2023-04-26 13:14:51 ET
Summary
- Many utility sector stocks have performed better lately, but that also leaves many at pricey valuations.
- I see PNW as a sell based on valuation, and the chart is not all that exciting.
- I outline a buy-the-dip idea, however.
Just 6% of large-cap U.S. stocks yield more than the 3-month Treasury bill, according to NDR Research . That's a high hurdle rate for income investors when seeking yield plays. So, a low valuation arguably must come along with a solid dividend rate.
I see shares of Pinnacle West Capital Corporation (PNW) as a sell on valuation. While not a risky company and not terribly overpriced, I see the intrinsic value about 10% below the current price.
Few Stocks Yield More Than The 3-Month T-Bill
According to Bank of America Global Research, PNW, through its regulated utility, Arizona Public Service (APS), provides electricity to more than one million customers in 11 counties in Arizona, including the Phoenix metropolitan area. APS provides power to over 1 million customers and is a vertically integrated utility with ownership of transmission, distribution, and generation assets.
The Phoenix-based $9.2 billion Electric Utilities industry company within the Utilities sector trades at a near-market 19.0 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.3% dividend yield, according to The Wall Street Journal.
Back in February, the company missed its Q4 earnings forecast while beating on the top line. The management team estimated that EPS would be in the range of $3.95 to $4.15 against a consensus that called for $4.13 of 2023 per-share profits. The stock did not react much but trended higher after the results hit the tape on Feb. 27.
Positive news came on March 7 when an Arizona rate case came out in favor of PNW - a court ruled that the firm could increase its rate of return slightly, but again, the stock was little changed. Then earlier this month, PNW declared an unchanged dividend amount of $0.865, so the forward yield remains robust above 4%, but that is actually near the lowest rate since late 2021.
PNW: Dividend Yield History, Low End Of Recent Range
Seeking Alpha
On valuation , analysts at BofA see earnings falling modestly this year after a steep drop in 2022. Per-share profits are then seen jumping back near $5 by next year and 2025. The Bloomberg consensus forecast is about in line with what BofA projects. Dividends, meanwhile, are expected to rise very slowly in the coming quarters.
With a forward operating P/E that's currently 15% above its five-year average and one that is at a premium to the broad market despite weak growth prospects, investors are currently willing to pay up for the stock. While the yield is high, I see the stock price's fair value closer to $73 if we assume $4.30 of next 12-month EPS and a lower, but still generous, 17 multiple. That's about 10% downside from today's price.
PNW: Earnings, Valuation, Dividend Yield Forecasts
PNW: Pricey On P/E
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q1 2023 earnings date of Thursday, May 4, before market open with a conference call later that day. You can listen live here . Before that, shares trade ex-dividend this Friday. After the reporting date, PNW holds its annual shareholder meeting on Wednesday, May 17.
Corporate Event Risk Calendar
The Technical Take
PNW has a lackluster chart. Notice in the graph below that shares are bucking up against resistance at the $80 level. Over the last year, the low $80s has been a point of profit taking. The good news this time is that the stock has rallied above its downward-sloping 200-week moving average while the 40-week moving average (which is basically the same thing as the 200-day moving average) is now inching higher.
The problem is that even if PNW holds above the low $80s, I see more resistance from $88 to $91. Support is found in the low $70s. For now, I would buy the dip on PNW should it retreat to the low to mid-$70s.
PNW: Stock Rallies To Resistance After A Bull Flag
The Bottom Line
I'm a sell on PNW based on valuation and unthrilling technicals. Buying a dip to the low $70s looks like a better play. What's more, later this year - assuming earnings come in higher by late 2024 and into '25, the valuation case would appear better.
For further details see:
Pinnacle West: An Expensive Utility, Decent Growth Outlook