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Should You Buy or Avoid TransAlta Corporation Following Mixed Q1 Results?

TransAlta Corporation (TSX:TA)(NYSE:TAC), one of the largest power generators and wholesale marketers of electricity in North America and Australia, announced mixed first-quarter earnings results on the morning of April 28, and its stock has responded by making a slight move to the upside. Let’s take a thorough look at the results to determine if we should consider establishing long-term positions today, or if we should wait for a better entry point in the trading sessions ahead.

The mixed first-quarter results

Here’s a summary of TransAlta’s first-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago.

Metric Reported Expected Year-Ago
Earnings Per Share $0.09 $0.07 $0.17
Revenue $593 million $655 million $775 million

Source: Financial Times

TransAlta’s comparable earnings per share decreased 47.1% and its revenue decreased 23.5% compared with the first quarter of fiscal 2014. The company noted that these weak results could be attributed to its total production decreasing 18% to 9,900 gigawatt hours and the average spot price of power decreasing in all three of its markets, including a 52.5% decline to $29 per megawatt hour in the Alberta market, a 52.8% decline to $34 per megawatt hour in the Ontario market, and a 59.1% decline to US$18 per megawatt hour in the Mid-Columbia market.

Here’s a quick breakdown of 12 other notable statistics from the report compared with the year-ago period:

  1. Comparable net income decreased 44.7% to $26 million
  2. Revenue decreased 3.1% to $246 million in its Canadian Coal segment
  3. Revenue decreased 22.6% to $82 million in its U.S. Coal segment
  4. Revenue decreased 26.1% to $181 million in its Gas segment
  5. Revenue decreased 8.8% to $73 million in its Wind segment
  6. Revenue decreased 19.4% to $25 million in its Hydro segment
  7. Revenue decreased 52.3% to $31 million in its Energy Marketing segment
  8. Comparable earnings before interest, taxes, depreciation, and amortization (EBITDA) decreased 11.3% to $275 million
  9. Comparable funds from operations decreased 11.3% to $211 million
  10. Comparable cash flow from operating activities decreased 45.2% to $153 million
  11. Comparable free cash flow decreased 20.9% to $110 million
  12. Ended the quarter with $61 million in cash and cash equivalents, an increase of 41.9% from the beginning of the quarter

Also, on April 27 TransAlta announced that it would be maintaining its quarterly dividend of $0.18 per share, and the next payment will come on July 1 to shareholders of record at the close of business on June 1.

Is TransAlta’s stock a buy today?

Even though TransAlta’s first-quarter earnings were far from impressive, I do think its stock represents an attractive long-term investment opportunity because it trades at favourable valuations and has a very high dividend yield.

First, TransAlta’s stock trades at 43.9 times fiscal 2015’s estimated earnings per share of $0.28, which may seem a bit high, but it trades at just 37.3 times fiscal 2016’s estimated earnings per share of $0.33, which is inexpensive given its long-term growth potential.

Second, TransAlta pays a quarterly dividend of $0.18 per share, or $0.72 per share annually, giving its stock a very high 5.85% yield at current levels, and I think this makes it one of the top dividend plays in the industry today.

With all of the information provided above in mind, I think TransAlta represents one of the best long-term investment opportunities in the energy sector today. Foolish investors should take a closer look and strongly consider establishing long-term positions.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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