Will Piedmont Natural Gas Pump Returns Into Your Portfolio?

Source: Getty Images

Source: Getty Images

Piedmont Natural Gas Company, Inc (NYSE:PNY) is an energy services company that distributes natural gas in the United States. Natural gas prices have risen extremely high in the last six months, which has helped the company’s stock rise 12 percent year-to-date.

It operates in two segments, regulated utility and non-utility activities. The company also operates energy-related businesses comprising unregulated retail natural gas marketing, regulated interstate natural gas transportation, and storage and regulated intrastate natural gas transportation. It distributes natural gas through transmission pipelines and distribution mains. The company serves approximately one million residential, commercial, industrial, and power generation customers in of North Carolina, South Carolina, and Tennessee, including wholesale customers served by municipalities.

The stock currently trades a $36.55 and 18.5 times earnings. It also pays a 3.5 percent dividend. The stock is right near its 52 week high. The question is will the stock push higher? An analysis of the company’s recent performance can help answer this question.

In its most recent quarter, the company reported net income of $62.5 million, or $0.80 per diluted share, compared to net income of $55.8 million, or $0.74 per diluted share for the same period in 2013. For the six months ended April 30, 2014, net income was $160.1 million and diluted earnings per share were $2.06, compared with net income of $141.7 million and diluted earnings per share of $1.91 for the same period in 2013. Margin for the quarter was $211.5 million, an increase of $27.7 million from the prior year’s quarter. Margin for the six months ended April 30, 2014 was $473 million, an increase of $57.6 million from the prior year period. The increase in margin is primarily attributable to customer growth, regulatory rate adjustments, increased transportation services in the power generation markets, and higher margin sales from secondary market activity.

Operations and maintenance expenses totaled $70.2 million during the second-quarter of 2014, an increase of $5.2 million from the same period in 2013. Operations and maintenance expenses totaled $130.8 million during the six months ended April 30, 2014, an increase of $9.9 million from the same period in 2013. The increase in operations and maintenance expenses is primarily due to increases in payroll and approved amortization of regulatory assets, partially offset by a decrease in employee benefits expense.

Pre-tax income from Piedmont’s joint ventures increased 15 percent for the quarter and 24 percent percent for the year-to-date compared to the same period in 2013 primarily due to improved performance at SouthStar Energy from the expansion into the unregulated retail natural gas markets in Illinois and favorable customer mix and price spreads in the Georgia markets. Utility interest charges for the quarter were $12 million compared to $3.3 million for the same period in 2013. Utility interest charges for the six months ended April 30, 2014 were $22.6 million compared to $7.8 million for the same period in 2013. The increase is primarily due to an increase in interest expense on long-term debt primarily due to higher amounts outstanding in 2014 and lower utility project construction expenditures compared to the prior year.

Looking ahead, given the still elevated prices of natural gas, Piedmont is in a strong position to do well for the rest of the year. Given its increased revenues and general ability to keep costs under control, Piedmont reaffirmed its revised fiscal year 2014 earnings guidance of $1.80 to $1.90 per diluted share. However, when announcing earnings, it had an emphasis at the upper end of the range. This bullish outlook suggests that the stock will continue to perform well. As such, I have a buy rating on the stock and a $43 price target.

Disclosure: Christopher F. Davis holds no position in Piedmont Natural Gas and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $43 price target.

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