Summary
NorthWestern Corporation (NYSE:NWE). sells power to a region of the country that is growing, which means the company has an increasing customer base.
Management has increased margins impressively.
The company has adequate cash to cover both interest and dividend payments.
This idea was discussed in more depth with members of my private investing community, Turning Points.
Northwestern Corp. provides electric and natural gas services in the following service areas (from the company's latest 10-K):
The economic performance of NWE's service area is mixed (data from the BEA).
Montana, South Dakota, and Nebraska are performing fairly well
But Wyoming and North Dakota had difficult 2015 and 2016.
All five states are now performing better:
In the latest BEA state-level data, all five states were seen growing at moderate rates.
Out of 30 diversified utilities, NWE is the 16th largest with a market capitalization of $2.69 billion. The company's 5.47 P/E made it one of the cheapest (23rd out of 30). Its forward PE of 15.88 places the company 20th on the forward earnings valuation list. NWE has the 8th largest dividend, which is currently yielding a 4.07% rate.
As I wrote at the end of last week, the utility sector is doing very well relative to the SPYs.
Let's take a look at the company's financial performance, starting with the relevant information from its income statement:
(Data from Morningstar.com; author's calculations)
NWE has done something that has eluded a large number of utilities - it has grown gross revenue each year for the past four years. And growth was strong (for a utility) in three of those years. Average yearly growth for the last three years was 3.13% - a remarkable number for a utility. The company's gross margin has increased a little more than 10% - again, a very good number for a utility. Its operating margin is also up, as is the net margin. The company is also generating more EBITDA as a percentage of revenue, which is leading to an increase in its interest coverage. Simply put, this is a great income statement for a utility. And the good news continues as we look at the company's cash flow statement:
(Data from Morningstar.com; author's calculations)
Because utilities are so capital-intensive (for most, non-current assets comprise more than 90% of their assets), they typically have large cash flow (remember that depreciation is a non-cash chart, so we add it back on the cash flow statement). NWE is no exception to this rule; depreciation is usually about the same amount as the net income.
GCCF is "Graham and Dodd Cash Flow" and is a measurement derived from one of the earlier additions of the classic investing book, Securities Analysis. I use it because it is a very conservative cash flow measurement. But even using this figure, NWE has money left over after paying for both its dividend and interest payment. That tells us that management is running the company very well.
The last two years, the company has had excess cash left over after paying for investments - another positive development. And its debt/asset ratio is very conservative.
The following chart is also attractive:
(Source: StockCharts.com)
Prices dropped at the end of 2017 and the beginning of 2018. At the end of last year, rising Treasury yields sent the utility sector lower, and NWE sold off with the rest of the market earlier this year. But the stock started to rally in mid-March and has been rallying since. Currently, it is consolidating gains right below the 200-day EMA. Momentum is leveling off, but it hasn't given a confirmed Sell signal yet.
NWE provides energy to a growing part of the US. Management has grown top line revenue and impressively increased margins. It has more than enough cash flow to cover interest and dividend payments. And the dividend yield of 4% is very attractive in the current environment.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.