Fortis Inc. (TSX:FTS), one of the largest electric and gas utilities companies in North America, announced better-than-expected first-quarter earnings before the market opened on May 5 and its stock has responded by falling over 1.5% in the trading sessions since. Let’s take a closer look at the quarterly results to determine if we should consider using this weakness as a long-term buying opportunity.
The better-than-expected first-quarter results
Here’s a summary of Fortis’ 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 |
| Adjusted Earnings Per Share | $0.65 | $0.61 | $0.68 |
| Revenue | $1.92 billion | $1.89 billion | $1.46 billion |
Source: Financial Times
Fortis’ adjusted earnings per share decreased 4.4% and its revenue increased 31.6% compared with the first quarter of fiscal 2014, as its adjusted net income increased 22.6% to $179 million. These results can largely be attributed to the company’s $4.5 billion acquisition of UNS Energy, which was completed in August 2014 and contributed $435 million in revenue in the first quarter, or 94.6% of its total revenue growth, but also had a $0.13 dilutive impact on earnings per share.
Here’s a quick breakdown of six other notable statistics from the report compared with the year-ago period:
- Revenue increased 167.3% to $727 million in its U.S. Regulated Electric & Gas Utilities segment (including UNS Energy)
- Revenue increased 0.6% to $1.05 billion in its Canadian Regulated Electric & Gas Utilities segment
- Revenue increased 5.4% to $78 million in its Caribbean Regulated Electric Utilities segment
- Cash flow from operating activities increased 69.8% to $450 million
- Ended the quarter with $299 million in cash and cash equivalents, an increase of 30% from the beginning of the quarter
- Weighted average number of common shares outstanding increased 29.5% to 276.7 million
Should you be a buyer of Fortis today?
It was a very strong first quarter for Fortis, so I think its stock has reacted incorrectly by moving lower. With this being said, I think the post-earnings decline represents nothing more than a long-term buying opportunity because the stock trades at inexpensive valuations and has a high dividend yield.
First, Fortis’ stock trades at just 19.4 times fiscal 2015’s estimated earnings per share of $1.98 and only 18 times fiscal 2016’s estimated earnings per share of $2.14, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 20.5. I think the company’s stock could consistently command a fair multiple of at least 20.5, which would place its shares upwards of $40.50 by the conclusion of fiscal 2015 and upwards of $43.75 by the conclusion of fiscal 2016, representing upside of more than 5% and 13%, respectively, from current levels.
Second, Fortis pays an annual dividend of $1.36 per share, which gives its stock a bountiful 3.5% yield at today’s levels. The company has also increased its annual dividend payment for 42 consecutive years, the record for a public corporation in Canada, and I think this makes it the top dividend-growth play in the market today.
With all of the information above in mind, I think Fortis represents one of the best long-term investment opportunities in the market today. Foolish investors should take a closer look and strongly consider making it a core holding.
