$MDU - Strong Financials, Consistent Growth, Solid Dividend - Why MDU Resources is a Buy

I wanted to find a stable company to add to my portfolio. One with strong fundamentals, a decent dividend and solid growth potential. I came across MDU Resources, headquartered in North Dakota and operates as a diversified utility, pipeline, construction services company. MDU Resources has continued to execute well amidst a challenging economy. It recently achieved near record-breaking results and has strategic investments planned for this year. I have highlighted some of the key points on my analysis below Company Construction and utility provider MDU Resources (MDU) had a tough 2020. Construction projects were halted or delayed in a lot of cases, and utility stocks weren’t exactly in favor with investors during a period when growth stocks reigned supreme. Still, for long-term investors with an eye on value and yield, I think MDU is a great choice. MDU Resources Group, Inc.’s MDU two-platform business model, strategic acquisitions, capital investments in the electric and natural gas utility plus improving backlog are its key tailwinds. Also, the company boasts enough liquidity to meet its near-term obligations. Some key highlights on why I think it might be a good pick up for your portfolio Consistent long-term growth at 9.3% EBITDA CAGR and 16.7% EPS CAGR Stocks with higher earnings-per-share growth rates are generally more desired by investors than those with slower earnings-per-share growth rates. This is a good sign for MDU and has a decent shot at beating earnings upcoming in early May Balance of cyclical and counter cyclical business with almost a 50/50 split between construction and regulated energy. this bodes well for the long run and will likely be a stable performer in the market Runway of attractive organic and inorganic growth opportunities Organic Growth: We are all familiar with the infrastructure spending bill that was passed in the UIS and MDU stand to benefit from this. Inorganic Growth: MDU Resources (MDU) Arm Buys Mt. Hood Rock, Expands in Portland (here) These investments will be aimed at enhancing the reliability of the company’s services, thus enabling it to serve an increasing customer base, effectively. MDU Resources anticipates its electric and natural gas utility segment to see a CAGR of 5% and expects its customer base to expand 1-2%, annually. Improving ROIC driven by rigorous capital allocation process Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its capital to generate profits. A company is thought to be creating value if its ROIC exceeds 2% and destroying value if it is less than 2%. MDU Resources Group's ROIC % is 6.29% (calculated using TTM income statement data). MDU Resources Group generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases. Valuation I find MDU to be attractively priced at $31.29, with a blended PE of 15.9. This sits below MDU's historical PE of 19.4 over the past decade, Analysts also express a bullish view on the stock, with a consensus Buy rating and an average price target of $34.33, implying a 10% upside potential from the current share price. Earnings Earnings are forecast to grow 6.74% per year and Earnings grew by 16.6% over the past year. If this trend continues, we will likely see a rise in the share price Insider Trading Significant insider buying over the last year with a majority of shares purchased in May 2020. This would make sense considering the price dropped off a cliff just a month prior (see chart). The management team knew it was a bargain and acted on the low share price Risks Biden’s Infrastructure Plan - While I see potential tailwinds for MDU's construction business from Biden's proposed infrastructure plan, there's no guarantee that such a proposal will pass. The construction business is more cyclical than the regulated utility business, and adds complexity risk to MDU's business model. Mild Dilution - MDU relies on both equity and debt to fund capital projects. This includes $100M in expected equity issuances this year, which will be mildly dilutive to shareholders TLDR I'm encouraged by the impressive earnings it generated amidst a challenging economy. Based o some of the key factors and management guidance I see continued growth for MDU for the foreseeable future. I continue to find the valuation to be attractive and the dividend to be well-covered and safe. Consider looking at MDU and potentially adding it to your portfolio

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StuartMooney

Apr 15, 2021

-6.49%

Change % Since Posting

32.49

Price When Posted

-2.11

Change Since Posting

MDU

MDU Resources Group Inc

30.38

0.00
0.00%
Current Price

$MDU - Strong Financials, Consistent Growth, Solid Dividend - Why MDU Resources is a Buy

bullish

I wanted to find a stable company to add to my portfolio. One with strong fundamentals, a decent dividend and solid growth potential. I came across MDU Resources, headquartered in North Dakota and operates as a diversified utility, pipeline, construction services company.

MDU Resources has continued to execute well amidst a challenging economy. It recently achieved near record-breaking results and has strategic investments planned for this year. I have highlighted some of the key points on my analysis below

Company

Construction and utility provider MDU Resources (MDU) had a tough 2020. Construction projects were halted or delayed in a lot of cases, and utility stocks weren’t exactly in favor with investors during a period when growth stocks reigned supreme. Still, for long-term investors with an eye on value and yield, I think MDU is a great choice.

MDU Resources Group, Inc.’s MDU two-platform business model, strategic acquisitions, capital investments in the electric and natural gas utility plus improving backlog are its key tailwinds. Also, the company boasts enough liquidity to meet its near-term obligations.

Some key highlights on why I think it might be a good pick up for your portfolio

Consistent long-term growth at 9.3% EBITDA CAGR and 16.7% EPS CAGR

  • Stocks with higher earnings-per-share growth rates are generally more desired by investors than those with slower earnings-per-share growth rates. This is a good sign for MDU and has a decent shot at beating earnings upcoming in early May
  •  
  • Balance of cyclical and counter cyclical business with almost a 50/50 split between construction and regulated energy. this bodes well for the long run and will likely be a stable performer in the market

Runway of attractive organic and inorganic growth opportunities

  • Organic Growth: We are all familiar with the infrastructure spending bill that was passed in the UIS and MDU stand to benefit from this.
  • Inorganic Growth: MDU Resources (MDU) Arm Buys Mt. Hood Rock, Expands in Portland (here) These investments will be aimed at enhancing the reliability of the company’s services, thus enabling it to serve an increasing customer base, effectively. MDU Resources anticipates its electric and natural gas utility segment to see a CAGR of 5% and expects its customer base to expand 1-2%, annually.

Improving ROIC driven by rigorous capital allocation process

  • Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its capital to generate profits.
  • A company is thought to be creating value if its ROIC exceeds 2% and destroying value if it is less than 2%. MDU Resources Group's ROIC % is 6.29% (calculated using TTM income statement data).
  • MDU Resources Group generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.

 

Valuation

I find MDU to be attractively priced at $31.29, with a blended PE of 15.9. This sits below MDU's historical PE of 19.4 over the past decade,

Analysts also express a bullish view on the stock, with a consensus Buy rating and an average price target of $34.33, implying a 10% upside potential from the current share price.

Earnings

Earnings are forecast to grow 6.74% per year and Earnings grew by 16.6% over the past year. If this trend continues, we will likely see a rise in the share price

Insider Trading

Significant insider buying over the last year with a majority of shares purchased in May 2020. This would make sense considering the price dropped off a cliff just a month prior (see chart). The management team knew it was a bargain and acted on the low share price

Risks

Biden’s Infrastructure Plan - While I see potential tailwinds for MDU's construction business from Biden's proposed infrastructure plan, there's no guarantee that such a proposal will pass. The construction business is more cyclical than the regulated utility business, and adds complexity risk to MDU's business model.

Mild Dilution - MDU relies on both equity and debt to fund capital projects. This includes $100M in expected equity issuances this year, which will be mildly dilutive to shareholders

 

TLDR

I'm encouraged by the impressive earnings it generated amidst a challenging economy. Based o some of the key factors and management guidance I see continued growth for MDU for the foreseeable future. I continue to find the valuation to be attractive and the dividend to be well-covered and safe. Consider looking at MDU and potentially adding it to your portfolio

 

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read-time
3 min

35.74

Target Price

8/ 10

Confidence

2-6 Months

Timeframe
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Earnings Release
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