Warren Buffett has made another addition to his list of subsidiaries. This time he's made an investment in the energy utility industry. Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) MidAmerican Energy utility announced that it will buy Nevada's electric and natural gas company NV Energy Inc. (NYSE:NVE) for $5.6 billion to expand its business in the energy sector.
In recent years, MidAmerican has aggressively invested in renewable energy projects. NV Energy said that with the help of MidAmerican's experience it will develop renewable energy projects in Nevada, which has vast solar, wind and geothermal resources.
MidAmerican, based in Des Moines, Iowa, will pay $23.75 per share for the company, which is a 23 percent premium to NVEnergy's closing price on Wednesday 29, 2013. This deal also includes debt, valued at $10.1 billion. The company said that NV Energy will operate as a separate corporate subsidiary of MidAmerican Energy Holdings Company under its current name and will continue to be headquartered in Las Vegas.
About NV Energy:
NV Energy is a holding company, which serves customers through its subsidiaries, Nevada Power Company and Sierra Pacific Power Company. Serving a joint service territory of nearly 46,000 square miles, NV Energy provides a wide range of energy services and products to approximately 2.4 million citizens of Nevada. The company earned $322 million, $1.37 per share on revenues of $2.98 billion in 2012.
The above chart shows the historic stock price performance of NV Energy compared to its competitors-PG&E (NYSE:PCG) and Pinnacle West Capital (NYSE:PNW), along with the Dow Jones U.S. Utilities index. You can see that the company's stock price outperformed Pinnacle West Capital and the industry index with a price appreciation of 11.77 percent over a one-year period. The rise in stock price reflects the investors' confidence in the company's performance.
The growth prospects of the company need to be supported by financial strength and stability in order to allow for sustainable profitable growth. In order to evaluate these aspects of the company's financial performance, a three-part DuPont analysis has been conducted.
Data Source: Morningstar
The above chart illustrates a breakdown of the company's ROE into three parts: net margin, asset turnover and financial leverage. There are two important points to be noted from this analysis. Firstly, the ROE is showing an upward trend in the long run as indicated by the linear trend line, over the years. Secondly, the ROE is majorly supported by net margins and the company has maintained its ROE by reducing its financial risk, which is reflected by the decreasing financial leverage ratio of the company. The important point to be noted here is that a drop in 2011 results was mostly due to rising coal and natural gas prices during the period, as these two are the main sources of energy production for NV Energy .
The above chart illustrates the growth in the company's total assets over the last five years and the ROA achieved by the company. We see a periodic improvement in total assets as they have increased from $11.35 billion to a total of $11.98 billion. Similarly, ROA has improved from 2.01 to 2.73, respectively.
In order to understand the company's performance with respect to its competitors and industry, valuation using multiples can give you a better understanding.
The above chart compares valuation metrics of NV Energy with the industry average and the S&P 500 average. The P/E ratio presents a clear undervaluation with respect to the industry. This shows that the earnings of NV Energy have remained untapped by investors as they have focused towards other players in the industry. P/B and P/CF show similar levels of undervaluation.
Warren Buffett has "an excellent eye to find jewels in the rough". It is a great opportunity for the company to become a part of Berkshire Hathaway's subsidiary MidAmerican, as it will gain access to financial resources and operations of MidAmerican to support growing energy needs. Second, reducing fuel coal prices will help the company to grow in the coming period. Third, as you all know, the housing industry is also recovering, which means the demand for electricity will grow in coming years. In my opinion, the acquisition will give an aggressive boost to this stock. I recommend for investors to invest in this stock.
Disclosure: I 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.