Rating Update: Stock Rating C-Low Neutral (9/16/19)-Pattern Energy Group Inc (PEGI).

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BUSINESS

Pattern Energy Group Inc., an independent power company, focuses on the construction, ownership, and operation of various power projects in the United States, Canada, and Chile. It holds interests in various wind and solar power projects. The company sells electricity and renewable energy credits primarily to local utilities and local liquid independent system organizations markets. Pattern Energy Group Inc. was founded in 2012 and is headquartered in San Francisco, California.
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INVESTMENT RATING

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PEGI is expected to continue to be an important Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.

Pattern Energy has a current Value Trend Rating of C (Low Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Pattern Energy has a very low Appreciation Score of 8 but a good Power Rating of 79, leading to the Low Neutral Value Trend Rating.

Pattern Energy’s stock is selling significantly above targeted value. The current stock price of $27.10 compares to targeted value 12 months forward of $10.
Pattern Energy’s very low appreciation potential results in an appreciation score of 8 (92% of the universe has greater appreciation potential.)
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Pattern Energy has a Power Rating of 79. (This good Power Rating indicates that PEGI has a better chance of achieving attractive investment performance over the near to intermediate term than all but 21% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and is in a strong phase current. An offsetting factor is PEGI’s earnings estimates have fallen very significantly in recent months.

INVESTMENT PROFILE

PEGI’s financial strength is above average. Financial strength rating is 60.
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Relative to the S&P 500 Composite, Pattern Energy Group Inc has slightly more Value than Growth characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that PEGI is higher risk. High historical growth is a positive for PEGI. Relative weaknesses include: low historical profitability, low financial strength, high financial leverage, low expected growth, and high earnings variability. PEGI’s valuation is moderate: high dividend yield, high P/E ratio, and moderate price/book ratio. PEGI has unusually low market capitalization.

CURRENT SIGNALS

Pattern Energy’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

Pattern Energy’s current technical position is very strong. The stock price is in a 18.4 month up move. The stock has appreciated 61.4% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Pattern Energy Group Inc (NASDAQ: PEGI) has recently enjoyed slight positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Pattern Energy Group Inc (NASDAQ: PEGI) stock enjoyed a major increase of 34.4% on 9/16/19. The shares closed at $0.04. However, trading volume in this advance was unusually low at 51% of normal. The stock has been exceptionally strong relative to the market over the last nine months but has declined -0.9% during the last week.

CASH FLOW

In 2018, Pattern Energy experienced a significant decline in cash of -$20.8 million (-17%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$253.0 million. Non-operating sources contributed +$284.0 million (+112% of EBITDA). Cash taxes contributed +$28.5 million (+11% of EBITDA). Re-investment in the business amounted to -$636.1 million (-251% of EBITDA). On a net basis, debt investors contributed +$239.3 million (+95% of EBITDA) while equity investors pulled out -$189.4 million (-75% of EBITDA).
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Pattern Energy’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Pattern Energy Group Inc Peer Group. (Since 2014 Non-operating Income, %EBITDA has accelerated very sharply.) In most years, Pattern Energy was in the top quartile. Currently, Pattern Energy is upper quartile at +112% of EBITDA (+$284.0 million).

Pattern Energy’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Pattern Energy Group Inc Peer Group. (Since 2015 Cash Taxes, %EBITDA has accelerated.) In most years, Pattern Energy was in the top quartile. Currently, Pattern Energy is upper quartile at +11% of EBITDA (+$28.5 million).

Pattern Energy’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Pattern Energy Group Inc Peer Group. In most years, Pattern Energy was in the lower quartile. Currently, Pattern Energy is lower quartile at -251% of EBITDA (-$636.1 million).

Pattern Energy’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Pattern Energy Group Inc Peer Group. (Since 2016 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Pattern Energy was in the top quartile and second quartile. Currently, Pattern Energy is at the upper quartile at +95% of EBITDA (+$239.3 million).

Pattern Energy’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Pattern Energy Group Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Pattern Energy was in the top quartile. Currently, Pattern Energy is slightly above median at -75% of EBITDA (-$189.4 million).

Pattern Energy’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Pattern Energy Group Inc Peer Group. In most years, Pattern Energy was in the lower quartile. Currently, Pattern Energy is lower quartile at -8% of EBITDA (-$20.8 million).
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Pattern Energy’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Pattern Energy Group Inc Peer Group. (Since 2013 Cash, %Revenue has acccelerated.) In most years, Pattern Energy was in the second quartile and top quartile. Currently, Pattern Energy is above median at +22%.

PROFITABILITY

PEGI’s return on equity has eroded very significantly since 2011.
A major analytical focus for PEGI is a very strong negative trend in pretax operating return a significantly offset by very strong positive trend in non-operating factors.
The productivity of PEGI’s assets rose over the full period 2009-2019: asset turnover has exhibited a volatile overall uptrend.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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PEGI’s return on equity is below median (-7.1%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is below median (-1.9%) reflecting asset turnover that is at the lower quartile (0.09X) and substantially below median pretax margin (-20.1%).
Tax “keep” rate (income tax management) is lower quartile (62.5%) resulting in after tax return on assets that is slightly below median.
Financial leverage (leverage) is upper quartile (6.00X).

GROWTH RATES

Overall, Pattern Energy Group’s growth rate has slowed considerably in recent years.
Pattern Energy Group’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 8.8% per year.

Total asset growth has been 7.2% per year.

Annual E.P.S. growth has been 35.6% per year.

Equity growth has been 2.8% per year. (More recently it has been -6.6%.)

Pattern Energy Group’s consensus growth rate forecast (average of Wall Street analysts) is 5.0% — substantially below the average of the historical growth measures.
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Relative to the Pattern Energy Group Inc Peer Group, Pattern Energy’s historical growth measures are generally second quartile. E.P.S. growth (35.6%) has been upper quartile. Total asset growth (7.2%) has been above median. Revenue growth (8.8%) has been above median. Equity growth (2.8%) has been slightly above median.

Consistent with this pattern, consensus growth forecast (5.0%) is also at the upper quartile.
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PRICE HISTORY

Over the full time period, Pattern Energy Group’s stock price performance has been below market. Between October, 2013 and September, 2019, Pattern Energy Group’s stock price rose +19%; relative to the market, this was a -30% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 33.8% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of 33.8% is upper quartile relative to Pattern Energy Group Inc Peer Group.

Current 5-year total return performance of 1.2% is lower quartile relative to the S&P 500 Composite.
Through July, 2019, with lower quartile current 5-year total return of 1.2% relative to S&P 500 Composite, Pattern Energy’s total return performance is upper quartile relative to Pattern Energy Group Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, PEGI’s overall valuation is high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Price/equity ratio is slightly below median. Ratio of enterprise value/assets is near the lower quartile. Price/earnings ratio is unavailable.
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Pattern Energy has a major value gap compared to the median. For PEGI to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 9.99X to 7.87X. If PEGI’s ratio of enterprise value/revenue were to fall to 7.87X, its stock price would be lower by $-11 to $16.
For PEGI to achieve upper quartile valuation relative to the Pattern Energy Group Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 9.99X to 10.09X. If PEGI’s ratio of enterprise value/revenue were to rise to 10.09X, its stock price would increase by $1 from the current level of $27.

VALUE TARGETS

PEGI is expected to continue to be an important Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.
Pattern Energy Group’s current Price Target of $10 represents a -63% change from the current price of $27.10.
Pattern Energy’s very low appreciation potential results in an appreciation score of 8 (92% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 8, the high Power Rating of 79 results in an Value Trend Rating of C.
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Pattern Energy Group’s current Price Target is $10 (+8% from the 2018 Target of $9 but -63% from the 09/16/19 price of $27.10). This slight rise in the Target is the result of a +8% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted flat growth has no impact on the multiple. The forecasted decline in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is 1.5% — slightly below our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2011 and 2018. The current forecast is well below the 2014 peak of 8%.

PTR’s growth forecast is 9.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2018. The current forecast is significantly below the 2014 peak of 24%.

PTR’s cost of equity forecast is 6.7% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2011 and 2018. The current forecast is steady at the 2011 low of 6.0%.
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At Pattern Energy Group’s current price of $27.10, investors are placing a positive value of $50 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 9.0% per year, and a return on equity of 4.0% versus a cost of equity of 8.6%.
PTR’s 2020 Price Target of $10 is based on these forecasts and reflects an estimated value of existing assets of $-5 and a value of future investments of $16.

About John Lafferty 80532 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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