CenterPoint Energy, Inc. (CNP) is a public utility company with its headquarters in Houston, TX. Indirectly, it owns CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast, which includes the city of Houston, and CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in six states. The company operates in six segments: Electric Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines, Field Services and Other Operations. Last-twelve-month total revenues as of 2013Q2 have been $8.35B, which is up 8.8% compared to the total of 2012. EBTIDA was down $90M in the same comparison period, or $1.99B. On July 25, 2013, CenterPoint Energy's board of directors declared a regular quarterly cash dividend of $0.2075 per share of common stock payable on September 10, 2013, to shareholders of record as of the close of business on August 16, 2013. This marks a 2.5% increase over the same figure last year and represents a 3.45% annual dividend yield. During the 2013Q2 earnings call the management reaffirmed full-year EPS guidance of $1.17 - $1.25 per diluted share. Effectively, the stock is trading at a Forward '13 P/E of 20.5X - 19.2X (as of August 13, 2013):
This falls within the sector's ranges:
The 5-year EPS growth figure of -4.68% seems to be reversing this year with LTM data on the rise. The total enterprise value of the company as of August 13, 2013, is $21.13B:
CenterPoint Energy, Inc. shall be valued both using fundamental and technical analyses. The first one consists of two parts: DCF and Sum-of-the-Parts (SOTP), which are distributed approximately 70-30. I used SOTP projections to complete the total company DCF. Technical analysis has been performed by Recognia Inc. accessed through TD Waterhouse online broker.
Before I proceed to the output of the model, I would like to focus a little on the history of EV/EBITDA multiple (5-year history plus LTM):
I felt it was important to do a little historical analysis of the multiple in order to exclude any extreme values, such as the 24% surge in the last 12 months. The reason it is crucial is that this multiple greatly affects Terminal Value [TV] in the output. Moreover, TV always makes up the biggest chunk of the value composition, often being as high as 80%+ of the total number.
Let us proceed to the output of the model, which is available in the downloadable workbook:
The total fair value per share is in the range of $20 - $25 but I incline towards the lower range in order to use values within the historical EV/EBITDA multiples. The wide variability can be explained by single-digit multiples (i.e. an increase from 8.0X to 9.0X is greater in percentage terms than an increase from 12.0X to 13.0X, although it is a one-point change in both cases). The overall composition is brought together in the following chart:
This is the first time in my analyses when balance-sheet related items made a drag on the total fair value. The reason is that CenterPoint Energy has been gradually diluting EPS by continuous increases in the total number of shares outstanding:
Thus, the distribution of the fair value drivers, excluding the effect of the equity dilution, looks like this:
- Terminal Value makes up four-fifths of the total value. Readers should keep in mind the sensitivity of this driver to a vast number of factors, including external (i.e. revenue growth) and internal (i.e. change in interest expense caused by reshuffling of the capital structure). Single-digit EV/EBITDA multiples aggravate the sensitivity even further;
- Dividends represent a decent share of the total fair value per share composition. Keep in mind that they are already discounted by the firm's Cost of Equity, which is slightly higher than WACC. I projected dividend growth to be 2.5% CAGR for the next 5 years;
- Next 5-year Free Cash Flows total 5% of the total amount. They are, in fact, Adjusted Free Cash Flows, as I call them, because they are net of projected dividend payments. It is important for CenterPoint Energy to be in the black territory in this metric in the long run.
Fundamental analysis has shown the "bits and bolts" of the company's fair value. Let us proceed to the market activity.
The following chart demonstrates intermediate-term buy/sell signals for the stock:
Approximately at $25 we see the buy signal and slightly below $24 we see a bearish signal. Also, notice the increased trading activity in the last week with trading volumes approaching 10M shares a day. This may indicate that the $24 benchmark is the current support level with the 50-day moving average closing in.
The stock is trading within the fair value range, according to my analysis. A number of megabanks and large brokerages have downgraded the stock to "HOLD" and assign targets of $26 - $27 per share. I have been more conservative in my calculations and believe the shares are trading slightly above the midpoint of the fair value range. Essentially, it all comes down to the management's ability to reverse the 3-year decline in revenues. We have seen that LTM data suggests that the slide has come to an end but we have to wait until the year-end results, which is another 6 months, or so.
I issue a "HOLD" recommendation on CenterPoint Energy's stock. Buyers may want to wait for another 5-10% drop to get a better yield in order to be compensated for the short-term uncertainties in the turnaround activity. If fundamental data supports, the next buying opportunities are above the $25 levels, intact with the technical analysis.