This year has been nothing but negative in the equity markets. As of October 17th, year to date The Dow is down 31.9% and the S&P 500 Index is down 34.68%. The last two weeks have been the most volatile of all, and it is impossible to know when the markets will settle. So, if I were to tell you about a stock that is up 18.23% year to date and has outperformed the Utilities Sector SPDR (XLU: 27.41, 0.00 (0.00%)) by 51.61%, you would probably be interested. Well this is exactly what I have in Piedmont Natural Gas Company (PNY: 30.23, 0.00 (0.00%)). Now, I know what you are thinking: it is too small with a Market Cap at just $2.26 Billion, which makes it too risky. I understand why this is a concern and that is what I thought when I started to follow this company, but now I will attempt to convince you that it will remain successful. A company that operates in natural gas distribution, Piedmont has strong valuations, steady growth moving forward, and has made me a strong believer.
Business
Piedmont Natural Gas Company operates in the United States and distributes natural gas to over one million customers in North Carolina, South Carolina, and Tennessee. In fiscal year of 2007 (which ended October 31, 2007), Piedmont sold or transported 122.3 million dekatherms of gas. This is an increase from 115.1 million dekatherms in 2006. Piedmont also had between 11.9 and 24.2 million dekatherms in storage during this year with 34.2 million dekatherms of potential capacity.
During fiscal year 2007, 44% of operating revenues came from residential customers, 24% from commercial customers, 14% from large-volume customers, and 18% from secondary market activities. Deliveries to residential customers are obviously dependent on temperature and weather. Natural Gas demand typically peaks during the coldest times of the year because most people use it to heat their homes. Weather in 2007 was 12% warmer than normal, which should lead to a decrease in demand from temperature sensitive customers. However, Piedmont sold 83.7 million dekatherms in 2007 compared to 83.6 in 2006 when the weather was just 6% warmer than normal. This is a sign of their growth and stability even when the industry demand seemed to be less than normal.
Stable Numbers
Piedmont’s valuation is very fair and aides in supporting its stability. I have picked out some of the numbers that best support this:
- Low Beta - 0.41
- Trailing P/E 2007 - 19.41x
- 2008E P/E - 19.50x
- 2009E P/E - 17.78x
- Return on Equity (TTM) - 12.61%
- Dividend Yield - 3.69%
The first number that I would like to mention is its Beta of 0.41. A low Beta is very essential in an extremely volatile market, such as the market we are currently experiencing. Its Return on Equity is in line with the industry average. Piedmont’s Dividend Yield of 3.69% is very healthy and just adds to the attraction of this company. Nothing in particular sticks out, but rather all of Piedmont’s numbers are stable. As you can see from the 2008 and 2009 estimated P/E ratios, there is definitely room to grow for Piedmont.
Growth
Piedmont has had strong growth in the past and will look to continue this into the future. In fiscal year 2007, even with the weaker housing market, they added 30,000 new customers. This is extremely impressive growth for such a slow time in new home construction. Piedmont reported earnings on September 11, 2008 for the third quarter of its fiscal year 2008. They experienced a loss of $0.10 a share compared to a loss of $0.12 a share in fiscal year 2007. This is a seasonal loss that is expected every year. On top of this, operating revenues increased 58% from a year ago during this same period. Analysts expect earnings per share to grow by 10% for fiscal year 2009. Its 3 and 5 Year Revenue growth rates are 4.34% and 15.73%. I’m sure you feel the same way that I do when I say I am amazed by all of these numbers. It is fair to expect this growth to continue into the future as the demand for natural gas increases.
Potential Risk
There are a number of risks that should be assessed when looking at a natural gas company. The first of these is if there is a significant increase in the cost of natural gas. This will increase the cost that Piedmont has to pay for natural gas, which will in turn force them to charge their customers more. Ultimately, this would decrease the company’s earnings. Another risk is what happens if people start to move to alternative sources of energy to heat their homes. Even if this were to happen, Piedmont would not be that negatively affected as even its largest customer only contributes less than 1% of its operating revenue. Although these risks are fair concerns, they are industry wide and not specific to anything that Piedmont does.
Final Thoughts
I hope I have done a good job in this article convincing you that Piedmont is a stock worth evaluating. From their strong fundamentals to steady growth moving into the future, they are a serious company that has managed to thrive in this down market. Whether or not they will continue to experience this success is obviously impossible to predict, but there is nothing to make me think otherwise. Piedmont is a company worth looking at and their excellent out-performance year to date has not been a fluke.
