Is Algonquin Power & Utilities a Buy After Its Fourth-Quarter Earnings?

Given its improving financials, healthy outlook, and attractive valuation, I am bullish on Algonquin Power & Utilities.

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On Friday, Algonquin Power & Utilities (TSX:AQN) reported its fourth-quarter performance. Revenue and adjusted net earnings grew by 26% and 10%, respectively. The utility’s adjusted EPS (earnings per share) came in at $0.22, 5% higher than its previous year’s quarter. Meanwhile, the company’s adjusted EPS for fiscal 2022 came in at $0.69, which was at the higher end of the company’s revised guidance of $0.66–$0.69.

The company’s solid quarterly earnings and initiatives to lower its capital intensity amid rising interest rates appear to have improved investors’ sentiments, driving the company’s stock price higher. On Friday, AQN’s stock price rose to a high of $10.98 before closing at $10.92, representing a rise of 4% from its previous day’s closing price. Meanwhile, the company is currently trading 23.8% higher this year. So, let’s assess whether the upward momentum can continue.

First, let’s look at its fourth-quarter performance in detail.

AQN’s fourth-quarter performance

During the December-ending quarter, AQN generated revenue of US$748 million, representing year-over-year growth of 26%. Adding new facilities, passing on increased expenses to its customers, and favourable rate revisions drove its topline. However, unfavourable currency translations offset some of the gains.

Despite the topline growth, the company incurred a net loss of US$74.4 million compared to a net profit of $175.6 million in the fourth quarter of 2021. The decline was primarily due to a noncash impairment charge of US$235 million, which the company incurred during the quarter. Meanwhile, removing these one-time or special items, the company’s adjusted net earnings increased by 10% to $151 million. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by 20% to US$358.3 million.

Further, the company sold its ownership interests in a portfolio of wind facilities in the United States and Canada, generating approximately US$357.6 million in net proceeds. The company’s financial position looks solid, with available liquidity of US$2.3 billion as of December 31. Now, let’s look at AQN’s outlook.

AQN’s outlook

Amid a challenging macro environment, AQN has adopted several initiatives to strengthen its balance sheet. These initiatives include lowering its capital investment intensity, optimizing its portfolio through the sales of assets worth US$1 billion, reducing its quarterly dividends by 40% to US$0.1085/share, and reducing its reliance on equity capital markets.

Meanwhile, AQN plans to make capital investments of US$3.6 billion this year, including a US$2.6 billion acquisition of Kentucky Power. Of the total capital spending, the company expects to invest around US$3.3 billion in the regulated utility group while the remaining US$300 million is allocated to the renewable energy group. The utility has various wind and solar projects in various stages of development, with a total production capacity of 600 megawatts. The company expects to put around 450 megawatts of projects into service this year.

Dividends and valuation

AQN had a solid track record of rewarding its shareholders by consistently raising its dividends by over 10% for the last 12 years. However, given the challenging macro environment, the company slashed its quarterly dividend by 40% to US$0.1085/share in January. Despite the reduction, the stock’s yield for the next 12 months is a juicy 5.45%.

Although AQN has witnessed healthy buying this year, it still trades at a 45% discount from its 52-week high. Its valuation looks attractive, with its NTM (next 12 months) price-to-sales and NTM price-to-earnings multiples standing at 1.9 and 13.6, respectively.

Investors’ takeaway

AQN is currently working on closing the acquisition of Kentucky Power, with the deadline for completing the deal April 26. Even if the company fails to complete the acquisition, it can free up the capital to fund several organic growth opportunities. So, the outlook for the renewable energy producer looks healthy. Considering its healthy outlook, improving financials, and attractive valuation, I expect the uptrend in AQN to continue.

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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