2023-04-07 12:04:54 ET
Summary
- The utilities sector usually performs well going into and during recessions, but the area is expensive on valuation.
- I continue to see shares of Black Hills as a sell, but the situation has changed somewhat.
- Following a guidance cut, the valuation has turned more pricey while the technicals have actually improved from my last look at BKH.
Economic data to kick start April has sputtered at best. ISM Manufacturing, ISM Services, JOLTS, ADP, and jobless claims all verified to the weak side, though the March non-farm payrolls report was an 11th straight better-than-forecast headline number. Still, there are growing signs that the domestic economy may dip into recession (if we're not already there).
Utilities are often the best sector to be allocated toward in the 12 months before and after the start of a recession, according to BofA research. Being choosey in the utilities space is imperative, however, as so many trade at rich valuations. I see shares of Black Hills (BKH) as a sell, reiterating my rating from October .
Keep Your Portfolio Shining With Utilities During Recessions
According to Bank of America Global Research, Black Hills Corporation is a vertically-integrated electric and gas utility headquartered in South Dakota. The company is primarily a regulated electric and gas utilities business with the remainder consisting of long-term contracted power production (269MW) and coal production. The company serves approximately 1.25mn customers in Colorado, Kansas, Montana, Nebraska, South Dakota, Arkansas, Iowa, and Wyoming.
The Rapid City-based $4.3 billion market cap multi-utilities industry company within the utilities sector trades at a near-market 16.5 trailing 12-month GAAP price-to-earnings ratio and pays a high 3.7% dividend yield, according to The Wall Street Journal.
The company issued a decent earnings report back in February, but the real problem was a downward revision of its 2023 EPS guidance from $4.00 - $4.20 to $3.65 - $3.85. If we apply a 15 multiple on $3.75 of EPS, then we get a $56 stock, more than 14% below the current price. Long-term earnings growth is still seen in the 4% to 6% range, and the firm recently issued debt for financing. Two sell-side outlets downgraded the stock after that disappointing outlook.
On valuation , analysts at BofA see earnings falling 6% this year following a 6% advance in 2022. Next year's per-share profits are seen moderating to just under 4%. The Bloomberg consensus forecast is more upbeat. Dividends, meanwhile, are seen as rising steadily over the coming quarters. Still, both BKH's operating and GAAP P/Es are somewhat lofty considering the growth outlook. While the current P/E is at about a 5% discount to its five-year average, a forward PEG just shy of 4 is expensive.
Black Hills: Valuation, Earnings, Dividend Yield Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Wednesday, May 3, after market close. Before that, though, the company holds its annual shareholder meeting on April 25, so there could be volatility around that event.
Corporate Event Risk Calendar
The Options Angle
Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.68 which would be an 8% decline from $1.82 of per-share profits earned in the same quarter a year ago. Black Hills has missed on bottom-line estimates in the past two quarters and shares have traded lower post-earnings in the previous five reports, so the trend favors the bears right now.
Shares plunged more than 9% following the February EPS report, and the options market has priced in a small 3.9% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the Q1 reporting date. I'm inclined to buy premium at that price. Let's look to the charts to see what the near-term trend suggests.
BKH: Cheap Options Ahead Of Earnings
The Technical Take
While I see BKH as overvalued, there are some positive aspects of the chart. Notice in the graph below that shares put in a bullish double-bottom pattern from late last year to the dip just a few weeks ago. Still, an old uptrend line was broken in Q4 2022, and that line was resistance on a rally attempt around the turn of the year.
After notching a low near $59 last October and this past March, shares may look to fill a gap to near $70 - that's where the falling 200-day moving average comes into play. Technically, a long position, eyeing $70 through call options heading into earnings, may work but the long-term trend still appears weak.
BKH: Bullish Double Bottom, Shares Under Trendline Resistance
The Bottom Line
I see shares of Black Hills as overvalued following the firm's guidance slash earlier this year. I reiterate my sell rating on a fundamental valuation basis but recognize that the stock may move up into earnings amid some near-term positive technical trends.
For further details see:
Black Hills: Profit Outlook Slashed, Improved Technicals