When even perma-bull Jim Cramer is scared, it behooves you to reach for a safety net. Picking a strong, growing utility like Northwestern Corp (NYSE:NWE) can help you preserve your money, while earning a good dividend (and hopefully growing your money). This corporation does business as NorthWestern Energy. It provides electrical and natural gas services in Montana, South Dakota, and Nebraska. It is small at a market cap of $1.26B. Yet it is big enough to be a safe haven. It trades at a P/E of 13.74 and an FPE of 13.48. It pays a 4.26% ($1.48) annual dividend.
It has a five year EPS Growth Estimate per annum of 5.5% -- good for a utility. NWE serves an area that stands to grow its population (and thus NWE's customer base) in the next ten years as the new oil shale operations bring new prosperity to the region. A few technology companies may even move to the area due to the relatively cheap cost of living and the often picturesque scenery. These businesses both will bring further more mundane businesses along with them. These states economies should boom relative to the majority of other US areas. This can only help a major utility in the area -- Northwestern Corp.
If you like "green" companies, this is also the company for you. It generates approximately 60% of its electrical power from hydropower. It is growing its wind power generation (still a small contributor). It uses natural gas turbines to generate the rest of the electrical power it supplies. This is much cleaner than the other common electrical generation fuel -- coal. It doesn't seem likely that Northwest Corp will run afoul of any environmental groups in the near future. This is one less thing to worry an investor.
The earnings results have been strong. It did miss two quarters out of the last four. However, those misses were only by one penny each. This may not be Fortune 100 type of management, but it is good. On top of that Northwest Corp. beat estimates by $0.20 in Q4 2011 (27.40%). Was this a fluke? I don't think so. Natural gas prices dropped precipitously in Q4 2011. Since natural gas prices could go up again at any time, it is unlikely that the company will pass much if any of these savings onto its customers. The customers would complain too strongly if Northwestern raised prices soon afterwards. Northwestern distributes this now much more profitable natural gas to customers directly.
Plus, it uses natural gas to generate a significant proportion of its electrical power using turbines. This accounts for much of the extra profits in Q4 2011. Northwestern would not have put such savings into their earnings estimates for the same reason they would not pass along the savings to the customers. The price of natural gas could rise at any time. Given this it seems extremely likely that Northwest, especially the stock price, will benefit greatly from much lower natural gas prices in Q1-Q3 of 2012. When the company gets to Q4 2012, the comparisons will start to be comparable.
Then the earnings growth will level out somewhat. You can stick with this still great stock at that time (or a little before), or you can just decide to go somewhere else. Regardless of your later decision, this could be a great place to hide during the depths of the EU recession. It is fairly certain that natural gas prices will remain low for all of 2012. There is too much over supply currently, and more is still coming online.
Unfortunately there is at least one piece of bad news. On Feb. 2, 2012, Northwestern Corp. announced that its Dave Gates Generating Station will be down for a period of several months following the discovery of a problem with the gas turbines. These are under warranty, but Northwestern will have to pay another company to replace the electrical energy the station would have generated. The first turbine is slated to go back online about 45 days after this announcement. It may be 90 days before the last turbine goes back online. This is bound to hurt Northwestern's bottom line for Q1 2012. Still this should be a very transitory problem, and Northwestern's customers should remain happy. They will still get their electricity.
The two year chart of Northwestern Corp. provides some technical direction for the trade.
click to enlarge
The slow stochastic sub chart shows that Northwestern Corp. is near over sold levels. The main chart shows Northwestern Corp. is in a strong uptrend. Its 50-day SMA has been above its 200-day SMA for over two years now. I can find no fundamental reasons why these technical conditions should not continue at least until Q4 2012. Even then Northwestern is still a great company with a good long term outlook. It is appropriate to buy this now. However, the overall market is still over bought. Plus the recent economic news from the EU is worrisome.
A disorderly Greek default, which could happen as early as Thursday, could cost the EU $1.3B. There are many problems beyond this. Many of the EU countries are going into recession. On top of this China this week revised its 2012 GDP estimate from +8.0% to 7.5%, and yesterday Brazil reported a FY2011 GDP of +2.7%, which is far lower than the +7.5% it reported for FY2010.
Given all of this world economic weakening, it may be wisest to average in. Still this is a "feel good" stock that should also perform. Few people are likely to be unhappy to have it in their portfolios. Another utility almost everyone may want in their portfolio is "Steady Eddie" Consolidated Edison (NYSE:ED). I have previously written about "Steady Eddie".
Good Luck Trading.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NWE over the next 72 hours.