BUSINESS
Avista Corporation, together with its subsidiaries, operates as an electric and natural gas utility company. It operates in two segments, Avista Utilities and AEL&P. The Avista Utilities segment provides electric distribution and transmission, and natural gas distribution services in parts of eastern Washington and northern Idaho; and natural gas distribution services in parts of northeastern and southwestern Oregon, as well as generates electricity in Washington, Idaho, Oregon, and Montana. This segment also engages in the wholesale purchase and sale of electricity and natural gas. The AEL&P segment offers electric services to 17,400 customers in the city and borough of Juneau, Alaska. The company generates electricity through hydroelectric, thermal, and wind facilities. As of February 23, 2022, it provided electric service to 406,000 customers and natural gas to 372,000 customers.
INVESTMENT RATING
With future capital returns forecasted to be above the cost of capital, AVA is expected to continue to be a modest Value Builder.
Avista has a current Value Trend Rating of C (Neutral).
This rating combines contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Avista has a good Appreciation Score of 74 but a slightly negative Power Rating of 36, leading to the Neutral Value Trend Rating.
Avista’s stock is selling well below targeted value. The current stock price of $34.33 compares to targeted value 12 months forward of $75.
Avista’s high appreciation potential results in an appreciation score of 74 (only 26% of the universe has greater appreciation potential.)
Avista has a Power Rating of 36. (This slightly negative Power Rating indicates that Avista’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: recent price action has been slightly unfavorable; the Electric & Other Services Combined comparison group is in a slightly weakened position currently; and earnings estimate behavior for Avista has been slightly negative recently.
INVESTMENT PROFILE
Avista’s financial strength is below average. Financial strength rating is 34.
Relative to the S&P 500 Composite, Avista Corp has significant Value characteristics; its appeal is likely to be to investors heavily oriented toward Income; the perception is that AVA is normal risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, low expected growth, and low historical growth. Avista’s valuation is low: high dividend yield, low P/E ratio, and low price/book ratio. AVA has unusually low market capitalization.
CURRENT SIGNALS
Avista’s current operations are stable. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
Avista’s current technical position is very weak. The stock price is in a 6.1 month down move. The stock has declined 22.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Avista Corp (NYSE: AVA) has benefited from minimal positive changes in fundamentals: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
Avista Corp (NYSE: AVA) has reported E.P.S. of $1.08 for its fourth fiscal quarter (ending December 31) versus $1.06 for the same period a year ago. E.P.S. were $2.24 for the latest four quarters through December 31 versus $2.13 for the same period a year ago.
On 2/21/24, Avista Corp (NYSE: AVA) stock increased 1.1%, closing at $34.33. Moreover, this advance was accompanied by above average trading volume at 149% of normal. The stock has risen 2.8% during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2022, Avista experienced a very significant reduction in cash of -$8.7 million (-39%). Sources of cash were much lower than uses. Cash generated from 2022 EBITDA totaled +$447.4 million. Non-operating sources contributed +$62.4 million (+14% of EBITDA). Cash taxes contributed +$48.9 million (+11% of EBITDA). Re-investment in the business amounted to -$793.9 million (-177% of EBITDA). On a net basis, debt investors supplied +$201.6 million (+45% of EBITDA) while equity investors supplied +$24.7 million (+6% of EBITDA).
Avista’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Avista Peer Group. (Since 2020 Non-operating Income, %EBITDA has accelerated.) In most years, Avista was in the top quartile and second quartile. Currently, Avista is upper quartile at +14% of EBITDA (+$62.4 million).
Avista’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Avista Peer Group. In most years, Avista was in the top quartile and second quartile. Currently, Avista is upper quartile at +11% of EBITDA (+$48.9 million).
Avista’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Avista Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, Avista was in the third quartile and top quartile. Currently, Avista is lower quartile at -177% of EBITDA (-$793.9 million).
Avista’s Debt Investors, %EBITDA has experienced a strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Avista Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Avista was in the third quartile and second quartile. Currently, Avista is at the upper quartile at +45% of EBITDA (+$201.6 million).
Avista’s Equity Investors, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Avista Peer Group. (Since 2020 Equity Investors, %EBITDA has sharply accelerated.) In most years, Avista was in the second quartile and top quartile. Currently, Avista is at median at +6% of EBITDA (+$24.7 million).
Avista’s Change in Cash, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Avista Peer Group. In most years, Avista was in the second quartile and lower quartile. Currently, Avista is substantially below median at -2% of EBITDA (-$8.7 million).
Avista’s Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Avista Peer Group. In most years, Avista was in the third quartile and lower quartile. Currently, Avista is at the lower quartile at +1%.
PROFITABILITY
Avista’s return on equity has eroded modestly since 2013. The current level of 6.8% is 1.07X the low for the period and is -20.0% from the high.
Avista’s very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a significant analytical factor.
The productivity of Avista’s assets declined over the full period 2013-2023: asset turnover has suffered a very strong overall downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend that accelerated very sharply from the 2019 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
Avista’s return on equity is at the lower quartile (6.8%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is at the lower quartile (1.9%) reflecting asset turnover that is at median (0.23X) and pretax margin at the lower quartile (8.2%).
Tax “keep” rate (income tax management) is upper quartile (115.2%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is at the lower quartile (3.10X).
GROWTH RATES
There are no significant differences between Avista’s longer term growth and growth in recent years.
Avista’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been -1.4% per year. (More recently it has been 9.0%.)
Total asset growth has been 3.5% per year.
Annual E.P.S. growth has been 1.8% per year. (More recently it has been -4.1%.)
Equity growth has been 4.0% per year.
Avista’s consensus growth rate forecast (average of Wall Street analysts) is 5.2% — above the average of the historical growth measures.
Relative to the Avista Peer Group, Avista’s historical growth measures are generally third quartile. Equity growth (4.0%) has been below median. Total asset growth (3.5%) has been at the lower quartile. E.P.S. growth (1.8%) has been at the lower quartile. Revenue growth (-1.4%) has been lower quartile.
Consistent with this pattern, consensus growth forecast (5.2%) is also at the lower quartile.
PRICE HISTORY
Over the full time period, Avista’s stock price performance has been significantly below market. Between April, 2013 and February, 2024, Avista’s stock price rose +22%; relative to the market, this was a -61% loss.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -10.4% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -10.4% is below median relative to Avista Corp Peer Group.
Current 5-year total return performance of -0.0% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -0.0% relative to S&P 500 Composite, Avista’s total return performance is slightly above median relative to Avista Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, AVA’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is at median. Ratio of enterprise value/revenue is slightly below median. Price/earnings ratio is near the lower quartile. Ratio of enterprise value/assets is lower quartile. The lowest factor, the price/equity ratio, is lower quartile.
Relative to Avista Peer Group, AVA’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is above median. Ratio of enterprise value/revenue is slightly below median. Price/earnings ratio is at the lower quartile. Ratio of enterprise value/assets is at the lower quartile. The lowest factor, the price/equity ratio, is at the lower quartile.
Avista has a minor value gap compared to the median valuation. For AVA to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 3.19X to 3.29X. If AVA’s ratio of enterprise value/revenue were to rise to 3.29X, its stock price would be lower by $2 to $37.
For AVA to hit lower quartile valuation relative to the Avista Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.19X to 2.69X. If AVA’s ratio of enterprise value/revenue were to fall to 2.69X, its stock price would decline by $-11 from the current level of $34.
VALUE TARGETS
With future capital returns forecasted to be above the cost of capital, AVA is expected to continue to be a modest Value Builder.
Avista’s current Price Target of $74 represents a +116% change from the current price of $34.33.
This high appreciation potential results in an appreciation score of 74 (only 26% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 74, the moderately low Power Rating of 36 results in an Value Trend Rating of C.
Avista’s current Price Target is $74 (+4% from the 2022 Target of $71 and +116% from the 02/21/24 price of $34.33). This plateau in the Target is the result of a +5% increase in the equity base and a +0% decrease in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in growth has a slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 7.4% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2014 and 2022. The current forecast is steady at the 2016 peak of 8%.
PTR’s growth forecast is 6.0% — slightly below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2014 and 2022. The current forecast is above the 2015 low of 2%.
PTR’s cost of equity forecast is 4.7% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is steady at the 2015 peak of 6.5%.
At Avista’s current price of $34.33, investors are placing a negative value of $-21 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 6.3% versus a cost of equity of 4.2%.
PTR’s 2024 Price Target of $74 is based on these forecasts and reflects an estimated value of existing assets of $50 and a value of future investments of $25.
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