Northland Power (TSX:NPI) is primarily in wind power generation — both offshore and onshore wind — which make up about 70% of its gross generating capacity that stands at over three gigawatts (GW).
The stock has corrected about 28% from its 2022 peak. Like the general stock market, the renewable energy stock experienced valuation contraction from a higher cost of capital, which sparked from rising interest rates last year.
The utility just reported its 2022 results last week. Here are some key highlights.
Northland Power: 2022 results
It’s always great to see sales growth, which can lead to earnings or cash flow growth. In 2022, Northland Power saw sales growth of 17% to $2,449 million. Its gross profit rose at a slightly lower rate of 16% to $2,178 million. Operating income climbed 34% to $1,051 million. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a cash flow proxy, climbed 23% to $1,398 million. This growth is also good to see for investors.
The utility’s cash provided by operating activities increased by 14% to $1,833 million. On a per-share basis, cash provided by operating activities climbed by only 5.6%. The per-share metric is weighed primarily from a share count that increased by about 8%.
On the positive side, despite a rising interest rate environment in 2022, the company was able to reduce its interest expense by $23.25 million (almost 10%) versus 2021.
The company renewed its at-the-market (ATM) equity program in the third quarter. The program allows Northland to issue up to an additional $750 million of common stock from treasury, which means it won’t dilute the stakes of current common shareholders. Previously, the ATM program raised gross proceeds of $871 million at an average price of $41.27 per share with the proceeds raised intended to fund projects.
Management provided 2023 guidance, estimating adjusted EBITDA in the range of $1.20-$1.30 billion, which would be a decline of just over 10% versus 2022 based on the midpoint. Similarly, its adjusted free cash flow per share and free cash flow per share are expected to fall about 8% and 13%, respectively. This lacklustre guidance is what’s weighing on the stock now.
Because Northland Power has demonstrated an erratic earnings history, I use the price to cash flow as its valuation metric. Based on this metric, the stock is fairly valued in the near term. Longer term, assuming growth will resume, the stock is considered to be undervalued and can result in total returns of about 12.2% per year through 2025.
Yahoo Finance indicates that 15 analysts follow the stock with a 12-month consensus price target of $46.17. This implies a discount of 28% from the recent quotation of $32.90 per share. To be conservative, investors should consider this price target for the year 2025 instead of anticipating a quick bounce in the stock this year.
Northland Power’s recent payout ratio was about 31% of earnings and 15% of free cash flow. So, its dividend yield of 3.6% appears to be sustainable.
The shares seem to be discounted for the long term. Additionally, the company has demonstrated its ability to execute projects successfully, growing operating cash flow per share by 22% annually, over the past decade! Lastly, management has identified growth projects through 2030. Therefore, the undervalued stock could deliver respectable returns for the long haul.