INVESTMENT THESIS
Analysts’ rating on Xcel Energy Inc. (NGS: XEL) is HOLD based on valuation. Over the last 52 weeks, XEL has traded between $47 and $74.
The company has shown solid cash flow growth, and is now investing in infrastructure upgrades. Continued debt refinancing at relatively low interest rates and balanced regulation at the state level should help offset pressure for additional external financing, including dilution from new stock issuance. In Analysts’ view, the company’s geographic diversity with respect to different state regulatory commissions is also a strong positive. We estimate that with prudent external financing for future capital expenditures and continued customer growth in its electric and gas service territories, Xcel could earn 9.9%-10.5% on common equity and perhaps a bit more if it can add new higher-margin wholesale contracts for electric power. The stock also carries a dividend yield of about 2.4%.
Like many electric utilities, Xcel is facing revenue pressure from customer conservation efforts, energy efficiency programs, and soft economic activity in most service areas. However, we believe that the company has made significant progress in addressing these challenges. In addition, operating margins have improved over the last two years due to lower coal and natural gas costs.
RECENT DEVELOPMENTS
The beta on XEL shares is 0.29.
In addition, sales declined on a weather-adjusted basis, but exceeded management’s previous estimates.
At NSP-Minnesota, earnings increased $0.06 per share for the 3Q20 and $0.08 year-to-date.
At PSCo, earnings increased $0.03 per share for 3Q20 and $0.01 year-to date.
At SPS, earnings increased $0.04 per share for 3Q20 and $0.04 year-to-date.
At NSP-Wisconsin, earnings increased $0.02 per share for 3Q20 and $0.04 year-to-date.
EARNINGS & GROWTH ANALYSIS
Management has narrowed its 2020 EPS guidance range to $2.75-$2.81 from $2.73-$2.83 per share. In addition, the company has initiated 2021 earnings guidance of $2.90-$3.00 per share. In addition, we expect earnings to be challenged by lower AFUDC, but to benefit from favorable regulation at the state level.
FINANCIAL STRENGTH & DIVIDEND
Analysts’ 2020 dividend forecast is $1.72, and Analysts’ 2021 forecast is $1.78. Management is targeting long-term dividend growth of 3.5%-4.0% annually, and has established a long-term target payout ratio of 65%-70%.
MANAGEMENT & RISK
Ben Fowke is the chairman, president and CEO of Xcel Energy. Brian Van Abel is EVP and CFO.
Other potential negatives include interest rate increases, inflationary pressures, unfavorable legislative or regulatory decisions, or a sizable overall decline in the utility industry’s average P/E.
COMPANY DESCRIPTION
Xcel Energy is an electric and natural gas utility with regulated operations in eight Western and Midwestern states. The company provides energy-related products and services to 3.5 million electricity customers and 1.9 million natural gas customers through its regulated operating utilities. The company is headquartered in Minneapolis.
VALUATION
Analysts’ rating on XEL is HOLD based on valuation. Over the last 52 weeks, XEL has traded between $47 and $74. The shares are currently trading at a high 25-times Analysts’ 2021 EPS estimate, near the top of the P/E range for comparable utility companies with fully regulated operations. The stock also trades at a premium to peers based on price/cash flow and price/book multiples. Analysts’ earnings model now projects a value of $64 per share for XEL, while Analysts’ DCF model points to a value of $62. Blending these approaches, we arrive at a fair value of $63 per share, below current levels. We would consider a more aggressive posture at the $58-$60 level in a normally trending market and absent any deterioration in the company’s strong fundamentals.
On November 6 at midday, HOLD-rated XEL traded at $73.68, down $0.05.
Source: Argus
