With the TSX Utility Index down about 6 per cent this year amid fears of rising interest rates, my colleague Rob Belanger and I thought we should take a look at the sector.
We started with companies listed on the TSX that are over $300-million in market capitalization.
One of the most commonly used valuation metrics is the enterprise value (market value of equity plus net debt) divided by earnings before interest, taxes, depreciation and amortization (EV/EBITDA). We are looking for a low number.
Price to cash flow (P/CF) values a company’s stock price relative to how much cash flow a firm is generating. A high P/CF indicates a company is trading at a high price, but may not be generating enough cash flow to support the multiple. The lower the figure, the better.
Return on equity (ROE) shows whether a company is a profit creator or a profit burner, and if it is growing profits without pouring new capital into the business. It indicates how much profit the company generates with the money that shareholders have invested. We want a high number.
Operating margin is a measurement of what portion of a company’s revenue is left over after paying for variable costs such as wages and inventory. If a company has an operating margin of 9.5 per cent it means that it makes 9.5 cents before interest and taxes for every dollar of sales. A high number is preferable.
Beta is a measure of the volatility, or systematic risk, of a security in comparison to the market as a whole. In theory, if a beta is 0.77 the stock will move 7.7 per cent when the market moves 10 per cent. We are looking for a low beta.
What did we find?
With operations in Ontario, Quebec and Saskatchewan, Northland Power has the highest 12-month revenue growth.
Capstone Infrastructure puts out some good numbers, including the lowest price-to-cash flow in our table. The company’s portfolio consists of power infrastructure and utilities businesses in Canada, Sweden and the U.K.
Boston-based Atlantic Power has the highest beta, the worst ROE, and an alarmingly high yield.
As always, readers would be well advised to conduct further research or contact an investment professional.