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Is Fortis Inc. the Top Utility Stock in the Market Today?

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:

  1. Revenue increased 167.3% to $727 million in its U.S. Regulated Electric & Gas Utilities segment (including UNS Energy)
  2. Revenue increased 0.6% to $1.05 billion in its Canadian Regulated Electric & Gas Utilities segment
  3. Revenue increased 5.4% to $78 million in its Caribbean Regulated Electric Utilities segment
  4. Cash flow from operating activities increased 69.8% to $450 million
  5. Ended the quarter with $299 million in cash and cash equivalents, an increase of 30% from the beginning of the quarter
  6. 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.

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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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