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Published: October 27, 2009
Sometimes the market drops the ball.
That's when value investors strike.
In this case, investors should look into one area the market
left behind in the rally: Utilities. Many of these companies
were beat up during the selloff, but because of plummeting
natural-gas prices, they didn't participate in the rally.
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Natural gas is the country’s second-largest fuel source for
power generation. The bottom fell out of the natural-gas market
more than a year ago, and electricity prices sank with it. The
industry built a significant amount of storage capacity as
inventories increased +15% higher than the five-year average,
according to the Energy Information Administration.
Until winter comes and people turn their heaters on, supplies
will remain high. That shouldn't last for long, especially as
winter is approaching the northern part of the country.
Some utilities still trade at the same levels they did in March,
even after a rally of more than +60% in the S&P 500. The market
downturn combined with falling natural-gas prices created the
perfect storm, and some utilities were left for dead.
The assets of these companies can still be had for
embarrassingly cheap prices.
These companies are trading at
steep discounts to their asset
values, shown by the price-to-book
value (P/B) measurement. You can
calculate book value by subtracting
liabilities from assets on a
company's balance sheet and dividing
that number by the number of shares
outstanding. This figure is known as
per-share book value. To see what
the market is paying for those
assets, divide the company's share
price by the book value per share.
Anything over 1.0 is the market’s
value of the company’s underlying
business.
But the market isn't even paying
full price for the assets of these
utilities. They are paying less for
the company that the net value of
its transmission pipelines,
power-generating equipment and other
tangible property. Three out of the
four companies in the table are
profitable, but the market is paying
nothing for those profitable
businesses. Even with the headwinds
facing utilities, that's hard to
believe.
And it’s not likely to last long.
These companies are a safer way to
play natural gas than buying natural
gas futures with
troublesome funds
like the U.S. Natural Gas Fund
(NYSE: UNG), which trades for a +4%
premium. But they're also value
plays, trading for discounts of -20%
or more.
The best part about this sector:
Generous dividends. So while
investors wait for a recovery in
prices, they can collect a fat
quarterly check in the meantime.
This year, the Natural Gas Supply
Association expects demand to be
flat compared with last year, but
there are a few wild cards at play.
Forecasts suggest a slightly warmer
winter for some part of the country,
but that could be offset by a much
colder winter in the Northeast.
Economic conditions also could
improve and cause an uptrend in
prices. This could have even more of
an impact on prices than the
weather.
The best pick in the table above is
NiSource (NYSE: NI), a holding
company that stores and distributes
natural gas from the Gulf Coast to
the Northeastern corridor. Its 3.8
million customers make it the best
positioned utility to benefit from a
cold winter in the Northeast.
NiSource's shares are up +35% for
the year, but still trade at a -20%
discount to book value -- while
paying a generous 6.6% dividend.
Natural-gas prices won't stay down
for long. If the Northeast freezes
this winter, or a recovery sets in,
expect Nisource's shares to continue
their winning streak.-- Brad Briggs
Staff Writer
StreetAuthority |
