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I must admit that Dominion Energy, Inc. (NYSE:D) has been one of the most challenging stocks in my coverage, as my previous bullish thesis on the leading multi-utilities has not panned out. I last updated investors in May 2023, as I assessed D could have formed its long-term bottom. However, the market had other ideas, as the 10Y (US10Y) didn’t top out until October 2023. As a result, I believe the market has gotten the downtrend bias in D spot on, as D was battered further.
While the timing of my bullish proposition on D was way off, my conviction that D was still close to peak pessimism remains resolute. Why? Consider that D has recovered more than 30% from its October lows through its recent highs in just over seven weeks. As a result, D re-tested levels last seen in early August 2023 before last week’s consolidation. Given the company’s highly leveraged balance sheet (projected FY23 net debt to adjusted EBITDA ratio of 6.3x), the market has likely re-rated D in response to a more dovish Fed in 2024. Observant investors should know that the Fed has communicated three rate cuts next year.
With that in mind, I gleaned that the bullish thesis on D has been revived, although the market’s focus will likely turn to the completion of its ongoing business review. The conclusion of the review is critical to providing clarity on its operating EPS outlook through 2025. Management wasn’t keen to provide specific clues into its medium-term outlook, although analysts at Dominion Energy’s third-quarter earnings conference attempted to press for indications.
Despite that, management stressed that it “views 2025 as the foundational year for post-review earnings growth.” However, Dominion Energy highlighted that investors shouldn’t apply “a simplified approach of applying a growth rate to the $2.90 earnings for 2023.” Therefore, a lack of forward operating EPS clarity following its recent divestitures (including its natural gas utilities to Enbridge (ENB)) could deter investors from returning aggressively, notwithstanding its relatively attractive valuation (“A-” valuation grade).
Notwithstanding the near-term caution, management suggested that “some of the factors could be considered tailwinds,” although specific guidance wasn’t provided. Based on the broad guidance provided by management on factors that could determine its operating EPS outlook, I believe the risk/reward profile is looking increasingly constructive.
Dominion Energy highlighted several factors that could be considered tailwinds to the company’s forward outlook: “Historic level of near-term regulated rate-based investment, evaluation of efficient sources of capital, impact of interest rates, earnings, and free cash flow growth from its contracted energy segment.”
As explained previously, the recent recovery has likely considered the near-term re-rating on potentially lower interest rates in 2024. With more clarity on rates, it should bolster Dominion Energy’s ability to source a suitable financing partner for its offshore wind projects and continue its energy transition ambitions. Furthermore, investors shouldn’t ignore that Dominion operates a regulated utility business. As a result, we should expect its earnings growth to recover, allowing the company to sustain an earnings profile over its cost of capital over time. With that in mind, I believe the thesis that D has bottomed out or reached peak pessimism in D isn’t unreasonable.
Accordingly, the updated analysts’ estimates suggest Wall Street is optimistic that the worst in Dominion Energy’s operating performance could be over. Wall Street analysts expect Dominion Energy’s operating EPS to recover to $3.44 by 2025. With that in mind, D last traded at an FY25 normalized EPS multiple of 13.6x, markedly below its 10Y average of 18.5x. As a result, I believe the market has continued to place D in the penalty box, pending the end of its business review. Despite that, if D’s long-term bottom occurred in October 2023, the re-rating possibility could be substantial, leading to an attractive risk/reward profile for investors at the current levels.
D price chart (weekly) (TradingView)
As seen above, I assessed that D’s buying momentum was resisted at the $50 level, suggesting dip buyers likely took profit after a sharp surge from its October lows. I believe profit-taking after the extent of its recent recovery isn’t unreasonable. What’s essential moving ahead is where D could consolidate, attracting another round of robust dip-buying to sustain its consolidation.
I assessed that the $40 to $45 levels could offer us pivotal clues into the market’s buying intentions on D over the next few weeks. If that zone holds robustly with solid buying sentiments, it should improve my thesis that D’s October 2023 lows should hold as its long-term low, as the market anticipates a positive outcome from Dominion Energy’s business review that is expected to be completed by early 2024.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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