Resourceful Buy in New Jersey

04/25/2014 7:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

We want to buy healthy, growing companies cheaply and hold them as they build wealth. And with the right entry point, I’m willing to stick throughout market cycles, says Roger Conrad, editor of Conrad’s Utility Investor.

Constructive regulatory relations, strong project execution, reliable disaster response, and sound financial policies: All are hallmarks of diversified natural gas distribution utility New Jersey Resources (NJR). As such, I’m adding the stock to our Conservative Focus list.

Lowest risk and largest of the company’s five business lines is New Jersey Natural Gas, on track to contribute 60 to 70% of fiscal 2014 forecast earnings of $2.75 to $2.95 per share (ending September 30).

The utility business will increase its customer base by 1.5% in fiscal 2014, thanks to a healthy regional economy and home conversions to gas from fuel oil.

Earnings will get further boosts from supplying gas to fuel the 830 megawatt Red Oak power plant starting in fall 2014, the SAVEGREEN energy efficiency program, spending $130 million over four years on system integrity (return on equity 10.3%), and developing compressed natural gas filling stations.

On the unregulated side, Energy Services manages transportation and storage for other companies across the country. Clean Energy Ventures owns distributed energy scale solar and onshore wind projects.

And Home Services has some 120,000 contracts throughout New Jersey for a range of appliances, including heaters, standby generators, and solar products.

Regulated utilities are notorious for getting in over their heads in non-utility businesses. New Jersey Resources, however, are leveraged to gas distribution.

Cash will start flowing this summer from a 25-year wind power sales contract with Northwestern (NWE), followed by a deal with the MidAmerican Energy unit of Berkshire Hathaway (BRK-B) in spring 2015. That will cut current dependence on solar tax credits that expire in 2017.

New Jersey Resources targets long-term annual earnings growth of 4 to 7%, and 5% dividend growth, supported by $725 million in utility capital spending through 2017.

That’s an attractive combination with the yield of around 4%. Insiders concur, having increased holdings nearly 10% the past couple months. Buy up to $45.

Subscribe to Conrad’s Utility Investor here…

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