Spire Inc.: Valuation And Yield Are Too Good To Pass On Here (NYSE:SR)

Investment Rundown

There has been a notable move from more traditional investment areas like utilities and industrials into tech companies, not only in the last few quarters but over the last decade, something that I think every investor can agree on. I want to highlight with this article on Spire Inc. (NYSE:SR) that there are a lot of opportunities that open up when this trend happens. A company like SR, which has a very large asset base and trades at some of its lowest levels in recent years, makes it a great buying opportunity. A yield of 5% and consistent bottom-line growth make SR in my eyes the backbone of a company for a portfolio.

Utility companies often accumulate a lot of debt during their years of operations, but I don’t think they should be confused with a significant amount of risk. A company like SR is in a great position to continue driving higher and higher cash flows and earnings to pay down debt, and they tend to be quite reliable as well.

Company Segments

SR works with the acquisition, distribution, and sale of natural gas to a diverse range of consumers across the United States. The company operates through three key segments: Gas Utility, Gas Marketing, and Midstream. SR is dedicated to providing natural gas to residential, commercial, and industrial users. Moreover, it plays a role in marketing natural gas services, along with participating in the transportation and storage of natural gas. Additionally, SR is engaged in propane operations, including propane pipeline activities, risk management, and various related ventures.

During its years of operation which spans back to 1857, SR has diversified its operations and operates these days in several states, like Alabama, Mississippi, and Missouri. Most customers are located in Missouri with over 1.2 million making up a majority of the total 1.7 million total customers. The company is operating pipelines meaning that much of the value the company generates comes from existing infrastructure then from manufacturing something and then selling it. The pipelines span 61.200 miles in total. 90% of the revenues come from the regulated gas utilities segment of the business whilst the rest is made up of marketing and some midstream operations. Another gas company that I have covered is Southwest Gas Holdings (SWX) which has seen similar trading patterns as SR, meaning lacking growth as investment firms seem to lean more towards growth companies now instead after news of rate cuts this year came out.

Earnings Highlights

Looking at the last report by the company there were noticeable improvements in the revenues YoY, perhaps not the last quarter, but for the full fiscal year of 2023, it rose by over 20%. This puts the company at an FWD p/s of just 1.25, a nearly 30% discount to its 5-year historical multiple of 1.74. Looking further at the income statement, see that the bottom line fell slightly YoY. The primary cause for this seems to have been higher interest expenses and a slight dilution YoY of about 1%. I think this will be short lived though and for margins to stabilise in the later part of 2024 and beginning of 2025 as we see the interest rates develop further. The last report was released on November 16 and the stock price rose steadily after for a few weeks but is down to the same level. The 52-week high for SR is at $75 and it seems the next report will come on January 30. I think that if SR posts strong numbers then and raises outlooks for the year, the stock price will rally. It has been in such a steady decline and reversing that will only be possible if the company posts strong results.

The primary way that SR drives revenues is from its pipeline which is its asset base to a majority. Revenues tend to be somewhat stable over the long term with some fluctuations quarter to quarter depending on how prices develop and asset depreciation looks. Despite the assets growing nearly 8% YoY since 2021 the company trades at some of its lowest multiples, a 37% discount based on p/s to the utilities sector. Even though there are some risks facing the company I think a fair multiple here would be around 1.7 at least. I argue that this is justified because of the stability of the revenue generation that SR and how reliable they have been the past decade, compounding at 10.12%. With a 1.7 multiple, we get a price target of $91 right now with a revenue per share estimate of $51 per share for 2024. I think that for 2024 SR could very realistically post similar revenue as to 2023, with perhaps more growth to the bottom line, depending on how the interest rates decrease. But with that said, I think 2024 will see SR posting just shy of $2.7 billion in revenues.

Let’s compare SR a little more to a close peer as well which would be ONE Gas, Inc. (OGS). These companies are very similar on a market cap basis, both between $3 – $3.3 billion. The stock price has, however, performed worse for GGS in the last 12 months, down over 22%, with SR down only 17%. Yield-wise wise SR is the winner here with 5.1% compared to 4.4% for GGS. Where I prefer SR and think it’s the better option is the valuation firstly, here SR trades at lower multiples than GGS, the p/e for example 13.4 compared to 14.2 for GGS. Historically SR has also been the superior company, growing the top line at a CAGR of 10.12 in the last decade and GGS at just 4.91%. I think SR has the better foundation for better and superior growth in the next decade which is why it’s my preferred choice of the two.

The company does forecast a pretty strong 5 – 7% long-term NEEPS growth rate which is driven by a 7 – 8% rate base growth for the gas utilities, the largest segment of the business. This outlook goes in line with the estimated revenues I have for 2024 for SR. With that price target of $91, we also receive an upside of roughly 50% right now and the 5% divine yields get us to 55% in the next 12 months. I think it’s not unreasonable that we get quite high up on that forecast, but a reliable 55% return in 12 months would get every single investment firm out there to invest in SR right now. I think the case can be made though that SR presents a very compelling chance that it could outperform the broader markets in the next 12 months, which means I am also rating it a buy now.

Risks

A notable risk facing SR stems from environmental variability, both in terms of climate and natural gas costs. The warmer weather contributes to increased depreciation on assets, consequently elevating capital expenditures and maintenance costs. This prolonged impact on earnings may necessitate a reduction in shareholder-friendly initiatives, such as buybacks and dividends, to ensure continued operational efficiency. The US continues to see shifting weather patterns and I think is reasonable to assume that in the next decade, the depreciation for SR assets will accelerate as a result.

More of a short to medium risk is the rising interest rates in the US which is putting pressure on the earnings of SR. The company has always had a lot of debt on its balance sheet, and I don’t think this is a major risk for investors. The leverage between EBITDA and long-term debt is roughly 5, and with such consistent EBITDA generation, I think higher leverage is no issue here. The debt levels are at just under $3 billion right now but with the chart clearly showcasing the EBITDA being able to keep up it remains a low risk to me. The TTM EBITDA is $681 million but has grown quickly from the $448 million it was back in 2018. That’s a 52% increase in just 5 years. The problem arises more in that for the short term SR might not be able to make as aggressive acquisitions and expansions as before, which might justify a lower valuation like we have seen for the last 12 months for the stock. This risk also ties into the first one I mentioned with shifting weather conditions, potentially leading to higher depreciation on assets. If SR is already sitting with a lot of debt and now faces high maintenance expenses it might lead to a hold on raising the dividend as capital is needed elsewhere.

Final Words

Utilities companies have struggled the past 12 months and SR is no different, down nearly 20% the past 12 months. When digging deeper into the company though it’s revealed that the asset base and areas of operations showcase a robust business model that leaves plenty of value for investors right now. The valuation has crept down to historical lows and with a yield past 5%, it’s hard to resist buying into SR at these price points. My price target indicates that a significant outperformance might be possible in the next 12 months and that leads me to rate the company a buy right now.