Vectren (NYSE:VVC) is probably not a household name, unless of course you live in Indiana or Ohio and they provide your gas or electricity. With that said, we think that investors may want to familiarize themselves with this company as it is the most attractively priced utility out of the 118 utility stocks we cover. For starters, Vectren is an energy holding company for three public regulated utilities operations: Indiana Gas, Southern Indiana Gas and Electric ((SIGECO)), and the Ohio operations.
Realistically, Vectren’s business can be broken down to simply Gas and Electricity services. The natural gas segment accounts for over half of the company’s sales, but less than a third of their net income because they make a smaller spread on supplying gas. The electric utility is just over one-fifth of the company’s revenue but provides about 40% of net income. One of the main reasons for Vectren’s profitability in electricity is because they supply the vast majority of the coal used in producing electricity from their own mines. In general, producing the coal instead of buying it from a third-party (like gas) leads to greater cost savings and higher profitability.
In terms of Vectren’s valuation, we compare the company’s current valuation versus how the market has valued it in the past. So, over the last ten years the market has been willing to pay .89x to 1.16x times revenue per share, but the current price-to-sales level is below that range at .83x. Furthermore, price-to-cash earnings is currently only 3.6x, but the market has historically ranged all the way from 6.1x to 8x. Clearly, this stock has fallen out of favor with the market for any number of reasons, but with a 6% yield investors can afford to wait for its perception to change. Based on the current fundamentals, if the stock were to reach just the lower end of those ranges, it would imply a price of around $34 per share or 50% higher than today’s close.
Of course, as with any stock investment, there are risks. Being a regulated utility means that Vectren has little to no control over their pricing, as it is mandated by the state. If the state came down hard on utilities, Vectren would have little recourse and profits would suffer. Also, there is no potential for rapid growth for a regulated utility, aside from a major ramp up in power usage within their covered area. However, those are always the drawbacks involved with a utility stock, but we think at these valuations there is enough appreciation potential to attract investors.
For investors worried about the near term future of the stock market, this may be a decent defensive option with a beta coefficient of only 0.39. Furthermore, the yield which has been steadily rising also offers some protection for investors. With limited downside risk and a valuation that suggests plenty of upside, we think long term value investors should begin to familiarize themselves with Vectren.