2023-03-14 10:15:45 ET
Summary
- I've been covering Portland General Electric for some time. My long-term RoR since I initiated my position is still negative, but I believe the time to "BUY" more has come.
- The company has some issues - every company does - but the relative upside and safety here is good enough for me to put money "at risk".
- I'm at a "BUY" - and my rating for 2023 is a "BUY" as well. Here is why I am long Portland General Electric for the coming year.
Dear readers/Followers,
Investing in USD stocks isn't easy for me at this time, due to a massively disadvantageous FX situation. It basically means that I love getting US-based, CAD-based, and EUR-based dividends, but any "BUY" made in foreign currency needs to have at least 5-10% more upside than usual, because of the normalized currency effects I'm including.
This might not be an issue for you at all - USD is likely your native currency - but it's an issue for many European investors and many of my readers who share my investment strategy.
But, Portland General Electric ( POR ) is a company in the utility space that might be a good enough "BUY" here to interest me. While the company as an investment is in the negative after my previous "BUYs" on the company, there are reasons to expect a double-digit RoR going forward here.
Here is why.
Portland General Electric for 2023 - The upside worth considering
I'm very selective with my west coast investing, because I see some issues in that part of the USA both now, and in the coming few years and decades. Impacts are likely to be climate-related, but also socioeconomic and related to the overall macro of the various states and areas there. I haven't been shy about this in my articles on POR, despite what from a high level looks like a relatively attractive thesis.
POR is exactly the sort of utility that you would expect a west-coast state such as this one to create. By that I mean, an almost illogical focus on "clean energy investment", to the detriment of the company's operations and even the company's overall safety and consumer supply. The company's ambitions are very clear.
You can likely start to guess my own stance about this by reading these articles. I'm in no way opposed to going "green" with generation. In fact, I own massive stakes in Danish Ørsted A/S (DNNGY) as well as similar companies with a far larger tilt to renewables than POR has.
The difference?
All of these operations and companies have done so "in the right way". They haven't shut down legacy or penalized legacy operations in favor of a bull-headed push to green initiatives, that risks the company's capability to supply customers using its own generation. That's what POR has done. The company has, numerous times, had to import legacy-generated power from out of state because its green pushes have left its generation insufficient to make up for shortfalls during energy-intensive times.
POR is removing its own capacity before it's ready to replace it with renewables, which has caused the company to look for solutions in some unorthodox manners, such as encouraging more customer generation of electricity through renewables.
But these two things - the company's operating area and the company's short-sighted approach to going green, are really the only two significant risks I see here. Even with the CapEx risks where the company needs to invest to both harden existing infrastructure and prepare for the coming decades, there are plenty of upsides to like for POR here.
When it comes to the west coast, I try and focus on the highest-rated, safest companies out there. That also includes REITs, and it includes other investments that I make into the area - every sector, basically. I believe the west will see a few years of troubles, but for the area to eventually "normalize" as policy and politics catch up (which it by the way seems to be doing already).
The company delivered results according to guidance, and CapEx according to guidance as well. Clearwater Wind is coming in 2023, and every year beyond that is slightly growing in investments as the company increases its hardening and resiliency investments, with not many investments in other areas by comparison.
I recently wrote an article about NJR, where I gave the company a "HOLD" based on the fact that it was at an unattractive valuation relative to its growth potential and its yield, resulting in an unfavorable potential RoR unless you valued the company at untold levels of premium above 20-21x P/E.
POR is different. The company does not forecast as great a rate of growth as NJR does, but still calls for solid annualized growth until 2027E.
The company is also working on the 2024E General rate case, with a base of $6.3B, applying for an increase of 16% marking an RoE of 9.8% at a cap structure of 50/50 with a cost of debt at 4.32% and a CoC of 7.06%. I believe these numbers to be somewhat optimistically forecasted, especially in light of where the interest rates might go. However, from what I've seen from other rate cases, I also believe that there is a very real possibility for the company to not get what they apply for - it's a 16% increase, and the consumers out west are already hurting with inflation and other cost increases.
For that reason, I choose to forecast the company at a significantly lower rate case result, discounting to an RoE closer to 9% than the 10% mark.
POR has a lot of things going for it - as many great utilities do. It has good reliability, it can brag about having the #1 renewable energy program in the nation (although, as I said, comes at a price), and it's had a good performance overall, even if 2022 was somewhat flat, and it calls for the long-term growth of 5-7% unlike most utilities, which call closer to 7-9%.
This also highlights why I've discounted the rate case. Given that the company has been working at an allowed RoE of 9.5%, I believe it to be excessively positive to expect anything above 9.5%, and probably better to expect something lower, to make sure that your expectations don't get smashed by what might happen.
However, POR has also proven its dividend stability over time...
...which means that it's likely safe, with some growth going forward, even if the payout ratio is rising towards somewhat excessive levels.
However, the key part of the 2023 thesis, and why I'm being more positive on POR than basically at any time before, is the valuation.
The upside is simply very appealing here.
Portland General Electric valuation - now realistically above 10%+ Annualized
While it's wrong to say that POR is at trough levels - because it has been lower, it's accurate to say that the company is looking more and more attractive here. Seeing the company below $43 is very rare - and seeing it below $46 also isn't that common.
POR is expected to average around 6-8% annual rate of EPS growth for the next few years. The yield, at this time, is closer to 4% which together with the conservative upside might be the difference maker compared to other companies in the same sector like NJR.
My earlier problem with POR was the valuation. That is no longer the case. At 17.5x, we're at the upper range of what I would consider acceptable for a great utility. I typically invest at higher yields, including utilities like Enel (ENLAY), E.ON (EONGY), Engie, RWE, and others - but these sorts of investments are not unattractive in the least.
POR is still trading below 19x P/E - quite far below it at the moment. Remember, the most premium utility trade is about the 20x P/E mark, with Fortis ( FTS ) a good example of one that I have written on as well. It doesn't go much higher than that - and European utilities are far below that.
The second problem with POR is that it really doesn't deserve a massive sort of premium - so anything above 16-18x P/E is not where you want to be. Still, my very early articles were almost negative/bearish on POR because of the perceived challenges (by me). Those challenges have turned out to be far smaller than originally expected, which I take into consideration here.
The upside for POR is very much there. Even on a 17-18x P/E, and an 18.5x high, we see a double-digit annualized upside at around 13.11% annually or 41.3% in the next 3 years. That is not a bad RoR.
My PT for the company at the latest article was around $52/share. I'm not changing this here. The company's upside at $52 is significant. The S&P Global analysts following the company here give the company a range of $47 to $60, with an average of $51.8, close to my own PT. 4 out of 7 analysts are at a positive rating of either "BUY" or "Outperform" here.
The company isn't at any meaningful premium to any closer peer out there in the US, and in fact trades at a significant discount to many of them, including Duke ( DUK ), Southern ( SO ), American Electric ( AEP ), and others. Peer averages for the company also show appeal.
With forecasts, analyst averages, peers, and fundamentals showing an upside, I find it easy to give the company a positive thesis here. You could go for options here, as I detailed in my last article on POR - but I believe at this time, it can make sense to actually go for the common shares.
Based on where the company currently trades, what it yields, and where it seems to be going, the following is my thesis here.
Thesis
- At a lower price of below $50/share, this becomes an interesting utility play in a potentially strong state. However, the lack of asset flexibility and company-stated plans for its future still does not encourage me to invest further here.
- It's my view that the company's plans lack proper context and forecastability, allowing us to easily account for potential provisions for extra costs or income effects, influencing margins and income.
- Because of this and despite good fundamentals, heavy discounting is needed. Energy trading losses during 3Q21 alone accounted for $1.09 per share, as well as $0.39 per share of what the company considers "unfavorable power cost" due to higher temperatures - and this company is seeing recurring problems with that.
- Improved forecasts and more problematic macro do call for a continued premium for utilities though - so I stick to my PT of $52.
- This makes POR a "BUY" here.
Remember, I'm all about :
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them (italicized):
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
While not "cheap" at over 17x normalized P/E, the upside here is good enough to where I consider it a "BUY".
For further details see:
Portland General Electric: How About A West-Coast Utility For 2023?