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MDU Resources: Great Opportunity for Value Investors

10/17/2018 5:00 am EST

Focus: UTILITIES

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Unwarranted concerns about interest rates are a likely catalyst for the slide in the shares of MDU Resources (MDU) since early September, observes Roger Conrad, editor of Conrad's Utility Forecaster.

The upshot for value hunters is that this is great opportunity to buy this well-run, low-leveraged, diversified utility company.

MDU Resources is basically two businesses in one. The company’s 8-state regulated electric and natural gas utilities and pipelines serve a region stretching from the once-again booming Bakken to the Pacific coast.

Its construction materials and services arm is national, rapidly growing and uniquely positioned to benefit from increased infrastructure spending in the next couple years.

Odds of the US government playing a big role in that effort would likely increase considerably if Democrats take control of the US House of Representatives in November, as voter polls indicate likely.

But with MDU’s construction services backlog up 49 percent over the past year to a new record high, it’s by no means required for success. Customers now include burgeoning high tech firms as well as the healthcare industry.

Because construction is cyclical in nature, MDU’s management has historically built its dividend and balance sheet strength on its utility and pipeline business alone, where revenues are more recession resistant. The utilities operate in one of the most economically vibrant areas of the country in the Dakotas and upper Rocky Mountain states.

Over the next five years, management expects to increase its customer base between 1 and 2 percent annually, resulting in 6 percent compound growth in rate base. One large project, the Thunder Spirit Wind Farm, will start adding to earnings in the fourth quarter as it comes on stream. And regulators are supportive in all jurisdictions, ensuring a fair return on investment.

As for the balance sheet, the superior BBB+ ratings from S&P and Fitch flow from exceptionally strong debt metrics. That includes the fact that MDU has only $35 million in total debt maturities through 2026 and generated over $100 million in free cash flow last year.

And it means the company has flexibility to make strategic acquisitions without worrying about capital markets. Ultimately, MDU’s strong businesses and low market capitalization of barely $5 billion make it a takeover likely. In the meantime, it's a buy at $26 or lower.

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