Mt. Carmel Public Utility: Shining Light On The Dark Mountain

Summary

• MCPB is categorized as a Caveat Emptor company by OTC Markets.
• Information on this company is sparse for lack of public release.
• I present publicly filed information not found on any financial site to date.
• This company is not as risky as OTC Markets presents and offers a buying opportunity.

Thesis

My aim in this article is to provide more information on this nanocap that’s been seemingly missing from financial market participants for some time. I scoured the internet and found the company’s filings with the Illinois Commerce Commission for the years 2016 – 2019. I’ll give a brief look into their main lines of business just to give a better idea of how its making money, and then I’ll present some of the metrics that can commonly be found on Seeking Alpha under the “Value” tab. Lastly, I’ll give my recommendation of how this stock can fit in your portfolio.

Introduction

The search for alpha can take us to unique corners of the market. When I was looking around and readjusting my portfolio to add some more less volatile dividend yielding stocks, I came across an article here on Seeking Alpha that gave a good summary of what the author called the “Secret OTC List”. I’m a big fan of using utilities as counters to volatility, so one name on the list that piqued my interest is Mount Carmel Public Utility, a nano-cap dividend paying utility.

As a microcap, it’s often hard to find information on such stocks. However, in the vast majority of cases, there’s usually a popular financial site or two that will have some financial information on what you’re looking for. That wasn’t really the case with MCPB and the places I looked (Seeking Alpha, Marketwatch, Yahoo! Finance, NASDAQ, and Schwab). So, if I couldn’t find readily available information, why pursue this any further?

I’ll say it again, I like using utilities to fight volatility. I see their dividends as the frosting and the low beta as the cherry on top for investing.

Mount Carmel Public Utility, according to the list and other typical financial sources, has anomalously sparse information, even for an OTC microcap. Most OTC stocks have some information available, even if it is outdated or incomplete. OTC Markets lists Mount Carmel Public Utility as Caveat Emptor (effectively, the company reports or doesn’t what it pleases to the public).

Given my experience with utilities, I know that these companies are subject to regulation and thus filings of some sort must exist somewhere that public investors haven’t been able to find or haven’t looked very hard for. The answer came when I looked at the state-specific level. The Illinois Commerce Commission houses regulatory filings (including financial statements) for Mount Carmel Public Utility.

Dividends

The dividend has been $1.20 per share each year from 2015 through 2019. At $34.40 per share, the dividend yield is a respectable 3.5%. Based on utility ETFs, this seems to be in-line with the utility sector (not abnormally high or unjustifiably low all else equal). The dividend payout ratio has ranged from 56% (2016) to 15% (2018) based on Net Utility Operating Income. You can see how the $1.20 dividend compares to the utility’s earnings below. It seems like the 3.5% is very safe based on earnings.

Earnings

The chart below shows Net Utility Operating Income over time. This figure has a 10.7% CAGR since 2015, but it obviously doesn’t go up in a straight-line. Some of the variability is due to rate changes, some of it is due to weather (colder weather requires more heating), and some of it is due to the variability in depreciation (due to capex timing) and taxes (due to deferrals, tax law changes, etc..).

Source: Author’s calculations

Based on this data, MCPB is priced at 8.4 times the average net utility operating income, or earnings, for the periods shown, 7.8 times 2019 earnings and ~8.0 times 2020 extrapolated earnings. In this analysis, I took the revenue CAGR for the period and assumed that the various expenses are the average percent of revenue they were for the period, 2015 to 2019. For a utility, the price to underlying earnings is very cheap, especially in a low interest rate environment. Some of this is understandable given the company’s sub-$7 million market cap, lack of geographic diversification, and focus on a less urban/ less growthy area in Illinois.

For context, the Utilities Select Sector SPDR® ETF shows a forward price-to-earnings of 18.54 times (as of November 24, 2020). If you click the hyperlink, you can see the most recent figure available.

Book Value

MCPB’s book value fluctuates as well. The book value ends up slightly down in 2019 compared to 2015. The average book value for the aforementioned period is $27.72 per share and the corresponding price to book is 1.24 times. As of 2019, MCPB is marked at 1.22 times book value. We can see that MCPB is priced much more cheaply than larger publicly traded utilities when compared against the SPDR® ETF, which has a current price to book of 1.99 times. With the extrapolated data shown above, I determined a book value of $31.27. Bear in mind, that reality will differ from an extrapolation, possibly wildly so. Prospectively, the Utilities Select Sector SPDR® ETF shows a forward price-to-book of 2.08 times (as of November 24, 2020). If you click the hyperlink, you can see the most recent figure available. Using our calculated book value of $31.27 for MCPB, if the stock price remains constant, then we are looking at a price to book ratio of 1.10 times, almost half of the rest of the utilities sector.

Source: Author’s calculations

Conclusion

Assuming you can get your hands on shares at a price at or below $34.40, I think it is worthy of a small allocation in a diversified portfolio. The relative undervaluation in this low interest rate, hard-to-find cheap opportunities environment makes this an attractive way to get access to utility exposure. However, investors should view any purchase with the perspective of a long-term shareholder. Given the lack of liquidity, small size, lack of big news historically and lack of transparency without significant digging, it’s possible short-term minded investors may find this stock unattractive. My hope is that the discovery of the Illinois Commerce Commission filings will shed new light on this stock and encourage investors to not give up on stocks that pique their interest, even if there doesn’t seem to be information on the surface.