Capital Power Corp. (TSX: CPX), one of North America’s largest independent power producers, announced its third-quarter earnings results on Wednesday morning, and its stock responded by falling 2.35% in the day’s trading session. Let’s break down the quarterly results and the fundamentals of its stock to determine if we should consider using this weakness as a long-term buying opportunity or wait for an even better entry point in the trading sessions ahead.
The results that ignited the sell-off
Here’s a quick breakdown of eight of the most notable financial statistics from Capital Power’s three-month period ended on September 30, 2017, compared with the same period in 2016:
| Metric | Q3 2017 | Q3 2016 | Change |
| Revenues and other income | $346 million | $374 million | (7.5%) |
| Adjusted EBITDA | $158 million | $148 million | 6.8% |
| Normalized earnings attributable to shareholders | $29 million | $30 million | (3.3%) |
| Normalized earnings per share (EPS) | $0.28 | $0.31 | (9.7%) |
| Net operating cash flow | $120 million | $105 million | 14.3% |
| Adjusted funds from operations | $134 million | $79 million | 69.6% |
| Electricity generation (Gigawatt hours) | 4,725 | 3,930 | 20.2% |
| Generation facility availability | 97% | 96% | 100 basis points |
What should you do with Capital Power’s stock now?
Even though Capital Power’s third-quarter results were “in line with management’s expectations,” it was a fairly weak quarter overall, so I think the 2.35% decline in its stock was warranted. That being said, I think the decline has resulted in a very attractive entry point for long-term investors for two fundamental reasons.
First, it’s undervalued. Capital Power’s stock now trades at just 17.8 times fiscal 2017’s estimated EPS of $1.38 and only 16.6 times fiscal 2018’s estimated EPS of $1.48, both of which are very inexpensive compared with its five-year average multiple of 29.2; these multiples are also inexpensive given its long-term earnings-growth potential.
Second, it has one of the best dividends in the industry. Capital Power pays a quarterly dividend of $0.4175 per share, equal to $1.67 per share annually, which gives it a juicy 6.8% yield. It’s also important to note that the company’s recent dividend hikes, including its 7.1% hike in July, have it on track for 2017 to mark the fourth straight year in which it has raised its annual dividend payment, and that it has a dividend-growth program in place that calls for annual growth of approximately 7% through 2020, making it both a high-yield and dividend-growth play.
With all of the information provided above in mind, I think all Foolish investors should consider initiating positions in Capital Power today with the intention of adding to those positions on any further weakness in the weeks ahead.
