2023-12-04 09:14:29 ET
Summary
- New Fortress Energy has seen a surge in its stock price following a solid Q3 report, though consensus 2024 EPS forecasts have retreated.
- The company operates in the LNG-to-power infrastructure sector and has projects in Puerto Rico, Mexico, and Brazil.
- Despite some risks, NFE's valuation is strong and its growth prospects are positive, making it an attractive investment option.
- I highlight key price levels to watch on the chart heading into year-end.
The Energy sector has struggled since WTI hit a peak near $95 in late September while natural gas prices have taken a sharp turn lower, too. The Q3 earnings season featured mixed results, but general price action has been lousy in a strong overall tape for oil and gas stocks. Still, LNG transport names often buck the broader sector trend, and one small gas storage and delivery firm with power operations has surged following a solid Q3 report in early November.
I reiterate my buy rating and refine my price target on New Fortress Energy ( NFE ). Consensus EPS expectations for FY 2024 have come down, but a bullish move on the chart suggests longer-term upside potential.
Energy Equities Turn Lower Since Late September
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 & Infrastructure and Ships.
The New York-based $8.1 billion market cap Oil and Gas Storage and Transportation industry company within the Energy sector trades at a modest 15.9 forward non-GAAP price-to-earnings ratio and pays a low 1.0% forward dividend yield. Ahead of earnings not due out until February next year, the stock has a moderate 35% implied volatility reading and an elevated 21% short interest - up three percentage points from my Q3 analysis.
Last month, NFE reported Q3 non-GAAP EPS of $0.30, which was said to be in line with estimates, and the revenue number topped expectations by a modest amount despite the near 30% year-on-year decline on the top line. Ahead of the earnings release, NFE's management had reaffirmed its guidance and projected EBITDA of $1.6 billion for 2023 and $2.4 billion in the out year. Q4 EBITDA north of $500 million should come to fruition as more projects come online while the longer-term outlook remains uncertain amid some project delays (though its Mexico export plant is now expected to start this month).
New Fortress also launched a new $800 million term loan facility partly for refinancing purposes and to fund future capex plans. Finally, BofA notes that projects in Puerto Rico, Mexico, and Brazil should reach commercial operations dates by the end of next year, helping to improve NFE’s leverage metrics.
The market liked the report – NFE shares surged from under $28 to above $32 on November 8. Remarkably, short interest on the stock remains extremely high, so additional explosive moves higher cannot be ruled out. Key risks for the firm include lower commodity prices and still-high financing costs. Also, lower global natural gas prices would be a negative feature as NFE has tracked prompt-month NG closely in the last two years.
NFE & Nat Gas Track Closely, NFE Shares Pulling Ahead Lately
On valuation , analysts at BofA see earnings snapping back sharply this year and next, but normalized operating EPS should steady around the $5 mark. The current consensus suggests about $4.50 of non-GAAP per-share profits in FY 2025. Revenues are seen rising significantly next year, then continuing to rise in 2025, however.
Dividends, meanwhile, are forecast to hold at $0.40 annually, making for a rather low yield considering this year’s share price rally. Still, we are talking about a stock with a forward P/E in the single digits assuming EPS near $5. Finally, free cash flow has been in the red over the last 12 months, but expectations show that metric inflecting positive over the coming quarters.
New Fortress: Earnings, Valuation, Dividend Yield, Free Cash Flow Outlooks
If we assume $5.20 of normalized earnings going forward and apply a sector median P/E of 9.9, then shares should be near $51.50. Last time, I assumed a 10% margin of safety given the risky nature of the industry. Taking the same approach, the valuation is more like the mid-$40s today in light of the most recent earnings report. Thus, I still have a buy rating, but I’m less sanguine considering the narrower potential upside.
NFE: Lofty Valuation Metrics, Reasonable Non-GAAP Earnings Multiple
Seeking Alpha
Compared to its peers, NFE stands out in a good way. Its valuation is strong while growth prospects are positive. While negative free cash flow and somewhat low GAAP profits , along with a high price-to-sales ratio, hurt the valuation grade, share-price momentum is robust. The Q3 profit report may have led to a jump in negative EPS revisions, though I do not see the November earnings snapshot as being overly negative. The turn lower in consensus FY 2024 EPS estimates is not easy to justify, in my view.
Competitor Analysis
FY 2024 Consensus EPS Estimate Has Retreated Amid Lower Commodity Prices, Higher Interest Rates
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q4 2023 earnings date of Tuesday, February 27. The stock goes ex-dividend on December 12 with a $0.10 dividend scheduled. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The Technical Take
NFE indeed broke out from a bullish rounded bottom pattern earlier this year . Notice in the chart below that the $32 to $34 area had been resistance, but the bulls were able to power NFE through the mid-$30s. There was volatility, however, since I last reviewed the stock through early November. A double-bottom low of $27 held as support last month, and we have since seen a tremendous 45% surge over a handful of weeks since the earnings release.
Also take a look at the long-term 200-day moving average – it's flattening out, telling me that a bearish to bullish reversal is being confirmed through that long-term trend indicator. With the RSI momentum oscillator jumping to its highest reading since the Q3 2022 peak, there’s further confirmation of a new uptrend. Still, I see resistance around $42 – that was a key price point in September and October last year as well as in a failed rally attempt early in 2023. Finally, the rounded bottom feature formed an upside measured move price objective to about $41 based on the height of the pattern.
Overall, taking some near-term profits here makes sense but a longer-term uptrend may just be getting going.
NFE: Major Upside Move, Strong Momentum, 200dma Shows Improvement
The Bottom Line
I reiterate my buy rating on NFE, but am a bit more cautious today in where I see the fundamental value and based on what the near-term technicals suggest. Longer-term, EPS outlooks appear favorable and a trend higher in the stock price appears well underway.
For further details see:
New Fortress: EPS Estimates Tempered, But Share Price Momentum Stands Out