PNM Resources: Exciting Initiatives Is Boosting The Bottom Line

Investment Rundown

The utility sector I think is quite an exciting one to get into, as the broad exposure it lends to investors can be very favorable during tougher times in the economy. With PNM Resources, Inc. (NYSE:PNM) for example, they have managed to diversify the business and take advantage of the Inflation Act which is set to boost the spending and investments into green energy among a vast array of other things too. The company provides electricity and services related to it, which is generally seen as a pretty stable market to be in. The need for electricity will always be there and prices can be volatile, but tend to generally be quite stable.

PNM has a decent dividend yield right now at just over 3% and with strong margins across the board I think it looks incredibly sustainable. The management of PNM is further investing into renewables, and I am quite bullish on the prospects of this, which is a significant reason for my current buy rating on PNM.

Company Segments

PNM is a regulated electric utility company with operations spanning across the U.S. states of New Mexico and Texas. While the company serves both regions, the majority of its business is concentrated in New Mexico, where approximately 550,000 out of its total 800,000 homes are located.

The company operates through two primary segments: Public Service Company of New Mexico and Texas-New Mexico Power Company. The PNM segment is involved in various aspects of the electricity industry, including electricity generation, transmission, and distribution. Within this segment, PNM owns and leases various assets such as communication equipment, office facilities, vehicles, and real estate to support its operations and services.

The company is continuing its efforts to be a less emission-producing company as heavy investments into renewables are underway. As for the sources that PNM generates energy from, it has them pretty all covered, all from coal to wind and nuclear. The segment here is investing quite heavily in solar and storage capabilities, which is a new and exciting market in my opinion. The investments going into this market are massive as the potential is incredible. Seeing PNM get a slice of this is appealing and supportive of the buy case, too.

The primary factor contributing to the stability of PNM is in the essential nature of the product it provides. Electricity is widely regarded as a fundamental necessity in our modern society, and the vast majority of homes and businesses rely on it. Consequently, even in challenging economic times, people tend to prioritize paying their electric bills over discretionary expenses. This inherent demand for electricity helps maintain the stability of PNM operations.

Earnings Highlights

From the last earnings report by the company, I think there are some things worth highlighting here. The company saw a significant increase in the bottom line on a YoY basis, going from $0.18 in Q2 FY2022 to $0.53 in the last quarter. This jump was large thanks to the lower cost of energy and the lack of losses the company acquired last year on securities. This quarter, they made $3 million from it, as opposed to losing over $40 million last year. But weighing on the earnings are the interest charges which were $45 million, or $180 million on an annualized basis, nearly double that of 2021.

Digging into the valuation of the company, I think it looks very solid given the low p/fcf it trades at. As we have gone over, the FCF is a highlight of the business, given its reliability and how PNM can grow them efficiently over time. Trading below its historical multiples here, I think offers investors with a decent immediate upside potential that is hard to turn down right now.

Risks

The impending merger with Avangrid (AGR) holds immense significance for OGS, as Avangrid stands as one of the nation’s foremost developers of renewable energy. Regrettably, there has been no recent update regarding this merger. In the event of unfavorable news concerning this matter, it could potentially erode investor confidence in the company and its growth potential. Such an outcome might result in a temporary decline in the company’s stock price.

Over the years, PNM has seen a consistent rise in its debt levels, which currently stand at their highest ever. This increase in debt has led to higher interest expenses for the company, especially in times like these when interest rates are on the rise. Consequently, PNM’s earnings have been impacted. If PNM faces challenges in maintaining its profit margins in the upcoming quarters, there’s a possibility that the market may apply a significant discount to its stock, as there could be expectations of downward revisions to EPS estimates.

With higher interest expenses, the net income has of course been affected. I think that right now some of the risks with PNM are that they won’t be able to decrease the debt fast enough and that rates will stay elevated for a prolonged period. This will suppress the bottom line and likely result in softer earnings growth in the next couple of years. Depending on the severity, we might see a significant share correction as a result.

Final Words

For investors who seek a well-diversified and stable dividend addition to a portfolio, I think that PNM offers that right now. The cash flows are solid, and the dividend yield is heavily supported by them. The company is investing more in the renewable space and I think this will benefit them heavily in the long run. With incentives from the government like the Inflation Act pushing up investments here, PNM will have an easier time expanding their business. Going into the coming quarters though it will be important to monitor the interest expenses of the business as the rates have gone up, it’s weighing on the earnings quite a lot. Nonetheless, I remain bullish on the operations and will be rating PNM a buy right now.