The list below compares the positive DuPont analysis to data on the valuation and debt of four US utility companies.
We began by screening utility companies for positive DuPont breakdowns based on return on equity (ROE). The DuPont formula uses ROE for its profitability measurement. The higher the ROE, the more profitable the company appears, but this profitability can come from many sources - some better than others.
In general, an encouraging DuPont breakdown implies one or more of the following:
- Improving Net Profit Margin, i.e., higher Net Income/ Revenues
- Improving Asset Efficiency, i.e., higher Sales/Assets
- Decreasing Financial Leverage ratio, i.e., lower Assets/Equity
Companies passing all requirements are thus experiencing increasing profits due to operations and not to increased use of leverage.
We limited the results of our initial screen to those operating in electricity, with a customer base greater than 500,000.
Next we analyzed each stock for evidence of undervaluation, a factor that many investors take into account when looking for a bargain. A P/E ratio under 12 and PEG below 1 typically indicate a company is undervalued relative to earnings growth. However, based on data from Finviz, the US electric utilities average P/E is 23 and PEG of 4.23, and all names on this list are valued below that, suggesting they are still attractive for their industry.
We also calculated each stock's relative strength index (RSI), another factor that can reflect undervaluation. Typically, an RSI at or below 30 may indicate a stock is oversold and therefore becoming undervalued. The RSI range for the companies on our list fell between 45 and 55.
In addition to valuation, we focused on the total debt of the stocks. In general, a debt-to-equity ratio of less than 0.1 indicates strong credit quality companies. However, debt-to-equity ratios differ across industries. Based on data from Finviz, the average debt-to-equity ratio for electrical utilities is 1.36.
When looking for electrical utilities that are showing signs of greater profits, this list is a good example of why other criteria such as earnings growth and debt should also be important to investors, and should be considered on an industry basis.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
Does the hard data speak for itself? Use this list as a starting point for your own analysis.
1. Portland General Electric Company (POR): Operates as an integrated electric utility in Oregon. Serves over 800,000 customers.
Market cap at $2.39B, most recent closing price at $31.60.
MRQ net profit margin at 10.36% vs. 10.23% y/y. MRQ sales/assets at 0.084 vs. 0.083 y/y. MRQ assets/equity at 3.222 vs. 3.421 y/y.
Long term debt/equity: 0.87
52 week high: -3.16%
52 week low: 36.61%
POR has recorded great gains over the last month, when compared to its closest competitors. The stock returned 2.91% since 4/12/13, better than NextEra Energy, Inc. (NEE) and Dominion Resources, Inc. (D), which returned 0.64% and -0.62%, respectively, during the same holding period.
And according to The New York Times Dealbook, POR has gained 28.19% over the last 12 months, outpacing the S&P 500, and its operating profit margin, with a three-year annualized change of 17.04%, is in line with the sector average, 17.40%. POR services roughly 4,000 square miles within Oregon, including Portland and Salem, as approved by the state. This area is home to about 44% of the state's residents.
POR is implementing new technology systems in several areas, including transmission and distribution, human resources, and finance and accounting. These technologies are expected to help improve processes and reduce operating cost, which are critical to its efforts to keep customer prices low in the face of increases in regulatory and inflationary cost, and may be expected to further boost the company's profitability.
2. UniSource Energy Corporation (UNS): Engages in the electric generation and energy delivery businesses. Serves approximately 630,000 customers.
Market cap at $2.04B, most recent closing price at $49.12.
MRQ net profit margin at 3.42% vs. 2.05% y/y. MRQ sales/assets at 0.081 vs. 0.079 y/y. MRQ assets/equity at 3.849 vs. 4.174 y/y.
Long term debt/equity: 1.59
52 week high: -2.98%
52 week low: 44.12%
UNS has recorded a solid performance over the last month, returning 0.22% since 4/12/13. This performance has eclipsed the likes of D and Duke Energy Corporation (DUK), but has lagged NEE, which returned 0.64% during the same holding period.
UNS has a higher than average projected earnings growth rate over the next 5 years (8.0%). This above the likes of Southern Company (SO) (projected EPS growth over next 5 years at 5.0%) and DUK (projected EPS growth over next 5 years at 4.17%).
UNS is a diversified business with a primary subsidiary, Tucson Electric Power Company (TEP). TEP reported net income of $1.5 million in the first quarter of 2013 compared with a net loss of $1.5 million in the first quarter of 2012.
And the company announced a second quarter dividend of $0.435 cents per share to be paid on June 26, 2013 to common shareholders of record as of June 7, 2013, as reported by Reuters. In addition, analysts and investors will have the opportunity to meet UNS Energy management on May 5-7, 2013 at the American Gas Association Financial Forum in Naples, FL.
3. DTE Energy Co. (DTE): Operates as an electric and natural gas utility company in Michigan. Reaches 3.3 million customers via subsidiaries.
Market cap at $12.16B, most recent closing price at $69.88.
MRQ net profit margin at 9.3% vs. 6.97% y/y. MRQ sales/assets at 0.097 vs. 0.087 y/y. MRQ assets/equity at 3.416 vs. 3.638 y/y.
Long term debt/equity: 0.95
52 week high: -3.51%
52 week low: 34.01%
Much like UNS, DTE has made steady returns over the last month, returning -0.07% since 4/12/13. This performance has also outpaced D and DUK, but fell behind NEE, which returned 0.64% during the same holding period.
DTE Energy Co. has a low short float compared to industry averages, suggesting perhaps that short sellers see limited downside in the stock. The company's short float stands at 0.85%, much lower than NEE (short float at 2.22%, representing 4.55 days of trading volume) and SO (short float at 1.38%, representing 3.2 days of trading volume).
DTE's subsidiary, DTE Pipeline Co. recently placed the northern portion of its Bluestone Project, which is a natural gas pipeline which can transport up to 600,000 million cubic feet per day. The Bluestone Project delivers gas from the Marcellus Shale in Pennsylvania and New York to the Millennium and Tennessee Pipelines, and it created about 1,000 construction jobs.
4. CMS Energy Corp. (CMS): Operates as an energy company primarily in Michigan. Serves over 6 million customers.
Market cap at $7.57B, most recent closing price at $28.36.
MRQ net profit margin at 7.28% vs. 3.84% y/y. MRQ sales/assets at 0.115 vs. 0.108 y/y. MRQ assets/equity at 5.224 vs. 5.3 y/y.
Long term debt/equity: 2.08
52 week high: -4.54%
52 week low: 32.48%
CMS has also recorded a solid performance over the last month, returning -0.25% since 4/12/13. CMS has closely matched UNS and DTE, beating out competitors such as D and DUK, but still trails NEE and POR, which returned 0.64% and 2.91%, respectively, during the same period.
The company announced on 4/25/2013 that recent credit rating upgrades from Moody's and Standard & Poor's elevated CMS's long-term debt rating to investment grade, a level never previously achieved by the company. CMS currently has $0 due in 2013, $450M due in 2014, $650M due 2015, and $530M in 2016.
And CMS has not resorted to drastically raising rates in order to increase revenue, a boon to customers and a possible sign of strength in the company's operations. President and CEO John Russell stated the company has a long-term plan to maintain the average base rate increases at or even below the rate of inflation over the next five years for most consumers.
*Accounting data sourced from Google Finance, EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.