Use access key #2 to skip to page content.

Yum, a power company that's trading below book value.

Recs

26

April 14, 2009 – Comments (10)

I came across a company this afternoon in a sector that I love that is currently trading for less than its tangible book value.  Check out these stats:

Price/Book: 0.7 vs. an industry average of 1.4

Dividend Yield: 4.1% (recently increased by 25%)

Dividend Payout Ratio: 44% vs an industry average of 56%

What is the name of this company that pays a solid dividend and trades for less than its book value you ask?  NV Energy (NVE), formerly known as Sierra Pacific Resources. 

 

NV Energy is a power company that provides electricity and natural gas to consumers primarily in Nevada and California.  Yes, Vegas is hurting right now and electricity demand there has fallen some, but there's a limit to how far it can fall. 

As I mentioned, NVE is trading for less than its tangible book value.  This means that the total current market value of its power plants and other assets is worth more than its current share price.  Now that's cheap.  In fact, NVE is the least expensive company on a price to book and price to tangible book value ratio in the utility sector according to Credit Suisse.

In its March report on the utility sector, Credit Suisse did not view NVE's discount to book value as favorably as I do.  Credit Suisse's sector analyst did not like fact that the company's EV / Base Rate ratio is not as low as its price to book value.  While this is true, either the analyst overlooked the fact (or the March report is older than this news) that NVE recently requested a rate hike from regulators.  Raising rates during a recession might not be easy, but NVE has traditionally had a very good relationship with according to T. Rowe Price's utility analyst.

One possible explanation for the weakness in NV Energy's stock over the past year, other than the general market weakness, is the liquidation of a large position owned by a hedge fund.  NVE's largest outside shareholder Horizon Asset Management was forced to lower its stake in the company from 30% to 5% to raise cash for investor redemptions.

Like most companies in the capital intensive utilities sector, NV Energy has a decent chunk of debt, but its current liquidity position will allow it to stay out of the capital markets in 2009 if necessary.  It has no significant debt maturities in 2009 or 2010 and its main bank credit facility is not scheduled to mature until November 2010.  So the company is in decent shape financially.

I added NVE to my CAPS portfolio today.

Deej

10 Comments – Post Your Own

#1) On April 14, 2009 at 2:12 PM, Schmacko (60.79) wrote:

Nice find, I'm adding this to my watch list.  I'm willing to bet a lower entry price can be gained by waiting for the overall market to drag it lower... which could happen very soon.

Report this comment
#2) On April 14, 2009 at 2:14 PM, dudemonkey (39.48) wrote:

I LOVE finding companies trading for less than book value.

Report this comment
#3) On April 14, 2009 at 3:02 PM, Mary953 (77.81) wrote:

Just one question - are they building or planning to build any power plants in the near future, especially nuclear power plants?  I am not as concerned from an environmental point of view as I am from the inevitable cost and buearacracy that they would run into.  One nuclear plant under construction can do terrible things to a company's balance sheet.

Report this comment
#4) On April 14, 2009 at 4:03 PM, TMFEldrehad (99.99) wrote:

As I mentioned, NVE is trading for less than its tangible book value.  This means that the total current market value of its power plants and other assets is worth more than its current share price. 

Maybe, but maybe not.

Tangible book value is tangible book value.  This is not necessarily the same thing as market value.

I'm not suggesting that NVE isn't cheap or that it isn't a good investment...  just making the academic point that the assertion that the market value of the assets is greater than the share price cannot be conclusively concluded by examining tangible book value.

Regards,

Russell (a.k.a. TMFEldrehad)

Report this comment
#5) On April 14, 2009 at 4:09 PM, Mary953 (77.81) wrote:

Don't you hate it when we come along and rain on your parade?

FWIW, I am putting it on my real life trading watch list.  It sounds too interesting to dismiss without some very thorough investigation.  After all, when the power goes out - That news is as major as the event that knocked it out.  No one gets so very upset when the video store closes unexpectedly

Report this comment
#6) On April 14, 2009 at 4:31 PM, mattskin (< 20) wrote:

Just an FYI:

Analyst Target Price Stats (12-month Targets)

Min: 10.00

Median: 13.00

Max: 16.00

STDDEV: 1.49

n=9 (analysts covering)

 That qualifies for my watch list as well.

Report this comment
#7) On April 14, 2009 at 4:44 PM, TMFDeej (99.43) wrote:

Hmmmm, awfully picky don't you think, Russ?  The book value of a power company's assets could just as easily be understated as it could be overstated.  It's not like we're talking about a bank with tons of loans on its books that it hasn't marked down here.  We're talking about real, tangible assets that actually do stuff. 

Of course, anyone who buys a stock in real life should do enough research on it to be comfortable with it.  FWIW, here's how Investpoedia defines tangible book value:

"Investopedia explains Tangible Book Value Per Share - TBVPS
A company's tangible book value looks at what common shareholders can expect to receive if the firm goes bankrupt and all of its assets are liquidated at their book values. Intangible assets, such as goodwill, are removed from this calculation because they cannot be sold during liquidation. Companies with high tangible book value per share provide shareholders with more insurance in case of bankruptcy.

In theory, a stock's tangible book value per share represents the amount of money an investor would receive for each share if a company were to cease operations and liquidate all of its assets at the value recorded on the company's accounting books. As a rule of thumb, stocks that trade at higher price to tangible book value ratios have the potential to leave investors with greater share price losses than those that trade at lower ratios, since the tangible book value per share can reasonably be viewed as about the lowest price a stock could realistically be expected to trade at."

I'd much rather look at a company's tangible book value to price ratio than I would at its P/E at this point.  It's a valuable metric.

I'm trying to bring, real world investment ideas to the community here.  I see too many doom and gloom posts and people shorting or going long / short quadruple latte ETFs and/or shorting the heck out of pump and dump OTC stocks in CAPS. 

Neither of these things bring much value to the table when they are not accompanied by real, actionable investment advice.  That's why I have been trying to mix in articles about stocks and bonds that I have actually purchased in the real world, like EXC common stock, AXP bonds, MRH bonds, etc... or that I think are at least good investments for CAPS.

Deej

Report this comment
#8) On April 14, 2009 at 5:39 PM, TMFEldrehad (99.99) wrote:

It is awfully picky of me, I'll admit.

"A company's tangible book value looks at what common shareholders can expect to receive if the firm goes bankrupt and all of its assets are liquidated at their book values."

Which, again, is not necessarily the same thing as their market values.  Your point is well-taken that market value could indeed be even higher.  Furthermore, I'm not suggesting that tangible book isn't a valuable metric - for I believe it certainly is.

I just like picking nits!

Report this comment
#9) On April 14, 2009 at 5:40 PM, RootnToot (29.82) wrote:

Nice work Deej,

Thanks for presenting this to the community for a look-see. I have been watching OTTR and now I will add this one to my list. +1 rec

RNT

Report this comment
#10) On April 14, 2009 at 7:22 PM, mattskin (< 20) wrote:

One thing, this company is a little over-levered, ~60% Debt/Tot Cap, Net Debt/Cap is very similar, which means they don't have a lot of cash on hand.

Their interest coverage is low too, EBITDA/Interest <2.0x last quarter.

Report this comment

Featured Broker Partners


Advertisement