March 15, 2012
Recommendation: Strong Buy
Welcome to the Stock of the Day for March 15, 2012. There has been a lot of buzz surrounding utilities lately, so I'd like to take a moment to cover a major East Coast and Midwest utilities player, CenterPoint Energy Inc. (CNP).
Company Overview: Center Point Energy diversifies its operations across five main businesses: 1) Electric Transmission & Distribution, serving the greater Houston metropolitan area. 2) Natural Gas Distribution, to 3.2 million homes across the Midwest. 3) Interstate Pipelines, encompassing 8,200 miles of natural gas pipe. 4) Field Services, gathering and processing natural gas from the mid-continent region. 5) Competitive Natural Gas Sales and Services, selling the processed gas to over 11,000 commercial and industrial customers dispersed across the eastern half of the U.S.
Earnings Buzz: At the end of February, CenterPoint Energy Inc. released mixed operating results for the fourth quarter. On one hand, total sales climbed 2.3% year-over-year to $2.15 billion on strong performance from its Electric Transmission & Distribution business and its Natural Gas sales and Services. Over the same period, profits dipped due to higher expenses; net income declined 6% to $117 million, or $0.27 per share. Nonetheless, analysts forecast earnings of $0.19 per share, so the company yielded a 42% earnings surprise! For 2012, the company forecasts earnings in the range of $1.08 to $1.20 per share; this is largely in line with analyst estimates.
Industry Breakdown: Out of the 115 companies in the Diversified Utilities industry, CenterPoint Energy is highly ranked across most fundamental metrics. Most notably, the company's earnings growth is third best in the industry, and its return on equity is fifth best. In addition, the company's 4.2% dividend yield is 12th best, and its Price/Earnings to Growth ratio is 13th in the industry. However, the company's sales growth is middle-of-the-road, so there is room for improvement. This company's main competitors are American Electric power Co. Inc. (AEP) and Xcel Energy Inc. (XEL), and it keeps pace with these larger companies in terms of operating margin and sales growth.
Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. For the past year, this stock has remained firmly in "buy" territory. Although the company could stand to improve its sales growth, it earns high marks on five out of the eight fundamental variables. So, it receives a B-rating for fundamentals. In addition, buying pressure has remained persistently strong over the past several months, so it earns an A for Quantitative Grade. Overall, this is an A-rated stock.
Bottom Line: This stock is a "strong buy," and I don't think it will lose its A-rating anytime soon.
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