Northland Power Inc

On my other blog I am today writing an overview of World Money Show of Toronto 2013...continue...

I do not own this stock Northland Power Inc. (TSX-NPI, OTC-NPIFF). This company is into generating electric power. I have a lot invested in pipelines and I would like to have more invested in electric power as my utilities investment. I read a report on this stock that said it was a good defensive stock to buy. That is, it is a good stock to hold in a stock market correction. I can certainly see the logic of using utility stocks as defensive stocks.

The thing I noted when I was updating by spreadsheet was that analysts keep thinking that this company will earn money, but each year it seems to have another loss as far as earnings go. For example in my 2011 review, EPS estimates for 2011 and 2012 were $1.05 and $1.07. The 2011 EPS was a loss of $.61. In my 2012 review, analysts' estimates for earnings for 2012 and 2013 were for $0.14 and $0.31. The 2012 EPS was a loss of $0.18.

However, the analysts' optimism has finally paid off. The EPS estimates for 2013 are at $0.93. The 12 months EPS to September 30, 2013 is at $0.91. However, for me to prove you can earn money, I would like to see a few years of earnings before I believe. But, EPS are going in the right direction.

This company was also an old income trust. When they changed to a corporation, they kept the dividends level, although, by corporation standards, they could not afford them. Their EPS Payout Ratio was always high, but the real problem lately is low and negative earnings. Their earnings per share have declined by 18% and 13% per year if you look at the 5 year running average over the last 5 and 10 years.

Net Income is down by 22% and 11% per year if you look at the 5 year running average over the past 5 and 10 years. The difference between EPS and Net Income growth (or non-growth) is because the company has increased their outstanding shares by 14% and 14.6% per year over the past 5 and 10 years. Call me old fashion, but I like my investment companies to earn money.

The one plus I see is that management does have money in this company. The company says that management ownership is at 39%. The CEO has shares worth $29.4M and an officer has shares worth $23.5M. Over the past year there was only insider selling and it was at $0.3M. This selling occurred early in the year.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations. The consensus recommendation is a Buy. (Most stocks have this rating.) The 12 month stock price consensus is $18.70 and this implies a total return of 23.39% with 16.66% from capital gains and 6.74% from Dividends.

I do have 5 year low, median and high median Price/Earnings per Share ratios and they are 9.40, 11.28 and 13.16. These are reasonable for a utility. The current P/E Ratio is 17.24 based on a stock price of $16.03 and EPS for 2013 of $0.93. The earnings estimate is probably reasonable and the EPS for the 12 month period ending September 30, 2013 is $0.91. However, the P/E Ratio test says that the stock price is relatively high.

I get a Graham Price of $10.50. The current Price/Graham Price Ratio is 1.53. The 10 year low, median and high median P/GP Ratios are 1.08, 1.30 and 1.44. The ratios are a bit high, but not unreasonable for a utility. The current P/GP ratio at 1.53 says that the stock price is relatively high.

The 10 year Price/Book Value per Share is 1.82. The current P/B Ratio is 3.04, a value some 67% higher. This test says that the stock price is relatively high.

The last test is the dividend yield test. The 5 year median Dividend yield is 7.52%. The current dividend yield at 6.74% is only 10% lower. Ideally, you want the current one to be higher than the 5 year median. However, this test does say that the stock price is reasonable. I often go with the dividend yield test, unless there is a good reason not to. I do not know a good reason not to.

The Globe and Mail has an article on John Heinzl entitled "Beware the risks behind Northland Power's lofty yield". However, despite the title and some negative comment, John Heinzl still recommends this stock.

When all is said and done, I do not like companies that cannot make a profit. I think that should come first and they should only pay dividends that they can afford. See my spreadsheet at npi.htm.

Northland Power Inc. indirectly owns interests in power projects. Northland's assets comprise facilities that produce electricity from "clean" natural gas and "green" renewable sources such as wind and biomass. Electricity generation is sold under long-term PPAs with creditworthy customers, and any fuel for natural-gas-fired projects, where required, is purchased under long-term contracts to assure stability of operating margins. This company operates in Canada, US and Germany. Its web site is here Northland Power.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.