Zacks Investment Research | Dec 12, 2019 08:11PM ET
The Zacks Utility Gas Distribution industry comprises companies that offer services to transport natural gas from the region of production to end users. Gas pipelines play a crucial role in delivering natural gas from intrastate and interstate transmission pipelines to consumers through small diameter distribution pipelines.
Notably, the natural gas network in the United States has nearly 3 million miles of pipeline. Increasing consumption of natural gas in the United States and internationally is driving demand for distribution pipelines.
Let us take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Strong Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat near-term prospects.
The Zacks Utility Gas Distribution industry — a 17-stock group within the broader Zacks Utilities sector — currently carries a Zacks Industry Rank #81, which places it at the top 32% of the 253 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few Gas Distribution stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats Sector But Lags S&P 500
The Gas Distribution industry has outperformed the Zacks S&P 500 composite and its own sector over the past year. The stocks in this industry have collectively gained 10.5% in the past year, while the Utility sector has declined 5.4% and the Zacks S&P 500 composite has gained 20.1%.
One-Year Price Performance
Gas Distribution Industry’s Current Valuation
Since utility companies have a lot of debt on their balance sheets, the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio is commonly used to value them.
The industry is currently trading at trailing 12-month EV/EBITDA of 14.16X compared with the S&P 500’s 11.55X and the sector’s 17.48X. Over the past five years, the industry has traded as high as 14.45X, low of 10.22X and at the median of 12.38X.
Trailing Five Years Enterprise Value-to EBITDA (EV/EBITDA)
Industry v S&P 500
Industry vs Sector
To Sum Up
The necessity of additions and improvement of gas distribution infrastructure positions U.S. pipeline operators well for growth. But the industry continues to face challenges from the renewable space. The technological advances are lowering the cost of operating utility scale renewable power projects and government grants are making them attractive to utility operators. Moreover, rising natural gas production continues to put downward pressure on prices and producers of the commodity might lower production volumes to accommodate the drop, which could mar the profitability of pipeline operators.
Gas Distribution Stocks to Add Now
Below are four stocks that have been witnessing positive earnings estimate revisions. Of these, two hold a Zacks Rank #2 (Buy) and the others carry a Zacks Rank #3 (Hold).
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