2023-07-14 12:36:20 ET
Summary
- New Fortress Energy's stock has been upgraded to a buy from a hold due to a solid valuation and improved chart, despite higher commodity prices and financing costs.
- The company reported a solid Q1, with EPS at $0.90, topping the consensus estimate of $0.83, and revenue up 15% YoY, though it missed expectations.
- The company faces headwinds such as soft oil and gas prices and high debt yields, but analysts see earnings normalizing above the $4 level this year with gradual increases in the future.
- Ahead of Q2 results expected in early August, I outline key price levels to watch on this high-volatility, high-short-interest stock.
WTI crude oil and Henry Hub natural gas futures prices have risen over the past two months. That's a key time frame as many Energy sector companies reported Q1 results in early to mid-May. I am revisiting New Fortress Energy ( NFE ) in light of a decent quarter, higher commodity prices, but also lofty financing costs.
Putting it all together, I am upgrading the stock to a buy from a hold on a continued solid valuation and modestly improved chart.
Oil & Gas Prices Creeping Higher
According to Bank of America Global Research, NFE is an integrated LNG-to-power infrastructure company engaged in virtually all aspects of LNG production, transport, and sales. The company operates in two segments, Terminals and Infrastructure, and Ships. The Terminals and Infrastructure segment engages in the natural gas procurement and liquefaction; and shipping, logistics, facilities, and conversion, or development of natural gas-fired power generation. The Ships segment offers floating storage and regasification units (FRSU) and liquefied natural gas ((LNG)) carriers, which are leased to customers under long-term or spot arrangements.
The New York-based $5.7 billion market cap Oil and Gas Storage and Transportation industry company within the Energy sector trades at a high 54.5 trailing 12-month GAAP price-to-earnings ratio and pays a modest 1.5% forward dividend yield, according to Seeking Alpha. Ahead of earnings in early August, the stock has a high 52% implied volatility reading and an elevated 15% short interest.
Back in May, NFE reported a solid earnings beat . EPS verified at $0.90, topping the consensus estimate of $0.83. Revenue missed expectations but was still higher by 15% on a year-on-year basis. Shares fell in the days and weeks after the Q1 report, but the stock found support at a key spot I will discuss later. The management team announced a new goal to produce $1.2 billion of 2023 Illustrative Adjusted Net Income - expect to hear an update on that target in its Q2 report due out in less than a month.
The owner/operator of liquefied natural gas infrastructure faces some headwinds, though, namely somewhat soft oil and gas prices (though those have rising lately) and higher financing costs . The firm's debt yields north of 10%, resulting in an annualized interest expense upwards of $100 million on its 2025-26 maturity debt. It will be key for the company to maintain sufficient liquidity and be prudent about capex plans.
On valuation, analysts at BofA see earnings normalizing above the $4 level this year, with EPS gradually increasing in the quarters ahead. The Bloomberg consensus outlook is more sanguine, with out-year per-share profits hitting $6 with more gains in 2025. Dividends, meanwhile, are expected to hold at $0.40 normalized. With single-digit earnings multiples, the valuation remains attractive while the firm's EV/EBITDA ratio holds at less than half that of the broad markets on a forward basis. The firm is free cash flow negative, but that should reverse by 2025.
New Fortress: Earnings, Valuation, Dividend, Free Cash Flow Forecasts
With another quarter in the rearview mirror, the valuation picture looks good. If we assume next-four-quarter EPS of $5 and apply a sector multiple of 9.4, then the stock should trade near $47, so I reiterate my buy rating on valuation, and it is even more attractive today compared to back in Q2.
NFE: Strong Valuation Case Considering EPS Growth Ahead
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Monday, August 7 AMC with a conference call the following day. You can listen live here . No other volatility catalysts are seen on the corporate event calendar.
Corporate Event Risk Calendar
The Technical Take
Last time , I looked at the long-term view of NFE. This goes around, let's double-click so to speak. Notice in the 3-year zoom below that NFE has established a short-term trading range. The $24 to $32 zone appears to be a basing space, so we have better levels to invest around with this Energy sector stock. With a falling 200-day moving average, though, the bears appear in control. Moreover, further upside resistance may show itself even if shares break out above $32 - the $42 spot is that area of potential selling.
Still, with a solid valuation case, in my view, eyeing areas to get long and where to manage risk is key. I assert that long today with a stop under $23 makes sense. Also, take a look at the volume by price indicator on the left side of the graph - there are ample shares traded in this range, so that will make any upside move or downside breakdown all the more important. Long-term support at $19 is still in play.
NFE: Emerging Trading Range, Long-Term Support Near $19 Persists
The Bottom Line
NFE has an improved valuation today versus earlier in the year, in my opinion. I am upgrading the stock from a hold to a buy.
For further details see:
New Fortress: A Better Valuation After Strong Q1 Results, Improved Technicals (Rating Upgrade)