National Grid Is One Utility Worth Buying Despite Rate Hike Expectations

Argus has upgraded National Grid plc (ADR) NGG to Buy from Hold, citing the company’s underlying business fundamentals as remaining strong, with 90 percent regulated operations provides a “high level” of earnings visibility.

Positive Expectations

The upgrade comes despite expectations of a rate hike, as rising interest rates would increase the interest costs of utilities, which are heavily debt-financed.

But, the brokerage said the U.K.-based electric utility is benefiting from investments in its U.K. network and from a favorable regulatory backdrop, which may aid returns well above its cost of capital.

“In the U.S., National Grid’s business is poised to recover, driven by rate increases, cost-savings programs, and new capital projects,” analyst John Eade wrote in a note.

Risks

However, Eade noted that continued weakness in GBP is a risk as earnings and dividend estimates in U.S. dollars are coming down as the pound deteriorates.

Valuation

On the valuation front, National Grid trades at 13.7-times Argus’ FY 2017 EPS estimate, toward the low end of the five-year historical average range of 11.7–17.0 and below the peer average of 16.5 for current-year P/E.

The analyst has set a price target of $62 on the shares, which have underperformed over the past quarter, falling 16.7 percent. On the other hand, S&P 500 rose 1.8 percent in the same period.

“Using a dividend discount model, we arrive at a fair value for NGG in the mid-$60s per ADR, about 15 percent above current levels,” Eade added.

At last check, ADRs of National Grid were down 0.12 percent to $56.99.