecasts

If we apply a 17 earnings multiple, in line with the sector average and slightly under NWE's 5-year average valuation, and assume normalized EPS of $3.60, then shares should be near $61, making it undervalued today.

NWE: Priced Cheap Compared to the Sector, High Yield

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Thursday, February 15 AMC. Before that, shares traded ex a $0.64 dividend on Thursday, December 14. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

It has been a year since I last reviewed NorthWestern. Shares have not done much in 2023 to excite the bulls. Notice in the chart below that the stock remains mired in a downtrend with a pronounced resistance line that now comes into play in the upper $50s to near $60. As I pointed out in Q4 2022, there is a broad area of support which has held over the last few quarters. Investors should monitor the $45 to $49 zone for continued support, and NWE bounced off that range in October.

Also take a look at the falling 200-day moving average. The bears appear in control as that long-term trend indicator line ventures into the mid-$50s. Moreover, with a high amount of volume by price in the $55 to $60 zone, and a Q2 2023 peak near $61, the bulls could have a tough time rallying the stock very much over the coming weeks. A bright spot, however, is seen in its RSI momentum oscillator gauge - it recently broke out from a downtrend. The bullish narrative here is that a trend change in momentum should come before a price trend inflection.

Overall, it is a neutral to slightly bearish chart.

NWE: Shares Holding Long-Term Support, Bullish RSI Move

The Bottom Line

I have a buy rating on NWE. I see the valuation as better today given the stock price drop in 2023 and improved earnings outlook. The dividend, meanwhile, is relatively high compared to the sector.

For further details see: