Xcel Energy (NYSE:XEL) is an overshadowed, consistent company with solid potential as the company continues to expand operations and grow the already large customer base. This is not the type of stock that will double in a year, but it provides a solid foundation for any portfolio looking for steady returns and a nice dividend. Below is our introduction into the business model, the company's strengths, and buying opportunity that exists for Xcel Energy as the stock has pulled back off of 52-week highs of $31.79 over the course of the last 7 months.
Investors and Wall Street continue to fail in realizing value in this company. The traditional issue with Xcel Energy is the way that Wall Street has viewed the company in the past. Traditionally, the company was viewed as the classic boring utility company that pays a steady dividend. This has led to a decline in the shares of Xcel Energy over the last few months as value has been found in other sectors. The question now is whether or not the company is undervalued as it continues to expand operations all over the country. The company has improving fundamentals and business prospects beyond 2014 and revenue will see a nice increase this year. The company has a market cap of $14.03 Billion and reports the next quarter on January 30, 2014. With this in mind, we value Xcel Energy at $30.00 by second quarter-end on May 30, 2014 and $32.00 by year-end 2014, an increase of 13.47% from current levels. We strongly feel that this company has the potential to see solid upside over the next year as it takes advantage of new market opportunities and continue to drive growth in the new businesses.
We hope that potential investors are presented with a thorough and comprehensive view of Xcel Energy, and at the end can look at the facts presented and the insightful research in order to support our decision to buy or sell shares in the company examined. The discussion begins with an overview of the company and the different businesses and potential new products being developed.
Xcel Energy at a Glance
Xcel Energy Inc. engages in the generation, purchase, transmission, distribution, and sale of electricity in the United States. It operates through Regulated Electric Utility, Regulated Natural Gas Utility, and All Other segments. The company generates electricity using coal, nuclear, natural gas, hydro, solar, biomass, oil, and wind energy sources. It is also involved in the purchase, transportation, distribution, and sale of natural gas. In addition, the company engages in developing and leasing natural gas pipelines, and storage and compression facilities, and investing in rental housing projects. It serves residential, commercial, and industrial customers, as well as public authorities in the portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin.
Xcel Energy Growth Strategy
Expanding Existing Operations
A substantial portion of revenue growth has been generated by expansion into new geographic regions. The company will continue to seek opportunities to further increase business, and the primary focus should be on developing and expanding existing revenue bases by strengthening customer relationships, and adding new customers.
Improved Asset Productivity
The company is focused on improving the revenue generated from all core business operations. XEL can accomplish this objective through increased cost savings and aggressive investment structures, both of which are expected to increase over the course of the next year.
Strengthening Customer Relationships
XEL markets services and products to both existing and new customers that complement existing operations. The company seeks customers who will diversify the revenue base and present new opportunities going forward.
Diversifying Service Offerings
Xcel Energy is committed to providing customers a broad and growing range of energy products and services and continues to invest considerable resources toward developing a range of solutions for energy customers. Each product and service offering produced revenue growth in 2012 as well as 2013. XEL will continue to leverage nationwide and provide expertise and synergies by adding value to customers through diversified offerings.
Large Energy Customer Base
Xcel Energy has a diversified customer base in over 8 states with long-term contracts. This means that Xcel Energy is not too reliant on a single customer as a source of revenue, limiting downside on any changes in customer base. New contracts are renegotiated every three to five years, which gives Xcel insight into what the future looks like for continuing business. One important factor to look at with Xcel Energy is that the boost in average customer retention rate of over 98% since 2000 being a dominant energy provider in over 8 states, which provides stable revenue stream and protects against industry downturns on business.
Business and Geographic Diversification in High-Growth Areas
Xcel Energy is well diversified across multiple operations of the utilities industry. This diversification affords it protection in the event of a downturn in any one sector while providing the ability to offer a "one stop" solution for energy customers. Higher growth areas such as North and South Dakota will prove to be important growth drivers going forward.
Highly Efficient, Flexible Structure Drives Significant Free Cash Flow Generation
Xcel Energy has a strong focus on return on net assets and high free cash flow generation in order to maximize shareholder value. The company has done a great job with cost control with active asset management strategies that results in a business model with a high degree of operating leverage. We wouldn't be surprised to see Xcel Energy increase the dividend as it continues to generate large amounts of cash in the future. Notice in the chart below how the operating expenses curve has flattened while revenue has remained consistent, with nice growth prospects going forward.
Increasing Market Share and Growing Business with Current Customers - XCEL Energy has committed to expanding existing relationships with the current customer base while securing new customers. XCEL has done this and continued to take market share by providing a "one stop shop" for energy products. Several of the largest customers have recently switched to sole or primary service contracts with Xcel Energy, locking in long-term contracts that will guarantee solid revenue for the foreseeable future. There are also significant opportunities to expand intrastate with current North American contracts.
How Xcel Energy Continues to Build Shareholder Value - Making Investments that Drive Value
- Attractive growth opportunities
- Improving regulatory constructs
- Operational Excellence
- Proactive risk mitigation
- Balanced value proposition
- EPS growth of 4% - 6%
- Dividend growth of 4% - 6%
Understanding the Main Components of the Xcel Energy Business - Constantly Evolving
NSP-Minnesota is an operating utility primarily engaged in the generation, purchase, transmission, distribution and sale of electricity in Minnesota, North Dakota, and South Dakota. The wholesale customers served by NSP-Minnesota comprised approximately 4 percent of its total KWh sold in 2013. NSP-Minnesota also purchases, transports, distributes and sells natural gas to retail customers and transports customer-owned natural gas in Minnesota and North Dakota. It provides electric utility service to approximately 1.4 million customers and natural gas utility service to approximately 0.5 million customers. Approximately 89 percent of NSP-Minnesota's retail electric operating revenues were derived from operations in Minnesota during 2013.
NSP-Wisconsin is an operating utility primarily engaged in the generation, transmission, distribution and sale of electricity in portions of northwestern Wisconsin and in the western portion of the Upper Peninsula of Michigan. The wholesale customers served by NSP-Wisconsin comprised approximately 6 percent of its total KWh sold in 2013. NSP-Wisconsin also purchases, transports, distributes and sells natural gas to retail customers and transports customer-owned natural gas in the same service territory. NSP-Wisconsin provides electric utility service to approximately 251,000 customers and natural gas utility service to approximately 108,000 customers. Approximately 98 percent of NSP-Wisconsin's retail electric operating revenues were derived from operations in Wisconsin during 2013.
PS Colorado (PSCo)
The wholesale customers served by PSCo comprised approximately 13 percent of its total KWh sold in 2013. PSCo also purchases, transports, distributes and sells natural gas to retail customers and transports customer-owned natural gas. PSCo provides electric utility service to approximately 1.4 million customers and natural gas utility service to approximately 1.3 million customers. All of PSCo's retail electric operating revenues were derived from operations in Colorado during 2013. A significant portion of PSCo's large commercial and industrial electric sales include customers in the following industries: fabricated metal products, as well as oil and gas extraction. Generally, PSCo's earnings contribute approximately 45 percent to 55 percent of Xcel Energy's consolidated net income.
SPS is an operating utility engaged primarily in the generation, purchase, transmission, distribution and sale of electricity in portions of Texas and New Mexico. The wholesale customers served by SPS comprised approximately 33 percent of its total KWh sold in 2012. SPS provides electric utility service to approximately 381,000 retail customers in Texas and New Mexico. Approximately 74 percent of SPS's retail electric operating revenues were derived from operations in Texas during 2012. For small commercial and industrial customers, significant electric retail sales include customers in the following industries: oil and gas extraction and crop related agricultural industries. Generally, SPS's earnings contribute approximately 5 percent to 15 percent of Xcel Energy's consolidated net income.
The Future of Xcel Energy Projects
- Monticello uprate and life extension project was a sound investment
- Experience is in line with industry performance
- Hearings scheduled for late summer 2014
- Commission decision expected in 2014
- Original 2013 electric rate increase of $16.9 million
- Interim rate increase of $14.7 million, subject to refund, went effective on Feb. 16, 2013
- In August 2013, revised rate request to $14.9 million, based on a ROE of 10.25% and other changes
- Final decision anticipated in first quarter 2014
Plans in Colorado
- Filed multi-year plan based on:
- ROE of 10.3%
- Equity ratio of 56%
- Rate base of $1.3 billion
- 2013 forecast test year
- Requesting natural gas rate increases of:
- $44.8 million in 2013
- $9.0 million in 2014
- $10.9 million in 2015
- Requesting extension of PSIA rider
- The OCC recommended a rate increase of $0.5 million, ROE of 9% and equity ratio of 51% and the ALJ's recommendation included the following:
- Use of an HTY
- ROE of 9.72%
- Equity ratio of 56%
- A $15 million incremental base revenue increase
- CPUC decision expected in the first quarter of 2014
Rate Increases in Wisconsin
- Seeking 2014 electric rate increase of $40 million (6.5%) and a natural gas rate increase of $4.7 million (3.8%)
- PSCW Staff recommended an electric rate increase of $23.8 million and a natural gas rate decrease of $1.1 million, based on a 10.2% ROE and a 52.5%equity ratio.
- Rates expected to go into effect in January 2014
New Mexico Providing Value
- Seeking 2014 electric rate increase of $32.5 million, including $12.1 million to be recovered through renewable energy rider
- Staff recommended a rate increase of $17.8 million (ROE of 9.8%) and NMAG recommended a rate increase of $9 million (ROE of 8.63%)
- SPS revised its request rate increase to $32.5 million, based on updates and an ROE of 10.25%.
- NMPRC decision is expected in the first quarter of 2014
- Implementation of final rates anticipated in 2014
In the case for Xcel Energy, considering the future prospects and improved pricing surrounding energy and utilities, the company appears to be undervalued compared to its peers. It will see increased spending from customers as pricing continues to improve in improved environments around the country. The recent pullback should be used as a buying opportunity as XEL continues to diversify the business and expand operations. The firm is trading at a discount in almost every valuation metric. Investors should focus on the firm's extremely low Price/Sales ratio (1.30) compared to competitors. When it comes to valuation, XEL appears to be a Buy at this point in time. The company also boasts a nice dividend yield at 4.00%.
Sales Growth is another key metric to look at in the Utilities space. This is an area that has slowed for many companies involved in this sector as competitors needed to re-vamp business lines in accommodating the economic environment. With sales growth of 5.81%, Xcel has proven that a high quality energy product can be successful and a sustainable business. This sales growth does not appear to be slowing down based on the company outlook and sales for 2014. EPS Growth has also remained consistent at 6.64% over the last 5 years.
Xcel Energy boasts a nice Operating Profit Margin at 17.12%, which outpaces other best of breed companies in the sector traditionally at 15.39%. This industry has been challenged by the high costs and tightening margins, but XEL has been very successful in terms of cutting costs and structuring contracts in a manner that will make it profitable.
Obviously, when looking at these measures, XEL is succeeding on all fronts. When specifically focusing on the ROA of 2.92%, the company is performing well when it comes to the operating efficiency, but this is also an area where management has focused on improving. The ROE of 10.20% shows the solid performance in terms of the shareholders' rate of return on investment in the company. XEL has outperformed its peers in a tough environment and with big opportunities approaching in the near future, expect this outperformance to continue.
Xcel Energy - A Solid Dividend Play
Another area for investors to focus is on the company's dividend payout ratio and overall financial strength. The company currently has a 4.00% Yield and has consistently raised the dividend over the past 8 years. Investors should look for this trend to continue as the company continues to grow its customer base around the United States.
- Annual dividend growth target range of 4% to 6%
- Current dividend payout ratio is ~58%
- Capital investment growth opportunities
What Investors Need To Know
The next earnings release will give investors insight into how the firm is positioning its product portfolio for 2014 and beyond. Expect this company to outperform in the Utilities Industry as it has one of the industry's best business models and management teams. The 2013 fiscal year proved that the company has adapted to a new environment and can weather the tougher markets, while positioning the company for strong future growth. This is a firm that has a great opportunity to grow and become recognized over the next year as the environment surrounding the company begins to become more favorable.
With this in mind, we value XEL at $30.00 by May 30, 2014 and $32.00 by year-end 2014, an increase of 13.47% from current levels. We arrive at this number by assuming that Xcel Energy will see an earnings increase of 7% over the course of the next 12 months, the company will begin to trade at an industry average P/E multiple (currently 14.9 and the industry average P/E multiple is 15.5), which gives us multiple expansion of at least 3%, and continued dividend increase representing an additional 3.5% (7%+3%+3.5%=13.5%).
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.
Additional disclosure: AlphaStreetResearch is a team of Investment Research Analysts. This article was written by Mr. Hunter Orr, Director of Research, with research assistance from Mr. Aaron Zander, Junior Research Analyst.