MDU Resources: Delivering Value While Building America

Nov. 01, 2019 5:58 PM ETMDU Resources Group, Inc. (MDU)14 Comments
Thomas Hughes profile picture
Thomas Hughes


  • MDU Resources is a diversified real assets corporation that just blew past consensus estimates for revenue and growth.
  • Core business is growing high double-digits and supported by record backlogs.
  • The dividend is safe and growing, distribution increases are in the future for this Dividend Aristocrat.
  • MDU is already on the move but it's not too late to buy. I see a 20% upside over the next 6 to 12 months.
  • Looking for more stock ideas like this one? Get them exclusively at The Technical Investor . Get started today »

MDU Is Ready To Move

I am so thrilled with MDU Resources (NYSE:MDU) right now I am not sure where to start. I turned it up earlier this year as a play on electric/utility, but it is oh so much more. The company is a diversified real assets corporation with a safe and growing dividend making it a near-perfect play for today's uncertain times.

While most of the business (about 75%) is in construction materials, it has a large and growing presence in infrastructure/construction, electric and natural gas utility, and natural gas pipelines & midstream. The construction materials business is Knife River, one of North America's largest producers of construction aggregates, concrete/cement, and other related value-added products.

The company just reported third-quarter earnings and the stock is on the move. The question now is, is this the time to buy? By my reckoning, MDU is on the way up to retest a two year high right now. Based on the outlook there is a high probability the stock will break out to new highs and advance as much as 20% over the next 6 to 12 months.

Business In General

Business, in general, is good. MDU reported solid top and bottom-line beats that led the company to revise guidance. The company guidance was not raised but it was tightened to a narrower range at the high end of the previous range. The company is assuming weather and business trends will remain intact, the most questionable assumption right now is the weather.

From the 3Q Press Release:

We remain excited about the continuing growth across all our operations and thank our employees, who now number an all-time high of more than 15,000, for their dedication to Building a Strong America" said David L. Goodin, president and CEO of MDU Resources.

The company is targeting a 5-8% CAGR over the indefinite future and is so far on track to do just that. EPS growth in the 3rd quarter topped 10.9% and came in well above consensus estimates.

The Construction Services and Materials Business

The Construction Materials and Services Businesses are the strongest performing segments this quarter and the largest in terms of revenue and earnings. At $102.6 million, earnings for the materials group is about 75% of the total by itself. Add the two groups together and the impact from Construction Services and Materials on earnings expands to 90%.

Revenue for the Materials business grew 17% from 3Q 2018 and drove a 30% increase in earnings. The construction Services business saw revenue increase 45% and drive a 120% increase in earnings. Based on the backlogs reported there is little doubt that these two segments will continue to drive revenue and earnings growth for the foreseeable future.

From the 3Q investor slideshow:

We continue to see exceptional performance from our construction materials and services businesses... We closed the third quarter with record revenue, earnings and backlog of work at these operations. As a result, we are increasing our full-year revenue guidance for our construction operations.

From the 3Q press release:

  • The company continues to see strong economic conditions in the majority of the states where it operates and had record backlog at the end of the third quarter of $747 million, a 27% increase from $590 million in 2018.
  • The construction services business ended the quarter with an all-time record backlog of $1.2 billion, a 34% increase compared to $896 million for the third quarter of 2018.

Utility And Midstream

The Midstream business is likewise growing double digits. At $7.7 million earnings are down from last year but that is due to a one-time tax benefit in the prior year. After factoring that out of the equation, earnings for the group are up 13.25% YOY and on track to continue growing at low to mid-double digits next year.

The downside is midstream and pipeline only contribute about 5.6% to total revenue. The upshot is that the midstream and pipeline industries (in general, as a whole) are expected to see double-digit earnings and revenue growth next year.

The expected growth in the midstream industry is not tied to the price of oil, only to volume transported and fees, which makes it a safe and stable revenue source for MDU. And MDU is on track to expand its footprint so we can expect to see revenue and earnings growth accelerate over the next 12 months. Newly completed projects are going online now-ish while others are slated to begin service late this year and early next year.

Our utility operations and pipeline business also continue to perform very well, with significant investments in growth projects and system upgrades. Our pipeline business placed its Demicks Lake project into service as scheduled in September, continuing to increase our natural gas transportation capacity in the Bakken region.

Despite the vote of confidence, the Utility segment did not perform all that well in the last quarter. The impacts of warmer than expected weather and higher costs resulted in a net-downtick in revenue and earnings. The good news is the Utility segment is a very small 0.50% of total earnings this quarter so not a major factor in the future growth outlook. Even so, the company is expecting a 5% CAGR in rate base over the next five years.

The electric and natural gas utility earned $700,000 in the third quarter, compared to $3.4 million in 2018. The earnings decrease primarily reflects higher operating costs and the effects of moderate summer weather.

MDU Is A Dividend Aristocrat

In addition to earnings strength, MDU is a Dividend Aristocrat. The company has been increasing its distribution for 28 years and fully expects to continue increasing in the coming years. The yield is a little low at 2.8% but sufficiently high enough to be attractive, the broad market is still yielding an average 1.85%. The payout ratio is also low but that's a great thing, at 51% it virtually guarantees future increases regardless of revenue or earnings growth.

The Technical Outlook

MDU popped after the earnings announcement and looks set to move up to the $30 level over the next few days to two weeks. The stock price gapped up on the surge of buying and broke through to a new +1-year high that is supported by momentum indicators.

Both the MACD and stochastic are bullish, MACD is gaining strength and stochastic is firing a bullish crossover, so higher prices are expected. Price action is consolidating at the new highs and above previous resistance where it is likely to build a new support zone. A move up from here is not guaranteed but likely to hit $30 if it materializes.

The Bottom Line

The bottom line is simple here. Real assets have been hot this year because of market conditions, yield and their relative safety compared to other stocks. Within that group, real assets equities have been outperforming. MDU Resources is a diversified real assets corporation that is delivering high revenue and earnings growth and on track to do the same in 2020. On top of that, MDU is a Dividend Aristocrat with market-beating yield.

Based on the charts the market has begun to recognize these facts but it's not too late to get in. I see at least 3.5% upside in the very near term and another 20% longer term and that's in addition to its yield and distribution-growth outlook. MDU is a buy.

With explosive earnings growth becoming ever elusive in today's market I expect dividend growth stocks will outperform the broad market over the next few years. 

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This article was written by

Thomas Hughes profile picture
I am the son of an Army helicopter pilot, a former chef, and a longtime market watcher and trader.I developed my trading style and market strategies writing analysis and commentary for I wrote daily analysis there for nearly a decade before venturing out on my own. I now write the Technical Investor, a market research newsletter where I take a technical approach to fundamental trading.In the Technical Investor, I keep abreast of economic trends and earnings outlook and then apply them to the market and the charts. In so doing, I root out the best sectors and companies for investment from the earnings growth perspective. As a trader, my main focus is the S&P 500 but I follow the broader market as well, gold, oil, the dollar, and cryptocurrencies. When it comes to investing my goal is buying strong dividend-paying stocks with earnings and dividends growth potential at the right technical times. I've found that this combination usually leads to capital gains, market-beating dividends, dividend growth, and an increasing yield on investment over the long term.

Disclosure: I/we 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.

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