The global financial markets have bounced back strongly in April. However, as uncertainty prevails, many fear that the equity markets could crash again. While it’s difficult to predict whether the markets will continue to rise higher or create a new low, buying stocks that are immune to economic cycles and offer strong growth should be the mantra. One such stock is AltaGas (TSX:ALA), which is in a sweet spot. The company’s unique business model and attractive valuation provides a strong underpinning for future growth.
Investors should note that AltaGas came up with a decent set of numbers for the first quarter. Meanwhile, the company reaffirmed its 2020 EBITDA and EPS guidance, which is encouraging. Besides, AltaGas offers a compelling dividend yield of 5.9%.
Business to fly high
AltaGas will continue to benefit from its diversified and relatively insulated business model. Investors should note that the company generates about 75% of its revenues from the rate-regulated utility business, which remains immune to the economic cycles and provides stability and growth. Majority of the company’s revenues in the utility segment are protected through the fixed distribution charges and decoupled rate structures in Maryland and Virginia, two of its biggest markets by the number of customers.
AltaGas projects 8-10% annual growth in the utilities rate base, which bodes well for future growth. Also, the increase in the customer base, higher returns through rate case settlements, and cost reduction are likely to boost margins.
As the utility business provides stability, the company’s midstream division offers high growth. In the most recent quarter, the midstream segment’s revenues marked 52% growth on a year-over-year basis. The stellar growth in the midstream segment reflects contributions from Ridley Island Propane Export Terminal (RIPET). Placed into service last year, RIPET adds significant value to AltaGas’s midstream business. RIPET’s export volumes averaged 35,141 bbls/d in the first quarter, which the management expects to increase to 50,000 bbls/d by the year end.
Despite challenges from the COVID-19 outbreak, I have a positive outlook on the company’s midstream segment. AltaGas will benefit from increased export volumes and utilization rate, as its access to the premium-priced markets continues to attract producers. Meanwhile, increased demand for propane in Asia augurs well for growth. The company’s midstream business will also gain from the full-year contribution of RIPET. Investors should note that 33% of RIPET’s 2020 expected volumes are under long-term take-or-pay arrangements, which have an average remaining life of about seven years. Moreover, the company’s comprehensive hedging program positions it well to ride out the volatility.
So far, AltaGas stock has corrected by 18% this year. The decline in AltaGas stock presents an opportunity to go long on it. AltaGas stock trades at a lower valuation when compared to the industry average. AltaGas is trading at a forward price-to-cash flow ratio of 5.3, which is well below the industry average of 7.3. Also, AltaGas stock is trading at a forward price-to-earnings ratio of 13.1, which is even lower than the industry average of 16.4.
AltaGas is often mistaken as an energy company owing to its midstream operations, which is not the case. As noted earlier, the company derives the majority of its revenue and profits from the utility business, which continues to thrive irrespective of the economic situations. AltaGas expects its utility business to contribute about 60% to this year’s normalized EBITDA. The company’s predictable cash flows and acceleration in midstream business are likely to drive its stock higher and add the safety net amid volatility.
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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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool recommends ALTAGAS LTD.