2023-03-23 22:14:48 ET
Summary
- I think the financial performance has been quite good. Management has rewarded shareholders with consistent dividend increases, and I think this trend can continue.
- The stock is about 29% cheaper than it was when I last reviewed the name, and the dividend yield is actually relatively close to the risk free rate.
- The shares aren't "ridiculously cheap", though, so I'm taking a small position, and I hope the stock price drops to allow me to buy more.
It's been a little over 34 months since I looked at Spire Inc. ( SR ), where I suggested that the shares were about 10% overpriced. The shares have lost about 6% since I wrote that article, and the S&P 500 is about up 38% since then, so I'd say the underperformance has been fairly massive. Although the shares have lost value, investors who bought investors have earned some dividend income, which has resulted in a positive 4% return since I last reviewed the business. The shortfall is far less, but still significant in my view. With all of that not so subtle bragging out of the way, I think a stock that's underperformed represents potential value, and so I feel inclined to review the name yet again. I'll determine whether or not it makes sense to buy the shares based on the latest financial results and the valuation.
The first thought I have when I wake up mirrors the last thought I have before I finally sleep: how can I make the lives of my readers even better? One of the ways that I try to make your lives more enjoyable is by saving you as much time as possible. I do that by writing a thesis statement near the beginning of each of my articles. This paragraph allows you to catch the gist of my thinking about a given name, so you can choose to read the whole screed or not. I will be taking a small position in Spire when the market opens next because I like the combination of strong performance, and high probability of a dividend increase. I'm not buying a full position, though, because the shares are expensive by some measures. Although the dividend yield is lower than the risk free rate, I don't think it's unreasonable to assume that the dividend will be raised yet again, which will put the yield above the risk free rate. This company is a rare beast in having a yield that's even close to the risk free rate. Finally, I compiled a schedule of debt repayments for your enjoyment and edification. Although next year will present a relatively heavy debt repayment burden, it won't be egregious in my view.
Financial Snapshot
I think the financial results have been fairly strong here. Specifically, the revenue, operating income, and net income for the latest quarter was higher by 46.5%, 57.6%, and 68% respectively when compared to the same period a year ago. Additionally, when we compare the most recent quarter to the same pre-pandemic era, revenue, operating income, and net income were higher by 35%, 43%, and 30%, respectively. So the company is doing well in my view. This is why management has seen fit to increase the dividend yet again, up by another 5.1% from the year ago period.
Additionally, I think the capital structure has improved somewhat from the same time last year, with long term debt down by about $50.5 million, or 1.6%. It's still a relatively highly levered business, but the trend has gone in the right direction. Additionally, I like looking at the size and timing of debt repayments. Normally there's a table that I can simply cut from a 10-K, but not in this case. Because I am so obsessed with making your reading life as simple and enjoyable as possible, I compiled all of the debt repayment information from note 6 of the latest 10-K and compiled it for you in an easy to read spreadsheet. You're welcome. We see from this that this year, 2024, 2026, and 2029 are periods where significant amounts of debt are to be repaid. I'm not over concerned, though, as I think the company will manage these. The problem might be the rates that they are obliged to pay, if interest rates remain elevated into 2024.
Spire Debt Maturity Schedule (Spire 10-K)
That relates to the one concern I have here. I'm worried about the fact that interest payments have increased fairly substantially, and I worry that these will at some point start to crowd dividend payments. That time isn't close at hand, though, so I'm willing to buy the shares at the right price.
Spire Financials (Spire investor relations)
The Stock
My regular readers know what time it is. It's at this point in the article where I describe how I think a reasonably good company like this one can be a terrible investment at the wrong price. This is because the "company" and the "stock" are not the same thing. They're not even close, actually. The company pays for a host of inputs, like natural gas, for instance. The stock, on the other hand, is a piece of virtual paper that gets traded around in a marketplace. The stock is impacted by a host of variables that have little to do with the business. For example, the stock might be impacted by the pronouncements of a fashionable analyst . The stock might move around based on the rising and falling demand for "stocks" as an asset class. Most bizarrely in my view, the stock may be impacted when a Fed official happens to misspeak. Given that the business chugs along and the stock is much more volatile, there's sometimes a disconnect between what's going on with the company, and what's going on with the stock.
In my experience, the only way to trade stocks profitably is to spot discrepancies between these two, and buy when the market is overly pessimistic, and sell when the market is overly optimistic. I really, really hate to brag about it, but spotting discrepancies is how I managed to avoid losses on this stock some years ago. Those who read my stuff know that I measure the pessimism embedded in price in a few ways, both simple and complex.
On the simple side, I like to look at the ratio of price to some measure of economic value like earnings, free cash, sales, and the like. I like to see a stock trading at a discount to both the overall market and its own history. When I last reviewed Spire, the shares were trading hands at about 20.5 times earnings, which I considered to be expensive. Fast forward to the present, and the combination of rising earnings and falling stock price means that this stock is now about 29% cheaper, per the following:
At the same time that the shares are relatively cheap, I think it's worth noting that the dividend yield is reasonably high. It's still about 50 basis points lower than the return that an investor can get on a 1-year Treasury Bill , but I think there's a very good chance that the company will continue to raise the dividend from here, so today's 4.2% yield stands a good chance at turning into a 5% yield in relatively short order in my view.
One more thing my regulars know is that I want to try to understand what the crowd is currently "assuming" about the future of a given company, and in order to do this, I rely on the work of Professor Stephen Penman and his book "Accounting for Value." In this book, Penman walks investors through how they can apply the magic of high school algebra to a standard finance formula in order to work out what the market is "thinking" about a given company's future growth. This involves isolating the "g" (growth) variable in this formula. In case you find Penman's writing a bit dense, you might want to try "Expectations Investing" by Mauboussin and Rappaport. These two have also introduced the idea of using the stock price itself as a source of information, and then infer what the market is currently "expecting" about the future.
Anyway, applying this approach to Spire at the moment suggests the market is assuming that this company will grow profits at a rate of about 5.5% from here. In my view, that is a pretty optimistic forecast.
So, I'm on the horns of a dilemma with this stock. By some measures, the shares are reasonably priced, and I like the fact that the dividend yield is high and likely heading higher. I think the company is in decent financial shape. On the other side of the ledger, the shares are expensive by this measure, and it seems that the crowd is rather optimistic about the future here, which isn't great from my perspective. My response to this will be to nibble on the shares. I'm not going to take a full sized position, but I'll certainly buy. My hope is that, after I buy, the shares drop in price again, so I'll be able to pick up more at an even more attractive price.
For further details see:
Nibbling On Spire