NorthWestern Corporation - Growth & Income

NorthWestern Corporation (NWE) is a high quality, low-risk stock yielding a hefty 4.8%. The company has also delivered three consecutive positive earnings surprises as it has successfully leveraged its fixed expenses through modest sales increases.

Valuation is attractive too, with shares trading at 13x forward earnings. It is a Zacks #2 Rank (Buy) stock.

Company Description

NorthWestern Corporation is an electric and natural gas utility operating in Montana, South Dakota and Nebraska. It is headquartered in Sioux Falls, South Dakota and has a market cap of $1.0 billion.

Third Quarter Results

Third quarter earnings per share came in at 40 cents, crushing the Zacks Consensus Estimate by 29%.

Total revenue grew 3.4% driven in part by an 8.1% increase in natural gas revenue. Revenue from the electric segment was up 2.6% driven by an increase in both retail residential and commercial volumes.

Meanwhile, operating income grew a stellar 22.7% as the company was able to leverage its fixed expenses.

Outlook

Although the company operates in low growth areas of the United States, the company plans to invest between $2.0 billion and $2.7 billion into its system over the next five years. The company also announced that on December 28 the Montana Public Service Commission approved electric and gas rate increases that went into effect on January 1, 2011.

These factors should drive earnings per share higher for the next several years.

NorthWestern reiterated its guidance for 2010 following the third quarter earnings release. The company expects to earn between $1.95 and $2.10 per share. The Zacks Consensus Estimate is slightly above guidance at $2.11, representing 4% growth over 2010 EPS.

The 2011 Zacks Consensus Estimate is currently $2.24, corresponding to 6% growth.

Dividend

NorthWestern pays a dividend that yields 4.8%. Since the company went public in 2008, it has raised its dividend twice.

Its payout ratio of 62% is typical for a utility company. Expect future dividend increases to coincide with earnings growth for the foreseeable future.

Valuation

The stock hasn't participated in the market rally over the last few months:

As a result, valuation looks compelling with shares trading at 12.8x forward earnings, a discount to the industry average of 14.0x. Its price to book ratio of 1.3 is also lower than the peer group multiple of 1.4.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

 
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