BUSINESS
NiSource Inc., an energy holding company, operates as a regulated natural gas and electric utility company in the United States. It operates through two segments, Gas Distribution Operations and Electric Operations. The company distributes natural gas to approximately 853,000 customers in northern Indiana, as well as approximately 2.4 million residential, commercial, and industrial customers in Ohio, Pennsylvania, Virginia, Kentucky, and Maryland. It operates approximately 54,600 miles of distribution main pipelines, as well as associated individual customer service lines; and 1,000 miles of transmission main pipelines. The company generates, transmits, and distributes electricity to approximately 483,000 customers in 20 counties in the northern part of Indiana, as well as engages in wholesale electric and transmission transactions.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, NI is expected to continue to be an important Value Builder.
NiSource has a current Value Trend Rating of C (Low Neutral).
The Value Trend Rating reflects consistent signals from PTR’s two proprietary measures of a stock’s attractiveness. NiSource has a neutral Appreciation Score of 56 and a slightly negative Power Rating of 39, resulting in the Low Neutral Value Trend Rating.
NiSource’s stock is selling well below targeted value. The current stock price of $26.25 compares to targeted value 12 months forward of $40.
This neutral appreciation potential results in an appreciation score of 56 (44% of the universe has greater appreciation potential.)
NiSource has a Power Rating of 39. (This slightly negative Power Rating indicates that NI’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this slightly negative Power Rating include: the Gas & Other Services Combined comparison group is in an extremely unfavorable position currently; and recent price action has been neutral. An offsetting factor is earnings estimate behavior for NI has been slightly favorable recently.
INVESTMENT PROFILE
NiSource’s financial strength is low. Financial strength rating is 18.
Relative to the S&P 500 Composite, NiSource Inc has moderate Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that NI is higher risk. Low stock price volatility is a positive for NiSource. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high financial leverage, and low historical growth. NiSource’s valuation is low: high dividend yield, moderate P/E ratio, and low price/book ratio. NI has unusually low market capitalization.
CURRENT SIGNALS
NiSource’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.
NiSource’s current technical position is very weak. The stock price is in a 6.8 month down move. The stock has declined 19.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Marginal positive changes in NiSource Inc (NYSE: NI) fundamentals have recently occurred: 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.
NiSource Inc (NYSE: NI) has reported E.P.S. of $0.53 for its fourth fiscal quarter (ending December 31) versus $0.56 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $1.59 compared to $1.84 a year ago.
NiSource Inc (NYSE: NI) stock closed at $26.25 on 2/21/24 after a modest gain of 0.9%. Moreover, unusually high trading volume at 160% of normal accompanied the advance. The stock has risen 2.4% during the last week and has performed in line with the market over the last nine months.
CASH FLOW
In 2022, NiSource experienced a significant decline in cash of -$20 million (-21%). Sources of cash were lower than uses. Cash generated from 2022 EBITDA totaled +$1,985 million. Non-operating sources contributed +$173 million (+9% of EBITDA). Cash taxes contributed +$30 million (+2% of EBITDA). Re-investment in the business amounted to -$3,180 million (-160% of EBITDA). On a net basis, debt investors furnished +$1,148 million (+58% of EBITDA) while equity investors received -$176 million (-9% of EBITDA).
NiSource’s Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Nisource Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, NiSource was in the third quartile and top quartile. Currently, NiSource is at the upper quartile at +9% of EBITDA (+$173 million).
NiSource’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Nisource Peer Group. In most years, NiSource was in the second quartile and top quartile. Currently, NiSource is below median at +2% of EBITDA (+$30 million).
NiSource’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nisource Peer Group. (Since 2020 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, NiSource was in the third quartile and top quartile. Currently, NiSource is substantially below median at -160% of EBITDA (-$3,180 million).
NiSource’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Nisource Peer Group. (Since 2020 Debt Investors, %EBITDA has accelerated very sharply.) In most years, NiSource was in the top quartile and lower quartile. Currently, NiSource is at the upper quartile at +58% of EBITDA (+$1,148 million).
NiSource’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Nisource Peer Group. In most years, NiSource was in the second quartile and top quartile. Currently, NiSource is slightly above median at -9% of EBITDA (-$176 million).
NiSource’s Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Nisource Peer Group as well. In most years, NiSource was in the second quartile and top quartile. Currently, NiSource is above median at -1% of EBITDA (-$20 million).
NiSource’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Nisource Peer Group as well. In most years, NiSource was in the third quartile and lower quartile. Currently, NiSource is below median at +1%.
PROFITABILITY
NiSource’s return on equity has eroded very significantly since 2013. The current level is 11.9% versus the high of 8.3% and the low of -0.9%.
This very significant erosion was due to very strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of NiSource’s assets declined over the full period 2013-2023: asset turnover has suffered a strong overall downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend although it experienced a very sharp recovery after the 2020 low.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
NiSource’s return on equity is at the upper quartile (11.9%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is above median (3.1%) reflecting asset turnover that is at the lower quartile (0.21X) and pretax margin at the upper quartile (15.1%).
Tax “keep” rate (income tax management) is at median (82.7%) resulting in after tax return on assets that is substantially above median.
Financial leverage (leverage) is slightly above median (4.59X).
GROWTH RATES
There are no significant differences between NiSource’s longer term growth and growth in recent years.
NiSource’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 -3.2% per year. (More recently it has been 7.2%.)
Total asset growth has been -0.7% per year.
Annual E.P.S. growth has been 3.8% per year. (More recently it has been 8.5%.)
Equity growth has been -1.9% per year. (More recently it has been 6.8%.)
NiSource’s consensus growth rate forecast (average of Wall Street analysts) is 7.3% — substantially above the average of the historical growth measures.
Relative to the Nisource Peer Group, NiSource’s historical growth measures are generally lower quartile. E.P.S. growth (3.8%) has been at median. Total asset growth (-0.7%) has been lower quartile. Revenue growth (-3.2%) has been lower quartile. Equity growth (-1.9%) has been lower quartile.
In contrast, consensus growth forecast (7.3%) is at the upper quartile.
PRICE HISTORY
Over the full time period, NiSource’s stock price performance has been significantly below market. Between April, 2013 and February, 2024, NiSource’s stock price fell -15%; relative to the market, this was a -73% loss. Significant price move during the period: 1) May, 2015 – August, 2015: -64%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -2.9% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2024 of -2.9% is upper quartile relative to NiSource Inc Peer Group.
Current 5-year total return performance of 2.4% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of 2.4% relative to S&P 500 Composite, NiSource’s total return performance is above median relative to NiSource Inc Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, NI’s overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is above median. Ratio of enterprise value/earnings before interest and taxes is slightly below median. Price/earnings ratio is below median. Price/equity ratio is near the lower quartile. The lowest factor, the ratio of enterprise value/assets, is lower quartile.
Relative to NiSource Peer Group, NI’s overall valuation is quite high. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is upper quartile. Price/earnings ratio is above median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is above median.
NiSource has a major value gap compared to the median valuation. For NI to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 4.32X to 3.29X. If NI’s ratio of enterprise value/revenue were to fall to 3.29X, its stock price would be lower by $-13 to $13.
For NI to fall to lower quartile valuation relative to the NiSource Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 4.32X to 2.87X. If NI’s ratio of enterprise value/revenue were to fall to 2.87X, its stock price would decline by $-19 from the current level of $26.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, NI is expected to continue to be an important Value Builder.
NiSource’s current Price Target of $39 represents a +48% change from the current price of $26.25.
This neutral appreciation potential results in an appreciation score of 56 (44% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 56, the moderately low Power Rating of 39 contributes to an Value Trend Rating of C.
NiSource’s current Price Target is $39 (+23% from the 2022 Target of $32 and +48% from the 02/21/24 price of $26.25). This rise in the Target is the result of a +4% increase in the equity base and a +19% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a very large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 11.8% — slightly above our recent forecasts. Forecasted return on equity exhibited a slight, erratic increase between 2014 and 2022. The current forecast is above the 2019 low of 8%.
PTR’s growth forecast is 4.0% — slightly above our recent forecasts. Forecasted growth erratic between 2014 and 2022. The current forecast is above the 2014 peak of 0%.
PTR’s cost of equity forecast is 6.1% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is steady at the 2016 low of 4.7%.
At NiSource’s current price of $26.25, investors are placing a negative value of $-14 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 8.3% versus a cost of equity of 3.9%.
PTR’s 2024 Price Target of $39 is based on these forecasts and reflects an estimated value of existing assets of $30 and a value of future investments of $9.
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